Berkshire Hathaway Inc. (BRK.A)

ASM 2018 Part 1

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May 5, 2018

Good morning. I'm Warren. He's Charlie. Charlie does most things better than I do, but This one's a little tough. Charlie, maybe you can chew on that a while. Okay. At the formal meeting that will begin at 3:45, we will elect 14 directors. Charlie and I are 2 of them. And I would like to introduce the other 12. I'll do it in alphabetical order. If they will stand as I announce their name, withhold your applause. It may be hard to do, but give it your best. And when we get all through, then you can let loose. But we'll do this alphabetically. Beginning with Greg Abel, if you'll stand and stay standing, Howard Buffet, Steve Burke, Sue Decker, Bill Gates, Sandy Gottesman, Charlotte Guymon, Ajit Jain, Tom Murphy, Ron Olson, Walter Scott, and Merrill Wedmer. Let's see. This morning, we posted both our earnings in our 10 Q. And if we can put up Slide 1, you can take a look at what was reported. And as I warned you in the annual report, a new accounting rule was introduced at the beginning of this year and it provides that our equity securities, whether we sell them or not, are mark to market every day. So we can have a gain or loss of a couple $1,000,000,000 in our equity securities portfolio. And that day, according to the accounting principles now in effect, which are a change, will be recorded as making a couple $1,000,000,000 that they are losing a couple $1,000,000,000 And I told you that would produce some very unusual effects from quarter to quarter. And it further explains why I like to release our earnings early Saturday morning and as well as the 10 Q to give people a chance to read through the explanation. Because if you just were handed this with a TV monitor at 3:30 in the afternoon or whatever it might be, you would report the net earnings figure understandably very quickly and it really is not representative of what's going on in the business at all. So if you look at the figure of operating earnings, which is what we look at, we actually earned a record amount for any quarter we've ever had. And that includes no realized gains or losses on securities or on the few remaining derivatives we have. You might leave that slide up there just a little longer, maybe this up. The insurance underwriting, GEICO had quite a good sized turnaround in profitability and a good gain, although not as big a gain as last year, which was a record in terms of policies in force. And really throughout most of our businesses and the details are on the 10 Q, which is up on our website now. And as you can see, the railroad was up significantly and we had most of our businesses tended to be up. Now we were aided in that in a material way by the reduction in the federal income tax rate from 35% to 21%. Our businesses were up significantly on a pretax basis, but the gain was further enhanced by the change in the income tax rate. So that pretty well sums up the Q1. We'll probably get some may well get some questions on it when we get into the question and answer section. The questions we'll be getting, we've got the press over here and we have the analysts on my left and of course we have our partners out in front of me and we will rotate among you. And the questions we get as we go through the next 6 hours or so, will understandably relate to a lot of current events. You will we may get asked and we don't know the questions, but we may get asked about Fed policy or whether we're seeing any inflation or whether business is speeding up or down or the threats we may face competitively in our businesses as we go along. And anything goes on the questions except we won't tell you we're buying or selling. But it really can be a question sometimes of confusing the forest with the trees. And I would like to just spend just a couple of minutes giving you a little perspective on how you might think about investments as opposed to the tendency to focus on what's happening today or even this minute as you go through. And to help me in doing that, I'd like to go back through a little personal history and we will start I have here I have here a New York Times of March 12, 1942. I'm a little behind on my reading. And if you go back to that time, it was about, what, just about 3 months since we got involved in a war which we were losing at that point, The newspaper headlines were filled with bad news from the Pacific. And I've taken just a couple of the headlines from the days preceding March 11, which I'll explain. It's kind of a momentous day for me. And so you can see these headlines. We've got slide 2 up there, I believe. And we were in trouble, big trouble in the Pacific. It was only going to be a couple months later that the Philippines fell, but here we were getting bad news. We might go to slide 3 for March 9th. I hope you can read the headlines anyway. The price of the paper is $0.03 incidentally. And let's see, we've got March 10th up there as slide. I want to get to where there's advanced technology of slides. I want to make sure I'm showing you the same thing that I'm seeing in front of me. So anyway, on March 10th, when again, the news was bad, full clearing path to Australia. And it was like it the stock market had been reflecting this. And I'd been watching a stock called City Service Preferred Stock which had sold at $84 the previous year. And had sold at $55 the year early in January, 2 months earlier. And now it was down to $40 on March 10th. So that night, despite these headlines, I said to my dad, I said, I think I'd like to pull the trigger. And I'd like you to buy me 3 shares of Citysearch preferred the next day. And that was all I had. I mean, that was my capital accumulated over the previous 5 years or thereabouts. And so my dad the next morning bought 3 shares. Well, let's take a look at what happened the next day. Let's go to the next slide, please. And it was not a good day. The stock market, the Dow Jones Industrials broke 100 on the downside. Now they were down 2.28 percent as you see, but that was the equivalent of about a 500 point drop now. So I'm in school wondering what is going on, of course. Incidentally, you'll see on the left side of the chart, the New York Times put the Dow Jones Industrial Average below all the averages they calculated. They had their own averages which have since disappeared, but the Dow Jones has continued. So the next day, we can go to the next slide and you will see what happened. The stock that was at 39, my dad bought my stock right away in the morning because I'd asked him to, my 3 shares. And so I paid the high for the day, that 38.25 was my tick which is the high for day. And by the end of the day, it was down to 37, which was really kind of characteristic of my timing in stocks that was going to appear in future years. But it was on the what was then called the New York Herb Exchange then became the American Stock Exchange. But things even though the war until the Battle of Midway looked very bad and if you'll turn to the next slide please, you'll see that the stock did rather well. You can see where I bought at 38.25%. And then the stock went on actually to eventually be called by the city service company for over $200 a share. But this is not a happy story because if you go to the next page, you will see that I well, as I always say, it seemed like a good idea at the time. So I sold I made $5 on it. It was again typical of the behavior. But when you watch it go down to 27, you know, it looked pretty good to get that profit. Well, what's the point of all this? Well, we can leave behind the city service story. And I would like you to again imagine yourself back on March 11, 1942. And as I say, things were looking bad in the European theater as well as what was going on in the Pacific, but everybody in this country knew, America was going to win the war. I mean, it was you know, we'd gotten blindsided, but we were going to win the war and we knew that the American system had been working well since 17/76. So you'll turn to the next slide, I'd like you to imagine that at that time, you had invested $10,000 and you put that money in an index fund. We didn't have index funds, but you in effect bought the S and P 500. Now I would like you to think a while and don't do not change the slide here for a minute. I'd like you to think about how much that $10,000 would now be worth if you just had one basic premise, just like in buying a farm you buy it to hold throughout your lifetime and depend. And you look to the output of the farm to determine whether you made a wise investment. You look to the output of the apartment house to decide whether you made a wise investment if you buy an apartment small apartment house to hold for your life. And let's say instead you decided to put the $10,000 in and hold a piece of American business and never look at another stock quote, never listen to another person give you advice or anything of the sort. I want you to think how much money you might have now. And now that you've got a number in your head, let's go to the next slide and we'll get the answer. You'd have $51,000,000 and you wouldn't have had to do anything. You wouldn't have to understand accounting. You wouldn't have to look at your quotations every day like I did that first day. I'd already lost $3.75 by the time I came home from school. All you had to do was figure that America was going to do well over time, that we would overcome the current difficulties, and that if America did well, American business would do well. You didn't have to pick out winning stocks. You didn't have to pick out a winning time or anything of the sort. You basically just had to make one investment decision in your life. And that wasn't the only time to do it. I mean, I could go back and pick other times that would work out even greater gains. But as you listen to the questions and answers we give today, just remember that the overriding question is how is American Business going to do over your investing lifetime? I would like to make one other comment because it's a little bit interesting. Let's say you've taken that $10,000 and you'd listen to the profits of doom and gloom around you and you'll get that constantly throughout your life. And instead, you use the $10,000 to buy gold. Now for your $10,000 you would have been able to buy about 300 ounces of gold. And while the businesses were reinvesting in more plants and new inventions came along, you would go down every year and you're look in your safe deposit box and you'd have your 3 ounces 100 ounces of gold and you could look at it and you could fondle it and you could I mean, whatever you wanted to do with it. But it didn't produce anything. It was never going to produce anything. And what would you have today? You would have 300 ounces of gold just like you had in March of 1942. And it would be worth approximately $400,000 So if you decided to go with a non productive asset, gold, instead of a productive asset, which actually was earning more money and reinvesting and paying dividends and maybe purchasing stock, whatever it might be, you would now have over 100 times the value of what you would have had with a nonproductive asset. In other words, for every dollar you have made in American business, you'd have less than a penny of gain by buying in the store value which people tell you to run to every time you get scared by the headlines or something. So it's just remarkable to me that we have operated in this country with the greatest tailwind at our back that you can imagine. It's an investor's I mean, you can't really fail at it unless you buy the wrong stock or just get excited at the wrong time. But if you own a cross section of America and you put your money in consistently over the years, there's just there's no comparison against owning something that's going to produce nothing. And frankly, there's no comparison with trying to jump in and out of stocks and pay investment advisers. You'd followed my advice incidentally or this retrospective advice which is always so easy to give, if you'd follow that, of course, there's one problem, buddy. Your friendly stockbroker would have starved to death. I mean, you could have gone to the funeral to atone for their fate. But the truth is you would have been better off doing this than a very, very, very high percentage of investment professionals have done or people have done that are active. It's very hard to move around successfully and beat really what can be done with a very relaxed philosophy. And you do not have to be you do not have to be you do not have to know as much about accounting or stock market terminology or whatever else it may be or what the Fed is going to do next time and whether it's going to raise 3 times or 4 times or 2 times. None of that counts at all really in a lifetime of investing. What counts is having a philosophy that you stick with, that you understand why you're in it and then you forget about doing things that you don't know how to do. So with all those happy words, we will move on and start the questioning and we'll start with Carol. Good morning. In choosing a first question to ask each year, I look for a question that is definitely Berkshire related and is timely. And this question seemed to fill a bill. The question came from William Anderson of Salem, Oregon, and he said, Mr. Buffet, you have previously said that there are 2 parts to your job, overseeing the managers and capital allocation. Mr. Abel and Mr. Jane now oversee the managers, which leaves you with capital allocation. However, you share capital allocation with Ted Wessler and Todd Combs. Question, does all that mean you are semi retired? Or if not, please explain. I've been semi semi retired for decades. The answer is that I was probably well, it's hard to break down the percentage of the time that I was involved in what now the jobs that are now done by Ajit and Greg and in the case of investing, the subpart of the job that is done by Ted and Todd. Ted and Todd each manage $12,000,000,000 or $13,000,000,000 So in total, that's $25,000,000,000 And we have in equities $170,000,000,000 probably now and $20,000,000,000 in longer term bonds and another $100,000,000,000 in cash and short term. So they're managing 2025 and doing a very good job. And I'd still have the responsibility basically for the other 300,000,000,000. So I think Charlie will tell you, in fact I would like him to comment, nothing's really changed that much. We've got clearly, we've got 2 people in Ajit and Greg that are smarter, more energetic, just bring more to the job every day. But they don't bring too much because the culture is that our managers are running their businesses. But there's a lot there's a good bit overseas. So they do a superb job. And Ted and Todd not only do a great job with the $12,000,000,000 or $13,000,000,000 each, they started with a couple of $1,000,000,000 each. Not that it's all been the growth of the $2,000,000,000 But they also do have done a number of things for Berkshire that they do it cheerfully but more importantly or skillfully. So there's just there's one thing after another that I will have them looking into or working on. And sometimes I steal their ideas. And but I think actually semi retired is probably catches me at my most active point. I think your questioner has got a good point. Okay. Charlie? Well, I've watched Warren for a long time. And he sits around reading most of the time and thinking. And every once in a while he talks on the phone or talks to somebody. I can't see any great difference. Part of the Berkshire secret is that when there's nothing to do, Warren is very good at doing nothing. I'm still looking forward to being a mattress tester. Okay, Jonathan Brant. Hi, Warren. Hi, Charlie. Given the growth in airplane build rates, it seems surprising that Precision Castparts isn't doing better on the top or bottom line. I understand the issue with the bumpy transition from old to new programs, but I've also heard from industry sources that Precision's market position is not as strong as it used to be amid intensifying competition and some technological disruption. What does Precision need to do to solidify and and strengthen its preeminent position with its aerospace customers so that it can deliver the growth you expected when Berkshire acquired it? More generally, 2 years after the acquisition, what is your outlook for that business? Give me the last part again, the outlook. More generally, 2 years after the acquisition, what is your updated outlook for that business longer term? Longer term and in the reasonably shorter term. It's a very, very good business. I mean you were you mentioned aircraft but we get into other industries but certainly aircraft is the most important. You have manufacturers that are very dependent on both the quality of the parts and the promptness of delivery. You do not want to have an aircraft worth $75 or $100 or maybe $200,000,000 and be waiting for a part or something of the sort. So it's reliability is both in terms of quality and delivery times and all of that sort of thing is enormously important. And we get contracts that extend out many years. And sometimes we I mean, we will get them well before the plane even starts in production. So there's very long lead times and we have found in the last year about it earlier but I know of some specific cases in the last year where other suppliers have failed in their deliveries. And then the manufacturers come to us and say we would like you to help us out. And we say, well, we'll be glad to help you out, but we'd like about 5 year contracts if we're going to do it because we're just not going to make up for these other guys shortfalls periodically. And but that sort of thing has a very long lead time. The business is a very good business. One thing you will see their earnings charged with is about $400,000,000 a little over $400,000,000 a year of intangible nondeductible in that case amortization of goodwill which is really is not an economic cost in my view. We have a significant amount of that through Berkshire but by far the largest amount is related to the Precision acquisition. So whatever you see you can add about 400 1,000,000 that in my view is not an economic expense, but the accountants would argue otherwise. But it's our money, so we'll take my view. Mark Donegan who runs that operation is incredible. And he has been not only he's a fabulous manager. I wouldn't have bought it without him in charge. He also has been very helpful to us in other areas. And he loves to do it. So you can't beat him both as a manager in his own operation but with his devotion to really doing everything that will help Berkshire. It was it's a very good acquisition with very long tails to the products that are being developed. Charlie? Well, yeah, I think we'd buy another one just like it tomorrow if we had the chance. Yeah. That's the answer. Man, a few words but he gets the point. Okay. Now we will go to the shareholder in Station 1. I believe that's probably up here to my right. Hello. This is Shao from Wuxi, China. So I would be the CEO of the Capital. And being the Moi team for 12 years, wish you and Charlie good health, so we could see you both around the meeting for 12 more years. Thank you. Quick question. We know both US and China delegations are in China for intense discussion on so called trade war. Let's go one step beyond the trade war. Do you think there's a win win situation for both countries? Or the world is just too small for both to win and we have to revisit your 1942 chart again? Thank you. Thank you. I'd like to just mention one thing. In August, I'm going to be 88 and that will be the 8th month of the year. And it's in a year that ends with an 8. And as you and I both know, 8 is a very lucky number in China. So if you find anything over there for me, this is the time we should be acquiring something, all those 8s. So do, where do? The United States and China are going to be the 2 superpowers of the world economically and in other ways for a long, long, long time. We have a lot of common interests. And like any 2 big economic entities, there are times when there'll be tensions. But it is a win win situation when the world trades basically and China and the U. S. Are the 2 big factors in that. But there's plenty of other citizens of the world that are involved in how this comes out. And there's no question and the nice thing about it in this country, I think, is that both Democrats and Republicans basically unbalanced, believe in the benefits of free trade. We will have disagreements with each other. We'll have disagreements with other countries on trade. But it's just too big and too obvious for that the benefits are huge and the world is dependent on in a major way for its progress. That 2 intelligent countries will do something extremely foolish. We both may do things that are mildly foolish from time to time. And there is some give and take obviously involved. But U. S. Exports in 1970 and U. S. Imports in 1970 were both about 5% of GDP. So here we were selling 5% of our GDP and buying up 5% of our GDP basically. Now people think we don't export a lot of things. Our exports are 11 and a fraction percent of GDP. They've more than doubled as a share of this rising GDP. But the imports are about 14.5%. So there's a gap of 3% or thereabouts. And I would not like that gap to get too wide. But when you think about it, it's really not the worst thing in the world to have somebody send you a lot of goods that you want and hand them little pieces of paper. I mean, because the balancing item is if you have a surplus or a deficit in your trade, you're going to have a surplus in investment. And so the world is getting more claim checks on the United States. And they to some extent they buy our government securities, they can buy businesses. And over time, you don't want the gap to get to be too wide because the amount of claim checks you were giving out to the rest of the world could get a little unpleasant under some circumstances. But we've done remarkably well with trade. China's done remarkably well with trade. The countries of the world have done remarkably well with the trade. So it is a win win situation. And the only problem gets to be when one side or the other may want to win a little bit too much and then you have a certain amount of tension. But we will not we will not sacrifice the world. I mean, we'll not sacrifice world prosperity based on differences that arise in trade. Charlie? Yeah. Well, I think that both countries have been advancing. And of course, China is advancing faster economically because it started from a lower base and they've had a little more virtue than practically anybody else in the world in having a high savings rate. And of course, a country that was mired in poverty for a long, long time and it assimilates the advanced technology of the world and it has a big savings rate. It's going to advance faster than some very mature company like Britain or the United States and that's what's happened. But I think we're getting along fine and I'm very optimistic that both nations will be smart enough to realize that the last thing they should do is have any ill wolf or the other. Okay. Becky Clark. This question comes from Kirk Thompson. He says, Warren, in this year's annual letter to shareholders, you referenced both cheap debt and a willingness by other companies to leverage themselves as competitive examples as to why it's hard to get more acquisition deals done. It seems like the trust and prestige of doing a deal with Warren Buffett and Charlie Munger allowed Berkshire to get a hometown discount and beat out firms that might pay a little more to a prospective seller. Have you given thought to having other Berkshire managers have more public exposure so future generations of successful business owners continue to bring deal opportunities to Berkshire like they have in prior decades? Yes, that sort of reminds me of who was it? Tony O'Reilly remarked one time about the responsibility of a CEO that the very first job of the CEO was to search through his organization and find that person who had the initiative and the brains, the determination, all of the qualities to be his logical successor and then fire the guy. There's no question. I think the reputation of Berkshire as being a very good home for companies, particularly private companies, good home for companies. I don't think that reputation is dependent on me or Charlie. It may take a little, there'll be a little testing period for whoever takes over in that respect. But basically, we've got the money to do the deals. We'll have the money to do the deals subsequently. People can see how our subsidiaries operate in the future. And the truth is that I think some of the other executives are going are getting better known. But there will be a I'll tell you this, if things get bad enough, you don't have to worry. They'll be calling us no matter what. So I do not worry about the so called deal flow, which is a term I hate. But I don't think there's I think that's dependent on Berkshire and not dependent on me. And as I mentioned, my phone isn't ringing off the hook with good deals. So that apparently this big winning personality or something is not delivering for you. So it may be the next person will be even more get even more calls. I Berkshire, the reputation belongs to Berkshire now and that and we are for somebody that cares about a business that they and their parents and maybe their grandparents lovingly build over decades. If they care about where that business ends up being after for one reason or another, they don't want to keep it or can't keep it in the family, We absolutely are the first call and we will continue to be the first call whether Charlie or I answer the phone or somebody else does. Charlie? Well, a lot of the subsidiaries have for a long time already been making all kinds of acquisitions with people they know and we don't. So it's already happening. And in fact, it's happening more there than it is at headquarters. So Don't tell them, Charlie. You're getting your wish. And it is weird that about 99% of the public companies that change hands in terms of control change hands in a sort of auction presided over by an investment banker. And the people that buy are usually just leveraged it to the gills and if it's just doing a little better, they re leveraged it. And that money is coming out of the charitable endowments and pension plans. We're making these highly leveraged investments in all these companies changing hands at very high prices. Sooner or later, this is not going to work perfectly. And it's going to have an unpleasant episode. And I think we'll be around and in good shape at that time. There was one fellow who came to me many years ago and he had a wonderful business. And he had been worried because he had seen a friend of his die and the problems that arose later when the managers, to some extent, tried to take advantage of the widow and it became a disaster. So he said he thought about it a lot the previous year and decided he didn't want to sell the business to a competitor who would be a logical buyer because they would fire all of his people and the CFO that would remain and all up and down the line they'd all be the acquirers people. He didn't want to do that to his people. And then he thought and he didn't want to sell it to a private equity firm because he felt they leverage it up. He never liked the leverage that much and then they just resell it later on to somebody. So it would be totally out of control of what he wanted to do. And he wanted to keep running it himself. So he said, Warren, he said, it isn't that you're such a great guy. He says, you're the only one left. So Berkshire will continue to be the only one left in many cases. Gary Ransom. Good morning. Warren, in your annual letter, you wrote about the potential for a $400,000,000,000 natural catastrophe event, something out in the tail of the loss distribution. I can think of another risk that could have a similar order of magnitude, and that would be cyber risk. I'm sure all your managers have taken steps against that potential, but in out in the tail of the cyber risk distribution, it could hit a lot of industries, a lot of your companies. So how do you think about and prepare for the big one in cyber? Yeah. Well, I include incidentally in my that part I wrote in the annual report where I said there's roughly nobody knows the answer on this. I mean I could stick down 2 and somebody else much smarter in insurance would stick down a different figure. But I think it's about a 2% risk of what I call a 400,000,000,000 dollars super cat of all time. And but cyber is in that equation. I mean that's not just earthquakes and that sort of thing. And frankly, I don't think we or anybody else really knows what they're doing when writing cyber. I mean, it is just very, very, very early in the game. And we don't know what the interpretations of the policies necessarily will be. We don't know the degree to which there'll be what there'll be correlated incidents which we don't really think are correlated now or haven't had the imagination to come up with. We know that every year when I go and hear these people from the CIA or wherever it may be, they tell me that the offense is out of the defense and will continue that way. And I can dream of a lot of cyber incidents which I'm not going to spell out here because people that have twisted minds maybe they probably got more way more ideas than I've got but I don't believe in feeding them any. But it's a business where we don't we have a pretty good idea of the probabilities of a quake in California, the probabilities of a 3 or a 4 hurricane hitting Florida or whatever it may be. We don't know what we're doing in cyber and we try to keep we don't want to be a pioneer on this. We do some business in that arena in Berkshire Hathaway specialty. But if you're doing something for competitive reasons which I'm okay with. But when I'm doing something that people tell me is a competitive necessity, we are going to try not to have we don't want to be number 1 or number 2 or number 3 and exposures on it. And I don't and I'm sure we are not in cyber, but I don't I think anybody that tells you now that they think they know in some actuarial way either what general experience is likely to be in the future or what the worst case would be I think is getting themselves. And that's why that's one of the reasons I say that a $400,000,000,000 event has I think has roughly a 2% probability per year event of happening. Cyber is uncharted territory and it's going to get worse not better. And then the question is whether we have a whole bunch of $25,000,000,000 commercial limits out there, whether there's some aggregation that we didn't foresee or that the courts interpret those policies differently than they are generally going to give the benefit of the doubt to the insured. So you're right in pointing that out as a very material risk which didn't exist 10 or 15 years ago and will be much more intense as the years go along. And all I can tell you Gary is that that's part of my 400 $1,000,000,000 in my 2%. But if you've got a different guess, it's just as likely that yours is right than mine on that. Charlie? Yes. Well, something is very much like cyber risk is you got computers programmed to do your security trading and your computer goes a little wild from some error. That's already happened at least once where somebody just was fine one morning and by the afternoon they were broke because some computer went crazy. We don't have any computers we allow to go big automatically trading securities. I think generally Berkshire is less likely than most other places to be careless in some really stupid way. I do think if there's a mega cat from cyber, let's say it hits $400,000,000,000 I do not think we'll have more than a 3%. No, no. We'll get our share. And but it will destroy what will destroy a lot of companies that we will actually if we had a $12,000,000,000 loss, I would think except for the new accounting rule, but I would think from what I call operating earnings, we would probably still have a reasonable profit that year. I mean we are in a different position than any insurance company I know of in the world in our ability to handle the really, really super, super cat. Okay. Shareholder from Station 2. I point out that the main shareholder to my right here has almost always net worth in one security. That's likely to be more carefully managed than some public place with people just passing through. Yeah. You don't want a guy that's 64 and is going to retire at 65. A lot of decisions you really don't want him or her to be making. Station 2. Wally Obermeyer, Obermeyer Wood Investment Counsel, Aspen, Colorado. Warren and Charlie, you 2 have demonstrated great talent in private sector capital allocation and shown the world the power of excellence in this area. Do you think there is a similar opportunity for state and federal levels? And if so, what approach and or changes would you suggest for society to achieve these benefits? That's too tough. Why don't we go on to a new question? I'm afraid I have nothing to add. I don't mean to be unfair to somebody asking a question, but it is unfortunately an entirely different game. And the electorate, the motivations are different. The terms of the reward system is different. I mean, everything is different. And if we knew how to solve that, we wouldn't we can't add anything to what you had in your view. I'm sorry on that. Okay. Andrew? Hi Warren. This question comes from Paul Speaker of Chicago Illinois. I believe you may be here today. He writes, one of your more famous and perhaps most insightful quotes goes as follows. Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks. In light of the unauthorized accounting scandal at Wells Fargo, of its admission that it charged customers for duplicate auto insurance, of its admission that it wrongly fined mortgage holders in relations to missing deadlines caused by delays that were its own fault, of its admission that it charged some customers and proper fees to lock in mortgage interest rates, of the sanction placed upon it by the Federal Reserve prohibiting it from growing its balance sheet and of the more than recent $1,000,000,000 penalty leveled by federal regulators for the aforementioned misbehavior. If Wells Fargo Company is a chronically leaking boat, at what magnitude of leakage would Berkshire consider changing vessels? Well, Wells Fargo. Proved the efficacy of incentives. And it's just that they had the wrong incentives. And that was bad. But then they committed a much greater error. And I don't know exactly how or who did it or when, but ignoring the fact that they had a faulty incentive system, which was incenting people to do things that were kind of crazy, like opening non existent accounts, etcetera. And that is the cardinal sin at Berkshire. We know people are doing something wrong, right as we sit here at Berkshire. You can't have 377,000 employees and expect that everyone is behaving like Ben Franklin or something out there. And they we I don't know whether there are 10 things being done wrong as we speak or 20 or 50. The important thing is we don't want to incent any of that if we can avoid it. And if we find when we find it's going on, we have to do something about it. And that is absolutely the key to it. And Wells Fargo didn't do it, but Salomon didn't do it. And the truth is we've made a couple of our greatest investments where people have made similar errors. We bought our American Express. That was the best investment I ever made in my partnership years. We bought our American Express stock in 1964 because somebody was incented to do the wrong thing in something called the American Express Fuel Warehousing Company. We bought a very substantial amount of GEICO. We bought what became a half of GEICO for $40,000,000 because somebody was incented to meet Wall Street estimates of earnings and growth, and they didn't focus on having the proper reserves. And that caused a lot of pain at American Express in 1964. It caused a lot of pain at GEICO in 1976. It caused a layoff of a significant portion of the workforce, all kinds of things. But they cleaned it up. They cleaned it up and look where American Express has moved since that time. Look at where GEICO has moved since that time. So the fact that you are going to have problems at some very large institution is not unique. In fact, almost every bank has all the big banks have had troubles of one sort or another. And I see no reason why Wells Fargo as a company from both an investment standpoint and a moral standpoint going forward is in any way inferior to the other big banks with which it competes. They made a big mistake. It costs I mean, we've still got I mean we have a large unrealized gain in it but that doesn't that doesn't have anything to do with our decision making. But the I like it as an investment. I like Tim Sloan as a manager. You know, and it he is correcting mistakes made by other people. I tried to correct mistakes. At Solomon and I had terrific help from Derek Maun as well as a number of the people at Bunker Toles. And I mean that that is going to happen. You try to minimize it. Charlie says that an ounce of prevention isn't worth a pound of cure. It's worth about a ton of cure. And we ought to jump on everything. He's he's pushed me all my life to make sure that I attack unpleasant problems that surface. And that's sometimes not easy to do when everything else is going fine. And at at Wells, they clearly and I don't know exactly what, but they they did what people at every organization have sometimes done, but it got accentuated to an extreme point. But I see no reason to think that Wells Fargo going forward is other than a very, very large, well run bank that had an episode in its history at which it didn't have. But GEICO came out stronger, American Express came out stronger. The question is what you do when you find the problems. Charlie? Well, I agree with that. I think Wells Fargo is going to be better going forward than it would have been if these leaks had never been discovered. Or happened. Yeah. So I think it but I think Harvey Weinstein has done a lot for improving behavior, too. It was clearly an error and they're acutely aware of it and acutely embarrassed and they don't want to have it happen again. No, if I had to say which bank is more likely to behave the best in the future, It might be Wells Fargo of all of them. This New York Times that I have here from March 12, 1942, If you go toward the back of it in the classified section you have one big section says help wanted male and another one that says help wanted female. You know, was the New York Times doing the right thing in those days? You know, I think the New York Times is a terrific paper but people make mistakes and the idea of classifying between taking ads and saying, well, we'll take them and divide them up between men and women what jobs we think are appropriate or the advertising is appropriate. We do a lot of dumb things in this world. And GEICO as I say in the early 1970s they just ignored then you can do it. The setting of proper reserves which mean they charge the wrong price to new customers because they thought their losses were less than they were. And I'm sure some of that may have been a desire to please Wall Street or just because they didn't want to face how things were going. But it came out incredibly stronger. And now it's got 13% of the households in the United States insured. And it came out with an attention to reserves and that sort of thing that was heightened by the difficulties that they'd found themselves in when they almost went bankrupt, 4042. It was a lot more stupid than Wells Fargo. It was really stupid what they did way back, right? Yes. They had the world by the tail and then they quit looking at the reserve development. But it was American Express was just picking up a few dollars by having the field warehousing company in 1963. And they were worried whether it was going to sink the company. And when some guy named Tino Deangelis in I think it was Bayonne, New Jersey. In fact, I went to the annual meeting in 1964 of American Express after the scandal developed and somebody asked if the auditor would step forward. And the auditor from one of the big firms which I won't mention came up to the microphone and somebody said, how much did we pay you last year? And the auditor gave this answer. And then the questioner said well how much extra would you have charged us to go over to Bayonne which is 10 miles away and check whether there's any oil in the tanks. So it you know here was something in a tiny little operation. Some guy was calling in from a bar in Bayonne and telling them the phony stuff was going on and they didn't want to hear it. They shut their ears to it. And then what emerged was one of the great company after this kind of what they thought was a near death experience. So it's we're going to make mistakes. I will guarantee you that we will get some unpleasant news at Berkshire. I don't know what it will be. The most important thing is we do something about it. And there have been times when I procrastinated and Charlie has been the one that jabs me into action. And so he's performed a lot of services you don't know about. Okay. Greg Warren. Good morning Warren. I have a little bit of a follow-up on Becky's question. At the 2014 annual meeting as well as this morning, you noted the power of Berkshire brand and its reputation as well as the strength of Berkshire's balance sheet would allow the company's next managers to replicate many of the advantages that have come with your being the face of the organization, one of which has been an ability to extract high rents from firms in exchange for capital infusion and the Buffett seal of approval during times of financial distress. I buy the argument about the strength of the balance sheet and believe that deals will continue to be done, with sellers still lining up to become part of the Berkshire family, especially if the company's next managers are allowed to keep a ton of cash on hand. But I'm not entirely convinced that they'll be able to garner the same 8%, 9%, 10% coupons as well as other add ons you've been able to extract from firms like Goldman Sachs and Bank of America in times of distress. I'd expect those rents to be at least a few percentage points lower once you're no longer running the show, that is until those managers build up a reputation to warrant higher returns. Am I right to think about it that way? I'm not sure. When we mentioned Goldman Sachs, we also dealt with General Electric in September early October of 2008. We probably could have actually extracted better terms. I think it might have been counterproductive in the end, But I was we would have done better incidentally financially if we'd really waited till the panic developed further because I didn't know how far it would develop. But we could have made a lot better purchases 3 or 4 or 5 months later than we did at that time. And we also did not want to do something that looked to be so high as to make the transaction disadvantageous to Gold Hunter to GE. They were going to take the terms we offered. But we actually didn't we didn't push it to the limit because there really wasn't anybody else around. I think and we're working on something right now that won't probably won't happen. It's not huge. But actually in this case both Todd and Ted have brought deals to me. 1 of them brought something to me and you know he was thinking and the same terms that I got and was thinking about. And he's the one that returned the call that he had received about a transaction. And I do not think the party on the other side is going to care about the fact that they had him on the phone rather than me on the phone. You know, there may there could be just a little bit at certain times in history, but we will continue to have our standards of what we think money is worth at any given time. And Ted and Todd think just as well about that as I do. And there will be times very occasionally when our phone will ring a lot. And I don't think they'll hang up because I don't answer if they need the money. Charlie? Well, the times he's referring to, a lot of them were like worse than 50 years. So that's a really rare kind of an occurrence. And we didn't make all that many deals. So I think he's right. It will be harder for us to make similar deals in the future. The problem is the sums involved now more than the problem of deciding what the proper term should be. And sometimes we can sometimes we can get what we think is appropriate. And sometimes we most of the time today, we can't. But you may see a transaction or 2 that not in terms of buying business but in terms of securities that strike you as perfectly decent ways to invest Berkshire's money. And they may well have come through on or Ted and said it directly to me. I like to think I'll be missed a little bit, but you won't notice it. Okay. Station 3. I'm John Lichter from Boulder, Colorado. Mr. Buffet, are you still involved in pricing decisions at See's Candies and the Buffalo News? And with what other Berkshire subsidiaries do you take more than a hands off approach? Yeah. You're correct that at one time I and for some quite a while, both Charlie and I took part in the pricing decisions at See's Candy. And certainly for some years, particularly when the question of the survival of the Buffalo News was really in question. I definitely took part in those decisions. In both cases, we had good managers but we still wanted to we thought those decisions were important. But it's been a long, long time, very long time since we've participated in anything like that. I can't tell you what the per pound price is for seized candy which is because people and you're invited to join this group send me free candy from time to time. And I can't really I can't tell you the prices. That's a Buffalo news. And then all I know is it's very, very, very hard to move up prices on advertising generally. So no, we the only thing is Ajit and I talk frequently. And if there's some very big risk if somebody wants a $5,000,000,000 cover on a chemical plant some way excessive loss of over $3,000,000,000 or something. We have a certain amount of fun with him deciding on the price in his head and I decide in my head and then we and then we compare notes. The kind of risk that you really can't look up in a book and see actuarially what it's fairly the parameters are fairly likely to be. I enjoy thinking through the pricing of that and I particularly enjoy comparing it with the G. So these are just oddball situations. But we do that sort of thing and we've done it for 3 decades. And it's part of the fun of my job. The candy prices, if you got to complain about those, you have to go to Charlie. Well, the answer is Warren is still doing it and talking to Ajit and but that's because Ajit likes it that way. We have a very peculiar place where the where Warren's contact with the various people elsewhere in the organization largely depends on what they want, not what he wants. The CEO of one of our It's very unusual and it's worked beautifully. The CEO of one of our most successful subsidiaries, I may have talked to unless I saw him here and just had a little, probably talked to him 3 times in the last 10 years. And he does remarkably well. He might have done even better if I hadn't talked to him those three times. And on the other hand, Ajit and I talk very, very frequently. And he's got the kind of business. I know more about the insurance business than I know about many of the other businesses. It's interesting and we are evaluating things that you don't look up in a book. I mean, actuarial talent is not what's important in the things that Ajit talks to me about. It's plenty important throughout our insurance operation. But in these particular cases, we're making judgments and his judgment is better than mine, but I like to I just like to hear about them. They're interesting propositions. Okay, Carol. This question comes from a Berkshire shareholder named Jack. He's a well known accounting company's Berkshire's bottom line will be useless. I'd like to argue with you about that. Shouldn't a company's earnings report say everything that happened to and within a company during an accounting period? Shouldn't the income statement be like an objectively written news paper informing shareholders of what happened under the management for that period, showing what management did to increase shareholder value and how outside forces may have affected the firm. If securities increased in value, surely the company and the shareholders are better off, and surely they're worse off if securities decreased in value. Those changes are most certainly real. In my opinion, ignoring changes in the way that some companies ignore restructuring costs is censoring the shareholders newspaper. So my question is, how would you answer what I say? Well, my answer to the question and asked what my answer would be to what he said. I would ask Jack, if we've got $170,000,000,000 of partly owned companies which we intend to own for decades and which we expect to become worth more money over time and where we reflect the market value in our balance sheet. Does it make sense to every quarter mark those up and down through the income account when at the same time we own businesses that have become worth far more money in most cases and become since we bought you name the company. Just take GEICO in extreme case. We bought half the company for $50,000,000 roughly. Do we want to be marking that up every quarter to the value and having it run through the income account? That becomes an appraisal process. There's nothing wrong with doing that in terms of evaluation. But in terms of a value and you can call it gain in net asset value or loss in net asset value. That's what a closed end investment fund or an open investment fund would do. But to run that through an income account, if I looked at our 60 or 70 businesses or whatever number there might be and every quarter we mark those to market, We would have obviously a great many in certain cases where over time we'd have them at 10 times what we paid. But how quarter by quarter we should mark those up and run it through the income account where 99% of investors probably look at net income as being meaningful in terms of what has been produced from operations during the year, I think would be well, I can say it would be enormously deceptive. I mean, in the Q1 of this year, you saw the figures earlier where we had the best what I would call operating earnings in our history and our securities went were down $6,000,000,000 or whatever it was. To keep running that through the income account every day you would say that we might have made on Friday we probably made $2,500,000,000 Well, if you have investors and commentators and analysts and everybody else working off those net income numbers and trying to project earnings for quarters and earnings for future years to the penny, I think you're doing a great disservice by running those through the income account. I think it's fine to have marketable securities on the balance sheet. The information available is to our market value. But we have businesses there. If we were, we never would do it. But if we were to sell half, we'll say of the BNS Emerald, we would receive more than we carry it. Carry it from, we could turn it into a marketable security and it would look like we made a ton of money overnight or if we were to praise it, praise it every 3 months and write it up and down. A, it could lead to all kinds of manipulation, but B, it would just lead to the average to any investor being totally confused. I don't want to receive data in that manner and therefore I don't want to send it out in that manner. Charlie? Well to me it's obvious that the change in valuation should be noted and it is and always has been goes right into the net worth figures. So the questioner doesn't understand his own profession. I'm not supposed to talk that way, but it slips out once in a while. Sometimes he even gives it a push. Okay, Jonathan. McLean's core operating margins have dropped about 50% from where they've generally been since acquisition. Could you elaborate on the competitive pressures in the grocery and convenience store distribution business that have caused the deterioration in profits? And do you expect the margin structure of that business to eventually get back to where it was? Or is this the new normal? Well, I don't know the answer to the second part about the future, but there's no question that the margins have been squeezed. They were very, very narrow as you know. They were about $0.01 on the dollar pretax. And they have been squeezed from that. Payment terms get squeezed. And in some cases we have fairly long term contracts on that. So it will go on for 5 years at 1. And then it's a very, very tight margin business. And the situation is even worse than you portray because within McLean we have a liquor distribution business in a few states and that business has actually increased its earnings moderately and we've added to that business. So within MacLean's figures are about $70,000,000 or so pretax from the liquor part that had nothing to do with the massive parts you're talking about in terms of food distribution. So it's even the decline is even greater in what you're referring to than you've noticed. And that's just become very, very much more competitive. And we have to decide. You look at our competitors and they're not making much money either. And that's capitalism. I think there comes a point where the customer says I'll only pay X and you have to walk away. And there's a great temptation when you're employing particularly employing thousands of people and you build distribution facilities and all of that sort of thing take care of them to meet what you'd like to term as irrational competition. But that is capitalism. And you're right. We took the earnings went up quite a bit from the time we bought it. And we're still earning more than that. And we've earned a lot of money over time. But as I say, a fair amount of that is actually coming from liquor distribution activities in about 4 states that we purchased very well run and we will do our best to get the margins up. But I would not I could not tell you give you a really your guess is almost as good as mine or your guess is almost as good as mine or better than mine maybe as to what margins will be in that distribution business 5 years from now. It's a very essential service. We do $40 some 1,000,000,000 and we move more of the product of all kinds of companies that names are known to you than anybody else. But when you get Kraft Heinz for that matter or Philip Morris or whomever it may be on one side of the deal when you get Walmart, some other 711 on the other side of the deal. Sometimes they don't leave you very much room in between. Charlie? I think you've described it very well. Okay. Station 4. Good morning, Charlie and Warren. I know that seems a little bit out of order but I'm a huge fan of yours, Charlie, mostly for your 25 cognitive biases. I'm from Seattle, Washington. I run a 1 person digital marketing firm that specializes in Facebook ads and email marketing. I use these a lot. Your breakdown of Coca Cola was really, really solid and I use that as reference when looking to how to understand the mechanics of my clients products and how to promote them. So I'm fairly certain that your cognitive biases work for internet related companies. Now that you're partnering with Amazon on healthcare, I'm curious, have you started to understand how to apply these biases to internet related companies? Or is there another set of tools you use to decide if you understand a business? Because you guys talk a lot about not investing in businesses that you don't understand. Well, healthcare is it. We don't plan to start healthcare companies or necessarily insurers or anything. We simply have 3 organizations with leaders that I admire and trust and mutually goes around all 3. And we hope to do something which Charlie correctly would probably say is almost impossible to change in some way a system which is taking 5% of GDP in 1960 and now taking close to 18%. And we have a hugely non competitive medical cost in American business relating to any country in the world. The countries that there were some countries that were around our 5% when we were at 5%. But we've managed to get to 18 without them going beyond 11 or so. Literally in 1960, we were spending $170 per capita on medical costs in the United States and now we're spending over $10,000 And you know every dollar only has $100 So there is a cost problem. It is a tapeworm in terms of American business and in its competitiveness. We don't we have fewer doctors per capita. We have fewer hospital beds per capita, fewer nurses per capita than some of the other countries that are well below us. And you've got a system that is delivering $3,300,000,000,000 That's almost as much as the federal government raises. It's delivering $3,300,000,000,000 or some number like that to 1,000,000 and 1,000,000 and 1,000,000 of people who are involved in the system. And every dollar has a constituency. It's just like politics. And whether we can find the Chief Executive which we're working in now and which I would expect we would be able to announce before too long. But that's a key part of it and whether that person will have the imagination and support of people that will enable us to make any kinds of significant improvements in a system which everybody agrees is sort of out of control on cost. But they all think it's the other guys' fault generally. We'll find out. It won't be easy. But it is not a the motivations are not primarily profit making. They're we want to deliver we want our employees to get better medical service at a lower cost. We're not going to we're certainly not going to come up with something where we think the service that they receive is inferior to what they're getting now. But we do think that there may be ways to make a real some significant changes that could have an effect and we know that the resistance will be unbelievable. And if we fail, we've at least tried. But the idea is not that I will be able to contribute anything to in some breakthrough moment by reading a few medical journals or something, changing something that is embedded as a medical system. But the idea is that maybe the 3 organizations which employ over a 1000000 people and which after we announced that we had a flood of calls from people who want to join in but there isn't anything to join into now. But they will if we have come up with any ideas that are useful. Whether we can bring the resources, bring the person and the CEO is terribly important and then bring the person, support that person and somehow figure out a better way for people to continue to receive better medical care in the United States without that 8% 18% going to 20% or 22% in the lifetime of our children or something of that sort because there are only 100¢ in the dollar. We will see what happens. If you were a G, actuarily figuring you would not you would not bet on us. But I think there is some chance we will do something. There's a chance nobody can quantify that we can do something significant. And we are positioned better than most people to try. We certainly got the right partners. So we will give it a shot and see what happens. There is some precedent for success in this public service activity. If you go back many decades, John D. Rockefeller the First, using his own money, made an enormous improvement in American medical care, perfectly enormous. In fact, there's never been any similar improvement done by any one man since that marbles it. So Warren having imitated Rockefeller in one way is just trying another and maybe it will work. Rockefeller incidentally lived a very long time. So I actually am trying to imitate him 3 ways there. We'll see what happens. But we are making a lot of progress. And I think we'll probably have a CEO within a couple of months. But if we don't have one, we're not going to pick somebody just because we want to meet any deadline or anything like that. We've got these wonderful partners. We don't have a partnership agreement among us. Somebody started growing up 1 in a legal department and the CEO just put a stop to it. You do have places that have a lot of resources. And while we all have our share of bureaucracy, we can cut through it if we've got something that we really think makes sense. And we will get the support. We'll get a lot of resistance too, but we will get the support of a lot of American business if we can come up with something that makes sense. But if it was easy, it would have already been done. There's no question about that. It's not easy. No. But it should be tried. Okay. Becky? This question comes from David Rolfe who is with Wedgwood Partners and has been the company has been shareholders in Berkshire since 1989. The stock is currently the largest holding in their stocks, 18 stocks. He asks this question. Over the past 2 years, you have listed the individual fund to funds performance from Protege Partners. When will you start showing the annual performance on $25,000,000,000 that Ted and Todd manage? Can you state if either Ted or Todd has beaten the S and P 500 index over the last 5 years? Yes. Both, A, we'll probably never report their individual performance. But you can be sure that I have an enormous interest in as does Charlie and how much we think they contribute to Berkshire and they have been terrific. They not only have the intellect and the record, but they are exceptional human beings. And Todd has done a tremendous amount of work, for example, on the medical project. And Ted is I've given him several things and he's done better than I can do. So the record since inception and I'm measuring it, Ted came later than a year or so later. But the record since inception is almost identical. Both of the 2 managers from their different inception and matching the S and P. And they've received some incentive compensation which they only get if they beat the S and P. And as I say, they're just slightly ahead. That really hasn't it's been better than I've done. So naturally, I can't criticize it. They were 2 very, very, very good choices. Charlie? You did report it in the previous year. You just didn't do it this year. But now you have your report. Well, I would the problem that all of us has is size. It's harder to run even $12,000,000,000 or $13,000,000,000 frankly than it is to run a 1,000,000,000 And if you're running $1,000,000 or something of the sort, it's a whole different game. You'd agree with that, wouldn't you, Charlie? Of course. Yeah. Okay. Just like any good lawyer, you never ask them a question unless you think you know the answer. Okay. Gary. My question is on GEICO. Last year, you promised growth and delivered. But along the way, the combined ratio was moving up, and it was the first time it was over a 100 in about 15 years. Granted, some of that was catastrophes. But even excluding catastrophes, there was something going on in the loss trends that caused you to slow down that growth, at least as we got to the latter part of the year. And I wondered if you could tell us what was going on. And I did look this morning too, so it looked like the Q1 settled down a little bit, but still like to know about the quarter. Yes, sure. The only thing I did different with the question, I'm sorry, when you say it causes a slowdown, we didn't want to slow down the growth. I mean, you're looking at a guy here that has never wanted to slow down the growth at GEICO. The growth did slow down, but it wasn't because we wanted it to. Our prices that led to the underwriting loss, the actual we'd have been slightly in the black without the catastrophes. But you know we hadn't paid our light bills, we might have been in the black too. I mean, this except for stuff doesn't mean much in insurance as far as I'm concerned. The if you look at the Q1, our margins were around 7% which is actually a little more than we aimed for. And I received the unaudited I mean the preliminary figures for April and they're similar. So the underwriting gain is or margins are perfectly satisfactory now and we'd love to get all the growth we can. And we will gain market share this year and we gain market share. Tony when Tony took over the place it was in 1993 it was 2 and a fraction 2 and a very small fraction percent and it'll be 13% of the house you know 13% of the households in the country now. And we will keep gaining share. We will keep riding on profitably most of the time and every now and then our rates will be in that slightly in that modestly inaccurate and inadequate I should say and or we'll have maybe some big losses on hurricanes or something of the sort. Or we'll have a Sandy in New York. But GEICO is a jewel and it's you know it's really our we've got others we feel awfully close to some really about. But it's an incredible company. It has a culture all of its own. It's saving its customers probably $4,000,000,000 or $5,000,000,000 a year against which they would otherwise be paying based on the average in auto insurance. And it will be profitable on underwriting a very high percentage of the year. It contributed another $2,000,000,000 to float last year. It is a terrific company. And like I say, the 1st 4 months are dramatically better. Now there's some seasonal in auto insurance. So the Q1 is usually the best of the 4 quarters, but it's not a dramatic seasonal side. I think when you read the 10 Q and you can take my word for April, I think GEICO is on a good profit track as well as a good growth track and the more it grows the better I like it. Charlie? Well, I think you've said it perfectly. It was never very bad and it's better now. Okay. Station 5. Good morning Warren Buffett and Charlie Munger. My name is Ethan Raposa. I am from Omaha, Nebraska. My question is, how does Donald Trump's tariffs affect the manufacturing business of Berkshire Hathaway? Well, today, steel costs We've seen we've seen steel costs increase somewhat. But as I said earlier, I don't think the United States or China there'll be some jockeying back and forth and there'll be something that leaves some people unhappy. But I don't think either country will dig themselves into something that precipitates and continues any kind of real trade war in this country. We've had that in the past a few times and I think we've learned a general lesson on it. But there will be some things about our trade policies that irritate others and there'll be some from others that irritate us and there'll be some back and forth. But in the end, I don't think we'll come out with a terrible answer on it. Charlie, I'll let you. Steel has it reached the conditions in steel were almost unbelievably adverse to the American Steel Industry. Even Donald Trump can be right on some of this stuff. The thing about trade, I've always said that the President whether it's President, any President needs to be an educator in chief which Roosevelt was in the depression. That's why he had those fireside chats and it was very important that he communicated to the people what needed to be done and what was happening around them. And trade is particularly difficult because the benefits of trade are basically not visible. You don't know what you would be paying for the closure way ordering today if we had a rule they all had to be manufactured in the United States or you'd be paying for your television set or whatever it may be. No one thinks about the benefits day by day as they walk around buying things and carrying on their own business. The negatives and there are negatives are very apparent and very painful. If you're laid off like happened in our shoe business in Maine. And you know you are been a very, very, very good worker. You are proud of what you did and maybe your parents did it before you and all of a sudden you find out that American shoes, shoes manufactured in America are not competitive with shoes made outside the United States. You know you can talk all about Adam Smith or David Ricardo or something and explain the benefits of free trade and comparative advantage and all that sort of thing. And that doesn't make any difference. And if you're 55 or 60 years old to talk about retraining or something like that, you know, so what? So I it is tough in politics where you have a hidden benefit at a very a very visible cost to a certain percentage of your constituency. And you need to do 2 things under those circumstances if you have that situation. You know what's good for the country. So you have to be very good at explaining how it does really hurt in a real way somebody that works in a textile mill like we had in New Bedford where you only spoke Portuguese, half our workers only spoke Portuguese. And suddenly they have no job and they've been doing their job well for years. You've got to do 2 things. You can you have to you have to understand that that's the price individuals pay for what's good for the collective good. And secondly you got to take care of the people that are that were retraining as a joke because of their age or whatever it may be. And you've got to take care of the people that become the roadkill in something that is collectively good for us as a country. And that takes that takes society acting through its representatives to develop the policies that will get us the right collective result and not kill too many people economically in the process. And you know we've done that in various arenas over the years. The people in their productivity years do help take care of the people that are too old and too young. I mean every time a baby is born in the United States, we take on an obligation of educating them for 12 years. It will cost $150,000 now. We have a system that has a bond between the people in their productive years and the ones in the young and old and it gets better over time far from perfect now but it has gotten better over time and I believe that the trade properly explained and with policies that take care of the people that are roadkill is good for our country and can be explained. But I think it's a tough it's been a tough tough sell to a guy that may choose in Dexter Maynard or worked on a loom in New Bedford, Mass or works in the steel mill in Youngstown, Ohio. Andrew? Okay, Warren. This question comes from a Berkshire shareholder, says they've been a shareholder for 10 years. I should say this may be one of the most pointed questions I've ever received for you. But you've elected to give it though anyway. But I did. The shareholder writes, I have watched the movie every year at this meeting when you testify in front of Congress on behalf of Solomon as the symbol of what it means to have a moral compass. Investors are increasingly looking to invest in companies that are socially and morally responsible. So I was disturbed when you were asked on CNBC about the role that business could play in sensible policies around the sales of guns. You said you didn't think business should have a role at all and you wouldn't impose your values on others. I was even more surprised when you said you'd be okay with Berkshire owning shares in gun manufacturers. At this meeting years ago, you said you wouldn't buy a tobacco company because of the social issues. The idea that Berkshire would associate with any company as long as it isn't illegal seems at odds with everything I think you stand for. Please tell us you misspoke. Well, let's explore that a little. Should it be just my view or should it be the view of the owners of the company? So if I decide to poll the owners of the company on a variety of political issues and one of them being whether Berkshire Hathaway should support the NRA. I don't want if a majority of the shareholders voted to do it or if a majority of the Board of Directors voted to do it, I wouldn't accept that. I don't think that the my political views, I don't think I put them in a blind trust at all when I take the job. And I in the election of 2016, I raised a lot of money. In my case, I raised it for Hillary and I spoke out in various ways that were quite frank. But I don't think that I speak when I do that, I don't think I'm speaking for Berkshire. I'm speaking as a private citizen and I don't think I have any business speaking for Berkshire. We have never at the parent company level, we have never made a political contribution. And I don't go to our suppliers. I don't do anything of that sort where I raise money either for the school I went to or for a political candidate I went to or anything else. And I don't think that we should have a question on the GEICO policyholder form. Are you an NRA member? And if you are, you just aren't good enough for us or something like that. I think I do not believe in imposing my political opinions on the activities of our businesses. And if you get to what companies are pure and which ones aren't pure, I think it is very difficult to make that call. I think with that response I'm almost afraid to call on Shirley but go ahead. Well obviously you do draw a limit Warren. Yes we do. All kinds of things which are beneath us even though they are legal. But we don't necessarily draw it perfectly because we have got some sort of supreme knowledge. We just do the best we can. And certainly we're not going to ban all guns surrounded by wild turkeys in Omaha. Okay, Greg. Warren, this question is also based on something you said more recently, so I can't guarantee it's going to be any easier. You recently noted that you prefer share repurchases over dividends as a means for returning capital to shareholders. Should Berkshire's cash balances continue to rise and hit the $150,000,000,000 threshold he noted as being difficult to defend to shareholders at last year's annual meeting. While I understand the rationale for not establishing a regular dividend, a one time special dividend could be a useful option for returning a larger chunk of Berkshire's excess capital to shareholders without the implied promise to keep paying a regular dividend forever. The drawback with the special dividend though is that it would lead to an immediate decline in book value and book value per share, whereas a larger share repurchase effort while depressing book value would reduce Berkshire's share count, limiting the impact on book value per share. If we do happen to get a few years out and Berkshire does hit that $150,000,000,000 threshold because valuations continue to be too high, both for acquisitions and for the repurchase of company stock, would you consider a one time special dividend as a means for returning capital to shareholders? Well, if we thought we couldn't use capital effectively, we would try to figure out the most effective way of returning capital to shareholders. And you could I would have probably I think it'd be unlikely we do it by a special dividend. I think it'd be more likely we do it by a repurchase if the repurchase didn't result in us paying a price above intrinsic value per share. We're never going to do anything that we think is harmful to continuing shareholders. So we think the stock is intrinsically worth X and we would have to pay some multiple some modest multiple even above that to repurchase shares we wouldn't do it because we would be hurting continuing shareholders to the benefit of the people who are getting out. But we will try and do whatever makes the most sense but not with the idea that we have to do something every day because we simply can't find something that day. We had a vote as you know I don't know, a few years back on whether people wanted a dividend and the B shares. So I'm not talking my shares or Charlie's or anything but the B shares voted 47 to 1 against it. So I think through self selection of who become shareholders I don't think shareholders world or countrywide on all stocks would go 47 to 1 at all. But we get self selection in terms of who joins us. And I think they expect us to do whatever we think makes the sense for all shareholders. And obviously, if we really thought we never could use the money effectively in the business, we should get it out one way or another. And you've got a bunch of directors who own significant very significant amounts of stock themselves. And you can expect them to think like owners. That's the reason they're on the board and you can expect the management to think like owners and owners will return money to all of the owners if they think it makes more sense than continuing to look for things to do. But we invested in the Q1 maybe, have to look it up on the well certainly through April probably close to $15,000,000,000 or something like that net. And we won't always be in a world of very low interest rates or high private market prices. So we will do what makes the most sense. But I can't see us ever making a special or almost it's very unlikely we would just pay out a big special dividend. I think that if we put that to the vote of the shareholders and Charlie and I did not vote, I think we would get a big negative vote and I'd be willing to make a bet on that one. Charlie? Well, as long as the existing system continues to work as well as it has, why would we change it? We've got a whole lot of people that are accustomed to it, have done well under it. And if conditions change, why we're capable of changing our minds if the facts change. And we've done that several times. Yes. Yeah. Although I must say it's a little hard. It always brings me back to Earth. Okay. Station 6. Hi. Good morning, Mr. Buffet and Ms. Munger. My name is Stephanie Yu from Horizon Insights, a China focused research firm based in Shanghai. So I have a lot of mutual fund clients in China who are very young, relatively younger, and they manage a smaller portion of funds. So my question is, if you only have $1,000,000,000 in your portfolio today, how would you change your investments? Would you consider more investment opportunities in emerging markets such as China? Thank you. Yes. I would say if I were working with 1,000,000,000 I would probably find within a $30,000,000,000,000 market in the United States where I understood things better just generally than I do around the world. I'd probably find opportunities there that would be better incidentally by some margin than what we can find for 100 of 1,000,000,000. But I wouldn't there's no way I'd rule out emerging markets. There was a time 15 years ago or so. Just because it was kind of interesting that took me back to my youth. On a weekend I went through a directory of Korean stocks and I bought and these were small stocks. Well they were small by the standards of either Korean or American business. They were big companies. But I found 15 or 20 and they were statistically cheap and bought some of each one myself. And there are opportunities with smaller amounts of money to do things that we just can't do. And, but I my first inclination always would be to comb through things in the United States and but I'd comb through in other countries. I probably wouldn't get into very very small markets because there can be a lot of difficulties even in market execution and taxation. A lot of things. You can find it. If you can't find it in America and China and Britain and a few other places, you probably aren't going to find it someplace else. You may think you found it but there may be a different game than you know. Our problem is size not geography. Charlie? Well I already have more stocks in China than you do as a percentage. So I'm with the young lady. Okay. Well, you can you want to name names? Do these stocks have names? No, I don't. Carol. This question and I should just add one thing. You will find plenty of opportunities. And China would say you've got a better hunting ground than even a person with similar capital in the United States. Would you agree with that? Yes, I do. Yes. And in a sense, it's logical that should be the case because it's a younger market but still a large market. So that markets probably work toward efficiency as they age. Japan had this very strange situation with warrants being priced out of line and all of that 30 years ago. And people notice after a while it disappears, but there can be some very strange things happen in markets as they develop. I think you'd agree with that Charlie, wouldn't you? Absolutely. Yes. Jonathan? Did I skip? I skipped Carol? Yes. I'm sorry. Okay. This question, and I would concede it is not a small one, comes from Gideon Pollock of Montreal. He says the world knows generally how the looks of Berkshire Hathaway have changed since you began to run the company in 1965. Berkshire was then a tiny Northeastern textile company, and now it is the number 4 company on the Fortune 500. What about the next 50 years? Could you give us your view of what Berkshire looks like in 2068? I think it'll look a long way away. No, the answer is I don't know. And I didn't know 50 years ago what it would look like now. I mean, it will be based on certain principles. But where that leads, we will find out and we'll have people that are thinking about different things than I am and the world is different. But we will be, I very much hope and believe and we will be that we'll be a shareholder oriented as any large company in the world. We will look at our shareholders as partners and we will be trying to do with our money exactly what we would do with our own, not seeking to get an edge on them. And who knows what else will be happening then. Charlie? Well, I want to talk to the younger shareholders in the group. Those of you who after we are gone sell your Berkshire stock and do something else with it, helped by your many friends, I think you're going to do worse. So I would advise you to keep the faith. Well, they say By the way, some of that has already happened in many families. I'll give his answer next time now that I see it get all the applause. Jonathan? Duracell's $82,000,000 of pretax profits in 2017 were still well below what it earned as a subsidiary of P&G. Can you clarify or quantify to what extent transition costs or purchase price accounting impacts at the segment level were still temporarily a burden last year? Or is it possible that the GAAP earnings contribution simply reflects the commoditization of the category given the entry of Amazon into the battery market? I did see that Duracell's earnings were up in the Q1. Is that a sign of a more meaningful contribution in 2018 and beyond as you finish rightsizing the manufacturing footprint and acquisition related charges fall away? Yes. Duracell should be earning more money than it is now and will be. And as you mentioned, it's well on its way there, but it it's not earning an appropriate amount now based on the history of the company. I I was around when I was on the board of Gillette when Gillette bought Duracell. And I've I've seen what it, does, what it isn't managed to its full extent. And I and I saw what Jim Kiltz did with it at Gillette when when when he ran it. And there were a lot more transition problems in the purchase. For one thing, there's a lot of rules connected with our swap of our stock in P&G for Duracell. There are a lot of things that you cannot do that made sense to do in that period of transition from P and G's management to ours. But Duracell, the brand is strong, very strong. The product line is very strong. So and we are making more money and we'll we should and I believe we will earn really what the property is capable of earning. We should be earning that relatively soon. But you're absolutely right that it is from a profit standpoint, it's underperforming. We're making a lot of changes. And some of those are involved in jurisdictions, countries where it is really expensive to change in terms of employment payments that have to be made if a plan is changed or something of the sort. But I like the Duracell deal absolutely as well as when we made it. Charlie? I like it better than you do. Now Duracell is a very, very is our kind of business. It is. Okay. Station 7. Good morning. I have a question related to the bond market, U. S. Treasury bond market. My name is Ole Larsen. I live in the San Francisco Bay Area. And I never worked in the financial industry. I started out buying penny mining stocks on the Vancouver Stock Exchange. And then decade later, I got married and my wife convinced me to buy Berkshire shares. That were probably a good decision. So my question is, I read the newspapers about the Federal Reserve and the inflation numbers. And there must be an increased supply of treasury bonds that must go to auction. And my question is, how would what do you expect that to impact yield or interest rate? Yes. The answer is I don't know. And the good news is nobody else knows, including members of the Federal Reserve and everywhere. There are are a lot of variables in the in the picture. And the one thing we know is we think that long term bonds are a terrible investment. And we at current rates or anything close to current rates. So basically, all of our money that is waiting to be placed is in treasury bills that they have an average maturity of 4 months or something like that at most. The rates on those have gone up lately so that in 2018, my guess is we'll have at least $500,000,000 more of pretax income than we would have had from the bills last year. But they still it's not because we want to hold them. We're waiting to do something else. But long term bonds, they're basically at these rates. It's almost ridiculous when you think about it because here the Federal Reserve Board is telling you, we want 2% a year inflation and the very long bond is not much more than 3%. Of course, if you're an individual and you pay tax on it, you're going to have some income taxes to pay. And let's say it brings your after tax return down to 2.5%. So the Federal Reserve is telling you that they're going to do whatever is in their power to make sure that you don't get more than a half a percent a year of inflation adjusted income. And that seems to me a very I wouldn't go back to penny stocks, but I think I would stick with productive businesses or productive certain other productive assets by far. But what the bond market does in the next year, you've got 1,000,000,000,000 of dollars, in the hands of people that are trying to guess which maturity would be the best to own and all that sort of thing. And we do not bring anything to that game that would allow us to think that we've got an edge. Charlie? Well, really wasn't fair for our monetary authorities to reduce the savings rates paid mostly to our old people with savings accounts as much as they did. But they probably had to do it to fight the Great Recession appropriately. But it clearly wasn't fair, and the conditions were weird. In my whole lifetime, it's only happened once that interest rates went down so low and stayed low for a long time. It was quite unfair to a lot of people, and it benefited the people in this room enormously because it drove asset prices up, including the price of Berkshire Hathaway stock. So we're all a bunch of undeserving people and I hope that we continue to be so. At the time this newspaper came out in 1942, it was the government was appealing to the patriotism of everybody. As kids, we went to school and we bought savings stamps to put in what they first call them US war bonds and they call them US defense bonds and then they call them US savings bonds, but they were called war bonds then. And you put up $18.75 and you got back $25 in 10 years. And that's when I learned that that $4 for 3 in 10 years was 2.9% compounded because they had to put in small print that. And even 11 year old could understand that 2.9% compounded for 10 years was not a good investment, but we all bought them. It was part of the war effort, basically. And the government knew I mean, you knew that significant inflation was coming from what was taking place in finance in World War 2. We actually were on a massive Keynesian type behavior, not because we elected to follow Keynes, but because war forced us to have this huge deficit in our finances, which took our debt up to 120% of GDP. And it was the great Keynesian experiment of all time when we backed into it and it sent us on a wave of prosperity like we've never seen. So you get some accidental benefits sometimes. But the United States government then was urging every citizen to put their money into a fixed dollar investment at 2.9% compounded for 10 years. And I think treasury bonds have been unattractive ever since. With the exception of the early 80s, that was something at that time. I mean, you really had a chance to buy you had a chance to invest your money by buying 0 coupon, treasury bonds, and in effect guarantee yourself that for 30 years you would get a compounded return, you know, something like 14% for 30 years of your lifetime. So every now and then something really strange happens in markets and the trick is to not only be prepared but to take action when it happens. Charlie, did you ever buy any war bonds or No. No. I never bought war bonds. No. Used to be like take me I didn't have any money when I was in the war. That's a good reason not to buy. Okay, Becky. This question comes from Angus Hanton who he and his wife are based in London and he says they've been shareholders in Berkshire Hathaway for over 30 years. He says, we have all read about the 0 based budgeting that has been so effective with Kraft Heinz and other investments that you've done with 3 gs partners. Can we expect these cost reduction techniques to be used by your managers in other parts of the Berkshire Hathaway enterprise? Well, in general, we do not expect the managers generally to get into a position where there would be a lot of change in terms of 0 based budget. And in other words, why in the world aren't you thinking that way all of the time? The 3 gs people have gone into certain situations where there were probably primarily in personnel, but in other expenses as well, a lot of expenses that were not delivering a dollar of value per dollar expended. And so they made changes very fast that, to a situation that probably shouldn't have existed in the 1st place, whereas we hope that our managers take a GEICO. GEICO has gone from, I think 8000 to 39000 people since we bought Control. But they're all very productive. I mean, you would not find a way for a 3 gs operation to take thousands of people out of there. On the other hand, I can think of some organizations, where you could take a whole lot of people out, where it isn't being done because the businesses are very profitable to start with. That's what happened with the tobacco companies actually. They were so profitable that they got all kinds of around that didn't weren't really needed but they, the money just flowed in. So I our managers have different techniques of keeping track of or of trying to maximize customer satisfaction at the same time that they don't incur other than necessary costs. And and I think probably some of our managers may well use something that's either zero based budgeting or something akin to it. They do not submit budgets, never have to me. I mean, they've never been required to. We've never had a budgeted Berkshire. We don't consolidate our figures monthly. I mean, I get individual reports on every company, but there's no reason to have some extra time spent, for example, by having a consolidated figures at the end of April or consolidated figures at the end of May. We know where we stand. And, you know, I'm sure we're the only company that probably in the in the whole Fortune 500 that doesn't do it, but we don't do unnecessary things around Virtu. And a lot of stuff that's done at big companies is unnecessary. And that's why a 3 gs finds opportunities from time to time. Charlie? Well, if you got 30 people at headquarters and half of those are internal auditors, that is not the normal way of running a big company in America. And what's interesting about it is obviously, we lose some advantages from big size, but we also lose certain disadvantages from having a big bureaucracy within this meeting after meeting after meeting around headquarters. And net, I think we've been way ahead with our low overhead diversified method and it also makes our company attracted to very able, honorable people who have companies. So generally speaking, the existing system has worked wonderfully. For us, I don't think we have the employment that could be cut effectively than a lot of other places have. And I think our methods have worked so well, we'd be very unlikely to change them. Yes, I think at headquarters, you could say we have kind of subzero based budgeting at that. And we hope that the example of headquarters is to a great extent emulated by our by our state. It isn't just the cost reduction. I think the decisions get made better if you eliminate the bureaucracy. Oh, yeah. I think a bureaucracy is sort of like a cancer and it functions sort of like a cancer. And so we're very anti bureaucracy and I think it's doing us a lot of good. In that case, we're quite different from, say, Anheuser Busch at its peak. Okay. Gary? My question is on small commercial and specifically direct small commercial. You seem to have some websites that enable buyers to purchase small commercial insurance directly. BuyBerk is one of them. It's a very competitive fragmented market. But what is your strategy for that market? And then can you ultimately GEICO ize the small commercial market? Well, we'll find out. I mean, it's a very good question because that's exactly the question we ask ourselves. And we have this incredible company at GEICO which has gone direct in the personal auto field and is, you know, first started at 1936. And there's no question in my mind that that over a lot of years and maybe not so many years, something like small commercial, anything that takes cost out of the system, makes it easier for the customer is going to work over time if you've got a system that was based on something that that had more layers of agency costs and that sort of thing. So we are experimenting and we'll continue to experiment on something like small commercial workers comp, whatever it may be. We'll try and figure out ways to take cost out of the system, offer the customer a, an equivalent product or better at lesser price. And we'll find out what can be done and what can't be done. And we're not the only ones doing it, as you know. We are not going to we've got some managers that are going to be quite, I'm sure, enterprising on that and we back them and we expect some to fail and some. And if a few succeed, we'll have some very good businesses and the world is going in that direction. So, you could expect us to try and go with it. Charlie? Well, if it were easy, I think it would have happened more fast. Yes, but it will happen as we go along. I mean, it wasn't easy in auto. I mean, when you think about it. No. It wasn't. No. I mean, it was a system with all kinds of extra cost to go back to the turn of the 19th century into 20th. I mean, it was built on fire insurance and strong general agencies and that's slopped over into auto when the auto came along in 1903 from Ford or whenever. And so it grew within a system that really wasn't very efficient compared to what was available. But it took State Farm initially to go to a a direct or a captive agency system and then it took USAA and then later GEICO and then later Progressive to go to direct systems that are even more efficient, consumer friendly. And the same thing is going to happen to some degree in all kinds of industries and certainly small commercial. Somebody will It could happen, but it will be slow. It takes an amazingly long time. I mean, it but, you know, the battle doesn't always go to to the strong and the race to the swift, but that's the way to bet, you know, as they say. So okay. Station 8. Austin Merriam from Jacksonville, Florida. Mr. Buffet, with the recent news of the partnership between you, Mr. Bezos and Mr. Diamond to challenge the healthcare industry and the self admitted difficulties you are running across. This would lead me to believe the industry has higher barriers to entry than may have originally been hypothesized, a larger moat, if you will. Would that justify a higher earnings multiple for established players in the industry, such as PBMs, for example? Well, just though the system may have a mode against intruders, it doesn't mean that everybody operating within the system has individual modes for one thing. Now I we are if this new triumvirate succeeds at all, we are attacking an industry moat. And I'm defining industry very broadly healthcare, not just healthcare insurers or this or that. We're trying to figure out a better way of doing it and making sure that that, we're not sacrificing care and and and and the goal is to improve care. And like I say, that is a it's a lot bigger than a single company's mode. It's bigger than a component of the industry's mode. The mode held by the whole system since it interacts in so many ways is actually that's the mode that essentially has to be attacked and that's a huge amount. And like I say, we'll do our best. But I hope if we fail, I hope somebody else succeeds. Charlie? Well, I suspect that eventually when the Democrats control both houses of Congress and the White House, we will get single payer medicine and I don't think it's going to be very friendly to many of the current BBMs. And I won't miss them. Andrew? This question comes from, Keeley and actually is directly about the issue of Moats. He notes that Elon Musk this week on his Tesla earnings call said the following, I think moats are lame. They are like nice in a sort of quaint, vestigial way. And if your only defense against invading armies is a moat, you will not last long. What matters is the pace of innovation. That is the fundamental determinant of competitiveness. So Warren, it seems the world has changed. Business is getting more competitive, pace of innovation, technology is impacting everything. Is Elon right? Well, yes, Warren. Elon says a conventional mode is quaint and that's true of a puddle of water. And he says that the best moat would be to have a big competitive position and that is also right. It's ridiculous. Warren does not intend to build an actual moat. Even though they're quaint. Yes. There's certainly a great number of businesses. This has always been true, but it does seem like the pace has accelerated and so on in recent years. There's been more moats that have been become susceptible to invasion that seemed to be the case earlier, but there's always been the attempt to do it. And there, here and there, there are probably places where the mode is as strong as ever. But certainly, you can work at certainly should be working at improving your own moat and defending your own moat all the time. And then, Elon may turn things upside down in some areas. I don't think he'd want to take us on in candy. And we've got some other businesses that wouldn't it's always easy. You can look at something like Granibals out there in the other room and it won't be technology that takes away the business and then Granite was it maybe something else that catches the young kids fantasy or something. But there are some pretty good moats around. Being the low cost producer, for example, is a terribly important moat. And something like GEICO, technology has really not brought down the cost that much and that I think I think our position as there are a couple of companies that have costs as low as ours, but among big companies, we are a low cost producer and that is not bad when you're selling an essential item. Okay, Greg. Warren, Berkshire Energy has benefited greatly from operating under the Berkshire umbrella. By not having to pay out 60% to 70% of earnings annually as a dividend, the company was able to amass $9,000,000,000 in capital in the past 5 years and closer to $12,000,000,000 in the past $10,000,000 money that can be allocated to acquisitions and capital spending, especially on renewables. While tax credits for solar energy don't run out until next year, we've already seen a dramatic reduction in Berkshire Energy's capital commitment to solar projects. And even though spending on wind generation capacity is projected to be elevated this year and next, it does wind down in 2020 as the wind production tax credits are phased out. Absent a major commitment to additional capital projects, it looks like Berkshire Energy's expenditures in 2021 will be its lowest since 2012, leaving the firm with more cash on hand than it has had in some time. Do you think it is likely at that point that Berkshire Energy starts funneling some of that cash up to the parent company? Or will it be earmarked for debt reduction or just be left on the balance sheet as dry powder for acquisitions? Yes. You're right about when tax credits phase out and all of that, although they as you know, they've extended that legislation in the past and knows exactly what the government's position will be on incentivizing various forms of alternative energy. But my guess is, I mean, if you take the logical expenditures that may be required in all aspects of the public of electric generation and the utility business generally, I think there'll be a lot of money spent and the question is whether we can spend it and get a reasonable return on it. And there again, we'll do what's logical. There are 3 shareholders basically of Berkshire Hathaway Energy. Berkshire Hathaway itself owns 90% of it and Greg Abel and his family perhaps and Walter Scott and again family members, own the other 10%. And we all have an interest in employing as much capital as we can at good rates. And we'll know when it can be done and when it can't be done and we'll do there's no tax consequences to Berkshire at all. So but the 3 partners will figure out which makes the most sense. But when you think of what might be done to improve the grid in the U. S. And the fact that we do have the capital, I wouldn't be surprised if we find good uses for capital in Berkshire Hathaway Energy for a long time in the future. Charlie? Yes. Well, I think there'll be huge opportunities in Berkshire Energy as far ahead as you can see to deploy capital very intelligently. So I think the chances of a big dividend is approximately 0. Yes. And we've not only got the money to an extent that virtually no utility company does, and we've also got the talent too. I mean, we've got a very, very talented organization there. So it's a very it's a big field and we've got shareholders that are capitalists and we've got managers that are terrific and you would think we'd find something intelligent to do over time in the field. So far we have. I mean we've owned it now for close to 20 years And we've deployed a lot of capital and so far so good. I mean, it's you look at the improvements that can be made in our utility system in the United States, you're talking 100 and 100 and 100 of 1,000,000,000 of dollars, if not 1,000,000,000,000. So where else but Berkshire? You look for that kind of money. Okay. Station 9. I'm Richard Surser from Tucson, Arizona. At Berkshire, what counts most are increases in our normalized per share earning power. That was in your last letter. What is our normalized per share earning power as you estimated? Well, I would say that what you saw in the Q1 under these tax rates would probably be reasonable guess. You know, obviously depends on the economy in any given year. I would say that would is a reasonable estimate. But we have firepower we haven't used and we'll have more firepower we go along. So we do expect that normalized earning power to increase over time. And if it doesn't, one way or another, we're failing you because we're retaining those earnings. So, I don't see anything abnormal in our earnings, figured now at a 21% federal rate. But as I look at the 5,250,000,000 in the Q1, seasonally insurance is better than the Q1, but seasonally most of our businesses, the Q1 is not the strongest quarter for us. I don't see anything abnormal in it. And then I think you can expect, you should expect, we expect substantial capital gains over time in addition to what comes from the operating businesses. So how much you figure in for that? I would say that the retained earnings beyond dividends of our $770,000,000,000 of equities. In other words, how much they are keeping from us, but that our share of the earnings which can be used by them, whether it's Apple or American Express or Coca Cola or Wells Fargo or whatever, our share is in many 1,000,000,000 of dollars annually. And one way or another, we think that those dollars will benefit us as much as if they've been paid out. Now in certain cases, they won't, but in certain cases, they'll excel the amount in terms of market value created. So there's many 1,000,000,000 of dollars we are not showing in our earnings that is being retained by our investees. And in one way or another, I think we'll get value received out of those. So you can take $20,000,000,000 or $21,000,000,000 under present tax rates, present economic conditions. And then we should get something from that and we should get more when we get $100,000,000,000 of cash invested and we should get more as we return earnings. So we hope it adds up to a bigger number as we go along. Charlie? Well, I don't think our shareholders are going to see another increase in net worth of $65,000,000,000 in a single year. They may have to wait a while for another. But I don't think that I think eventually there another will come and then another. Just be patient. We don't regard the present situation as disadvantageous except we like the businesses we have. We like the businesses that we own part of. We are not reflecting in the way we look at earnings. The dividends we get from those partially owned companies falls far short of what they're going to contribute in our view to Berkshire's overall earnings over time. We wouldn't own those stocks otherwise. And so, And you also like the Apple and Airline stocks you've recently purchased better than the cash you parted with. Absolutely. Yes. And it's quite a lot. Yes. Yes. Okay. We won't pursue that further. Carol? This question is from Daniel Kane of Atlanta. Your annual letter this year pointed out that Berkshire has become a leader in real estate brokerage in the United States. Congratulations. That is a significant feat in less than 20 years. But let me mention a sticky point. If fees charged by stock market active managers are a drag on investor performance, I would argue that real estate commissions are no different and perhaps more detrimental, especially when one considers the lifetime effects of large foregone upfront cash flows and the power of compounding interest. I would be pleased to hear your rejoinder on the points I've raised. Well, the purchase of a home is the largest financial transaction for a significant percentage of the population that they make. And and, people a lot of people need a lot of attention and you can show a lot of houses before you sell 1. I would say this, if you look at our close to 50,000 agents now, I think they make a good living, or decent living, but, I would say that, that people who manage money make a whole lot more money with perhaps less contribution to the welfare of the person that they're dealing with. So I don't think that there are unusual profits involved in being a real estate agent. I don't think there are unusual profits involved in the ownership. We like it because it's fundamentally a good business. But here we are doing 3% of all real estate transactions in the United States and we're making maybe $200,000,000 a year, which we won't get into what the comparative efforts are and Wall Street earned 200,000,000 I think I have to tell them about Roy Tolles a little bit on this. Roy Tolles, for example, Charlie's partner many, many, many years ago decided he was going to want to buy a house in San Marino. He's going to have a number of kids. So he sent his wonderful wife, Martha, out. And for 6 months, he had her look at houses in San Marino. And this is many years ago. And if they were priced at 150,000 she would offer, he had her offer 75,000. And of course, the real estate agents were going crazy, because they were going to get something listed 150 sold at 75. And then finally, when she found one that they both really liked, he had to offer something like 120 and the real estate agent was so happy to get a bid that was in the general area of the offering price that he would work very hard on the seller to take that bid because he knew what he did not want 6 more months of Roy bidding at the lower prices. So you don't sell them on the first trip. Incidentally, I had Roy buy a house from me sight unseen because this was a guy that knew human nature. You don't get rich Real estate agency is people earn their money, and they earn it in a perfectly respectable and honorable manner in terms of what they get paid. And as in every single industry there is, there can be excesses or mistakes or that sort of thing. But we will continue to buy more brokers. In fact, we'll probably have another couple to announce before long. And we will feel that if we get to where we're doing 10% of the real estate brokerage business in the country and we're making $600,000,000 or $700,000,000 a year pretax, we will not think that's a crazy amount of money to make for enabling 10% of 5,000,000 people to change their homes every year in the United States. Charlie? Well, commissions in real estate may get unreasonable if you're talking about $20,000,000 houses. It seems a little ridiculous to pay a 5% commission on a $20,000,000 transaction. But do any of us really care if the kind of people who pay $20,000,000 or a house have a slightly higher commission? The ordinary commission is pretty well earned. Yeah. We have a number of brokerage firms. So the highest has that their average transaction in one section of the country would be close to $600,000 a unit. But the in terms of the sales price of the house, but the in most of our real estate operations, the average price is more like $250,000 or something in that area. And you can show a lot of houses to make $1,250,000 sale and of course you split the listing company and the selling company are usually 2 different companies. So it's it's, it does not strike me as excessive. And incidentally, it doesn't strike the people in the industry that way easier. It has not has been particularly susceptible to online type substitution or something of the sort. The real estate agent earns their commission in most cases. But Charlie has had more experience with $20,000,000 houses, so he will comment on that area. Okay. We'll have one more question before we break. Jonathan? Given the changes in consumer tastes in the food business and Kraft Heinz is already high margin structure, do you think the brands they own today plus new product introductions can together maintain or increase the current level of profits over the next 10 years without the benefit of acquisitions? Is there anything in their portfolio besides ketchup that is enjoying growing demand? Well, in effect, you're asking me whether Kraft Heinz is a good buy. We don't want to give information on marginal securities like in that manner. But, yes, there are a number of items besides ketchup that enjoy growing demand, and some vary quite a bit by geography. There's enormous differences in the penetration of various products in the portfolio. Consumer packaged goods are still a terrific business in turn return on invested assets and you know, but the population worldwide grows fairly small and and at a fairly a fairly minor rate. And, people are going to eat about the same amount and there is some more willingness to experiment, you know, or go for, organic products of the sort. It's a very good business and and, there are new products coming out constantly. It's not one where you're going to get terrific organic growth, but it never has been. And I like the business and we own 26% and so of it. But there are a number of items within Kraft Heinz that enjoy pretty fairly healthy growth that, and I think you'd find out at most food companies and I think you'd find very good returns on invested on tangible net assets at those businesses. And with that talk about food, we will now break for lunch and we will come back in about an hour and look forward to rejoining you.

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