Okay, I had a hot dog with a lot of ketchup for lunch. I hope you did the same. We'll go to Doug.
Thank you, Warren. Mae West once said, "The score never interested me, only the game." Are you at the point now where the game interests you more than the score? Before you answer the question, let me explain to you why I asked it. In the past, your research has been all-encompassing, whether measured in time devoted to selecting investments and acquisitions or the intensity of analysis. You were interested in the old days of knowing the slightest minutia about a company. You once said in characterizing Ben Rosner, quote, "Intensity is the price of excellence," close quotes. Your research style has seemed to morph over time from a sleuth-like analysis. American Express comes into mind when you hired Jonathan's dad, Henry Brandt. You and he conducted weeks of analysis and site visits and channel checks, not so much in the later investments.
As an example, you famously thought of making the Bank of America investment in your bathtub. There is an investment message of this transformation from being intense to less intense. Would you please explain the degree it has to do with the market, Berkshire's size, or some other factors?
Yeah, I think actually you have to love something to do well at it. There may be exceptions on that, but it is an enormous advantage if you absolutely love what you're doing every minute of it, and that the nature of it is that that intensity adds to your productivity. I have every bit of the intensity, not manifested exactly the same way, but it's there every minute. I love thinking about Berkshire, I love thinking about its investments, I love thinking about its businesses, I love thinking about its managers. It's part of me. It is true, you can't separate the game from the scorecard, so your scorecard is part of playing the game and loving the game. The proceeds, to me, are unimportant, but the proceeds are part of the scorecard, so they come with the scorecard. It's much more important.
There's no question about it, I would feel the same way about Berkshire at this point if I didn't own a share of it, if I didn't get paid. It's what I like doing in life, and that's why I do it. I don't think it's actually a correct observation, and Charlie can comment on this, to say that because we're doing things in a somewhat different way, that any of the intensity or the passion has been lost. There's nothing more fun for me than finding something new to add to Berkshire, and that was true 40 years ago, it's true now, and be true 10 years from now, I hope. Charlie, how would you answer that?
I think when you bought American Express for the first time, you didn't know that much about it, naturally you were digging in rather deeply. The second time you bought it, I remember you got on the golf course with Olson?
Frank Olson, yep.
You just saw how he couldn't get rid of American Express if he wanted to, then you bought it the second time. The research was still just the first one was hard and the second was easy.
It's all cumulative.
Yeah, it's cumulative, actually.
Yeah. What I learned sitting with Lorimer Davidson on a Saturday at GEICO in January of 1951 is useful to me, and I don't have to learn it a second time. I can build on it. That's one of the great things about investing. The universe, there's enough in it so that you can find lots of opportunities, but it's not like it's changing dramatically all the time. There's some things that may change, and we just don't play in that part of the game if we don't understand them. What Charlie says is true. I didn't know a thing about American Express when the Salad Oil Scandal hit in November of 1963, but I thought I saw an opportunity, so I learned a lot about it, and I went around to restaurants and talked to people about travel and entertainment cards, as they were called then.
I learned about traveler's checks. I talked to banks, and I was absorbing some knowledge. Then, as Charlie said, when we were up at Prouts Neck playing golf with Frank Olson, and he was running the Hertz Corp, and he was telling me that there was no way in the world that he could get rid of American Express or even get them to cut their fees. That was my kind of business, and I knew enough to proceed to buy a fair amount of stock, and now we own whatever it is, probably 13% of the company or thereabouts, and they keep buying in their stock. We can't buy any more stock ourselves. I got asked that question in March of 2009 by Joe Kernen, "Why aren't you buying the stock of American Express?" Well, it was a bank holding company and we couldn't add a share.
They are doing it for us, and I love that. At The Coca-Cola Company, at Wells Fargo, to a lesser degree at IBM. At most of our companies, our interest in the company goes up every year because the companies are repurchasing shares, and they probably earn more money, we got a double play going for us. The passion is not gone, I promise you. Station one.
Hi, Warren and Charlie. My name is Vincent Wong from Seattle. When people analyze a stock, a lot of them look at quantitative metrics such as P/E ratio, return on equity, debt-to-asset ratio, et cetera. Mr. Buffett, when you analyze a stock for purchase, what's your top five quantitative metrics that you look at, and what's your preferred number for each metric?
Yeah.
Thank you.
We're looking at quantitative and qualitative. We aren't looking at the aspects of a stock. We're looking at the aspects of a business. It's very important to have that mindset that we are buying businesses, whether we're buying 100 shares of something or whether we're buying the entire company. We always think of them as businesses. When Charlie and I leaf through Value Line or look at annual reports that come across our desk or read the paper or whatever it may be, for one thing, we do have this cumulative knowledge of a good many industries and a good many companies. Not all by a long shot. Various numbers are of different importance depending on the kind of business.
If you were a basketball coach, if you were walking down the street and some guy comes up that's 5'4" and says, "You ought to sign me up because you ought to see me handle the ball," you would probably have a certain prejudice against it. There might be some one player out there that it made sense on. On balance, we would say, "Well, good luck, son, but we're looking for seven-footers." If we find seven-footers, we have to worry about whether we can get them halfway coordinated and keep them in school and a few things like that. We see certain things that shout out to us, "Look further" or "Think further." Over the years, we've accumulated this background of knowledge on various kinds of businesses.
We also have come up with the conclusion that we can't make an intelligent analysis about all kinds of businesses. Usually, some little fact slips into view that causes us to rethink something. It was mentioned how I got the idea about buying the Bank of America or making an offer to Bank of America on a preferred stock when I was in the bathtub, which is true. The bathtub really was not the key factor. The truth is, I read a book more than 50 years ago called "Biography of a Bank." It was a great book about A.P. Giannini and the history of the bank. I have followed the Bank of America, and I followed other banks for 50 years. Charlie and I have bought banks. We used to trudge around Chicago trying to buy more banks in the late '60s.
We have certain things we think about in terms of a bank that are different than we think about when we're buying ISCAR. There is not one size fits all. We have certain things we think about when we're buying an insurance company. There are certain things we think about when we're buying a company dependent upon brand. Some brands travel very well, Coca-Cola being a terrific example, and some brands don't travel. We just keep learning about things like that. Every now and then, we find some opportunity. The Bank of America, whenever it was in 2011, was subject to a lot of rumors, big short interest, morale was terrible and everything else. It just struck me that an investment by Berkshire might be helpful to the bank and might make sense for us.
I'd never met Brian Moynihan at that point. Maybe I'd met him at some function, some party or something, but I had no memory of it. I didn't have his phone number, but I gave him a call. Things like that happen. It's not because I calculate some precise P/E ratio or price-to-book ratio or whatever it might be. It is because I have some idea of what the company might look like in 5 or 10 years, and I have a reasonable amount of confidence in that judgment, and there's a disparity in price and value, and it's big. Charlie, would you like to elaborate?
Yeah. We don't know how to buy stocks just by looking at financial figures and making judgments based on the ratios. We may be influenced a little by some of that data, but we need to know more about how the company actually functions. Anything a computer could be functioned to do in terms of screening, I never do it. Do you use a computer to screen anything?
No, I don't know how to.
No.
Bill's still trying to explain it to me. It's a little hard to be precise on because we don't really use screens. On the other hand, we're screening everything. It's not like we sit there and say we want to look at things that are low price to book value or low PEs or something of the sort. We are looking at businesses exactly like we'd look at them if somebody came in and offered us the entire business, then we try to think, what is this place going to look like in 5 or 10 years, and how sure are we of it? A lot of companies, we just don't know the answer to it.
We do not know which auto company is going to be knocking the ball out of the park 10 years from now, or which one's going to be hanging on by its fingernails. We've watched the auto business for 50 years, a very interesting business, but we don't know how to foresee the future well enough on something like that.
We think that the Burlington Northern will have a competitive advantage 15 years from now with a high degree of confidence. We would never have that degree of confidence about Apple no matter what their financial statement showed.
No.
It's just too hard.
Yeah, we don't know about an oil company 10 years from now, in terms of what the product will be selling for or anything. I would say we're virtually 100% confident about a Burlington Northern or a GEICO or some other companies that I won't name.
People with very high IQs who are good at math naturally look for a system where they can just look at the math and know what security to buy. It's not that easy. You really have to understand the company and its competitive position and the reasons why its competitive position is what it is, and that is often not disclosed by the math.
Yeah. It's not what I learned from Benjamin Graham, although the fundamentals of looking at stocks as businesses and the attitude toward the market and all that is absolutely still part of the catechism. I don't know exactly how I would manage money if I was just trying to do it by the numbers that-
You'd do it poorly
Yes. Yeah. That takes care of that. Okay, Carol.
This question is from Benjamin Knoll of Greater Twin Cities United Way. "Every time Bill Gross writes a new essay on the, quote, "New Normal," unquote, I get more depressed about the prospects for my retirement. Do you share his view that market returns in the next few decades will be much lower than in the past few? Should we expect Berkshire's future market returns to be greatly constrained, not only by its size, but also by much lower equity returns overall?
Charlie and I don't pay any attention to macro forecasts. We have worked together now for 54 years, I can't think of a time when we made a decision on a stock or on a company where we've talked about macro. We don't know what things are going to look like in any precise way. Incidentally, naturally, we think if we don't know, nobody else knows. That's a little conceit that we have. So why spend time talking about something you really don't know anything about? People do it all the time, it's not very productive. We talk about the businesses. I like Bill Gross, he sounds like Lloyd Bentsen. He's a friend of mine. It doesn't make any difference to me what he thinks about the future.
It doesn't make any difference to me what any economist thinks about it. I have a general feeling that America will continue to work well. Throughout my adult lifetime and before that, there's always been all kinds of opinions about what's going to happen this year or the next year or anything like that, nobody knows. What you do know with a very high degree of certainty, in my view, is that BNSF will be carrying more carloads 10 years from now, 20 years from now, that there will be no substitute for the service that they provide, that there will be two important railroads in the West and two important railroads in the East, and that they will have an asset that has incredible replacement value.
Nobody could turn out something like it, they'll get paid fairly for what they do, it's not very complicated. To ignore what you know because of predictions about what you don't know or what nobody else knows, in our view, is just plain silly. We don't have anything against somebody talking about a New Normal or an old normal or an in-between normal, but it doesn't mean anything to us. My own guess is that people will do very well owning good businesses if they don't pay too much for them, whether they hold them for 10 years or 20 years or 30 years.
If they try and time their purchases in some way by listening to forecasts about what's going to happen in business and try and buy and sell them, they're going to do very well for their broker and not so well for themselves. Charlie?
Of course, Warren, we have a lot of money. We have to do something with it, we're going to do our thing no matter what the external climate is. If you're a busy surgeon and trying to decide whether to work two more years before you retire, you may be more interested, and rationally so, in the New Normal, and I would personally advise the guy to work an extra couple of years. In other words, I kind of agree with Bill Gross.
What do you think the normal is?
Well, less than we've enjoyed in our lifetimes. The New Normal.
Well, what have we enjoyed in the last 10 years? I mean, you know.
It hasn't been so bad.
No, it hasn't been so-
It's not nearly as good as it was in the first 30.
Yeah. Yeah. Do you think it'll be worse than the average of the last 10 years?
I think that's quite a conceivable outcome.
Yeah. Take your pick.
Okay.
Jonathan?
Warren, I'm sorry my last question about Solar was directed at Charlie, but my next question is about underwear, so I think you can probably field this one.
Boxers or briefs?
I'm not talking. Over time, Fruit of the Loom and others have lost nearly all of the T-shirt focused wholesale screen print market to Gildan, a relatively new player with very low cost structure. Gildan is now going after the underwear focused retail market and is having some success with certain large customers. Brand is obviously more important in the retail market, but is there any reason to think Fruit of the Loom won't lose significant amounts of share here over time, just as they did in the wholesale screen print market? What can they do to protect what remains of their franchise?
You keep your costs down, you constantly work at brand building, you try very hard to make sure that your main customers, in turn, have their customers happy with the product and are happy at the price points that you can deliver it at. You're correct that Gildan, in terms of certain aspects, the non-branded aspects, basically, of some parts of the business has hurt Fruit in the last 10 years certainly. We turn out first quality, low priced underwear with a strong brand recognition. I think it will be very tough to either build a brand against it or to beat our cost significantly. Gildan pays very little in the way of income taxes, you know, because they route stuff through the Cayman Islands.
That's a modest factor, I think you'll find five years from now or 10 years from now that our market share in men's and boys, particularly underwear, will hold up. You're right, they're a competitive threat. Hanes is a competitive threat. It's not a business that you can coast in. I mean, it's not Coca-Cola, but it's not an unbranded product either. I think Fruit will do reasonably well, but it will not get anything like the kind of profit margins that you can get in certain branded products. Charlie?
Well, yeah, too, with as many products as we have, we may average out pretty well in terms of market shares. We're not going to win every skirmish or every battle.
Okay, station 2.
Hi Warren, hi Charlie. I'm Fritz Hauser from Offenburg, Germany. I'd like to know what 10 books influenced you the most and that weren't written by Graham and Fisher. I'd also like to tell you that I think it would be great if you would publish the portfolio statements of the Buffett Partnership years. I think there are a lot of small investors that would get a kick out of knowing what you invested and how you went ahead and analyzed the companies. Thank you.
Well, Charlie ran something called Wheeler and Munger, his portfolio was even more interesting, we'll start with you, Charlie.
Oh, no.
He ran a more concentrated portfolio than I did in those days.
Yeah. I don't think people would be greatly helped. You wouldn't recognize the names, most of them, of the early Buffett Partnership. You'd recognize American Express and others. Rattle off some of the names.
Yeah, well, we can start with Mosaic Tile and.
The Map.
Meadow River Coal and Land. There's hundreds of them. Flagg-Utica, Philadelphia Coal and Iron, you name it. I've literally owned I bet I've owned four or 500 names at one time or another, but most of the money's been made in about 10 of them.
Yeah.
Yeah.
I couldn't name 10 books either that I regard as that much better than the next 10. My mind is a blend of so many books, I can't even sort it out anymore.
Yeah. Well, "The Intelligent Investor" changed my life in terms of I literally had read every book in the Omaha Public Library by the time I was 11 on the subject of investing. There were a lot of books. There were technical books, Edwards and Magee, I mean, that was a classic in those days, and a whole bunch of them, Garfield Drew. I enjoyed reading them a lot. Some of them I read more than once. I never developed a philosophy about it. I enjoyed it. I charted stocks. I did all that sort of thing. Graham's book gave me a philosophy, a bedrock philosophy on investing that made sense. I mean, he taught me how to think about a stock. He taught me how to think about the stock market.
He taught me that the market was there not to instruct me, but to serve me, and he used that famous Mr. Market example. He taught me to think about stocks as pieces of businesses rather than ticker symbols or things that you could chart or something of the sort. It was that philosophy, and in some way, further influenced by Phil Fisher's book, Phil Fisher was just telling me the same thing that Charlie was telling me, which was that it's very important to get into a business that had fundamentally good economics and one that you could ride with for decades, rather than one where you had to go from flower to flower every day. That philosophy has carried me along. Now, I've learned different ways of applying it over the years, it's the way I think about businesses now.
I have not found any aspect of that bedrock philosophy that has flaws in it. You have to learn how to apply it in different ways. Those are the books that influenced me, and of course, in other arenas, Charlie's probably read more biography than anybody that I know of. I like to read a lot of it. We just got through reading the Joe Kennedy biography. You've read that, haven't you, now, Charlie?
Yeah.
I'm not sure you want to emulate everything he did, but it's still interesting reading. We read for the enjoyment of it. It's been enormously beneficial to us, but the reason we read is that it's fun. It's still fun. On top of it, we have gotten very substantial benefits from it. My life would have been different if Ben Graham hadn't gone to the trouble of writing a book which he had no financial need to do at all. I would have had a very different life. Okay, Becky.
This question comes from Bill Miller of Legg Mason. He writes, "The U.S. airline industry has been plagued with terrible economics for over 100 years. With the pending merger of USAir and American, the industry will have consolidated at the point where the top four carriers will control almost 90% of the traffic. As a result, the industry has been consistently profitable this past several years, with many of the airlines now earning double-digit returns on invested capital and generating substantial free cash flow. Do you think the industry's much improved economics are likely to persist, and would there be any economic benefits if Berkshire were to own a domestic airline and pair it with NetJets?
Well, the answer to the second is no, but the question about the industry is really interesting because it is true that it has consolidated very significantly, and in some businesses, you can have only two competitors, and they're still terrible businesses. They beat each other's brains out, and sometimes they end up competing to do very stupid things. You can argue that that's what happened with Freddie Mac and Fannie Mae. Enormous companies that had a huge advantage over everybody else, but they still, in their battle to both report higher earnings every quarter and to beat the other guy out, drove prices for insuring loans down to the improper levels and did a lot of other stupid things, too.
You do see certain industries where once they get down to very few companies do extremely well, and you see other industries where even when they get to be two of them, they don't do that well. You can take Coke and Pepsi in the U.S. They're the only two colas that people can name, and 50% or so of the soft drinks are colas. If you go into a supermarket on the weekend, you will see them pricing their product at ridiculously low prices and competing very vigorously. It's very industry specific. The airline industry has this situation where they have a very low incremental cost per seat with enormous fixed costs, and the temptation to sell that last seat at a very low price is very high, and sometimes it can be very difficult to distinguish between the last seat and other seats.
It's a labor-intensive, capital-intensive, largely commodity type business, and it's been, as Bill Miller points out in that question, it's been a death trap for investors ever since Orville took off. As I've said, if there had been a capitalist at Kitty Hawk, he should have shot down Orville and done us all a favor. Having neglected to do that, investors have poured money into airline companies and aircraft manufacturing companies now for 100 years plus with terrible results. If it ever gets down to where there's one airline, then there's no regulation. It will be a wonderful business, and then the question is whether having gotten down now through a lot of bankruptcies to a relatively few that are doing a high percentage of the seat miles, whether it's a good business yet. I don't know the answer to, but I'm skeptical. Charlie?
The last time we were presented with a similar opportunity was when the railroads did exactly what Bill Miller suggests. The railroads got down and consolidated and got better control of their labor costs, and it turned into a wonderful business. What did we do? We missed it, and we stumbled in very late to the party, right?
Right.
We've proven ourselves to be slow learners in this field, and it's conceivable, isn't it, that Bill Miller is right in what he suggests?
Which way do you bet?
It goes into my too hard pile.
Mine too.
He could be right.
Yeah, sure he could. It'll be fun to watch. We like things we have stronger feelings about. We do not think that things will change dramatically in, well, with See's Candies. Even there, the real profitability is limited to the West Coast, we do not see some competitor coming along and taking away business.
You really couldn't create another railroad.
I hope not.
You can create another airline.
Very easily, you have people that like to do it.
That's what we don't like about it.
People love doing it.
Yeah.
It's exciting to people, and you can sell the idea. I've had probably 12 proposals over the last 25 or 30 years from people that want to get into the airline business one way or the and a number of them have. It's sexy for some reason. If you go to the office of some Mr. Big CEO and say, "I want to talk to you about this new airplane," you get in the door. If you want to talk to him about hauling coal or something, it's a little different. It is a business that attracts people, and you can go out and raise money for a new airline. The record is, it's really been something. I don't know how many bankruptcies there have been in the airline field, but it's an enormous number. Of course, some have done it more than once.
We bought USAir. I bought that. I was at Graz with Ed Colodny. He explained to me how wonderful the airline was. He's a good guy, incidentally. I wrote a check. By the time the check was cashed, they were having troubles. It did not take long.
No.
They went bankrupt twice. We were very lucky. We actually made quite a bit of money on it, as it turned out, because there was a little blip at one point. I think it went bankrupt twice after we bought it. Charlie and I were on the board. We would look at these projections. They were just ridiculous. They never came true, did they, Charlie?
No.
No.
No.
We were very popular because we actually pointed that out a few times. Okay, Cliff.
I wanted to ask you about share repurchases. How high a floor should shareholders think about the 1.2 times book value buyback multiple? Are there circumstances under which you would not be buying back at 1.2?
Well, generally speaking, book value's got nothing to do with the price at which you should repurchase your shares. Intrinsic business value does, and the correlation between intrinsic business value and book value throughout the investment universe is, there is virtually no correlation. Book value is unimportant in most companies. It actually has reasonable tracking utility at Berkshire. Our intrinsic business value is very considerably above book value, and we have signaled that. We'll say it right here, we've said it before, but in addition, we've signaled that by saying that we would repurchase our shares, as long as we had a substantial cash balance and met all the needs of our operating companies, at 120% of book value. If we got the opportunity to buy it there, we would probably buy a whole lot of it. The calculus is very much what I put in the report.
You take care of your business with money first, if you can buy additional businesses, it's something where you add to the per share value of the business. You do that. If you can repurchase your shares at a significant discount from intrinsic value, it's like buying dollar bills at $0.90 or $0.80 or whatever it may be, it's a very sure way of improving per share value. It's been very difficult for us to do it because every time we announce it, people say, "Well, if he thinks it's worth more than 120% of book.
If those cheapskates are willing to pay that.
Yeah. Right. Well, if at least one cheapskate is willing to pay that. They're right. We've got mixed emotions on it. We don't really like the idea of running a company where it makes most of its money by buying its partners out at a discount. If partners want to sell out at a discount, we also like the idea of buying and making sure money that way. We haven't done much of it. Most of the time, our stock has sold in a reasonable range in relation to intrinsic business value. We would think that probably a fairly significant percentage of the time in recent years it sold at least some discount. There were a few years when we thought it sold for more than intrinsic business value.
If in our opinion, in the directors' opinion, the stock is selling at a significant discount, and we've got the money around, and we've got the stock offered to us in reasonable quantity, we will buy it. There could be circumstances, unlikely, but there could be circumstances where we would buy a whole lot at a price that would be attractive for the stockholders who stayed in. Charlie?
Nothing to add.
Station 3.
Hi there. Sean Cawley, I'm a real estate agent in Los Angeles, California. Question for Charlie. It's kind of a real estate question, and it's also a company culture question. Have you ever considered moving to Omaha to be closer to corporate headquarters?
Oh, I think the answer to that is no.
I'm sure the answer to that is no. Our partnership works extremely well, and even though we're somewhat technophobic, we have gotten to the point where we can handle using the phone and don't push us beyond that.
No, we've never learned anything beyond the phone.
As a practical matter, we each know exactly how the other guy thinks, so we don't really even need the phone exactly. We used to do a lot of phoning back when it cost a lot of money to phone. It doesn't cost anything to phone, and we don't talk to each other hardly. Charlie, but Charlie has a lot of fond thoughts about Omaha, incidentally. As do I.
Yes, although as I said earlier on this weekend, they are rebuilding it so rapidly now that I feel like Rip Van Winkle.
Yeah.
They've torn down so many of the buildings I remember. It's amazing how much Omaha has changed the last five years.
Well, you have to remember that a third of the lifetime of the country has passed during our lifetimes, so you have to expect a little change occasionally, Charlie. Okay, Andrew.
Okay, Warren. We got a couple of questions related this year to climate change and its impact on the company. Let me ask this question from Clem Dinsmore, who asks, "If asked, what would the underwriting experts at your casualty insurance and reinsurance companies advise you and your fellow board members are the emerging risks to Berkshire's many enterprises from the changes in extreme weather associated with climate change?" I would add that Jed McDonald asked a separate question, but related, saying, "What are your thoughts on the price on carbon debate?
Well, as you've noticed if you've been here the last few years, the climate really is getting a lot warmer. Charlie knows far more about science than I do, which is not saying a whole lot. My general feeling is that there is certainly a reasonable chance that people that are worried about warming and the effect of CO2, et cetera, are right. I don't know enough so that I can speak as any kind of an expert on it. I don't know the answer on it. I certainly am willing to assume that there are a lot of very smart people who think that, and I think that it's a reasonable assumption. I don't think that it makes any real difference in assessing insurance rates from year to year.
We have a general tendency to be pessimistic in our assumptions about the likelihood of natural catastrophes, we would have that general bias, which I think is useful, regardless if there were no carbon emissions of any kind going on, we would still assume that whatever the past history had been of natural disasters, we would assume that they were going to be somewhat worse. The global warming in terms of resetting prices of insurance from year to year is not a real factor. Our general pessimistic bias is something of a factor. The second part about pricing of carbon emissions, want to repeat that again?
The full question, I abbreviated it, was what are your thoughts on the price of carbon debate? Do you think it's a feasible way, for example, to incentivize efficiency improvements and capture the externalities of carbon's damaging effects, is it a lofty, idealized concept too tricky to figure out in practice?
I would say that the question calls for having Charlie give the answer.
Well, you got to realize that I'm a Caltech-trained meteorologist, but that was before they'd invented most of modern meteorology. I think that carbon trading is pretty impractical. A whole bunch of nations with different ideas and so on. I think if you wanted to change habits, the correct answer is carbon taxes. I think Europe, because they're socialists and wanted to tax the thing that people needed the most, they put these big high taxes on motor fuel. They did it by accident, and not because it was a good idea vis-à-vis global warming and a lot of other issues, but because they really needed the money. I think they stumbled into the right policy. I think the United States should have way higher taxes on motor fuel, and that's efficient. Some group of shareholders who they like, they're clapping for high taxes.
They weren't all clapping. Okay, Doug.
Warren, my next question is both a question and an unusual challenge. I'm asking this next question because in the past, you've been open to inviting your audience to apply for jobs. In 2002, you suggested that shareholders who thought they were eligible to send in their qualifications if they were interested in seeking a seat on your board of directors. Again, in your 2006 letter, when you advertised for a successor to Lou Simpson at GEICO, you said at the time, "Send me your resume." In the past, you have discussed your views on short selling. You have cited that stocks tend to rise over time, and you have talked about the asymmetry between reward and risk. By contrast, the last 15 years has demonstrated that short selling can be a value additive tool to total return when done by professionals.
In fact, I believe Todd Combs had success as a short seller when you hired him.
He had so much success, he stopped doing it.
Mike. Yes, Charlie, he got the job from that success.
No, he didn't.
You can't slide that one in there, Doug.
Okay. My question is, would you ever consider committing capital to a short selling strategy? Would you or Berkshire consider being my Homer Dodge, who invested in your partnership as the original seven investors? Would you or Berkshire Hathaway be willing to give my firm at least $100 million in a managed account? If Sea Breeze failed to outperform the increase during that two-year period of the book value increase in Berkshire, all the earned fees earned would be contributed half to the Sherwood Foundation and half to two charities of my choice, including the Jewish Federation of Palm Beach County. Even if Sea Breeze outperformed Berkshire's change in book value, 25% of the earned fees would be contributed to the charities. I want to add something else. You talked about being technophobic.
Technology may be very hard for Berkshire to invest in, but it is also disruptive to many industries whose business models are scathed by it, and this produces very fertile ground for short selling opportunities.
Well.
Let me answer that.
150. Okay, 155 without that an add
The answer to your question is no. Charlie and I are no strangers to short selling. I mean, we both-
Failed at it.
Well, just think about how lucky you are. You don't have the competition from all kinds of people that listen to us or ourselves. No, we may even propose a little wager at some point, but we'll let that ride for the time being. If you go back far enough, we did a reasonable amount of short selling, and I've certainly identified lots of companies that I thought were far overpriced, and I've identified a fair number of companies that I not only thought, but I was virtually certain were frauds. Charlie, we've been seeing them ever since we got in the business. Making a lot of money short selling still is not a game that appeals to us over a long period of time. It's one of those things that-
We don't like trading agony for money.
We wish you well. Station 4.
Ben Sauer from Shreveport, Louisiana. Could you be more specific about what factors you considered when determining what a fair price was for an acquisition such as Heinz? Also, what sources do you use to make judgments about major changes that will affect an industry?
Yeah, well, we usually feel we're paying too much. Isn't that right, Charlie? We find the business so compelling, the management or associates so compelling, that we gag and we get there on the price. There is no perfect mathematical formula. Looking back, when we bought wonderful businesses that turned out to continue to be wonderful, we could have paid significantly more money, and they still would have been great business decisions. You never know 100% for sure, it isn't as precise as you might think.
Generally speaking, if you get a chance to buy a wonderful business, and by that I mean one that has economic characteristics that lead you to believe with a high degree of certainty that they will be earning unusual returns on capital over time, unusually high, and better yet, if they get the chance to employ more capital at, again, at high rates of return. That's the best of all businesses. You probably should stretch a little. Charlie and I have had several conversations where we were looking at a business which we liked, and we're sort of gagging at the price, Charlie or I will say, "Let's do it," even though it kind of kills us to pay that last 5%.
We did that with See's Candies, Charlie was the one that said, "For God's sakes, Warren, write the check." I was the one that was suffering. It's happened. It's happened quite a few times, hasn't it, Charlie?
It almost always happens. Modern prices are not cheap.
No. No. Great businesses, you're not going to find lots of them, and you're not going to get the opportunity to buy them, although you do in the market. The stock market will offer you opportunities for profit percentage wise that you'll never see, in terms of negotiated purchase of business. In negotiated purchase of a business, you're almost always dealing with someone that has the option of either selling or not selling, can sort of pick the time when they decide to sell and all that sort of thing. In stock markets, it's an auction market, crazy things can happen. You can have some technological blip that will cause a flash crash or something, the world really hasn't changed at all, but all kinds of selling mechanisms are tripped off and that sort of thing.
You will see opportunities in the stock market that you'll never really get in the business market. What we really like, we really like buying businesses to hold and keep. We like buying cheap marketable securities, too. Particularly when you've got lots of cash coming in, and you're going to continue to have lots of cash coming in, you really want to deploy it in great businesses that you can own forever. Charlie, anything?
No, we're sort of in a different mode now, and that has a great lesson in that if we'd kept our earlier modes, if we'd never learned, we wouldn't have done very well. The game of life is a game of everlasting learning. At least it is if you want to win.
We want to win. Yeah. Carol?
This question is from Logan Reed of Pawling, New York, and it has both a question and a postscript, and I'm going to do the postscript first. It's friendly. "I'm an 86-year-old World War II vet, which puts me about halfway between you and Mr. Munger. I would respectfully and urgently request that you quit eating so many hamburgers." "Those things plug up your arteries, and I want to keep you around for a while, in spite of the fact," the unfriendliness comes in here, "that you voted for President Obama." Now, here is the question.
This guy is trying to kill me. He's doing it.
Thank you. "Over the years, you've frequently alluded to your legendary reputation for thriftiness, you've extolled the virtues of the managers of Berkshire companies who have invariably been extremely cost-conscious. If these are hallmarks of the philosophy which has enabled you to achieve your astounding success, how can you possibly support an administration which has plunged our country into $16 trillion worth of debt, has not indicated the slightest concern over the inefficiency of big government?
Yeah. Well, the $16 trillion, we'll have to give Bush a certain amount of credit for that, too. Certainly wasn't the Obama administration that at least allowed policies that created the greatest financial crisis and required an appropriate stimulus on the part of the government. In the end, I find it totally unproductive and That fellow at 86 probably should have found it out by now, to discuss politics with people. You're going to have roughly half agree with you and half disagree. If you look at this, the trouble is, Charlie and I, even though he's a Republican, I'm a Democrat, we really don't disagree as much as you might think based on that.
I could say you could just take your pick here and vote for one of us and ignore the other one. We would offer a little something for everyone. The amount of deficit spending in the last four years, the amount of fiscal stimulus provided, I think has been quite appropriate in relation to the threat to the economy that was posed by the greatest panic in my lifetime. You literally had a situation where Berkshire Hathaway was getting a phone call because General Electric needed money, and we were the last stop. That is quite a situation. It's quite a situation when Freddie and Fannie go into conservatorship, and WaMu and Wachovia fail, and where money market funds have 5% drained out of them in three days and with a panic underway. We needed fiscal stimulus in this country.
The real question is how to get off of that. That is a problem, but it's a lesser problem than we would have had if we decided to follow some austerity program, in my view at least, starting in 2008. How do you feel about that, Charlie?
I agree with you completely.
Yeah.
By the way, so did George W. Bush.
Yeah.
That was bipartisan that we were in so much trouble that on both sides of the aisle, we finally got together and supported these extreme interventions.
George Bush issued probably the 10 greatest words of economic thought in history. Most people don't give him credit for that. They think of Adam Smith and comparative advantage and Keynes and animal spirits and all those guys. George Bush went out there in September of 2008 and said, "If money doesn't loosen up, this sucker could go down." I mean, that is a man that knew how to get to the point. And I give him great credit for it, enormous credit, and plenty of members of his party did not agree with what he was doing. We owe him a lot in that respect. And our leaders, generally speaking, of both parties, once they were in terrible trouble, I think behaved or came up with policies that, in general, were very useful in avoiding something far worse than what we experienced.
They weren't easy to do. I mean, they took some guts. I am disturbed by a national debt that grows in respect to GDP. In fact, I wrote an article in "The New York Times," an op-ed piece in, I think maybe 2009 or 2010, talking about this very problem. We came out of World War II with a gross or net debt higher in relation to GDP than we have now. And people were predicting terrible things at that time because of that situation, and the country has done sensationally. The real danger is that it just continues to grow, and it gets easier to print money than exercise some discipline. We've encountered far worse problems than we face now.
This is not our country's toughest hour by a huge margin, and I think we will do fine, but with a lot of bickering and kind of nonsense that will bother you when you read about it day to day. But when you look at it from the viewpoint of history 10 or 20 years from now, you will not be that disturbed. Charlie?
I agree with you about George W. Bush, and I like these nonpartisan episodes when we get together and do things right. I also think that our current problems are quite confusing. In fact, if you aren't confused, I don't think you understand it very well.
That sort of immunizes you from everything.
Well
How bothered are you by the level of debt in relation to GDP?
Well, I don't think there's any one fixed ratio that is written in the stars as required. As a matter of fact, most of the debt, as I conceive it, is not even counted in what you call debt. The off-the-books debt of the United States is bigger than the on-the-books debt. All the present value of future promises that are unfunded.
That can be changed, however.
Yes.
Yeah.
You say can be changed, but are we really going to take Social Security away from somebody who's worked a lifetime?
Well, we shouldn't.
I don't think it's very likely.
No. Social Security is not a killer actually, in terms If you have a GDP that rises a couple percent in real terms.
Well, of course.
more in nominal terms.
That's the great problem. All of our problems are trivial if GDP will just rise at 2% per annum per capita. All these problems that the Republicans are screaming about fade into insignificance if we can do that. You got to have policies that enable you to do it, and I'm not sure we always do that very well.
Okay. Stay tuned. Jonathan?
I have a question about the competitive landscape in the paint business. I personally always use Benjamin Moore. Some say that Benjamin Moore is disadvantaged because it doesn't control its own distribution as does Sherwin-Williams, and they note that it has lost market share to Behr, which is sold in the home centers at lower prices. You recently replaced management there. What changes in strategy and/or pricing, if any, are being undertaken at that unit, and what is the outlook for that franchise?
Yeah, Benjamin Moore, it's a relatively small percentage of the total paint industry, but at the high end, it is the best-regarded paint, and we have not lost position in that respect. When we purchased Benjamin Moore, I made a promise. I even made a video. It had a dealer system, and people had invested their savings and passed on from generation to generation dealerships from Benjamin Moore, and counted on the company adhering to a dealer system even though you could always get a huge jump in volume, particularly in the first year, if you went with the big boxes. We were always approached by the big boxes, and they said, "Let us take Benjamin Moore into our stores," whether it be Home Depot or whomever.
We would've gotten a big jump in volume when that happened, and they would've loved to have us as a brand with that kind of identity in their stores. It would've represented a total change in the distribution arrangement. I don't think it would've worked out as well over time, and I know it would've been essentially, particularly after my pledge, which the management pledged, too, it would've been double-crossing a network of dealers that trusted us, and trusted us when we bought it to continue with the policy. A dealer policy will work with a first-class brand like Benjamin Moore. It will never get the kind of market share as We'll take a Behr, which is distributed through Home Depot. We were actually offered Behr at one time. Charlie, you remember that one?
Yes, I do.
Yeah. The company was actually investigating and well on its way to implementing some moves that would've, in effect, gutted, or we felt would drastically hurt the dealers and violate the pledge that I'd made to them back when we bought it. We did have a change there. We will not follow The Sherwin-Williams Company path, which is a very effective business strategy. I'm not knocking that at all, but that is not our strategy. Our strategy will be a dealer strategy focused on the high end of the market.
Besides, it's worked very well.
Oh, yeah. It's worked well. It'll continue to work well. It doesn't mean that The Sherwin-Williams Company won't do extremely well. I think they will. Doesn't mean that Behr won't do well. I think they will. We are in a different segment, and it's up to us to protect and really foster the dealer distribution network, and I think we can have something, and do have something very special with those dealers and with the position that Benjamin Moore & Co. has. It will not lead to far higher market share or anything. I think it will lead, and it has, to very decent profitability. Benjamin Moore & Co. is a good business, and I think it will continue to be a good business. Charlie?
Well, I agree totally. I always wish we could buy five more like it tomorrow.
Yeah. Exactly. Okay. Station 5.
Derek Foster, Ottawa, Canada. First of all, thank you, Warren, for sharing all your information. You've changed my life. I took finance in university, couldn't understand Greek formulas, but now I can invest reasonably well. My question to you is, in the past you've said for 99% of investors, you should simply stick money in an index fund and let it go and don't worry about it. Those 1% of investors, choose your best five stocks and put a substantial amount of money in it. I'm just wondering, how about a strategy of perhaps buying 20 of the best stocks in America, Procter & Gamble, Coca-Cola, Johnson & Johnson, whatever, the companies that have been around for a century or decades or whatever, and just leaving it at that. Do you think that would outperform an index fund over the long term? I want Charlie's opinion as well.
Well, it's a little bit of I don't know whether you're saying the 20 largest companies. The 20 best, you might get different thoughts from different people on which they are. I think probably the 20 you would pick would virtually match the results of an index fund. Who knows exactly which ones would be the best? The real distinction, and Graham made this in his book basically, is between the person who is going to spend an appreciable amount of time becoming something of an expert on businesses, because that's what stocks are, or the person who is going to be busy with another profession, wants to own equities, and actually will do very well in equities, but the real problem they have is that they may tend to get excited about stocks at the wrong time.
Really, the idea of buying an index fund over time is not to buy stocks at the right time or the right stocks. It's to avoid buying them at the wrong time, the wrong stock. Equities will do well over time, and you just have to avoid getting excited when other people are excited, or getting excited about certain industries when other people are. Trying to behave like a professional when you aren't spending the time and bringing what's needed to the game to be a professional. If you're an amateur investor, there's nothing wrong with being an amateur investor, and you just simply you've got a very logical, profitable course of action available to you, and that is simply to buy into American business in a broadly diversified way and put your money in over time.
I would say your group of 20 will probably match an index fund, and you'll probably do well on that, and you will do well in an index fund. Charlie?
I've got nothing to add. I do think that knowing the edge of your own competency is very important. If you think you know a lot more than you do, well, you're really asking for a lot of trouble.
Yeah. That's true outside of investments too.
Yes.
Yeah.
Works particularly well in matrimony.
Do you want to give any other advice on this?
No.
He gave it in the movie. I saw people taking notes. Okay, Becky.
This question comes from James Broadbelt Harris of Columbus, Ohio. He says that your enormously generous multibillion-dollar charitable gifts of Berkshire Hathaway stock over the past decade have and will continue to be sources of saleable assets for the charities linked to the Buffett, Gates, and Munger families. Could annual sales of billions of dollars' worth of donated stock by these charitable foundations be a reason why shares have traded under 120% of book value? Will announced share repurchase plans fully address this selling by the charitable funds in the coming decade?
Yeah. I give away 4.75% of my stock, we'll say every year, let's say that's $2 billion worth of stock, roughly. That's 1%, a little less than 1%, of the market value of Berkshire. Many companies on the New York Stock Exchange trade over 100% a year. A 1% sale annually of the outstanding capitalization is absolutely peanuts. You can even argue in some cases that it can aid in terms of market price because the availability of stock sometimes determines whether people get interested in buying. A supply of 1% annually is not going to change the level at which a stock trades. It's insignificant compared to the volume. I think Berkshire's volume, A and B combined, probably averages, what, $400 or $500 million a day, so $2 billion spread over a year is not going to affect things.
You can argue that everybody else has a right to sell their stock or give it to a charity. I don't think I should be totally tied up in terms of being able to give the stock away. Charlie?
There's nothing so insignificant as an extra $2 billion to an old man.
I've never given away a penny that in any way changed my life.
No.
No. Have you, Charlie?
No.
Oh, okay. Well.
No, of course not.
Yeah. We never even thought about it.
No, it would be unthinkable.
It has a lot more utility in the hands of other people than it does in my safe deposit box at the Okay, Cliff.
Thank you. Looking over your first quarter results and the 10-Q, I was wondering, this might apply more to the non-insurance businesses, what are you seeing in terms of reading the tea leaves for the U.S. economy right now? Are you starting to see lift? I'm curious if you feel any need to start to expand Berkshire internationally, outside of the U.S.
Well, we're willing to go any place where we think we understand, in a reasonable way, what things are going to look like in five or 10 years and where we get our money's worth and good management and all of the things that we emphasize. We've never foreclosed anything, but we're going to find most of our opportunities in the United States. It's just the nature of things, that this is a huge market for businesses and we're better known here. Most of our deals will take place here, but we find things outside the United States, particularly in terms of bolt-on acquisitions. In terms of current business, ever since the fall of 2009, it's coming on four years, we've seen a gradual improvement.
Sometimes people have gotten encouraged to think it was speeding up quite a bit, then they get feeling that they start talking about a double dip, which I've never believed in, it hasn't happened. What we see overall is just a slow progress in the American economy. You saw those figures on car loadings for the first 17 weeks, we were up three and a fraction %, the other railroads were up four-tenths of a %. The industry as a whole might be up 1% or thereabouts, a little over 1%. This economy is not, for the last four years, it's not come roaring back in any way, shape, or form. It's never faltered, and I wouldn't be surprised if it keeps going this way. Now, finally, the overhang in housing ended.
It ended about a year ago. We're seeing some recovery in home prices, which has a big psychological effect, and we're seeing some improvement in construction. We don't want to start overbuilding again. We really want to have housing starts that more or less equal household formation. I think we're seeing that. If you ask me where we're going to be when we meet here next year, I think we will have moved forward, but I don't think it will be in any surge of any sort, but I don't think it will stall either. Charlie?
Well, it's not a field where-
Yeah
I've been good.
We do know what's going on now, though. I mean, we have a pretty-
Yeah, we know what's going on now.
Yeah. I guess that ends it then.
You can't make a lot of money knowing what's going on now.
Yeah. You can't make a lot of money thinking you know what's going to go on tomorrow if you don't either.
Yeah.
We'll just keep playing the game. I mean.
Yeah, we keep playing the game.
If we hear about something tomorrow that we can spend $15 billion or $20 billion on and we feel we like the business, U.S. or otherwise, we'll move in an instant. If we don't, we won't do anything. We just never know when opportunity is going to come along. It does come along from time to time. Sometimes in financial markets, it comes in a huge way. I mean, that will happen from time to time. We may not see very many more, but most of the people in this room will see four or five times during their lifetimes, they will see incredible opportunities offered in probably in equity markets, but maybe in bond markets as well.
Things will happen, and then you have to be able to act, and that means both in terms of having the ability and also having the mental fortitude to jump in when most people are jumping out. Okay, station six. Charlie, you want to?
No.
No. Okay, station six.
Hi. Brandon from Los Angeles. If I'm in my 20s and I'm starting a partnership, what advice do you have about getting people to put in money before I have a track record as a solo investor?
Well, you haven't sold me. No, I think people should be quite cautious about investing money with other people, even when they have a track record, incidentally. There are a lot of track records that don't mean much. Overall, I would advise any young person that wants to manage money and wants to attract money later on to start developing an audited track record as early as they can. I mean, it was far from the sole reason, far from the sole reason that we hired Todd and Ted, but we certainly looked at their record. We looked at a record that we both believed and could understand because we see a lot of records that we don't really think mean much.
I mean, if you have a coin flipping contest, as I wrote some years ago, you get 310 million orangutans out there, they all flip coins, and they flip them 10 times, instead of having 300 million left, you'll have 300,000 roughly left that'll flip 10 times in a row successfully. Those orangutans will probably go around trying to attract a lot of money to back them in future coin flipping contests. It's our job when we hire somebody to manage money to figure out whether they've been lucky coin flippers or whether they really know what they're doing.
When you had his problem, didn't you scrape together about $100,000 from a loving family?
Well, I hope they kept loving me after they gave me the money. Well, it was very slow, and it should have been very slow. As Charlie has pointed out, some people thought I was running a Ponzi scheme probably there, and other people may not have thought it, but they thought it was to their advantage to sort of scare people because they were selling investments and all that. To attract money, you should deserve money, and you should develop a record over time that does it. Then you should be able to explain to people why that record is a product of sound thinking rather than simply being in tune with the trend or simply just being lucky. Charlie? You're starting today and you're 25 years old. How do you attract money?
Well, I think most people start with friends and family or people whose trust they've already earned in some other way. It's hard to do when you're young, and that's why people start so small.
A relatively few will be successful.
That's right, too.
Yeah. A great many will be successful and make. We had the hedge fund record here, and during that time, the hedge fund managers have probably made a very considerable amount of money. As I pointed out, Todd and Ted, working under a two and 20 arrangement, if they put the money in a hole in the ground, would make $120 million each this year. It's not exactly an arrangement that you don't want to think about a little bit before you engage in it.
The arithmetic attracts many of the wrong sort of people.
Naturally, we thought we were exceptions.
Yes.
Andrew?
Okay. At Berkshire, there's a unique dynamic that exists between your recognition of Ajit's special skills and Ajit's special skills. You comment often about how unique Ajit's skills are. Just tell us, is Ajit your successor? If not, what happens to Ajit's businesses without Ajit?
Well, they won't be without Ajit for a long time. He's remarkable in many ways, but one of the ways he's particularly remarkable is that when people start copying something he's doing, and turning what was maybe quite profitable into something that becomes something that every Tom, Dick, and Harry is doing, he figures out new ways to do business. I notice you started with the A's when you started on possible successor with Ajit, and you won't have any more luck when you get to the B's. Charlie?
Well, I think the basic answer is that if Ajit ever is not with us-
We won't look as good.
Yeah, we won't look as good. Right.
That's true of a number of other managers, too. We have an extraordinary group of people, in most cases, who do not need the money that they earn working for us. They may make substantial money, and they are doing a job for you shareholders and for me and Charlie that you can almost say we don't deserve. I think they're having a good time running their businesses. The one thing we do is try and create an atmosphere where they can enjoy running the businesses rather than spend all their time running back and forth to headquarters and doing show and tell operations and that sort of thing. It's taken a long time, though, too. We operated Berkshire for 20 years without Ajit. If he'd come in the office in 1965 instead of 1985, we'd probably own the world.
Kind of fun to think about, isn't it? Charlie? Doug?
Howard, like you, I have two sons that I love. Like you, I have a son in the audience today. This question is not meant to be disrespectful.
Sounds like it's going to be, go ahead.
It's a question I have to ask.
Okay.
Someday your son Howard will become Berkshire's non-executive chairman. Berkshire is a very complex business, growing more complex as the years pass. Howard has never run a diversified business, nor is he an expert on enterprise risk management. Best as we know, he hasn't made material stock investments, nor has he ever been engaged in taking over a large company. Away from the accident of birth, how is Howard the most qualified person to take on this role?
Well, he's not taking on the role that you describe. He is taking on the role of being non-executive chairman in case a mistake is made in terms of who is picked as a CEO. I think the probabilities of a mistake being made are less than one in 100, but they're not zero in 100, and I've seen that mistake made in other businesses. It is not his job to run the business, to allocate capital, do anything else. If a mistake is made in picking a CEO, having a non-executive chairman who cares enormously about preserving the culture and taking care of the shareholders of Berkshire, not running the business at all, it will be far easier to then make another change.
He is there as a protector of the culture, and he has got an enormous sense of responsibility about that. He has no illusions at all about running the business. He would have no interest in running the business. He won't get paid for running the business. He won't have to think about running the business. He'll only have to think about whether the board and himself, as a member of the board, whether the board may need to change the CEO. I have seen many times, really many times, from over 60+ years, or, well, probably 55 years as a director, times when a mediocre CEO, likable, not dishonest, but not the person who should run it, needs to be changed. It's very, very hard to do when that person is in the chairman's position.
It's a bit easier now that you have this procedure where the board meets at least once a year without the chairman present. That's a very big improvement, in my view, in corporate America. A board is a social institution, and it is not easy for people to come in, we'll say, to Chicago or New York or Los Angeles once every 3 months, have a few committee meetings, and maybe have some doubts about whether they've really got the right person running it. They may have a very nice person running it, but they could do better. Who's going to make a change? That's the position that the non-executive chairman, in this case, Howard, would be in. I know of nobody that will feel that responsibility more in terms of doing that job as it should be done than my son, Howard.
I think the Mungers are much safer with Howard there. You got to remember, the board owns a lot of stock. We're thinking about the shareholders. We're not trying to gum it up for the shareholders.
After my death, whatever it may be in terms of value then, but it would be $50 billion worth of stock, will over a period of time go to help people around the world. That makes an enormous difference, whether the company behind that stock is doing well or not. Both Charlie and I have seen, we've seen more than one example of where a CEO who might be a 6 on a scale of 10 and is perfectly likable and has perhaps helped select some of the directors that sit there and continues to run the business year after year when somebody else could do it a whole lot better. It can be very hard to make that change if that person controls the agenda and keeps everybody busy when they come into town for a little while and-
You can have a CEO that's nine out of 10 on everything, but with deep flaws, too.
Yeah.
It helps to have some objective person with a real incentive sitting in the position Howard will be in.
The example I've used in the past, "Blessed are the meek for they shall inherit the earth." After they inherit the earth, will they stay meek? Well, that could be the problem if somebody got made CEO of Berkshire. It could be a position where people might want to throw their weight around in various ways. You may have noticed that in the annual report, in terms of our newspapers, I said, "I am not going to be telling them who to endorse for president." 10 of them endorsed Romney and two endorsed Obama. I voted for Obama, but I'm not going to change that. When I write that sort of thing, I'm trying to box in my successor to some degree, too. We do not want somebody using Berkshire Hathaway as a power base in the future.
We want them to be thinking about the shareholders. It's that simple.
Sometimes somebody becomes CEO who has the characteristic of a once famous California CEO. They used to say about him, he was the only man who could strut sitting down.
Okay, station 7.
Is that me? Hi, I'm Bradley Johnston from Minneapolis, Minnesota. My question is within the context of a very low interest rate environment that may be sustained for some time, the challenge that insurance companies are facing in that environment with respect to managing their capital as well as managing their risk and uncertainty when they have future liabilities and potentially the need for liquidity. Maybe you could transcend that down to the individual as well, who is dealing with a low interest rate environment trying to manage uncertainty and yet still get some cash return from investments. I appreciate your concept of selling some of your shares periodically and being better off to do that rather than take dividends, many people are dealing with the challenges of cash flow.
Yeah, this-
just one final tag on, if you could at the end, could you explain what Federal Reserve Chairman Ben Bernanke believes he has as a tool in his toolbox called the Term Deposit Facility?
No, the answer is I can't. Can you, Charlie?
No.
The problem faced by people who have stayed in cash or cash equivalents or short-term treasuries or whatever. It is brutal. The loss, if they live off their income, the loss of purchasing power, it's just staggering when you get into these low interest rates. They are huge victims of a low interest policy, and a dramatically low interest policy. Basically, I wrote back in 2008 to own equities. Equities were cheap, and you were almost certain to get killed, for at least a while. We had promised that the Fed was going to hold rates very low. It was a great time to own equities. I feel sorry for people that have clung to fixed dollar investments, particularly short-term ones, during a period like this, and I don't know what I would do if I were in that position.
Imagine having some sum that seemed like a very large amount of money in the past. A quarter of a percent on $1 million is $2,500 a year, and that is not what people anticipated when they were saving over the years. Well, anybody I've advised, I've always felt that owning businesses certainly made more sense than fixed dollars under most circumstances. Not every time in my life, but probably 90% of the time in my life it's made more sense than owning fixed dollar investments. It certainly made dramatic sense a few years ago when equities were marked down to where they were terrific buys, and where you could see the prospect that fixed dollar investments were going to pay very little for a considerable period of time.
I didn't anticipate that we would see the kind of rates for the extended period that we have already, and I don't know how long it will go on. It's a real dilemma for people. I get a lot of letters from people that say, "I've got $300,000 and I've saved. What should I do?" The fallout from low interest rates has hit millions of people in a very harsh way, and you don't read much about it, and they don't have much of a voice. It's been a good argument for owning productive assets rather than dollars during a period like this. Charlie?
It had to hurt somebody, and the savers were convenient.
What would you do about it?
I would've done about what they did.
Yeah. Would I.
I would've felt bad about it, but that's what I would've done.
Okay. Station eight. We're now going to the shareholder base. We've gone through the panels, and we've got about 45 minutes left, and so we're going to give the shareholders a chance to ask all the questions. Maybe answer them too. Ask all the questions from this point. Station eight.
Hi. Chris Yu from Tokyo, Japan. Can you talk a little bit more about the IBM investment? Where do you see the moat for that business? Just in the spirit of full disclosure, I work for Microsoft.
Yeah. The moat around which business?
IBM.
Oh, IBM. Well, I would say that I do not understand the moat around an IBM as well as I understand the moat around a Coca-Cola. I think I have some understanding of it, but I feel I would have more conviction about the moat around a Coca-Cola or a Wrigley or a Heinz for that matter, than an IBM. I feel good enough about IBM that we put a considerable amount of money in it, and there's nothing that precludes both Microsoft, which you mentioned, and IBM being successful. In fact, I hope they both are. I've got enough conviction about IBM's position that we took a very large position. I like their financial policies.
I think the odds are good that their position is maintained in a strong way over time, but I don't feel the same degree of conviction about that as I do about the BNSF Railway. It's very hard for me to think of anything that could go wrong with BNSF. I can think of some things that can go wrong with IBM. They incidentally have a very large pension obligation. Now they have a large pension fund too, but you're talking 75 or $80 billion of assets and liabilities that it is a big annuity company on the side, and balls can take funny bounces in the annuity field. I would rather they didn't have that, but that is a fact that I take into consideration when I buy.
They show the assets and liabilities of being roughly equal, the liabilities are a lot more certain than the assets over time. Charlie?
Well, yeah. At least the IBM pension plan has the resources of IBM. Suppose you're a big life insurance company now. All over the world, the life insurance companies have started to suffer the tortures of hell. In Japan, they agreed to pay 3% interest, and of course, there was no way to earn 3% interest once the Japanese policies had been in place a long time. A whole lot of once revered, secure places look unsecure now. Around Berkshire, you'll notice the life operations are where we have our own policies as distinguished from reinsurance are pretty small, right?
Yeah, we do not like giving options in this world. People tend to, well, particularly if they got a sales force pushing them on, as you have in the life insurance industry, they have tended to give people options that have, in certain cases, cost them huge amounts of money. You always want to accept an option, you never want to give an option. The life business is in just the reverse side of that. Actually, the mortgage business. Charlie and I were in the savings and loan business. The idea of giving somebody a 30-year mortgage where if it's a good deal for you, they can call it off tomorrow, and if it's a good deal for them, they keep it for 30 years. Those are terrible instruments.
They're good for you if you're buying a house. I recommend everybody in this room get a 30-year mortgage immediately on a house for all they can. If it's a bad deal and rates go to 1%, you can refund it, and if rates go to 6% or 7%, then maybe you can buy it back for $0.70 on the dollar or something of the sort. The life companies have engaged in that big time, big time in the last few decades, and a lot of them are paying the price, and some of them haven't even realized exactly quite what the problems are.
They're kind of like the fellow in the switchblade fight, where the other guy takes a big swipe at him with a switchblade. The fellow says, "You didn't touch me." The other guy says, "Well, just wait till you try and shake your head." Well, that's a little bit like where some of the life companies are right now, Charlie. Anything further, Charlie?
No, that's gloomy enough.
Okay, station nine.
Hi, my name is Masato Muso. I'm from Los Angeles, California, and an MBA student at Boston University. You have mentioned that you are 85% Benjamin Graham and 15% Philip Fisher, and you have also said that if you only had $1 million today, you could generate 50% returns. Since I'm a young investor, this is my question for the both of you. How was your investment strategy different when you were still accumulating money as opposed to managing billions? Did you focus on specific industries, small cap, large cap, et cetera?
Age.
Thank you.
Well, managing $1 million is an entirely different game than running Berkshire Hathaway or running some 20 or $50 billion fund of money. If Charlie and I were running $1 million now or $100,000, we'd be looking at probably some very small things. We would be looking for small discrepancies in certain situations, the opportunities are out there, periodically they're extraordinary. That's something we really don't think about anymore because our problem is handling $12 billion or $14 billion or whatever it might be coming in every year, and that means we have to be looking for very big deals and forget about what we used to do when we were very young. Charlie?
Yeah, I'm glad I'm through with that particular problem.
He worked pretty hard at it when.
Yes
We both did.
Did we ever.
Yeah. We looked under a lot of rocks and yeah.
I used to make big returns on my float on my own income taxes. Between the time I got the money and I paid it to the government, I frequently made enough money to pay the tax. It was working for small amounts of money and doing anomalous things.
He didn't tell me how to do it, though. Okay, station 10.
Hi, Warren and Charlie. This is Andy Ling from Shanghai, China. Thank you very much for what you have said and what you have done. People around the globe have benefited a lot from your philosophies. You have a lot of fans, even in China. My question is, how did you see investments in emerging markets? Will Berkshire expand its investments in places like China? If yes, what kind of industries and companies are you interested in? Thank you.
We don't really start out looking to either emerging markets or specific countries or anything of the sort. We may find things as we go around, but it isn't like Charlie and I talk in the morning and we say, "It's a particularly good idea to invest in Brazil or India or China," or whatever it may be. We've never had a conversation like that, have we, Charlie?
No.
No. It just won't happen. We don't think that's where our strength is. We know that our strength is not there. We think probably most people's strength isn't there either. It sounds good, but I don't really think it's the best way to look at investments. If you told me that we could only invest, we're perfectly willing to do it. We owned a lot of PetroChina at one time. We own some BYD now. We've owned securities outside the U.S., and we'll continue to. If you told us that we could only invest in the U.S. the rest of our lives, we would not regard that as a huge hardship, would we, Charlie?
It's a great way to sell an investment advice, to have a whole lot of different categories, lots of commissions, lots of advice, lots of action. A lot of things we just don't feel we've got enough of an edge so that we want to play.
Yeah. When we hear somebody talking concepts of any sort, including country-by-country concepts or whatever it might be, we tend to think that they're probably going to do better at selling than at investing. It's just such an easy way. It's what people expect to hear when somebody comes calling, that today we think that you ought to be looking at this or that around the world. The thing to do is just find a good business at an attractive price and buy it.
Yes. Our experts really like Bolivia, and you say, "Well, but last year you liked Sri Lanka." It's just we're not comfortable with that.
Yeah. We usually think it's a lot of baloney, but
That's why we're not comfortable.
Yeah. Okay, station 11.
Hello, Mr. Buffett and Mr. Munger. My name is Brant Hooker from Los Angeles. I want to thank you both, first of all, for all the years of advice and your financial philanthropy, as well as your education and or knowledge philanthropy you've given to so many investors around the world. My question is, the U.S. government was seemingly complicit in enticing the American public to buy a home, and therefore a mortgage, at any cost. Do you think our legislators are doing the same thing now, and are we creating a bubble?
No, I don't think we're remotely near a bubble in terms of housing now. I certainly think that your statement is accurate but not complete in terms of what went on before. The whole country almost really kind of went crazy in terms of housing, and the government was a very big part of it because they're a very big part of the financing of it. It's certainly true that plenty of legislators were encouraging Freddie and Fannie to be doing things that they shouldn't have been doing, and not just in retrospect. If you looked at it at the time, you could come to that conclusion. There were an awful lot of people doing the same thing.
It was coming from all sources, and it had that aspect to it, which bubbles do, where year after year, for three or four or five years, whatever it might be, that the skeptics looked like idiots. That the people who jumped on the bandwagon were the ones that were refinancing their houses at ever higher prices and people who were speculating on other houses. It just looked all so wonderful, and people are really susceptible to that sort of bandwagon effect where they see their neighbors making easy money. Everybody's making easy money but them, and they finally succumb. It's the nature of things. It doesn't mean the people at Freddie or Fannie were necessarily evil, a few of them were, or that legislators necessarily were evil, although again, a few of them probably were.
Overwhelmingly, I think most people just got caught up in a grand illusion, it's happened many times in history. It'll happen again, you can use that very much to your profit. We're not in that kind of a period now in housing. You've got very low interest rates which support, in many cases, the purchase of houses because it brings down the payments, obviously. I personally about a year ago I recommended to people that they buy houses, I certainly recommend to people that they finance them now. Most places I would recommend if you're going to live in the community for some time and you find a house that fits your needs, I think it's probably a very good time to buy it, in part because the financing is so unbelievably attractive. Charlie?
Well, the main problem was that as things got crazier and crazier, the government could have intervened by pulling away the punchbowl before everybody was totally drunk, instead the government increased the proof. This was not a good idea. It's hard to get governments in a democracy to be pulling away the punchbowl from voters who want to get drunk.
Well, it's almost impossible.
Yeah.
I mean, it isn't.
You're complaining a little bit about what's sort of inevitable in life. Not too good an idea.
Yeah. You'll see it again, not necessarily in housing, but you will see it. Humans will continue to make the same mistakes that they have made in the past. They get fearful when other people are fearful. You saw it in those money market funds when $175 billion flowed out in three days. When people get scared, it's very pervasive. I've often thought that if I owned a bank in a two-bank town, if I were inclined to, I might hire a whole bunch of Hollywood extras to form a line in front of the other guy's bank. The hell of it is that as soon as they got through forming a line there, they'd start forming a line at my bank because people really get fearful en masse. Confidence comes back sort of one at a time.
When they get greedy, they get greedy en masse, too. It's just the way the humans are constructed. That's where Charlie and I have an edge. We don't have an edge particularly in many other ways, but we are able, I think perhaps better than most, to not really get caught up with what other people are doing. I don't know whether we learned that over time or what, but when we see falling prices, we think it's an opportunity to buy, and it doesn't bother us. Now, we don't own things on margin or we don't get ourselves in a position where somebody else can pull the rug out from under us, and that's enormously important in life. You never want to get out on a limb, and of course, leverage gets very tempting when things are going up.
Leverage is what was introduced into housing in a huge way. People just felt that you were an idiot if you didn't keep borrowing more on your house and maybe using that to buy more houses or using it to live on or whatever. Finally, the roof fell in. Charlie? Okay, station one.
Hi, Warren. Hi, Charlie. My name is George Issles from Cologne. Do you see investment opportunities in the Eurozone? For example, extending your stake in Munich Re. Do you trust in the policy of the ECB to bring the things together? Thank you.
Yeah. Well, we are perfectly willing to look at business opportunities in the Eurozone, and we bought a couple of bolt-on acquisitions, one for $200 million in the farm equipment area, and we'll be happy if we find a business in any one of the 17 countries tied to the euro. There might be a few of them we'd be a little less inclined than others. It may create opportunities for us to buy businesses. We'd be happy to. Europe is not going to go away. The European Monetary Union has a major flaw, and they're grappling with a way to correct that flaw, and with 17 political bodies and a lot of diverse cultures, it's really tough for them to do so. They'll do it in time, in my view. Essentially, they synchronized a currency without synchronizing much else.
Nature finds the fatal flaw always, and so does economics. They found it fairly quickly in terms of the euro, and the structure that was put in place will not work, and they'll have to find something that does work. They will eventually, but they may go through a fair amount of pain in the process. Charlie?
Yeah, structured as Europe was structured, letting in Greece into the European Union was a lot like using rat poison as whipping cream. It was an exceptionally stupid idea. It's not a responsible capitalistic country. A place where people don't pay taxes and so on.
I've tried for years to get him to use country A and country B.
Committed fairly extreme fraud in the course of getting into the union. They lied about their debt. Europe made terrible mistakes. They have politicians, too.
You think it'll be behind them in 10 years?
I think Europe will muddle through.
Sure.
Think what Europe has already muddled through.
We would be delighted even with that dire forecast, not overly. We would be delighted tomorrow to buy a big business in Europe that we liked, and we'd pay cash for it.
Hope you'll call me if it's in Greece.
I make these small suggestions, but you can see it doesn't help much. Okay. Station two.
Hi, I'm David Yaris from Miami Beach, Florida. On behalf of the internet, welcome to Twitter. My question is, how has social media impacted your business and the Berkshire companies, and what impact do you see it having on the world in the short and long term?
Probably half the people or more in this audience could answer that question better than I can. Certainly at a place like GEICO, it makes a difference, over time will make a huge difference in marketing, just as the internet made a change. GEICO was founded in 1936, it had a great business idea of going direct, it did it entirely by mail initially, and it worked very well. Then it progressed to, as the world changed it, went to TV advertising and phone numbers and that sort of thing. Then it went to the internet, and now it goes on to social media. We have to listen to our customers in all our businesses. Some of them it's much more dramatic than others. I've been amazed at how fast the world has changed.
I thought the internet, for example, in terms of GEICO, would affect younger people very quickly in terms of their buying habits. The truth is that it spread across the entire age range very, very quickly. Huge change, you have to respond to that. I am not the best person by miles to do that, we have people that are very good at it in our businesses, they're thinking about it plenty, they'll continue to think about it. It would be a terrible mistake to put me in charge of social media at Berkshire Hathaway. Charlie would not be a particularly good choice either. Charlie, do you want to defend yourself or?
Well, I don't understand it very well for a very good reason. I avoid it like the plague.
I hate the idea of the teenagers in my own family immortalizing for all time the three dumbest things they said when they were 13. Yeah, we would have been in big trouble, Charlie.
We would have been in big trouble, both of us, if that were the system. I think there's a time when your ignorance and folly ought to be hidden.
Yeah. I also think that when you multitask like crazy, like the young people do, none of the tasks is likely to be done well. Is there anyone we've forgotten to offend? Okay, station 3.
Hello, my name is Stuart Kaye and I work in Stamford, Connecticut. Earlier in the meeting, you said when reading over financial statements, you identified companies you were virtually certain were frauds. What was it in those financial statements that you saw that made you be so certain they were frauds?
Well, it varies just enormously over the years, we can't identify 100% of the frauds or 90% or 80%, there's certain ones that jump out to you. Just people give themselves away a lot, too. In poker, they talk about tells, Charlie and I have bought a lot of businesses. It's very important when we buy those businesses that we assess the individuals that we're buying from with some degree of accuracy because they hand us the stock certificate and we hand them a lot of money, we count on them to run the business with as much enthusiasm after they have the money as they did before. So we are assessing people, we don't think we can assess everyone accurately. We just have to be right about the ones where we make an affirmative decision.
Those decisions have not always been perfect, they've been pretty good, I would say they probably have gotten a little bit better even as the years has passed. Similarly, in looking at financial statements, for example, in the insurance field, we've seen some frauds, you can see things being done with loss reserves occasionally. We saw it back in I won't name any names, unlike Charlie. We'll call them company A's and B's instead of naming names. You would see companies that when they were offering stock to the public the year or two before that, the reserves would go down very suspiciously, or even when they were selling them to other insurance companies. If they were buying in stock, they might be building the reserves.
There's a million different ways, I don't claim I know all the ways, obviously, I have seen enough situations over the years and I've seen how promoters act. You can spot certain people who you know are one way or another playing games with the numbers. They give themselves away. I can't give you a checklist of 40 items or something of the sort that you look for in the balance sheet or the income account or the footnotes. Charlie, can you help him anymore?
Sometimes it's pretty obvious. I once was introduced by Warren, of all people, by accident, to a man who wanted to sell us a fire insurance company.
That was terrible.
Among the first things he said with a thick accent from Eastern Europe, I think.
Don't name countries.
I don't remember the country.
Good.
What he told me was, he says, "It's like taking candy from babies," he said. "We only write fire insurance on concrete structures that are underwater." I figured out instantly that it was probably fraudulent.
The guy's acute.
I'm a very acute man.
Yeah, the guy's acute. Yeah, you had some experience, as a lawyer in the movie industry a few places.
Oh, my God.
Yeah. When you get into accounting for Well, movies are a good thing, in terms of how fast you write off properties and anything where you've got construction in progress or progress payment type things. There's so many ways you can cheat in accounting. Financial institutions are particularly probably prone to it. There's been plenty of it in insurance.
A lot of it, they're not being deliberately fraudulent because they're deluded. In other words, they believe what they're saying.
Yeah. People like to hire them as salesmen. If you've got doubts, forget it, basically. There's probably some reason you It's interesting. The accounting, they've worked harder and harder at coming up with disclosures in accounting, I'm not sure I find present financial statements more useful or, in some cases, as useful as I found them 30 or 40 years ago. I don't know. Charlie, you have a?
Well, I think the financial statements of big banks are way harder to understand now than they used to be. They just do so many different things, and they've got so many footnotes, and there's so much gobbledygook. They're not my grandfather's banks.
Yeah. Well, we couldn't understand them when we owned them.
Yeah.
We bought a company that at Gen Re where they had 23,000 derivative contracts, Charlie and I could have spent 24 hours a day and had the help of 10 or 20 math PhDs, and we still wouldn't have known what was going on. It cost us about $400 million to find out. That was in a benign market. Nobody can.
The accountants had certified the balance sheet.
Sure.
It's a new kind of asset. I invented a name for it. I said, "Good until reached for.
Yeah. Well, you would actually The same auditing firm would be auditing two different companies that are on the opposite side of a derivative transaction and attesting to different values to the same contract. Charlie found one mistake at Salomon on a derivative contract. What was it, $20 million?
No, it was a big contract, both sides reported a large profit blessed by their accountants on the same contract.
Kind of like us in Swiss Re.
Just for making it. Once people get in a competitive frenzy, things just go out of control.
I became the interim CEO of Salomon in 1991, fortunately, I testified to both the House and Senate committee before I found this out. Generally speaking, incidentally, Salomon wanted to have conservative accounting. I think that would be a fair statement, and in many cases did. They did come in to me one day and they said, "Warren, you probably should know that we have this item," I think it was around $180 million or something like that with a capital base of $4 billion maybe, but $180 million, and they said, "This is a plug number, and we've been plugging it ever since Phibro merged with Salomon in 1981." For 10 years, this number moved around every day. As I remember, Phibro or Sal, one of them was on a trade date system, the other was on a settlement date system.
In 10 years with Arthur Andersen as their accountant paying a lot of money in auditing fees, they just never figured out how the hell to get the thing to balance, they just stuck a number in every day. They literally plugged it for 10 years, I couldn't figure out how to unplug it myself. You almost had to start over. Didn't they do that one time out there?
We did that, Warren.
Yeah. Right.
We had a discrepancy when we changed accounting systems in our savings and loan, and none of the accountants could fix it. We just let it run out.
Yeah, we let the account-
We just let the account run out, and then we-
Figured we'd start over again
we started over, right.
Yeah. Accounting is not quite the science that people might want you to.
In accounting, you can do things like they do in Italy when they have trouble with the mail. It piles up and irritates the postal employees. They just throw away a few carloads, and then everything flows smoothly thereafter.
They're naming names again, folks. That happened in some unnamed international country.
Yeah, Italy.
Okay. Section four.
Good afternoon. My name is Jerry Lucas from Newark, Delaware. You answered a question earlier about emerging markets. I just have a similar question. If you found a business that attracted you in sub-Saharan Africa, outside of South Africa, are the conditions right today to make that investment?
Well, I might not know enough to do it myself. If it was attractive enough and I thought I understood the nature of the business, I would probably get some advice from some other people, and I might not end up doing it, but I wouldn't totally preclude it.
I saw that done. The University of Michigan hired an investment manager in London who specialized in sub-Saharan Africa. I thought, "My God, how are they doing this?" What they did is the little banks would trade in the pink sheets in Africa, and the first thing people would want was not to have the money under their pillow, and they just bought all the little banks in Africa, and they made a lot of money. It is possible if you know what you're doing to go into very unlikely places. I would say we're not very good at it.
No, that isn't our specialty.
No.
It can be done. If we were poor enough, we might even be thinking about doing it, right, Charlie?
I don't think so.
Okay. Next year, we'll prepare for this. Okay. Station five.
Hello, I'm Marvin Blum from Fort Worth, Texas, the home to four of your companies.
Absolutely. We love Fort Worth.
Thank you. We love you, too, and your presence in our community. I am an estate planning lawyer, it's interesting as we wrap up today to ponder that the baby boomer generation is about to pass along the greatest transfer of wealth in history. I can design plans that eliminate estate tax and pass down great amounts of wealth to the next generation, but many of my clients come to me and say they want a plan like Warren Buffett's, leaving their kids enough so they can do anything, but not so much that they can do nothing. Now they ask me, and I'm asking you, how much is that? How do you keep from ruining your kids?
Well, I think more kids are ruined by the behavior of their parents than by the amount of the inheritance that they. Your children are learning about the world through you and more through your actions than through your words from the moment they're born. You're their natural teacher, it's a very important and serious job. I don't actually think that the amount of money that a rich person leaves to their children is the determining factor at all in terms of how those children turn out. I think that the atmosphere and what they see about them and how their parents behave is enormously important. I would say this, I've loosened up a little bit as I go along. Every time I rewrite my will, my kids are happy because they know I'm not reducing the amount anyway.
I do something else which I think is an obvious thing, but it's amazing to me how many people don't do it. I think that your children are going to read the will someday. That's assuming you're a wealthy person. Your children are going to read the will someday. It's crazy to have them read it after you're dead for the first time. You're not in a position to answer questions then, unless the Ouija board really works or something of the sort. If they're going to have questions about how to carry out your wishes or why you did this or that, why leave them endlessly wondering after you die? In my own case, I always have my children I rewrite a will every five or six years or something like that, and I have them read it. They're the executors under it.
They should understand how to carry out their obligations that are embodied in the will. They should also, if they feel there's anything unfair about it, they should express themselves before I sign that will, we should talk it over, we should figure out whether they're right or I'm right or someplace in between. I do think it's very important in wealthy families. Once the kids are of a certain age, I don't advise doing this with your 14-year-old or something, but when they get to, certainly by the time they're in the mid-30s or thereabouts, I think they should be participants in the will. I do think that if you get to be very wealthy, that the idea of trying to pass on, create a dynasty of sorts, it just sort of runs against the grain as far as I'm concerned.
The money has far more utility. The last hundreds of millions or billions have far more utility to society than they would have to create a situation where your kids don't have to do anything in life except call a trust officer once a year and tell them how much money they want. Charlie?
I don't think I want to go into this one.
Okay.
I'm absolutely sure you don't want to discuss your will with your children if you're going to treat them unequally.
No.
That is poison.
One of the problems you have, and what you want to discuss just for that very situation is there may be circumstances where one child will have much more of an interest in one type of asset than another, or something of the sort. You want to make sure that your definition of equality in terms of handling different kinds of assets meshes, or at least is understood by the children so that they don't think the fact that you gave one a farm and another a house or something of the sort resulted in inequality when you thought it was equality. Charlie, you want to? No. He's staying away from this one. Okay. Station 6.
No question.
No questions. I like station 6. Station 7.
Mr. Buffett, Mr. Munger, thanks for everything that you do for us, including the advice that you give us, and also as an individual investor, for the things that you've done for me. I have a question. You've long been against stock splits, but as you think about the Berkshire A share, and one day, if you don't split it can get to $1 million, is the board thinking about how to deal with that in terms of getting new stock owners, the ownership structure, and so on?
Well, I think we've got a pretty good arrangement now. It evolved originally through some people that were going to try and make a lot of money off of our shareholders by creating their own split shares, so we created the B shares. Then when the BNSF acquisition came along, we wanted to be sure that people that wanted to have a stock-free exchange or that wanted to get shares were not prohibited simply because they had a small amount of BNSF and therefore our B shares were too expensive. I think now with one stock in the $100 range, people that own the A stock can split their stock any time they wish. We've always pledged that there won't ever be this situation, but if there were some corporate transaction or anything like that, the A and B will get treated identically.
I really see no reason to change the present situation. Charlie?
I would not hold your breath until we change.
That may apply to almost anything in our life. Okay. I think we'll take about a five minute or so recess, then we'll get onto the business part of the meeting. I thank you all for coming, and I hope you come next year. If you'll please take your seat, we'll get onto the annual meeting of shareholders. We use a script for this. The meeting will now come to order. I'm Warren Buffett, chairman of the board of directors of the company, and I welcome you to the 2013 annual meeting of shareholders. This morning, I introduced the Berkshire Hathaway directors that are present. Also with us today are partners in the firm of Deloitte & Touche, our auditors. They are available to respond to appropriate questions that you might have concerning their firm's audit of the accounts of Berkshire. Forrest Krutter is secretary of Berkshire.
He will make a written record of the proceedings. Becky Amick has been appointed Inspector of Elections at this meeting. She was certified at the count of votes cast in the election for directors and the motion to be voted upon at this meeting. The named proxy holders for this meeting are Walter Scott and Marc Hamburg. Does the secretary have a report of the number of Berkshire shares outstanding entitled to vote and represented at the meeting?
Yes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 6th, 2013, being the record date for this meeting, there were 892,657 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 1,126,012,136 shares of Class B Berkshire Hathaway common stock outstanding, with each share entitled to 1/10,000 of one vote on motions considered at the meeting. Of that number, 637,192 Class A shares and 691,560,484 Class B shares are represented at this meeting by proxies returned through Thursday evening, May 2nd.
Thank you. That number represents a quorum, we will therefore directly proceed with the meeting. First order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott, who will place the motion before the meeting.
I move that the reading of the minutes of the last meeting of the shareholders be dispensed with and the minutes be approved.
Do I hear a second?
Second.
The motion has been moved and seconded. Are there any comments or questions? We will vote on this motion by voice vote. All those in favor say aye.
Aye.
Opposed? The motion is carried. Next item of business is to elect directors. If a shareholder is present who did not send in a proxy or wishes to withdraw a proxy previously sent in, you may vote in person on the election of directors and other matters to be considered at this meeting. Please identify yourself to one of the meeting officials in the aisle so that you can receive a ballot. I recognize Mr. Walter Scott to place a motion before the meeting with respect to election of directors.
I move that Warren Buffett, Charlie Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson, Walter Scott, and Meryl Witmer be elected as directors.
I second the motion. It has been moved and seconded that Warren Buffett, Charles Munger, Howard Buffett, Stephen B. Burke, Susan L. Decker, William H. Gates III, David Gottesman, Charlotte Guyman, Donald Keough, Thomas S. Murphy, Ronald Olson, Walter Scott, Jr., and Meryl Witmer be elected as directors. Are there any other nominations? Is there any discussion? The nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballot on the election of directors and deliver their ballot to one of the meeting officials in the aisles. Ms. Amick, when you are ready, you may give your report.
My report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast not less than 695,403 votes for each nominee. That number far exceeds a majority of the number of the total votes of all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.
Thank you, Ms. Amick. Warren Buffett, Charles Munger, Howard Buffett, Stephen B. Burke, Susan L. Decker, William H. Gates III, David Gottesman, Charlotte Guyman, Donald Keough, Thomas S. Murphy, Ronald Olson, Walter Scott, Jr., and Meryl Witmer have been elected as directors. The next item of business is a motion put forth by Robert L. Berridge. The motion is set forth in the proxy statement. The motion directs Berkshire Hathaway to establish quantitative goals for reduction of greenhouse gas and other air emissions at its energy-generating holdings and publish a report to shareholders on how it will achieve these goals. The directors have recommended that the shareholders vote against this proposal. I will now recognize Bruce Herbert to present the motion. To allow all interested shareholders to present their views, I ask Mr. Herbert limit his remarks to five minutes.
Good afternoon, Mr. Buffett, Mr. Munger, ladies and gentlemen. My name is Njoroge Nyoike. I am a student of economics and finance at Wartburg College in nearby Iowa. I hail from Kenya, and I'm here with a group of fellow students, all of whom very much appreciate the opportunity to take part in this celebrated event. I stand on behalf of Voice of Seattle to move item number 2 on page 12 of the proxy, a proposal that Berkshire establish goals for greenhouse gas reduction at its energy holdings. We applaud MidAmerican Energy for having the largest renewable energy portfolio in the entire USA. However, it is also true that MidAmerican generates close to half of its power by burning coal, is a huge emitter of greenhouse gases. Given this fact, why doesn't MidAmerican have a plan?
66 of other U.S. electric utilities have greenhouse gas reduction goals, 66%, but MidAmerican is not among them, despite publicly proclaiming that on its website, and I will quote, "We will set challenging goals and assess our ability to continually improve our environmental performance." As you are aware, climate disruption creates profound financial risk for the global economy as well as for Berkshire. The Investor Network on Climate Risk, whose members manage more than $11 trillion, and the Carbon Disclosure Project, whose members represent more than $80 trillion in assets globally, have called on companies to disclose risks related to climate change, as well as to take steps to reduce that risk. In 2010, the SEC announced that climate risks are financially material, and they must be disclosed.
This is because high carbon path creates risk, whereby the low carbon path is a lower risk, more secure way into the future. Without planning and a set of forward-looking goals, neither management nor investors can know where they stand. In addition, Berkshire is seen as being particularly vulnerable to climate disruption. Why? Because many of the most negative financial impacts of climate disruption are borne by insurance companies. For example, GEICO took its largest single loss in history from Superstorm Sandy, a $490 million loss to claims on more than 46,000 flooded vehicles. Berkshire's reinsurance business is likely to bear significant risk from the clear trends towards increasingly extreme weather. While some portion of this may be pushed towards clients in the form of higher premiums, is it really fair or a good long-term strategy to saddle customers with the cost of poor planning?
I would like to conclude by recapping some of the major points. Hundreds of the world's largest institutional investors, representing trillions of dollars of invested assets, have called on companies to set greenhouse gas reduction goals. Such goals are key tools for managing the profound business risk created by climate disruption. More than two-thirds of utilities have already established such goals, and institutional proxy advisory firms repeatedly recommend voting for goal setting and disclosure of this sort. Therefore, I urge you all to please join us in voting for this common sense proposal that avoids risks, preserves profits, and treats our customers fairly. Thank you very much.
Thank you, Mr. Herbert. The microphone at zone one is available for those wishing to speak for or against the motion. Zone one is the only microphone station in operation. For benefit of those present, I ask that each speaker for or against the motion limit themselves to two minutes and confine your remarks solely to the motion. Anyone who would like to speak should go to zone one where Mr. Herbert was, and we will turn the microphone over to the next speaker.
Thank you, Mr. Buffett. I believe that just burning some coal, although it is bad for the environment, as long as it's operating inside the EPA guidelines for it should be perfectly fine. That's my only view on it. Thank you.
Thank you. Is there another speaker?
Mr. Buffett, good afternoon.
Good afternoon.
I just want to say, we know how passionate you are and such a philanthropic individual. The environment is incredibly important, on behalf of my good friend John Doerr, who could not be here this afternoon, I know how passionate he is also about the environment. Please take consideration into this man's proposal. I know you've agreed to go against his proposal, but if not this year, perhaps next year you will look at this man's initiative again. Thank you so much.
Thank you. Is there another speaker?
No further speakers.
Thank you. The motion is now ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballot on the motion and deliver their ballot to one of the meeting officials in the aisles. Ms. Amick, when you're ready, you may give your report.
My report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast 57,569 votes for the motion and 598,162 votes against the motion. As the number of votes against the motion exceeds a majority of the number of votes of all Class A and Class B shares outstanding, the motion has failed. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.
Thank you, Ms. Amick. The proposal fails. Does anyone have any further business to come before this meeting before we adjourn? If not, I recognize Mr. Scott to place a motion before the meeting.
I move this meeting be adjourned.
I second the motion.
A motion to adjourn has been made and seconded. We will vote by voice. Is there any discussion? If not, all in favor say aye. All opposed say no. This meeting's adjourned. Thank you. Come back.