Berkshire Hathaway Inc. (BRK.A)

ASM 1998 Part 2

← View all transcripts

May 4, 1998

Let's settle down, please. And we'll we're going to go to, please we skipped one last time. So we're going to go first to zone 4. Hello. My name is Nelson Arata. I'm from Southern California. And I have a question. It's not really related to intrinsic value or any of that stock stuff, but more on house houses. I'm still quite young. I don't have a house yet, and I'm thinking about buying a house someday soon. And in order to do that, I'm going to have to put a down payment, which means I might have to share or sell my shares. And I was wondering if you can provide some insight on when is the best time to buy a house and how much down payment you should be putting down? In relation to interest rates and also in relation to available cash, in the stock market? Well, Charlie is going to give you an answer to that in a second. I'll just relate one story, which was when I got married, we had we did have about $10,000 starting off and I told Susie, I said, now, you know, there's two choices. It's up to you. You can we can either buy a house which will use up all my capital and clean me out, and it'll be like a carpenter who's had his tools taken away from him or, or what you can let me work on this and someday who knows maybe I'll even buy a little bit larger house than would otherwise be the case. So she was very, understanding on that point. And, we waited until 1956. We got married in 1952. And I decided to buy a house when it was about when the down payment was about 10% or so of my worth because I really felt I wanted to use the capital for other purposes. But that was a way different environment, in terms of what was available to buy. In effect, if you have the house you want to buy, I definitely believe in just going out and probably getting the job done. But I, in effect, you're probably making something in the area of a 7% or 8% investment implicitly when you do it. So, you know, you'll have to figure out your own equation from that. Charlie probably has better advice on that. He's a big homeowner. In both senses of the word. I think the time to buy a house is when you need 1. And And when do you need 1? Well, I have very old fashioned ideas on that, too. The single people, I don't care if they ever get a house. When do you need one of your marriage, Charlie? I'll follow-up here for this. You need one when your wife was, wasn't it? Yes. I think you've got that exactly right. The security office, please, for emergency message. Gregory Crawford to the security officer office for emergency message. Thank you. Okay. Hope it isn't a margin call. Okay. We'll go to zone 1, please. I'm Ralph Pfeffer from Phoenix, Arizona. The question I'm going to ask does not pertain to Berkshire Hathaway, But I would appreciate it if you gentlemen, if you can explain the justification and rationalization for the exorbitant salaries, bonuses, perks, directors' fees, and other benefits that most public corporations are paying. Well, Well, I would say this. In my own view, the most exorbitant are not necessarily the biggest numbers. What really bothers me is when companies pay a lot of money for mediocrity, and that happens all too often. But, we have no quarrel in our subsidiaries, for example, for paying a lot of money for outstanding performance. I mean, we get it back 10 or 20 or 50 for 1. And similarly in public companies, we think that there have been managers and our managers who have taken companies, to many, many, many billions of market value more than would have happened, with virtually anyone else. And they sometimes take a lot of money for that. Sometimes, as in the case of Tom Murphy at Cap Cities, you know, it just didn't make a difference to him. I mean, he performed in a way that would justify would have justified huge sums, but it wasn't he would tell you that he had all the money he needed. So and and they just didn't care to, to take what the market might bear. But I am bothered by irrational pay systems and I'm particularly bothered when average managers take, really large sums. I'm bothered when they design or have designed for them systems that are very costly to the company, maybe partly to make themselves look good because they want huge options themselves. So they that they give options widely throughout the company. So they design a system that is illogical company wide because they want one that's illogical for them personally. But large sums per se don't bother me. The mind paying a lot of money for performance. It's done in athletics. It's done in entertainment. But in business, the people who are the 200 hitters and the people who would not attract a crowd as an entertainer, have worked it out. So I mean, the system has evolved in such a way that many of them take huge sums. And I think that's, obscene, but I can tell you there isn't much you can do about it. The system feeds on itself and companies do look at other companies' proxy statements. Every CEO does and they say, well, if Joe Smith is worth X, I have to be worth more. And they tell the directors that certainly you wouldn't be hiring anybody that was below average. So how can you pay me below average? And the consultants come in and ratchet up the rewards. And it's not anything that's going to go away. It's like we were talking about campaign finance reform earlier. The people who are the who have their hands on the switch are the beneficiaries of the system. And it's very hard to change the system when the guy whose hand is on the switch is benefiting enormously and perhaps disproportionately from that system. Charlie? Well, yeah, I'd like to report that the original Vanderbilt behaved even better than the people at Berkshire Hathaway. He didn't take any salary at all. He thought it was beneath him as a significant shareholder to take a salary. That ideal, I'm afraid, died with him. And Charlie Charlie and I our directors are paid $900 a year, but I tell them on an hourly basis they're making a fortune because we don't work them that hard. But what Charlie and I did not think through when we established that $900 a year is that they set our salaries too. So we have not followed the standard procedure, which is to load it on the directors and the directors shall load it on you. I do think it will have pernicious effects for the country in its entirety as this thing keeps escalating because I think you're getting a widespread perception that, at the very top, corporate salaries in America are too high. And that is not a good thing for a civilization when the leaders are regarded as not dealing fairly with the institutions that they had. And as for the corporation consultants who, advise on salaries, All I can say is that prostitution would be a step up for them. Put him down as undecided. Zone 2, please. I'm Dan Blum from Seattle, Washington via Cambridge, Massachusetts. I want to ask whether the issuance of Class B stock has achieved the objective which you announced for it when it was created? Well, I would say this, that the considering the alternatives we faced, which was the, imminence of unit trusts that would have been promoted with heavy front end commissions, with substantial annual fees, with bad tax consequences and with probably a misrepresentation of the historical record in such a way that people who really didn't know much about securities would have been enticed in. With that as an alternative, I think the B stock was the best thing we could have done and and I feel good about how it's worked out. I think that, you know, we didn't we didn't we didn't set out to issue it. We don't like talking anybody into buying our stock. But, I don't think in any way that, the group we have here is diminished in the least by having a mix of B and A shareholders as opposed to A only. The B is worked out as well as possible. I hope that it, you know, we haven't enticed anybody in with unreasonable expectations. That's the biggest thing that Charlie and I worry about. And it's hard not to have that happen with the historical record. I know it would have and starting with Berkshire, I think. We enjoy things as they come along and and we've gotten a good group with the B shareholders and we're happy with the present situation. Charlie? Yeah. We wanted to step hard on what we regarded as a disreputable financial scheme. And that we did. And then and I think the way we sold the V was such as to not as to attract the kind of people who really did look at it on a long term basis. We did everything we could to discourage people who thought they're going to make a lot of money in a hurry. So we I think we attracted a whole new group of shareholders who are quite similar in perspective to the shareholder group that we already had and that was our hope. Zone 3, please. My name is Alan Rang from Pittsburgh. I first want to thank Susan Jacques for returning the cocktail yesterday, and I hope she was rewarded with good sales at Borsheim's. Question is regarding the fact that you don't report details of anything under $750,000,000 And with the change of the values of small cap in relation to large cap, would that be something that Berkshire or individuals might try to look as opportunity with the small cap premium shrinking as it has? We don't worry about whether a stock is small cap or large cap except to the extent that by now we've gotten to a point where anything below a certain level just is not of interest to us because it can't be material to our results. So we never think of opportunities as existing because of something as small cap or sectors or all that, you know, what generally gets merchandised. So our cutoff point is set more or less at the point where we think it's material. That's not as defined by the SEC. We could have a higher limit, but we think when you get down below 2% of assets or thereabouts that, the reporting of positions would not affect anybody's calculation of intrinsic value or give them insights about the way we run the business, but it would be more for the people who are looking for things to piggyback on. And so we will move the cutoff point up as we go along. Because of our size, we will never be in companies that have capitalizations that, you know, of a half a $1,000,000,000 or a $1,000,000,000 because we just can't put enough money in. Occasionally, we'll be in one just by accident. But we're looking at things that we can put $500,000,000 in ourselves, at least at $500,000,000 on 5% position is a $10,000,000,000 market cap. And that limitation has hurt, will hurt, is hurting our performance to some degree. You would if Berkshire were exactly oneone hundredth of its present size, in all respects, owning the operating businesses it did, but all oneone hundredth the size, our prospects would be better than they are with the kind of money we have presently. Charlie? I've I'm Mr. Munger, for each of your answering our questions. I found myself at 5 am standing outside the door here, and I don't do that for anyone. And it's a real pleasure to hear your answers. I have two questions. One is, with Travelers, the company Travelers and their merger with Citibank, do you have confidence in the management of Sandy Weil? My second question is, you said it in a few meetings ago that diversification is a protection against ignorance. And it only takes 3 great companies to be set for an investment lifetime. And I invested in those 3 companies, Coca Cola, Gillette, and Disney. And I went ahead and invested in a 4th company without asking you. I invested in Pfizer. And I just wonder what you think about is is a very, very good manager. Sandy is I mean, the record is clear. He it is not easy to manage, in Wall Street. And Sandy has done an excellent job there as well as in in other allied or somewhat allied fields. So his record is proven. And he has been the last ever since buying commercial credit from Control Data. He's built a terrific company. And he's built a terrific company in businesses that themselves aren't necessarily so terrific. So it's required real management skill. Pharmaceuticals, we missed. We would not have known how to pick out any single business, but we single company within the industry. But we certainly should have recognized, did recognize, didn't do anything about it, that the industry as a whole, represented a group that would achieve good returns on equity and where some sort of a group purchase might have made sense. We did buy 1 a while back, but we didn't it was peanuts. And, it would have been, that it was within our circle of competence to identify the industry as likely to enjoy very high profits over time. It would not have been within our circle of competence to try and pick a single company. Charlie? Yeah. We stupidly blew that one. We'll blow more too. Zone 5. Not a consultant. I have a question, sir, Mr. Buffet, about your operating management style. In my opinion, the mainstream media minimizes the significance of your non public operating investments. When you consider capital allocation in these companies, do you have the managers submit annual business plans? And if so, do you formally meet with those managers to see how well you can track progress against those plans? That's a good question. And the answer is that we may meet with some of them annually. We may meet with others semi annually, but we have no formal system whatsoever and we will never have a formal system. We don't demand any meetings of any of our managers. We have no operating plan submitted to headquarters. Some of the companies use operating plans themselves, some of them don't. They are all run by people who are have terrific records and they have different batting styles. And, we're not about to tinker with somebody that's batting with 375 just because somebody else holds the bat a little differently or uses a different weight bat or something of the sort. So we believe in letting them do currently and in the future what has been successful for them in the past. And different people have very different styles. I've got my own style, you know. But we we have managers that like to talk things over. We have other managers that like to go their own way. And, we have managers that have a by the book approach, which works well. We have other managers that wouldn't dream of that. We have managers that most managers probably have monthly statements of financials. We have other managers that don't. And that really isn't a problem. What we want to have is good managers. And there is there's more than one way to get to at least business heaven. And and we have a number that have found different ways, to get there. So we have never imposed we have certain requirements because we're a public company and SEC requirements and Internal Revenue Service coordination. But we have never imposed anything, from the top, on any of the operating managements. We have MBAs running companies. We have people who never saw a business school. And talent is the scarce commodity. And when you find talent and they've got their own way of doing things, We let it we're delighted to have them do it more than letting them have to do. We want them to do it their way. We don't want to change them. Charlie? Yeah. The truth of the matter is that we have decentralized power in the operating businesses to a point just short of total abdication. And we don't think our system is right for everybody. It has suited us and the kind of people that have joined us. But we don't have criticism for other people like Emerson Electric or something who have operating plans and compare performance quarterly against plan and all that sort of thing. It's just not our style. Yeah. We centralized money. And everything else we decentralize pretty much. But I don't know whether you've met him here, but for example, Al Yossi is here. He started flight safety in 1951. And he's I don't know what he'll spend on simulators this year but it could easily be $100,000,000 or thereabouts. And he just if I spent hours with him, I couldn't add 1, 1 100th of 1 percent to his knowledge of how to allocate that money. I mean, it would be ridiculous. It would be I Allah allocates the money. And that's an unusually capital intensive business compared to most of our businesses. There's some that I get into the details more because I've just worked with a person that's running things a long time, and we kind of enjoy it. Ajit and I talk virtually every night about the reinsurance business. I am not improving the quality of his decisions at all. But it's an interesting game, and I like hearing about it and he doesn't mind talking about it. So we talk him over. But that's just a matter of personal chemistry. And as we add managers, we will adapt to them. We adapt our accounting systems to agree to them. Now we do have certain requirements that they know how to run them and they know how to run them. And if they don't this hasn't been the case, but if they didn't, we would we'd do something about the manager. We wouldn't try and build a bunch of systems. Zone 6, please. Good afternoon, gentlemen. My name is George Donner from Fort Wayne, Indiana. My question has to do with estimating the intrinsic value of a company, in particular the capital intensive companies like you were mentioning. I'm thinking of things like McDonald's and Walgreens, but there are lots of others where you have a very healthy and growing operating cash flow, but it's largely or completely offset by heavy expenditures on putting up new stores or restaurants or building a new plant. And so my question is, what do you do for your estimate of future free cash flow? And with treasuries around long treasuries around 7 6%, at what rate do you discount those cash flows? Well, we discount at the long rate just to have a standard of measurement across all businesses. But we would take the company that is spending the money as it comes in and they don't get credit for gross cash flow. They get credit for whatever net cash is get left every year. But of course, if they're spending the money wisely, even though you have to discount it for more years, the growth in cash development should offset that or they weren't investing it wisely. The best business is one that gives you more and more money every year without putting up anything, to get it or very little. And we've got some businesses like that. The 2nd best business is a business that also gives you more and more money. It takes more money, but the rate at which you invest reinvest the money to get that growth is a very satisfactory rate. The worst business of all is the one that grows a lot and where you're forced in effect, forced to grow to stay in the game at all and where you're reinvesting the capital at a very low rate of return. And sometimes people are in those businesses without knowing about it. But in terms of discounting in terms of calculating intrinsic value, you look at the cash that is expected to be generated and you discount back in our case, we use the long term treasury rate. That doesn't pay mean that you pay the amount that that present value calculation leads to, but it means that you use that as a common yardstick, that treasury rate. And that means if somebody is reinvesting all their cash flow the next 5 years, they better have some very big figures coming in down the road because if someday, a financial asset has to give you back cash to justify you laying out cash for now for it now. Investing is the art, essentially, of laying out cash now to get a whole lot more cash later on and something at some point better to deliver cash. Ben Graham in his class used we used to talk about what he called the frozen corporation. And the frozen corporation was a company whose charter prohibited it from ever paying anything to its owners or ever being liquidated or ever being sold. And Sort of like a Hollywood producer. Yeah. And the question was, what was such an enterprise worth? Well, that's sort of a theoretical question, but it forced you to think about the realities of what business is all about. And business is all about putting out money today to get back more money later on. Charlie? I do think there is an interesting problem that you raised because I think there is a class of businesses where the eventual cash back part of the equation tends to be an illusion. I think there are businesses where you just keep pouring it in and pouring it in. And then all of a sudden it doesn't work and no cash comes back. And what makes our life interesting is trying to avoid those and get them the alternative kind that drowns you in cash. The one figure we regard as utter nonsense is the so called EBITDA. I mean, the idea of looking at a figure before the cash requirements of merely staying in the same place and there usually are any business with significant fixed assets, almost always has with it a concomitant requirement that major cash be reinvested in order simply to stay in the same place competitively and in terms of unit sales. To look at some figure that is before that is stated before those cash requirements is absolute folly and it's been misused by lots of people to sell lots of merchandise in in recent years. It's not to the credit of the investment banking fraternity, but it just learned to speak in terms of EBITDA. I mean, the idea of abusing a measure you know is nonsense and then piling additional reasoning on that false assumption. It's not creditable intellectual performance. And then once everybody is talking in terms of nonsense, why? It gets to be standard. And I'm in the Academy of Finance at Northwest High School here in Omaha. Could you explain the criteria you look at when selecting your stocks? Well, we look at and I'm glad you came. I hope there's a large group. I got a note, I think from your teacher on that. We look at it as the criteria for selecting a stock is really the criteria for looking at a business. We are looking for a business we can understand. That means they sell a product that we think we understand, and we understand the nature of their competition, what could go wrong with it over time. And then when we find that business, we try to figure out whether the economics of it means the figure out whether the economics of it means the earning power over the next 5 or 10 or 15 years is likely to be good and getting better or poor and getting worse. But we try to evaluate that future stream. And then we try to decide whether we're getting in with some people that we feel comfortable being in with. And then we try to decide what's an appropriate price for what we've seen up to that point. And as I've said last year, what we do is simple but not necessarily easy. What the checklist that is going through our mind is not very complicated. Knowing what you don't know is important and sometimes that's not easy. And knowing the future is definitely, it's impossible in many cases in our view and it's difficult in others and sometimes it's relatively easy. We're looking for the ones that are relatively easy. And then we, and then when you get all through, you have to find it at a price that's interesting to you. And that's very difficult for us now, although there have been periods in the past where it's been a total cinch. And that's what goes through our mind. If you were thinking of buying a service station or a dry cleaning establishment or a convenience store in Omaha to invest your life savings in and run as a business, you think about the same sort of things. You think about the competitive position and what it would look like 5 or 10 years from now, and how you were going to run it, who was going to run it for you and how much you had to pay. And that's exactly what we think of as when we look at a stock because a stock is nothing other than a piece of a business. Charlie? Yes. If finance were when finance is properly taught, it should be taught from cases where the investment decision is easy. And the one I always cite is the early history of National Cash Register Company. And that was created by a fanatic who, bought all the patents and had the best sales force and the best production plants. And He was a very intelligent man and passionately dedicated to the cash register business. And of course, the cash register business was a godsend to retailing when cash registers were invented. So that was the pharmaceuticals of a former age. If you read the an early annual report prepared by Patterson who was CEO of National Cash Register, An idiot could see that this was a talented fanatic, very favorably located and that therefore the investment decision was easy. If I were teaching finance, I would collect 100 cases like that. And that's the way I would teach the students. We have that annual report. What was that? 19 0 4 or something, Charlie? Was it? But it's really a classic report because Patterson not only tells you why his cash register is worth about 20 times what he's selling to to poor to people, but he also tells you that you're an idiot if you want to go in competition with him. And it's a classic of food. It is just a tone. But no intelligent person can read this report and not realize that this guy can't lose. Good afternoon. My name is Robert Roland from London, England. I've been in Omaha all weekend with my wife on the first leg of my honeymoon. I've noticed you're quite a fire of nostalgic assets. Can I ask whether nostalgia is one of your filters? Are there any assets like that left in the US to buy? And if not, can I suggest you come to the UK where all we do is sell them? Well, I don't want to interrupt your honeymoon. But if you'd send me a list of those companies that might be that might be to our liking because, Charlie and I tend to, operate from sort of a Norman Rockwell frame of mind. And it is true that the the kind of companies we like sort of do have a homey Norman Rockwell Saturday Evening Post type character to them there. They, they have character and, the kind of companies, I think, frequently that the people, when they join them, expect to spend the rest of their lives there rather than and, look at it as something to stick on their resume. And there are businesses like that. If you look at the businesses that we bought in the last 3 or 4 years, there's a there is a character to the businesses and to the people that build them. And that's why the people that build them stay on and feel very strongly about running them correctly even to have no financial consequence to themselves whatsoever. So if you've got a list of those in England and you still have any strength left after your honeymoon, drop me a line. Us in attendance today. Terrific. We had the opportunity to play a national game, an investment challenge. And on the list of stocks that were Burt A and Burt B, can you explain what the difference of the two stocks are? Yes. The difference between the Berkshire A and B is simply that an A can be converted to a B at any time in the ratio of 1A into 30Bs. The B cannot be converted into the A. So it's a one way street on conversion. The economic value of the B is exactly 1 30th that of the A. So anything that any time the A ever gets any money of any kind from dividends or liquidation or a merger or something of the sort, for every $30 that you get on the A, you're going to get $1 on the B. The two differences are that there is less voting power proportionately in the B and the B does not participate in a designated contributions program that Berkshire runs simply because that would be very, very hard to administer. And when we issued the B, we pointed out those two differences. The B should never sell for more than onethirty of the price of the A. When it sells just a tiny bit above that, then arbitrage settles in as people buy the A and convert it to B and sell the B. Occasionally, the B may be at a slight discount to the A because it's not convertible the other way. But I think as a practical matter, you can treat the A and B as very equivalent investment choices. There's not enough difference to make it significant. Nothing further. Okay. Area 10, please. My name is Sheena Cho from the become as successful as you. Well, if you're interested in business, I definitely think you ought to learn all the accounting you can by the time you're in your early twenties. Accounting is the language of business. Now that doesn't mean it's a perfect language. So you have to know the limitations of that language, as well as all aspects of it. So I would advise you to learn accounting and I would advise you to be, in terms of part time employment or anything else, work at a number of businesses. There's nothing like seeing how business operates to build your judgment in the future about businesses. The when you understand what kind of things are very competitive and what kind of things are less competitive and why that works that way, all of that adds to your knowledge. So I would do a lot of reading. If you're interested in investments, I would, a, I would take the accounting courses. I do a lot of reading about investments And I would get as much business experience. I would talk business with people that are in business to find out what they think makes their operation tick or where they have problems and why. I just think you just kind of sop it up every place that you can. And if it turns you on, you'll do well in it. I mean, I think that if it there are certain activities grab different people. But if business is of interest to you, my guess is you'll do well. And if you do if you understand business, you understand investments. Investments are simply business decisions that in terms of capital allocation. I wish you well on it. Charlie? Yeah. There's also the little matter of underspending your income year after year after year. Which we have mastered. Yes. That really works if you keep at them. Yeah. I mean, Charlie and I both Charlie started having children at a rapid rate. So he he and he was a lawyer when there was not big money in then. But I was any money you save before you get out and start having a family is probably worth any dollar is probably worth $10 later on simply because you can save it. It's the time to save is young. And you'll never have a better time to save than really pre formation of a family because the expenditures come along then, whether you like them or not. So I work for yourself first and put the money aside. I was lucky that way. I didn't have to pay for my own college. Probably wouldn't have gone to college if I'd had to pay for it. But I was able to save everything I made in my teens and those dollars got magnified quite a bit. Whereas the money I when I started first selling securities, I mean, that the money I made then was taken up by family needs to quite make sense. So start saving early. A lot of it's habit anyway. So it's a great habit to have. Okay. Zone 1, please. I'm Toni Allison from New York City following up on the questionnaire from London. In light of the current dearth of investment opportunities, do you see yourselves investing in non U. S. Companies which are well managed, understandable and growing? Well, if we find such companies, as you describe, at a price that's half attractive, we're perfectly willing to buy them. So the answer to that is yes, but we would be looking to an extent worldwide, irrespective of market conditions in the United States. Now market valuations in this country are tend to be fairly well matched in most of the major companies countries. So we don't there's been a bull market all over the world in a huge way in the bigger markets. And so unfortunately, I mean, it would have been nice for us if the U. S. Market had tripled and other markets had stayed the same. And then we would be very likely to be finding things abroad. We're not finding them abroad, but we certainly are looking for the kind of thing you're talking about. We are not reluctant to invest abroad and our 2 of our well, all three of our largest holdings, American major businesses abroad. And in the case of Coke and Gillette, it's major businesses abroad. And in the case of Coke and Gillette, it's a majority of their earnings from abroad. So we're interested. And there's better growth opportunities in many areas abroad than here. We're Finding bargains as we look around the world. Charlie? Nothing more. Okay. Area 2. My name is Henry Allen, Mamaroneck, New York. Question I have is a little delicate, relates to my family and heirs rather than myself because I'm a couple of decades older than you gentlemen. You've been very candid about the succession and the estate planning, but how will the recipients of huge grants, charitable grants, get the liquidity they need without to use the money without unduly driving the stock down? Well, I don't think that supply and demand in terms of specific let's just say that 3% of Berkshire were to be added to the supply annually. I don't think that makes much difference. What really makes the difference is the prospects of the business. If my charitable foundation were operative today, it would have to sell it would have to it would have to give away 5% of the value of the foundation every year. And if Berkshire paid no dividend, that means it would have to sell 5% of the holdings per year. I don't think that the price of Berkshire would be materially different if there were a seller of that would be, in this case, 2% of Berkshire's capitalization. I don't think it would be materially different. If it is, it probably should be different. I mean, there should be a reasonable amount of trading that can take place annually without affecting the price of the stock materially or the price of stock is being propped for on sort of unnatural reasons. So I wouldn't really worry about that. We had one shareholder die about a year, year and a half ago that had 3 quarters of 1% of the company, for example. It was sold in, I don't know, 6 weeks or thereabouts. And they raised at that time $250,000,000 or thereabouts from the sale. I am not worried about that. I'm worried about I mean, I don't worry, but the key factor is what are the prospects of the businesses. If the businesses are worth money, there are all kinds of companies on their stock exchange who are perfectly decent businesses where 30% or 40% of the stock turns over a year. And Berkshire's price should not be way different if 10% trades a year as opposed to the present 3%. Charlie? I agree with that. I don't think there'd be any problem at all at the present time. The Buffett Foundation, we're selling 5% of its holdings every year. It could be 500 shares a week or something like that. But if there isn't demand for 500 shares a week of A on a company with our capitalization, then the price probably is artificially wrong at that time. I just had lunch with Susie and she doesn't look to me like she's in any imminent danger of mortality. Yeah. It will come into play when the survivor of the 2 of us dies and when the estate gets cleaned up and everything else. So I think certainly hope, and I think it's quite a ways away. You people have more important things to worry about. Is does the book Buffetology by Mary Buffett present fairly in all material respects the calculations you used in evaluating the business for purchase? Or did the lady just write a book? Well, it was written by 2 authors. But I would say that, no, I would say that in a general way, it gets at the investment philosophy. But I wouldn't say that, it's not the book I would have written precisely, but I have no quarrel with it either. I actually think by reading Berkshire's reports, you should be able to get more. I would think you get more of our philosophy than in any other manner. I think Larry Cunningham, the fellow who held the symposium at the Cardoso School at Yeshiva, the, fellow who held the symposium at the Cardozo School at Yeshiva, did the best job actually of sort of reconstructing the various things that that have been written at Berkshire into sort of the best organized presentation of our philosophy. So he's selling it right here. It's a very practical Yeah. He had it at Borsheim, in the mall outside Borsheim yesterday. And Larry did a very good job and I had nothing to do with it. But, I think that that I really think he's done a first class job of sort of organizing by topic. I mean, all these things that I've sort of written annually and Charlie's written over time. So that would be that would probably be my if I were picking one thing to read, that would probably be the one. Okay. Zone 4, please. My name is Leora Garner. I'm from Los Angeles, California. And I want to begin by thanking you for having Bob Hammond. It was a stroke of genius. I could shop at 4 Shines, and my husband was entertained while I did so. Well, Bob is not only the best bridge player around, buddy, but he is an entertaining guy too. We we He's great. Yeah, he is great. I agree with you. My question. You owned Disney once before and sold it. You also owned advertising companies in the '70s, I believe. Right. And you sold them. Could we have some insight into your thinking as to why you sold them? I'm not sure I want to give you any insight into that thinking. Well, we'll start off with the fact that when I was 11, I bought some city service preferred at 38 and it went to 200, but I sold at 40. So grabbing my $2 a share of profit. So I had everything we've ever sold, has gone up subsequently, but some of them have gone up more painfully subsequently than others. And and, certainly the Disney sale in the sixties was a huge mistake. I should have been buying. I forget about about holding. And, that's happened many times. I mean, we think that anything we sell should go up subsequently because we own good businesses and we may sell them because we need money for something else, but we still think they're good businesses and we think good businesses are going to be worth more over time. So everything I sold in the past virtually that I can think of has gone on to sell it at a lot more for a lot more money, and I would expect that would continue to be the case. That is not that's not a source of distress. But I must say that selling to Disney was a mistake. And actually, the ad agencies have done very well since we sold them too. Now maybe some of that money went into Coca Cola or something else. So I don't worry about that. I would worry, frankly, if I sold a bunch of things right at the top because that would indicate that in effect, I was practicing the bigger fool type approach to investing and I don't think that can be have been buying into good businesses as they've gone along. Charlie? Well, I'm glad that the questioner brought this touch of humility because it is really useful to be reminded of your errors. And I think we're pretty good at that. I mean, we kind of mentally rub our own noses in our own mistakes. And that is a very good exact number of cents per share that he sold at. And exact number of cents per share that he sold at and compare it with the current price. It actually hurts him. It actually doesn't hurt. The truth is, you know, because it, you know, you just keep on doing things. But it is instructive to look at to do postmortems on everything and say as long as you don't get carried away with it. But every acquisition decision, that kind of thing, there should be postmortems done. Most companies don't like to do postmortems on their capital expenditures. I, I've been a director of a lot of companies over the years and and they've not usually not spent a lot of time on on the post mortems. They spend a lot of time on telling how wonderful the acquisitions are going to be or the capital expenditures, but they don't like to look so hard necessarily at the results. Think of how refreshing the Board of Directors meeting would be if they sat down. And now we'll spend 3 hours examining all our stupid blunders and how much we've blown. And then after that, the compensation committee will meet. No, that is not going to happen. Right. Okay. Area 5, please. My name is Kellar, Harpal Keller from Portland, Oregon. Two questions, one of a personal nature. Obviously, there are many, many people here today. And I wonder if one of the true patriarchs of the investment business is here today, Phil Currey. Many of his friends and admirers would wish him well. Phil, up till a week ago, was going to be here today. Phil is 101. Wrote a book on investments in 1924 and I've known him, Phil, for about 46 or 7 years. And Phil has made all the meetings for a number of years, would be here today. And he broke a hip about 5 or 6 days ago and but he sent a message that, he will definitely be here next year. And he will be too. When he couldn't buy stocks below net net, he changed his standards because the environment changed. Now, the world today seems to be a much different place than in 1989 when the USSR collapsed. Even they are stumbling toward the free enterprise system. The Russian mafia is a perverse illustration of that. Now there is only one superpower in the world, the USA, and we must be extremely grateful for the men who put us on the track to the free enterprise system. Now, the free enterprise system is out of the bottle. It's not going to get back in. It seems to be expanding and accelerating around the world. With the resulting expansion of world trade, may that lead to a reevaluation of historical measures for measuring investments? Well, my answer to that would be that I doubt it, but I, you know, I also don't know. But I don't think that the end of the Cold War is something that I would factor into my evaluation of businesses. There are all kinds of events that happen and their impact in terms of being quantified, very difficult to figure over time, very difficult to isolate any single variable in a complex economic equation. So in terms of how the world is going to work 10 years from now or the returns are going to be on equity and business, I don't know what will be all the variables that impact on that. And obviously, right now, people are very bullish about the fact that those returns or something like those returns will continue. But I don't I would not rely in making such a projection on the fact that the Cold War has ended or really any political or economic development around the world. I don't know how to predict future earnings of American business. And when I look at all of the great historic events of the past, nothing there gives me much in the way of a clue as to which ones would signal major changes in profitability of American business. Charlie? Well, I think you raised one very interesting question. If the rest of the world becomes very much more prosperous as it will if it adopts the free enterprise system, which investments are likely to do best? I would argue that the Cokes and Gillette and so on are likely to be helped by a great increase in prosperity in what is now the 3rd world. And I'm not so sure that's true of a lot of other businesses. We like the international businesses we have. And as I say that our 3 top holdings all have a major international aspect to them and really in aggregate a dominant international aspect to them. And there's no question in my mind that Coke will grow faster outside of the United States than in And the same is true of Gillette and really the same is true of American Express. So that's built into what we our evaluation of those businesses. But I felt that way before 1989 too. I mean it's very hard to evaluate out how the ball is going to bounce generally but around the world. But it is a plus to have products such as Gillette has or Coke have that have demonstrated the fact that they travel extraordinarily well around the world, that people crave those products and that they're going to no one's going to find a way to do it better than those 2 companies in their respective fields. So and they sell an inexpensive product. So all of that's going for us. But in terms of how stocks generally sell or the profitability of American business generally is in the future, I don't it doesn't help me much. Do you have any more Leonard? No more. Okay. Area 6. Hi. My name is Bartley Cohen. I just want to thank you for a great weekend. And my question is, after you bought Dairy Queen, I heard they put Coca Cola in tall the stores. But yesterday, when I went to the Nebraska Furniture Mart, they they said they don't take American Express. And my question is my question is do you encourage stopped to use each other each other's products or do you leave it up to the management of the subsidiary? Well, that's a good question. And and it does tell you something about the Berkshire method of operation. We tell each subsidiary to run their business in the way that they think is best for their operation. And, Horsheim's takes American Express, Sees takes American The Furniture Mart doesn't, for example. But that is that'll be true in other areas too. If Harvey Golub at American Express, who has absolutely done a sensational job for us, if he wants to talk with or have his representatives talk with anybody at any of our operations, you know, we're all for that happening, but we will never tell a subsidiary manager which vendor to patronize or anything of that sort. Once we start making decisions for our managers in that respect, then we become responsible for the operation. And they are no longer responsible for the operation. They are responsible for their operations. And that means they get the call of the decisions. And they should do what is best for their subsidiary, and it's up to any other company that wants to do business with them to prove why that's that is best for them. And that's the Berkshire approach to things. And I think, on balance, our managers like it that way. So they're not getting second guessed and somebody can't go over their head. I get letters all the time from people who are trying to jump over their heads of our sort of thing. And it doesn't work at Berkshire. They deal with the managers of the businesses and they're not going to get around them. Charlie? I love your answer. It gives Warren lots of time to read annual reports at headquarters. Area 7. Hello. My name is Steve Ereco. I'm from New York. What do you think is likely to happen with respect to the tobacco settlement? And what do you think should happen? And secondly, McDonald's and Dairy Queen are similar businesses. Was there a relationship between your acquisition of Dairy Queen and the disposal of McDonald's? Thank you. Yes. There's no connection in the second case. They have certain similarities, but there's certainly a lot of differences too. Burger King and McDonald's would be much more similar or Wendy and McDonald's, but Dairy Queen is much more of a niche than away from that. The tobacco settlement is interesting just in terms of watching the dynamics of it because one of the things in labor negotiations, it's always a problem, is that when you, as a manager, you have a labor negotiation. At the end of the negotiation, you as management are committed and basically, the union isn't because the union is going to have a vote on it. And that's just the way it is. I mean, it's it, you can't get away from that, but it is it is not fun to be in a negotiating position where you're bound and the other side is not bound. And although that wasn't totally contractually necessarily the situation of the tobacco area, it smelled like trouble to me for the tobacco companies, whether you feel they should have had that trouble or not, but it smelled like trouble to me when they were bound and you had another side that was not bound in any way and where there were lots of political considerations and where there was a lot of time was going to expire. I mean, that just that did not smell to me like a deal that would stick. And I don't know any of the tobacco executives that were involved in that, but I'm I don't know how much they agonized over getting in a position where they were bound and the other party wasn't. But I can tell you from labor negotiations that that's not a pleasant place to be and it's not a great strategic place to be. Charlie, what do you think on that? I don't feel I've got any great expertise in this situation. Okay. Zone 8, please. Hello. I'm Jamie McMahon from Birmingham, Alabama. And, I was hoping that, mister Buffet and mister Munger, y'all would expand a little bit on your ideas of an inheritance and the positive and negative influences that they can have, on your heirs and what you might be able to do as a business person and investor and as a parent to, sort of mitigate those negative influences? Yeah. Well, I quoted, I think Kaye Graham was quoting her father at the time, but that some years back as saying, if you're quite rich, probably the idea of leaving your children enough so they can do anything, but not enough so they can do nothing is not a bad formula. I think if you're talking about people that aren't quite regiasing, I socially, I wouldn't have a system that involved inheritances. But recognizing the situation that exists, I think probably at lower levels that leaving to the children in this society is perfectly okay. But I believe enough in a meritocracy that if I were devising the system with a consumption tax and everything, I would probably make inheritance a form of consumption that would be very heavily taxed. Because I don't believe that because you happen to be the come out of the right womb essentially that you are entitled to live an entirely different life than somebody who wasn't quite as lucky in terms of womb selection. But in my own case, you know, I follow the enough so they can do anything but not enough so they can do, nothing. I think that society showered all these. I was very lucky. I was wired the right way at the right time in history to do very well in this kind of a market economy where, as Bill Gates has told me, if I was born some 1000 of years ago, I'd been some animal's lunch. You know, I don't run very fast. And there are different, different assets that are, that are useful at different times. And I'm not wired to play championship bridge or championship chess or not wired to be a basketball star or anything. It just so happens I'm in an area where it pays off like crazy to be good at capital allocation. And that doesn't make me a more worthwhile human being anybody else or anything. It just means I was lucky. And I should that luck in effect, enable many generations of people that are good at womb selection to do nothing in this world. I would have some reservations about that. So that's my own feeling on inheritance. But Charlie has a bigger family and, he can give you a better answer. Well, I feel in a capitalist system that there should be inheritance tax. And once that's been imposed and paid, what each person wants to do in his own testamentary arrangements is up to that person. I see very few people that I regard as ruined by money. Many of the people that I see ruined to have money would have been ruined without money. And I think the percentage of the people that are going to be living the life of the French aristocracy before the revolution is always going to be very small. And there are plenty of grasping people to take the money away from the the incompetence ruling the world as their money cascades ever higher. So I like a fair amount of charity. And certainly some testamentary charity is okay. But I feel it's an individual choice that people have to make. They got a choice there. Number 9. My name is Samuel Wong from Irvine, California. I have two questions. Question number 1, do you think the U. S. A. Market is overvalued today? And question number 2, would you buy fresh rate stock today considering the fact that they have a nice run up already this year? And if yes, presuming I have a kid, 20 years old and he has $150,000 to invest in Berkshire Hathaway and he won't need the money until 5 years later gradually. Would you recommend to buy A share or B share or the combination? If you decide to buy Berkshire, I don't think it really makes much difference whether you buy A or B. But we don't make any recommendations about whether people buy or sell Berkshire. We never have and that's a game we don't want to get into. In terms of overvalue, the question whether the market is overvalued it's simply as we said last year here in the annual report. It's not the general market is not overvalued if two conditions are met, is, in our view, which is that interest rates remain at or near present levels or go lower and or and that corporate profitability in the U. S. Stay at the present, or close to the present levels, which are virtually unprecedented. Now those are a couple of big ifs, as we pointed out. A lot of the stories that came out after the annual report would emphasize one aspect or another, but it simply and they say, what does he mean by that? Well, it means exactly what I say. If the two conditions are met, I think it's not overvalued. And if the if either of the conditions is breached in an important way, I think it will turn out to be overvalued. And I don't know the answer, which is why I put it with in the form that I did. It's very tough at any given time to look forward and know what level of valuation is justified. You do know when certain dangerous things appear. And certainly, if you're predicating your answer that stocks are okay at these prices, you have if you come to that conclusion, you have to also come to the conclusion that in our view that corporate earnings at present levels are likely to be maintained. And that's a conclusion you would have to come to. I don't think it's obvious that that's the case. Area 10, please. Good afternoon. My name is Jamie Harmon and I'm from Boston. You say that companies should only spend a dollar on capital expenditures if it will create more than $1 of market value. I'm wondering how do you determine this? Is it based on, a, historical returns on capital, b, a qualitative judgment of the company's competitive position, c, a quantitative projection of the returns on capital, or d, something else? Well, it's based on all of those factors you mentioned and more. But in the end, we can say today every dollar we've retained has been worthwhile because on balance those dollars have produced more than $1 of market value. And it's actually with a great many companies, you could say that now because things have turned out so well. But it would be a case to check on it is over every if after 3 or 4 years, you found that the dollars we've retained haven't created more of that in value, then the presumption becomes very strong at that point that we should start paying out money. But almost any management that wants to retain money is going to rationalize it by saying we're going to do wonderful things with the money we retain. And we think there should be checks on that, which is why in the report, in the ground rules, I suggest making checks on the validity of those projections. Charlie and I, if you asked us today whether the single dollar we retain from the earnings today, we've got a use for today that will produce about more than a dollar value. The answer is no. We do think that based on history, that the prospects are better than 50%, well over 50%, then the next few years, we would have an opportunity to do that. But there's no certainty to it. Charlie? Nothing more. Okay. Area 1, please. Good afternoon. My name is Gary Bialis. I'm from Southern California. I want to thank you again for producing this owner's manual that you did a couple of years ago. I find it quite useful and use it quite often. Two questions. Can you tell me if the rule of thumb is still applicable regarding the statement in the owner's manual that the percent increase in the book value attracts pretty well the percent increase in intrinsic value? Or is the fact that you now have more owned businesses, especially ones like GEICO and FlightSafety, mean that the spread between those two is possibly narrowed? Well, the true have tracked pretty well over over the years. I mean, compared to the record of most businesses that are publicly owned, I would say that over the 33 or so year span, our market price has tracked intrinsic value more closely than 80% or 90% of the companies that we view, probably 90%. Of the companies that we view. Probably 90%. But that doesn't mean it does it all the time. And there are times when the market price will outpace intrinsic value the change in intrinsic value. And there are times when it obviously then that it will lag behind. So it's far from perfect, but it's better than most. Ideally, we would like it to track it perfectly. If we had we ran this as a private company and we met once a year and set a price on the stock to have it traded once a year. And Charlie and I were responsible for setting that price. We would try to set a price that was as close to intrinsic value as we could. And that would to the extent that we could do it, it would be a perfect tracking. The market isn't like that and the market responds to a lot of other things. So it's not perfect. It's not getting more perfect in our view, but we still think that Berkshire tracks it better than most companies. Charlie, you have it? Nothing to add. Area 2. I'm Elizabeth Cruz from New York City. I have a question about Gillette. Another significant Gillette investor, KKR, recently sold over $1,000,000,000 in Gillette shares, shares that they had acquired through Gillette's acquisition of Duracell. Knowing that KKR has also been a successful investor, do you see this as a negative signal about Gillette's future prospects, particularly on the eve of the launch of the Mach 3 RZR? And what do you think their plans are for the remainder of their shares? Well, I think they may have even publicly stated, I'm pretty sure they have. The Duracell shares which from which the Gillette shares came, were held by a specific investment fund that was formed in a I don't know what year, but a given year and which was is scheduled to disband at a certain point. So, those shares, whether they were Aburocell or whether they're a Gillette, were scheduled for disposition at some point within a given term. And I think that KKR made the decision and they've made it with other stocks too, is to have maybe 3 or so offerings between now and that terminal date for their partnership. And why they pick any one of any given date is up to them and their advisors. It means nothing to us. I mean, what the if they didn't have that kind of a fund and they decided to sell, it wouldn't make any difference to them. And I presume if we made a decision to sell, it wouldn't make any difference in their case. So we form our ideas of valuation independent of anybody else's thinking on it. But in the case of on it. But in the case of KKR specifically, they have a termination date on a partnership that own those shares and have to dispose of them one way or another between now and the termination date and probably decided with the quantity of stock they had that they were going to have several sales. The Mach 3 is terrific incidentally. I've been using it since October. So Henry did not decide to sell that stock based on the Mach 3. Area 3, please. I'm Gertrude Goodman from Palm Springs, California. Mister Buffet and mister Munger, there are many stocks that rise and eventually split. My question is, do you foresee in the near future a split for Berkshire Hathaway Class A? Well, that's an easy one. No, the answer is no. We have no plans to split the A. In effect, we let people who want to split the A, split it themselves into And Charlie, do you have any additional comment? SECRETARY No, I think you said no perfectly. We don't take that attitude because we're cavalier about how shareholders feel. We really think that in your in the long range interest of Berkshire, that the policy we followed on not splitting has benefited the company and shareholders. We nothing dramatic about it, but I think that we have a better class of shareholders in aggregate in this room than we would have if we're selling at $3 a share or $30 a share or maybe even $300 a share. Area 4, please. Good afternoon, Mr. Buffet and Mr. Munger. My name is Jack Sutton from New York City. I have two questions. The Japanese stock market has been likened to the U. S. Market in 1974. With stock selling at very low price to book values as compared to U. S. Stocks, would it not make sense to invest in a basket of Japanese stocks or an index fund of Japanese stocks? Question number 2: Berkshire Hathaway tends to invest in companies with high margins and high return on common equity. Berkshire's investment in the airline business seems to have digressed widely from those principles. Could you elaborate on why Berkshire invested the airline industry? And would Berkshire consider new investments in the industry in the future? Going to the first question, the reason that and I don't know the exact figures, the Japanese stocks put some at a lower price book ratio than U. S. Stocks is simply because Japanese companies are earning far less on book than American companies. And earnings are what determine value, not book value. Book value is not a factor we consider. Future earnings are a factor a factor we consider. And as we mentioned earlier this morning, earnings have been poor for a great many Japanese companies. Now if you think that the return on equity of Japanese business is going to increase dramatically, then you're going to make a lot of I mean, and you're correct, you're going to make a lot of money in Japanese stocks. But the returns on equity, the return on equity for Japanese businesses has been quite low. And that makes a low price to book ratio very appropriate because earnings are measured against book. And if a company is earning 5% on book value, I don't want to buy at book value if I think it's going to keep earning 5% on book value. So a low price book ratio means nothing to us. It does not intrigue us. In fact, if anything, we are less likely to look at something that sells at a low relationship to book than something that sells at a high relationship to book because the chances are we're looking at a poor business in the first case and a good business in the second case. What was the other question on Germany? Buying it. Airlines. Yes. I always repress everything on airlines. I don't want to we never we've never bought an airline common stock that I can remember. So what we did was we lent money to US Air for a 10 year period and we had a conversion privilege there. It looked like it was a terrible mistake. I made the mistake, but it we got bailed out. But we never made the determination. When we bought our stock, U. S. Air was selling at $50 a share or thereabouts to come in. And we didn't have an interest in buying US Air at 50 or 40 or 30 or 20. And we got a chance to as things went along, all the way down to 4. And we never bought it. And we never bought American or United or Delta or any other airline. It's not a business that intrigues us. We did think it was intriguing to lend money to them with a conversion privilege, And it's worked out now as it because we got lucky and because Steve Wolf came along and really rescued the company from right at the brink of bankruptcy. But we're unlikely to be in airlines. Although, again, we wouldn't mind lending money to a lot of businesses that we wouldn't buy common equity in. I mean, that could happen again in various industries, including the airline industry. Charlie, do you have anything to say on either the airlines or the Japanese market? Well, the airline experience was very unpleasant for us. The net worth just melted. It was about 1,500,000,000 and it just went 100,000,000, 100,000,000, 100,000,000. And finally, the cash is running down. It is a very unpleasant experience. And we try and learn from those Japanese market? Oh, the Japanese market. I suppose anything could happen. After all, we bought silver. But we have never made a big sector play on a country. In fact, we've almost never made a big sector play. We would have to come to the conclusion the Japanese business, instead of earning whatever it's earning on equity now, is going to earn appreciably more on equity. I got no basis for I wouldn't argue with anybody else feels that way. I wouldn't argue with them, but I have no basis for coming to that conclusion. And unless you come to that conclusion, you're not going to make good returns. I mean, unless that happens, you're not going to make good returns from Japanese stocks. You cannot earn a lot of money from businesses that are earning 5% on or 6% on equity. And I look at the reports, but I don't see the earning power now. Now maybe it'll all change. I mean there's talk of there's already been a small temporary tax cut, but corporate tax rates are quite high, as you know, in Japan. And they used to be 52% here in the United States. Now they're 35%. So you could have things happen that increase corporate profits. But I don't have any special insight into that, that anyone that reads the press generally would not have. There are also readings in corporate culture that have to be made. Owning stock in a corporation where you know that if shareholders or somebody else has to suffer, the choice is likely to be that somebody else will be chosen. That is a different kind of a company to invest in than one that thinks that the principal purpose of life is to keep some steam boiler company going in a particular community or something no matter how much the shareholders suffer. I think it's hard to judge corporate culture in the foreign countries as well as we can judge it in our own. Are you five? Yvonne Edmonds from, Cedar Mountain, North Carolina. I have a specific question but not a trivial one. And very interesting. But I haven't seen a correlation coefficient between the S and P 500 daily from day to day performance close, say, and the and Berkshire Hathaway's close Now it so happens for me and I'm sure some other people in the audience that I don't always have access to newspapers or the Internet for that matter, newspapers that publish Berkshire Hathaway performance on a daily basis or even a weekly basis for that matter or a monthly basis. It would be very helpful to know the extent of a correlation coefficient between those two variables. If you have that, would you just know what it is? And if you don't, would you please consider calculating it in the future? Well, it could be calculated, but I don't think it would have much meaning. I mean, it would be a historical correlation coefficient which I would be very reluctant to have people place any weight in. I try to indicate even the limitations of the yearly comparison of the relative performance because what was doable by us in the past is not doable today. I mentioned in my annual report, the best decade I ever had on comparative performance by far was the 50s. Now I don't think it was because I was a lot smarter than unwilling to accept that. But I had edge of, it's probably 40 plus points per year. But I was working with it. That has no relevance to today whatsoever. It would be misleading to publish it or to make calculations based on it. So I think that you would find I don't know what you'd find on a specific correlation between Berkshire and the S and P. You'd find a lot of correlation. Well, you might not find so much even. You'd find it in intrinsic value between that and Coke and a few stocks like that. But I don't really think that's particularly useful information going forward. We have no objection. Anyone wants to make the calculation, but it wouldn't be something that would be of any utility to us. And if we don't think it's annual calculation has some meaning because it's an all time high. We do think that the S and P annual calculation has some meaning because it's an alternative for people to invest. They don't need us to buy the S and P. So unless over time we have some advantage over that, what are we contributing? What value is added by our management? So we think that that's people should hold us accountable even though we wouldn't we would prefer not to be because that it is a tough comparison for us as a taxpaying entity against the non pretax calculation on the S and P. But we don't pay any attention to beta or any of that sort of thing. It just doesn't mean anything to us. We're only interested in price and value. And that's what we're focusing on all the time. And any kind of market movements or anything don't mean anything. I don't know what Berkshire is selling for today. And it really makes no difference. It just doesn't make any difference. What does count is where it is 10 years from now. And I can't tell you what it was selling for on May 4, 1983 or May 4, 80 6. So I don't care what it sells for on May 4, 1998. I do care where it is in general 10 years from now. And that's where all the focus is. Charlie? Yeah. We're publishing data in the forum where we would like it if we were the passive shareholder. And so you're getting the data and you're getting it on a time schedule based on what we would want if we were in your position. And we don't think the correlation conditions would help us. We don't think anything that relates either to volume, price action, relative strength, any of that sort of thing. And bear in mind, when I was in my teens, I used to eat that stuff up. I mean, I was making calculations based on it all the time and kept charts on it and wrote the operation the operation now. One of the pleasant things about dealing with Warren all these years is he's never talked about a correlation coefficient. If the correlation isn't so extreme, you can see it with a negative eye. He doesn't compute it. Okay. We're going to go to zone 6, and I'm going to have a deli bar. And Charlie has got one here, too. These are terrific. My my question has to do with what you mentioned earlier about how companies have to reinvest a certain amount of cash in their business every year just to stay in place. And, if one could say that the best businesses are the ones that not only throw off lots of cash but can reinvest it in more capacity. But I suppose the paradox is that the better accompanies opportunities for making expansionary capital expenditures, the worst they appear to be as consumers of cash rather than generators of cash. What specific techniques have you used to figure out the maintenance capital expenditures that you need to do in order to figure out how much cash a company is throwing off? What techniques have you used on Gillette or other companies that you've studied? Well, if you look at a company such as Gillette or Coke, you won't find great differences between their depreciation. Forget about amortization for them all, but depreciation and sort of the required capital expenditures. If we got into a hyperinflationary period or I mean, you can find you can set up cases where that wouldn't be true. But by and large, the depreciation charge is not inappropriate in most companies to use as a proxy for required capital expenditures, which is why we think that reported earnings plus amortization of intangibles usually gives a pretty good indication of earning power. And I don't I've never given a thought to whether Gillette needs to spend $100,000,000 more, dollars 100,000,000 less than depreciation in order to maintain its competitive position. But I would guess it's the range is even considerably less than that versus its recorded depreciation. The businesses you have to worry about, I mean, an airline business is a good case. In airlines, you just have to keep spending money like crazy. And you have to spend money like crazy if it's attractive to spend money, and you have to spend it the same way if it's unattractive. You just it's part of the game. Even in our textile business, to stay competitive, we would have needed to spend substantial money without any clear prospects of making any money when we got through spending it. And those are real traps, those kind of businesses. And they may work out one way or another, but they're dangerous. And in a sea's candy, we would love to be able to spend $10,000,000 $100,000,000 $500,000,000 and get anything like the returns we've gotten in the past. But there aren't good ways to do it, unfortunately. We'll keep looking. But it's not a business where capital produces the profits. You need more simulators as you go along and more pilots are to be trained. And so capital is required to produce profits. But it's just not the case at seas. And at Coca Cola, particularly when new markets come along, the Chinas of the world or East Germany or something of the sort, the Coca Cola Company itself would old Soviet Union. So those are expenditure. You don't even make the calculation on them. You just know you've got to do it. You've got a wonderful business and you want us to have it spread worldwide and you want to capitalize on it to its fullest. And you can make a return on investment calculation. But as far as I'm concerned, it's a waste of time because you're going to do it anyway. And you know you want to dominate those markets over time. And eventually, you'll probably fold those investments into other bottling systems as the market gets developed. But you don't want to wait for conventional bottlers to do it. You want to be there. One of the ironies incidentally, it might get a kick out of some of the older members of the audience, that when the Berlin Wall went down and Coke was there that day with Coca Cola for East Germany, that Coke came from the bottling plant at Dunkirk. So there was a certain poetic irony there. Charlie, do you have any hand then? I've heard Warren say since very early in his life that the difference between a good business and a bad business is usually that good business just throws up one easy decision after another, whereas the bad business gives you a horrible choice where the decision is hard to make. Is this really going to work? Is it worth the money? If you want a system for determining which is a good business and which is a bad business to see which one is throwing the management bloopers time after time after time. Easy decisions. It is not very hard for us to decide to open a new C's store in a new shopping center in California that's obviously going to succeed. It's a blooper. On the other hand, there are plenty of businesses where the decisions that come across your desk are just awful. And those businesses, by and large, don't work very well. I've been on the Board of Coke now for 10 years and we've had project after project come up. And there's always an ROI. But it doesn't really make much difference to me because in the end, almost any decision you make that solidifies and extends the dominance of Coke around the world in an industry that's growing by a significant percentage and which has great inherent underlying profitability, the decisions are going to be right. And you've got people there that will execute them well. You're saying you get blooper after blooper. Yeah. And then Charlie and I sat on US Air and the decisions would come along and it would be a question of, you know, do you buy the Eastern Shuttle or whatever it may be. And you're running out of money. And yet to play the game and to keep the traffic flows such as with connecting passengers and everything, you just have to continually make these decisions whether you spend $100,000,000 more on some airport. And they're agony because, again, you don't have any real choice, but you also don't have any real conviction that it's going to translate those choices are going to or lack of choices are going to translate themselves into real money later on. So one game is just forcing you to push more money into the table with no idea what kind of a hand you hold. And the other one, you get a chance to push more money in knowing that you've got a winning hand all the way. Jerome? Why did we buy you out there? Could have bought more coke. Area 7. My name is Patel. I am from upstate New York. My question is, is Berkshire prepared for 29 style of depression or like a prolonged bear market that exists in Japan? And would it be as successful in those situations? Well, we are probably we don't we don't expect what you're talking about. But we are probably about as well prepared as any company can be for adversity because we Berkshire has been built to last. Net, we would benefit over a 20 year period by having some periods of terrible markets periodically in that 20 year period. That doesn't mean we're wishing for them and it doesn't mean they're going to happen. But we make our money by allocating capital well and the lower the general stock market would be, the better we can allocate capital. So we're well prepared but we're not necessarily expecting. Charlie? Yes. We are not going to ever sell everything and go to cash and wait for the crash so we can go back in. On the other hand, we are structured so that I think now that a lot of turmoil in the next 20 years will help us, not hurt us. I don't mean it'll be pleasant to go through the down cycle, but it's part of the game. Area 8, my name is Pete Banner from Boulder, Colorado. First of all, mister Buffet and mister Munger, thank you for your genuine generosity today. Berkshire closed yesterday. The a share was about, or Friday, dollars 69,000 and the b share was about $2,300 Do you feel that price is grossly overpriced or grossly underpriced or reasonably priced? Well, I'll let Charlie answer that one. I'm not going to say. No, we're just never going to we're never going to give out advice on Berkshire stock. There's no you know, that is up to people who want to buy and sell it. And anything we would say could easily get magnified and people would be acting on it months later. And who knows all the problems that it could produce. So, it would be quite eccentric if we were to every day put out an announcement, now's the time to buy, now's the time to sell our own stock. Eccentric we are, but that eccentric we aren't. Area 9. Irene Finster, your longtime partner from Tulsa, Oakland. Irene has a soda pond. You ought to go visit her. First, I want to thank you for giving your shareholders the opportunity to select their own charities. And second, I'm very concerned about your health due to your diet of red meat. Irene, these are our products that I'm eating. Red red meat, candy, ice cream, and, And that's just what I do it that's what I do in public. And Cokes. And I want to know what your doctor says. My doctor says I must be heavily relying on my genes. I will tell you, I mean, Charlie and I are both very helpful. If you were in the life insurance business, you would be happy to write us at standard rates, I could assure you. You know, they asked George Burns when he was 95, what does your doctor say about smoking these big black cigars? And he said, my doctor's dead. Charlie and I played bridge with George when he was about 97, I'd say, at the, Hillcrest Country Club. And there was a big sign behind him that said, no smoking by anyone under 95. And actually, at his 95th birthday party, he had about 5 very good looking young girls that were there to greet him with a with a big cake and everything. And he looked them over one after another. And he said, oh, girls, he said, I'm 95. 1 of you is going to have to come back tomorrow. We're very big on George Burns in recent years. Area 10. My name is, Hubert Vos. I'm from Santa Barbara, California. Earlier this morning, you made a comment that if the market fell, you would be spending less time on the Internet because you'd be very busy. And this has reinforced an impression I have had that the cash flows of Berkshire Hathaway are enormous, but that possibly in the last 12 months, you've been investing less than you had previously? And if so, if this is correct, what does that say about waiting for attractive values? How long are you willing to to wait? And what does that say to the investment public in their own habits? Well, you're correct that we have not found anything to speak of in, inequities in a good many months. And the question of how long we wait, we wait indefinitely. We are not going to buy anything just to buy something. We will only buy something if we think we're getting something attractive. And incidentally, if things were 5% cheaper, that were 10% cheaper, that wouldn't change anything materially. So we have no idea when that period ends. We have no idea whether, as I've said, it can turn out that these valuations are perfectly appropriate if returns on equity stay where are. They are, but they are even then, they aren't in the least mouth watering. So we won't feel we missed anything particularly if returns stay where they are. Because if it turns out that these levels are okay, they still will not produce great returns from here in our view. That doesn't mean you couldn't have a tremendous market in the short term or something of the short term. Markets can do anything. I mean, you look at the history of markets and you just see everything under the sun. But we will not you know, we have no time frame. If the money piles up, the money piles up. And when we see something that makes sense, we're willing to act very fast, very big. But we're not willing to act on anything that doesn't check out, in our view. There's no you don't get paid for activity. You only get paid for being right. Charlie? Yeah. An occasional dull stretch for new buying. This is no great tragedy in an investment lifetime. And other things may be possible in such an era, too. I mean, it isn't like we have a quiver with only one arrow. We sat through periods before. I mean, the most dramatic one being the early 70s, late '60s and early '70s. For a long time, it doesn't seem so long when you look back on it. It seems long when you're going through it. But it's like having a tooth pulled or something. But it's what can you do about it? The businesses aren't going to perform better in the future just because you got antsy and decided you had to buy something. We will wait till we find something we like. We'll love it when we can swing in a big way though. That's our style. Area 1. Larry Pikowski, Millburn, New Jersey. Berkshire seems never to have made any real pure real estate investments with the not counting facilities the operating companies might own with the exception of West Coast involvement in the residential project in California. I was wondering if you've ever looked at a real estate transaction and tried to apply the same filters, meaning competitive advantages, returns on capital that you do in operating companies? And if not, is it a circle of competence issue or is there something you find disinteresting about real estate? Okay. Charlie wants to take this one. Let me take this one because here is a area where we have a perfect record that extends over many decades, we have been demonstrably foolish in almost every operation that had to do with real estate we've ever touched. Every time we had a surplus plant and didn't want us to hit the bid and let some developer kind of take an unfair advantage of us. We would have been better off later if we'd hit the bid and invested the money in fields where we had the expertise. That housing track that I developed because I didn't want to let the zoning authorities rob me the way they wanted to. I wish I had let them. We have a certified record of failure in this field. And we the funny thing is we understand real estate. And we're good at it. Right. But actually, as a correct to say, we do understand real estate. And Charlie got to start real estate. Yes. But we understand other things better. And so the chances that we're going to be big in real estate are low. We've seen lots of things. The prices intrigue us in terms of what we get for our money. I tried to buy a town when I was, what, 21 years old? The U. S. Government had a town in Ohio for sale and would have worked out very well. There's nothing about the arena that turns us off, but the see we don't see great returns available. And like Charlie says, the few things, particularly having an old plant or something, that is not we have not been great at working our way out of those. Fortunately, they have been very important in relation to the network of Berkshire. Area 2. Good afternoon. My name is Fred Castano from Detroit, Michigan. My question concerns Nike. Nike is a company experiencing some short term problems but is a great company with an excellent track record. Phil Knight is similar to Bill Gates in the respect that he's a marketing genius and has and is a very hard worker. Making sneakers is a very simple business with high margins. How do you view Nike? And what do you think of the company? Well, I think Phil Knight is a terrific operator. And he's a competitor. He's got a lot of money in Nike. But in terms of what we think of the stock, we keep all of those fuels to ourselves pretty much. Area 3. Hello. My name is Ed Clinton. I'm from Chicago, Illinois. I'm wondering about the tobacco litigation. There's also there have been some comments about fatty food. Do you think there's going to be a new trend of fatty food litigation coming out of the tobacco problems? Well, I signed a waiver before I do any of that myself. No, I would doubt I would I do not see those 2 as being remotely similar. But, Charlie, do you have any different views on that? Well, I think the traditional tort system is particularly ill suited for solving what might be called the tobacco health problem. So I regard that whole thing instead of my Mad Hatter's Tea Party. And we set out from afar. Area 4. Yes. I'm Fred Bunch from near TiteWad, Missouri. In light of the What was the name of that company that town? Tightwad, Missouri. Tightwad, Missouri. There's a bank there. Do they name it after me or Charlie? I'll neither one, Laurel. You both fit in. In light of today's healthy growth and stability of the American economy at the present time and over the last, 5 years or so, how much credit, if any, do you give the Clinton administration and why? Well, I give credit to I give credit going back to Volker, significant credit to Volker. I give credit to Reagan. I give credit to, certainly to Greenspan and to Reuben. And I give credit to Clinton on that. I think that first tax bill was very important, carried by one vote. And I think he may listen to Rubin. So I think there's a lot to give credit for and I think you can spread it around a fair amount. Charlie may be less charitable here, but let's see. No, I've got no great quarrel of the way the country, the economy is performed. I think it's way better than any of us would have predicted. My name is Travis Keith. I'm from Dallas, Texas. And my question regards what Philip Fisher referred to as scuttlebutt. When you've identified a business that you consider both in terms of total hours and in terms of the span in weeks or months that you perform that investigation over? Well, the answer to that question is that now I spend practically none because I've done it in the past. And and one advantage of allocating capital is that an cumulative in nature so that you do get continuing benefits out of things that you've done earlier. So by now, I'm probably fairly familiar with most of the businesses that qualify for investment at Berkshire. But when I started out and for a long time, I used to do a lot of what Phil Fisher described. I followed this scuttlebutt method. And I don't think you can do too much of it. Now the general premise of why you're interested in something should be 80% of it or thereabouts. I mean, you You're interested to start with. Now you've got to find out if you can keep him in school, if he's coordinated and all that sort of thing. That's the scuttlebutt aspect of it. I believe that as you're acquiring knowledge about industries, in general, companies specifically, that there really isn't anything like first doing some reading about them and then getting out and talking to competitors and customers and suppliers and ex employees and current employees and whatever it may be. And you will learn a lot. But it should be the last 20% or 10%. I mean, you don't want to get too impressed by that because you really want to start with a business where you think the economics are good, where they look like 7 footers and then you want to go out with a scuttlebutt approach to possibly reject your original hypothesis or maybe, and if you confirm it, maybe do it even more strongly. I did that with American Express back in the 60s. And essentially, the scuttlebutt approach so reinforced my feeling about it that I kept buying if you talk to a bunch of people in an industry and you ask them, if you talk to a bunch of people in an industry and you ask them what competitor they fear the most and why they fear them and all of that sort of thing, Who would they use the silver bullet that Andy Groves on and so on? You're going to learn a lot about it. You'll probably know more about the industry than most of the people in it when you get through because you'll bring an independent perspective to it and you'll be listening to everything everyone says rather than coming in with these preconceived notions the decision on keeping the American Express when we the decision on keeping the American Express when we exchanged our perch for common stock in 1994. I was using the scuttlebutt approach when I talked to Frank Olson. I couldn't have talked to a better guy than Frank Olson. Frank Olson, running Hertz Corporation, lots of experience at United Airlines and a consumer marketing guy by nature. I mean, he understands business. And when I asked him how strong the American Express card was and what were the strengths and the weaknesses of it and who was coming along after it and so on, I mean, he could give me an answer in 5 minutes that would be better than I could accomplish in hours and hours and hours or weeks of roaming around and doing other things. So you can learn from people. And Frank was a user of it. I mean, Frank was paying X percent to American Express for his Hertz cars. And Frank doesn't like to pay out money. So why was he paying that? And if he was paying more than he was paying on Master, Charger, Visa, why was he paying more? And what could he do about it? I mean, you just keep asking questions. And I guess Davy explained that in video we had ahead of time. I'm very grateful to him for doing that because that was a real effort for him. But that was really what I was doing back in 1951 when I visited him down in Washington because I was trying to figure out why people would ensure him down in Washington because I was trying to figure out why people would insure with GEICO rather than with the companies that they were already insuring with and how permanent that advantage was. What other things could you do with that advantage? And there were just a lot of questions I wanted to ask him, and he was terrific in giving me the answers that changed my life in a major way. So I've got nobody to thank but Davion then. But that's the scuttlebutt method and I do advise it. Charlie? Hi. My name is Richard Lontoc from Toronto, Canada. I have a question for both of you. Mr. Buffett, Berkshire Hathaway's earnings in 1997 is less than that of 1996. What do you intend to do in 1998 to improve that earnings? And, Mr. Munger, I've been watching you and Mr. Buffet eating the See's Candies and drinking the Coca Cola the whole day. Join in. Do you intend to do any commercials in the future like, what Dave Thomas does for Wendy's? What you wish you wish you think we should do on? Now you're talking. We aren't old enough to be really good in a commercial. What we would like to do is have somebody up here happily eating See's candy and answering these questions who's about 110 years old. That would really be helpful. We, in terms of the earnings, the final bottom line GAAP reported earnings mean absolutely nothing at Berkshire to us. Now the look through earnings, which we publish, do have some meaning, but even those have to be interpreted in terms of whether there was a super cat occurrence or whether GEICO had an unusually good year and we try to mention those factors. But we do hope that the look through earnings do build at a reasonable clip over time. But our final earnings include capital gains and we can report those in any number that we wanted to and we paid no attention whatsoever to realize capital gains at Berkshire. The IRS does, but and that's why we may send them $1,000,000,000 or more this year. But they mean nothing in terms of measuring our progress. They look through earnings, say something about it. That table, the first couple of pages, it shows our change in book value versus the S and P says something about it not perfect. The real test is the gain in intrinsic value for sure over time. And that there's no hard number for that. But so far, Charlie and I judge it satisfactory, but we also judge as non repeatable. Charlie, any more in front? No. Area 7, please. Good afternoon, mister Buffet and mister Munger. My name is Keiko Mihalik, and I'm an MBA student at Wharton, but please don't hold that against me. We won't. I never made it that far. I was an undergraduate student. Could you please explain how you differentiate between types of businesses in your cash flow valuation process, given that you use the same discount rate across companies? For example, in valuing Coke and GEICO, how do you account for the difference in the riskiness of their cash flows? We don't worry about risk in the traditional the way you're taught actually at Wharton. We but it's a good question, believe me. But what we're if we could see the future of every business perfectly, it wouldn't make any difference whether the money came from running streetcars or from selling software because all the cash that came out, which is all we're measuring between now and judgment day, would spend the same to us. It really the industry that it's earned in means nothing except to the extent that it may tell you something about the ability to develop the cash, but it doesn't tell you it has no meaning on the quality of the cash once it becomes distributable. We look at riskiness essentially as being sort of a no a go, no go valve in terms of looking at the future businesses. In other words, if we think we simply don't know what's going to happen in the future, that doesn't mean it's necessarily risky. It just means we don't know. It means it's risky for us. It might not be risky for someone else who understands the business. In that case, we just give up. We don't try to predict those things. And we don't say, well, we don't know what's going to happen, so therefore, we'll discount it at 9% instead of 7%, some number that we don't even know. That is not our way to approach it. We feel that once it passed a threshold test of being something about which we feel quite certain that the same discount factor tends to apply to everything. And we try to do only things about which we're quite certain when we buy into businesses. So we think all the capital asset pricing model type reasoning with different rates of risk adjusted return and all that, we tend to think it as well, we don't tend to. We think it as nonsense. And but we do think it's also nonsense to get into situations or to try and evaluate situations where we don't have any conviction to speak of as to what the future is going to look like. And we don't think you can compensate for that by having a higher discount rate. I'm saying it's Yes. This great emphasis on volatility in corporate finance, we just regard as nonsense. If we have statistical probability of putting out a million and having it turn into this way as long as the odds are in our favor and we're not risking the whole company on one throw or anything close to it, we don't mind volatility in results. What we want is the favorable odds. We figured the volatility over time will take care of itself on Hit Berkshire. If we have a business about which we're extremely confident as to the business result, If we have a business about which we're extremely confident as to the business result, we would prefer that it have high volatility than no volatility. We will make more money out of a business, where we know where the end game is going to be if it pounces around a lot. I mean, for example, if people reacted to the monthly earnings of seas, which might lose money 8 months out of the year and makes a fortune in November December, If people reacted to that and therefore made its stock as an independent company very volatile, that would be terrific for us because we would know it was all nonsense. And we would we're very certain but the world thinks that its fortunes are going up and down and therefore it behaves with great volatility, we love it. That's way better than having a lower beta. So we think that we actually would prefer what other people would call risk. When they when we bought the Washington Post, I've used that as, you know, it went down 50 percent in a matter of a few months. Best thing that could have happened. I mean, that doesn't get any better than that. Business was fundamentally very non volatile in nature. I mean, TV stations and a strong dominant newspaper, That's a non volatile business but it was a volatile stock. And that is a great combination from our standpoint. Area 8. Good afternoon, and thank you for staying around to answer our questions. I have 2. First of all, would you give us what logic went into your decision to both buy and sell McDonald's? And my second question goes to a term that you've used. You talked about the caliber of the shareholders of Berkshire Hathaway. How do you define the caliber and what difference does it really make? Well, it makes a lot of difference. And our idea of a high caliber group is one that is just like us. And that's not entirely facetious in that we basically want shareholders who look at the business the same way we do because we're going to be around running something. And what could be worse than having a group out there had a whole different set of expectations than we did and that evaluated us in a different way or all those sort of things. I mean, if you are going to have a given number of shares outstanding, let's say we have an equivalent of 1,200 and some 1,000 A shares. Somebody is going to own every single share. Now would you rather have them owned by people who understand your business, who understand your objectives, who measure you the same way you do, who have similar time horizons? Or would you rather have the reverse? It makes a real difference over time to be in with people that are compatible with you. So it's a significant plus to us, the operation of the business, and it leads to a more consistent relationship between price and intrinsic value when you have a group like that because they understand themselves and they end the business and they're not likely to do silly things in either direction. So you get a much more consistent relationship than if we had a whole bunch of people who were thinking that the most important thing in evaluating this business was next quarter's earnings. The question about McDonald's simply is it's an outstanding business, and we don't talk about it when we buy it. We don't talk about it if we sell it. Charlie? The question of what difference does it make to the management who the shareholders are. Well, if you are into what I call trustee capitalism, where the shareholders aren't just a faceless bunch of nothings, but you feel as a kind of a hair shirt an obligation to do as well as you can by the shareholders? Well, wouldn't you rather feel an obligation to people you liked instead people you didn't like? Yeah. Let's say you were running a business and you had a choice of 3 owners. You could have 100% of it owned by whatever your favorite philanthropy is. You could have 100% of it owned by the U. S. Government. And you could have 100% owned by the worst person you can think of in your hometown. I mean, I think it would make a difference in how you felt about going to work every day. Number 9. Yes. My name is Steve Chek. I'm from Southern California. My question has to deal with kind of quality versus price. I've been to 3 annual meetings and I've heard great things about Coke every year. But as far as I'm aware, you have not bought any additional shares of Coke over the last 3 years even though the stock has done just fine. If an investor has a relatively short time frame, say 3 to 5 years, how much weight do you think one should give to quality versus price? Well, if your time frame is 3 to 5 years, a, a, I wouldn't advise it being that way because I think if you think you're going to get out then, it more toward leaning toward the bigger fool there. The best way to look at any investment is how will I feel if I own it forever and put all my family's net worth in it. But we basically believe in buying if you talk about quality, meaning the certainty that the business will perform as you expect it to perform over a period of time, so the range of possible performance is fairly narrow. That's the kind of business we like to buy. And all I can say is that we like to pay a comfortable price and that depends, to some extent, on what interest rates are. We haven't found comfortable prices for the kind of businesses we like in the last year. We don't find them uncomfortable in the sense that we want to sell them. We added to Coke one time about, I don't know, 5 years ago or thereabouts. And it's conceivable we would add again. It's a lot more conceivable we would add and subtract. But that's the way we feel about most of the businesses. We did make a decision last year that we thought bonds were relatively attractive and we trimmed certain holdings and eliminated certain small holdings in order to make a bigger commitment in bonds. Charlie? You talk about quality versus price. The investment game always involves considering both quality and price. And the trick is to get more quality than you're paying for in the price. It's just that simple. But not easy. No, but not easy. Gentlemen, good afternoon. Jeff Kirby from Green Village, New Jersey. Would you comment, please, on tax free spit offs shareholders in general? And particularly, how you would feel about those were you to believe that a materially higher value would be ascribed to one of your operating companies in the public arena than as part of Berkshire Hathaway? Well, there certainly have been times in Berkshire's history when certain certain components of Berkshire might well have sold at higher multiples as individual companies than the amount they contributed to the whole of Berkshire, although I don't think that would be the case now. But our reaction to spinoffs would be even if we thought there was some immediate market advantage, it would have no interest basically to us. We like the group of businesses we have as part of a single unit at Berkshire. We hope to add to that group of businesses. We will add to that group of businesses over time. And the idea of creating a lot of little pieces because we could get a little more market value in the short term, it just doesn't mean anything to us. Charlie? Yes. It would add a lot of frictional costs and overheads. And we have I don't know of anybody our size who has lower overhead than we do. And we like it that way. Right now, our after tax cost of running the operation has gotten down to a half a basis point of capital value. When you think that many mutual funds are at 125 basis points, that means they have 250 times the overhead ratio to capitalization that we have. And LA got a bunch of marketable securities and we got that plus businesses. We don't need anymore. But we can get lower, Warren. We can get a lot lower. I know. You think they'd work for $500 a year instead of $900 a year? Mr. Munger. I was kind of curious if you could tell me, do you know or can you tell us how much business Nebraska Furniture Mart and Borsheim's did this weekend? And secondly, do you have any interest in investing in the auto industry? And if not interested now, what would change your mind about this industry in the future? Well, the first question, I don't know what the market did, but I do know they had a lot of shareholders there. I've gotten that verbal report on that. There would be less change in their normal business. They do you're talking about a company that at the mart that does $800,000 a day on average. It is a big operation. So our shareholders have an impact, but not the relative impact that they would have at Forshine. Forshine's dead over twice as much this year as last year and they had a big day. And what was the other question, Charlie? Industry. The auto industry. Oh, the auto industry. Yeah. We Charlie was big in General Motors in the mid-60s, right, Charles Hahn? Was it your biggest commitment? I had a temper. Luckily, it passed. Yeah. No, you made money on it, Ted. Yes, I did. We it's kind of industry that's it's interesting for us to follow. I mean, it's many years ago, it was the dominant factor or overwhelming factor in the economy. It's diminished a fair amount, but it's still a very important industry. And it's the kind of industry that anyone can follow. I mean, you have experience with the product and competing products. And you everyone in this room understands in a general way the economic nature of the industry. But we've never felt that we understood it better than other people. So we've seen auto companies at very low multiples sometimes and with prices that, in hindsight, look very attractive. But we've never really felt that we knew who among the auto companies 5 years from now would have gained the most ground relative to where they are now or to gain the most ground relative to what the market might expect? It just isn't given to us, that knowledge. Charlie? I agree. Area 2. Hi. My name is Scott Rudd from Eden Prairie, Minnesota. And my question is this. 10 years from now, and I'm referring to Borsheim's as the retail part of it to the consumer, not so much the corporate division. 10 years from now, what would be the 3 things that you would expect to change on a day to day operating basis to change the most and affect your ability to be dominant in that area? Well, I think are you talking about Borsheim specifically? Yes. I think Borsheim's I don't know about 3 things, but I have Borsheim's may be one of, a couple of our companies that, where the Internet could be a huge, have a huge potential for us. I don't know if that'll happen, but there's no question that we operate, and I've got a message on the Internet, that at considerably, very considerably lower gross margins than does a Tiffany or publicly held jewelry operations. We are giving customers considerably more for their money. We've got way lower operating costs than the public companies. And I say on the Internet, our operating costs are costs are 15 to 20 percentage points and even more, in some cases, less than publicly owned competitors. So we've got a lot to offer. Now the big question people always have with jewelers is how do you know who to trust? I mean, it is an article that most people feel very uncomfortable buying. And I think that the Berkshire Hathaway identification can help people feel experience of customers around the country as they see it. And I don't think that I think it is a product. It's a high ticket item. So saving money gets to be really important. Just like auto insurance, saving money gets to be really important. So I think that the Internet could be of significant assistance to Borsheims in terms of spreading, and facilitating, its nationwide reputation. So horse shimes could have a lot of growth and the Internet could be a big part of it. Our job is to get the message to people around the country that they can literally have us send half a dozen items to them that they can look at with no high pressure salesmanship at all or anything of the sort and look at the prices, decide what they want in their own homes. And they will do very well with us. And we have a lot of people taking advantage of that now, but we could have 10 or 20 or 50 times that number as the years go by. And I think we should work very hard on that. GEICO has possibilities through the Internet, obviously, also. But anything where you're offering a terrific deal to the consumer. But one of the problems has been how do you talk to that consumer. The Internet offers possibilities right now. The thing is that everybody in the world is going to be there. And why should they click on you instead of somebody else? Actually, the Berkshire Hathaway name may help a little bit on that, although GEICO's name is extremely well known. GEICO is, I said in the annual report, we were going to spend $100,000,000 basically in promotion this year. We'll spend more money than that. The brand potential in GEICO is very, very big and we intend to push and push and push on that. Charlie? Well, all that said, if the Internet helps some of our business, well, certainly the CD ROM and the personal computer combine the clobber world book for us. Yes, we've paid our entry fee. Yes, we it's not all plus. No. Area 3. My name is Gadi from Zurich, Switzerland, and my question refers to 2 food businesses, namely McDonald's and Dairy Green. Are there major differences in the investment characteristics between McDonald's and Dairy Green? And if yes, would you explain them? Yes, there are major differences. McDonald's owns perhaps in the area of a third of all locations worldwide. I can't tell you the exact percentage. But if they've got 23,000 outlets, they own many, many thousands of them and operate them. And then the remainder, they own a very high percentage and lease them to their operators, their franchisees. So they have a very large investment on which they get very good returns in physical facilities all over the world. Dairy Queen, has, counting orange, Julius, 6,000 plus operations of which 30 odd are operated by the company and even those, some are in joint ventures or partnerships. So the investment in fixed assets is dramatically different between the 2. The fixed assets investment by the franchisee, or the person as landlord obviously is significant at Dairy Queen, but it's not significant to the company as the franchisor. So that the capital employed in Dairy Queen is relatively small compared to the capital employed in McDonald's. But McDonald's also makes a lot of money out of owning those locations and receives whereas Dairy Queen will, in most cases, receive 4% of the franchisees' sales in terms of a royalty. At a McDonald's, there's that more than that percentage plus rentals and so on. So they're 2 different very different economic models. They both depend on the success of the franchisee in the end. I mean, you have to have a good business for the franchisee to, over time, have a good business for the parent company. Both companies have that situation to deal with. Charlie? I've got nothing to add. The 4% is not very much when you stop to think about providing a group of franchisees with the nationally recognized brand and quality control and all sorts of desirable business aids. 4% is at the low if you look at the whole industry, 4 percent is in the lower part of the range. But we're fine. Yes. Part of what attracted us was the fact that the charges to the franchisees are low at Dairy Queen. A successful franchisee can sell his operation for significantly more than he has invested in tangible assets. And we want it that way, obviously, because that means he's got a successful business and it means that over time, we will have a successful business. You want a franchise operator to make money and you want him to create a capital asset that's worth more than he's put in it. That's the goal. Area 4. Good afternoon, Mr. Munger and Mr. Bellett. Name is Patrick Byrne. I'm a shareholder, and I'm here from Cincinnati, Ohio. Back again this year to ask a question to see if I can get the 2 of you to disagree on a subject. I picked education as an area where we might see some daylight between the 2 of you. First, though, on the subject of education, I'd like to offer some brief thanks. I'm lucky in that parents, in the late seventies, made a wise choice of buying some Berkshire stock and putting it in a college fund for my brothers in May. And our that basically paid for our higher education. I suspect there must be thousands of people like us who've had our education paid for by wealth that the 2 of you created. And we owe you. Although, we probably all have been a lot better to skip college and keep stock. Well, on the subject of education, Milton Friedman has said or has written that if you if you really care about poverty in the US and the disadvantage of women and minorities and and so on, that and you could cure one single thing in the US, it would be the public education system. And done many things, and I'm sure mister Munger has as well, for the for public education. But I noticed last year, in this annual meeting, mister Munger, well, both of you, of course, criticized some aspects of higher education like business schools, but Mr. Munger included a it was a tad critical, I would say, of the U. S. Public education system. And I wonder if you 2 agree with what Friedman says and what you think the importance of public education is and what might be done to improve it. I'm going to let Charlie go on a second, but I just want to say Patrick Byrne is the son of Jack Byrne, who made a fortune for us by resuscitating GEICO when he got into trouble in the mid-70s. In fact, I met Patrick's dad on a Wednesday night, about 8 o'clock at night in Washington when GEICO was it was bankrupt and it was about very close to being declared. So And after talking with about 3 hours that night, the next day I went out and bought 500 and some 1,000 shares of GEICO that Davy referred to at $208,000,000 which is $0.40 on the stock that we paid $70 for later on. So Patrick's dad, we may have made the Bernd family a little more money. He made us a lot of money. Patrick is now running Dutchheimer's in Cincinnati and doing a sensational job. His brother, Mark, on June 30th, if we hit the target date, we'll be establishing a major operation in London and Bermuda that will in which we will be a very large partner. So he's only got one other brother left and he's out playing golf in California. But if times get tough, we're going to try and recruit him too. Now, Charlie, with that all that time to prepare, what do you have to say about education? Well, I certainly agree with Milton Friedman that it would be hard to name one factor if we could fix it that would be more worthy of fixing than than education in the United States, particularly the the lower grades in education where the failures are so horrible in many big cities particularly. So yes, I think it's a terrible problem and it needs fixing. Of course, there's a huge debate as to what the best way is to fix it and I am skeptical myself of big city school systems getting fixed under their own momentums. In other words, I'm quite sympathetic to the people who say we may have to go to an alternative like vouchers, that the incentive structure has gotten so bad in some places that you can't fix it with evolution. It takes revolution. Warren, you're more optimistic about this. Well, I'm not necessarily more optimistic. I probably feel, though, that democracy without a good public school system available to the entire population is is sort of a mockery because there's there's so much inequality to start with. I mean, it isn't just inequality of money, but I mean, my kids, whether they inherit any money or your kids, whether they inherit any money, compared to the kids of somebody or both parents are struggling to keep the place going or maybe just one parent living in poverty. I mean, it is so unequal to start with that if you accentuate that inequality by giving those who are generally higher up on the ladder also a far better education than you give those who have chosen the wrong womb. I think that that's just I don't think the society should tolerate that or rich society should tolerate. That doesn't mean it's easy to solve because I've said a lot of times that, unfortunately, it seems like a good public school system is is like virginity that it can be preserved but not restored. And it's it's very hard when you get a system that's lousy to do much about it because under those circumstances, the wealthy people are going to all opt out of the system. And they're going to be less interested in the bond issues. They're going to be less interested in the PTA. They're going to be less interested in the outcome of the other people's children if they have all opted out for their own system. And they have one educational system for the rich and another for the poor, With the poor being getting the poor system strikes me as doing nothing but accentuating inequality and other problems that result from that in the future. So I don't know the answers on improving the system. You I read some of the experiments that take place. But I do believe, to start with, that you have a good public school system as we do in Omaha, that you do your damndest to maintain that so that there is no incentive for the rich grandparent or the rich parent to say, I love the idea of equality, but I love my grandchildren and my child more. So I'm going to yank him from the public school system. And then you get this exodus, which leaves behind only those who can't afford to make that choice. And the problem I have with the voucher system, if there were a way, the idea of competition I like. And I think a good parochial system does, for example, create a better public system when I think we've had that situation in Omaha. But I think the voucher system, if simply amounts to giving everyone an additional amount, simply means that the rich get X dollars of the public school system subsidized. But the poor still or whatever that differential is, remains. I mean, you could have a golf voucher system because I play golf. I don't play very often. But if I play at the Omaha Country Club, then you could have a voucher system so that everybody in Omaha would have more access to the country club by giving everybody $1,000 a year to play golf. But it just means it would reduce my bill by $1,000 but it still wouldn't do the job for the guy who's on the public course because he'd still be beyond his means to move to full scale equality with me. I don't think there's anything more important. And I agree with Charlie totally. I think the first eight grades, you can forget it after that. If you have the first eight grades right, good things are going to flow. And if you have those wrong, you're not going to correct it as you get beyond that point. And I commend Walter Annenberg on the $500,000,000 I think it is very tough to see results in that arena. And if you find something that is producing results, I think it should be replicated elsewhere. I think that obviously, a fellow in Chicago says that the unions have caused considerable problems in getting adjustments made, but he had the political clout behind him to overcome some of those problems. It ought to be a top national priority. We have the money to educate everybody well in this country. And the question is, can we execute? And that's something I hope good minds like Patrick's work on. Charlie, you have anything for that? Yeah. I think when something is demonstrably failing at performing the function to which is assigned by a civilization just to keep pouring more and more money into a failing modality. Is not the Munger system. So I'm all for taking the worst places where there's failure and trying a new modality. And it wouldn't bother me at all to have vouchers only for the poor. But I think we have to do something in our most troubled schools to change our techniques. I think it's insane to keep going the way we are. So you go for means tested vouchers, basically. Well, I I mean, I don't disagree with that idea. But all I know is we're it is a terrible place to fail. And part of the trouble is ideological. If you have an absolute rule or can't be any tracking viability, no matter how much better reading can measurably be taught by systems that involve people that brain blocked shouldn't have the power. We should do what works. It's always a funny I mean, all know it works. The problem is that once it gets beyond a certain point on a downhill slope, essentially, you have the citizens that are able to do something about it essentially opt out. And that, I don't know. I am a product of the Omaha public schools. And in my day, the people who went to private schools were those who couldn't quite hack it in the public schools. That is still the situation in Germany today. Private schools are people who aren't up to the public schools. I prefer a system like that. But once a big segment of that system measurably fails, then I think you have to do something. You don't just keep repeating what isn't working. No, I agree with that. Patrick, have you gotten your answer? Let's go to area 5. My name is Kevin Murphy. I'm from Camarillo, California. And my question is, what do you look for when determining if a person is honest or not? Well, that's a good question, Kevin. You I think generally, Charlie and I can do pretty well with the situations we see, but we have to have some evidence of behavior in front of us. And I would say even there are some occupations where we're going to expect to find a higher percentage of people who behave well than others. But if we work with someone over a period of a few months or more, I think we've got we can come up with a pretty high batting average in terms of how they behave. But at Salomon, I think I was able to separate out the people who I felt very good about and the people I was a little more nervous about fairly quickly among the ones I work with actively. But how do you spot that precisely? Leave your lunch money on their desk sometime. Maybe you'll find out in a hurry. We like people. I mean, the great example is somebody like a Tom Murphy where they're just bending over backwards all the time to make sure that you get the better end of the deal or that that doesn't mean they aren't competitive. I mean, if you play him a golf game for money or something like that, he wants to win the worst way. But there are people that just they don't take credit for things that they didn't do. In fact, they give you credit for some of the things that maybe they did. You can get a feel for it over time. Charlie, do you have any good guidelines on that? Yes. I think that people leave track records in life. And so somebody at your age should figure that by the time he's 22 or 3, he will have left quite a track record and the world will be able to figure you out. So I think that I think track records are very important. And if you start early trying to have a perfect record and in some simple thing like honesty, you're well on the way to success in this world. John Agnelli one time told me, he said, when you get older, you have the reputation you deserve. He said, you can get away with it for a while early on. But by the time anybody gets to be 60 or so, they very probably have the reputation you deserve. And the truth is you're going to have the reputation that you If you list all of the things that you admire in other people, you'll find out that almost everything you list, you may not be able to kick a football 60 yards or something of that sort, but every almost everything you list and the people that you admire and like, there are qualities that you can have if you just set out to do that. And didn't Ben Franklin do that, Charlie? No, sure. I always say that the best way to get what you want is to deserve what you want. I'll have us some more of you anticipate any negative financial impact to the economy or to our companies due to the Millennium problem? And if so, what financial strategies are you considering? Well, I don't think there'll be major problems for our company. You know, there are going to be some problems anytime you have something that big. If people didn't see it coming in 1980 or 1985, they're not going to be perfect at solving it by 2,000. You can count on that. But But I don't think it has any investment consequences for Berkshire Hathaway that we should be considering now. And I do think you'll see most of the problems in the governmental area. Maybe they won't find your tax return for 2 or 3 years. Who knows? Charlie? Yeah. Area 7. In your description of McDonald's, you have the sense that there's a great business buried in McDonald's and there are 2 good businesses that are mixed in with it. And the problem is with the real estate and the operational business that as the company is currently capitalized, they can't earn the same kind of returns they can earn in the franchising business. You were or still are a significant shareholder of solution that creates the same opportunity you have at International Dairy Queen? Well, my guess is I don't know the details on it but my guess is that with 23,000 locations all over the world, I think it would be extraordinarily difficult to separate the real estate business out from the franchising business at this point. I think they could have gone a different route. I'm not saying it would have been a better route at all. In fact, the odds are they followed the right route in owning and controlling so much real estate. But I think I just the problems would be horrendous. Certainly, you wouldn't want to sell it and lease it back because you would not end up with more value, in my view, by doing that. And spinning it off in a real estate trust or something with operating in 100 plus countries and with all of the franchise arrangements, I think it would be a huge, huge problem. I would not want to tackle it myself. So I think that you should look at McDonald's and I don't know anything about their plans on this but I think you should look at McDonald's as being a very good business but the one that will continue in its present mode vis a vis the real estate. Although I think they've signaled that they're going to do less on new properties, somewhat less in connection with ownership than they've done to this point. But there's 23,000 locations out there and every operator, his own arrangement is very important to him. And it just it would be a mammoth job. And I'm not sure how much extra value would be created in the end anyway. Charlie? Yeah. The net returns on capital McDonald has earned all these years are high even though they have owned a lot of their real estate. I think it's hard to quarrel with the way they did it. They had the best record. And the multiple is not greatly different, in my view, than if the real estate were separate, you know. I mean, now if you get all the real estate de taxed in some arrangement, you might get a little more out of it. But it doesn't strike me as a big deal. Area 8. Yeah. Hi. I'm Rachel White from Missoula, Montana. And during the lunch break, I heard some people talking about double taxation and how that impacts whether that impacts your investments? Well, we are structured very poorly. And if you were looking if you're going to start all over again and do some most of the things we've done, you would you'd probably not do it in corporate form or precisely like we do it. I mean, what that gentleman was talking about in connection with McDonald's applies much more to Berkshire Hathaway even than by far than McDonald's in terms of de taxing part of the income stream. If we own Coca Cola with a cost of a $1,200,000,000 or 1 $1,300,000,000 and a market value of $15,000,000,000 we're not going to sell it. But if we did sell it, we would incur a capital gains tax on the order of almost $5,000,000,000 That means that the $15,000,000,000 Now if that $10,000,000,000 is reflected in Berkshire's value and you bought your stock when we bought our Coke, then you pay a second tax in turn in reflection of the a very disadvantageous way of owning securities to have a corporation in between you and the securities themselves. If we ran as a partnership, that would not be the case. I ran Berkshire Hathaway. I mean, I ran Buffett Partnership for many years and we only had one tax at the individual level. So our stockholders are to the extent that we own marketable securities and we own a lot of them and to the extent that we have a lot of profits over time in those own those securities in a disadvantageous way. Now one of the we also have a float which helps us own them, which is a big plus. But corporate ownership of securities, if you have the option of owning them directly or through partnership, corporate ownership is disadvantageous. And we're stuck with it. We've had it for all these years. We've got no plans to do anything about it. We couldn't probably do anything about it if we wanted to. So that is a drag on our performance compared to what would be the situation if we operated as a partnership. And Lloyd's syndicates, for example, didn't have that problem. Some insurance companies that operate in Bermuda may not have that problem to the same extent. Certainly, partnerships don't have that problem to the extent they own securities. But it's a fact of life with us and we're going to pay a lot of taxes. Charlie? We have no cure for the corporate income tax. And it is a big disadvantage for the indirect owner of securities. So far, we've surmounted it well enough, But we're carrying a load there. It's become a bigger disadvantage since the individual rate went to 20 percent with our corporate rate being 35 percent. If we make $1 on a stock, it becomes $0.65 And to the extent that you've owned Berkshire, that's $0.65 now 20% off that becomes $0.52 whereas if you'd own the stock directly, you'd have had $0.80 dollars Now when we owned GEICO and it wasn't consolidated with us, you could have carried that one more extreme. I mean, GEICO had capital gains and we had a capital gain proportionally in GEICO and so on. I mean, how you're structured does make a real difference. But usually, once you get into a given structure, you're kind of stuck with it, as I indicated in the answer to the gentleman on McDonald's. Now to the extent we have very long holding periods at the corporate level, the real mathematical disadvantage shrinks. Yes. And we might not have been able to get the float that we have if we hadn't been operating it in a corporate structure. So that is a mitigating factor, too. But we like to have the mitigating factors without anything to mitigate if we get our choice. Area 9, please. Good afternoon. My name is Fred Strassheim and I'm from here in Omaha. I have a question about your acquisition methodology. And I was intrigued to read in your annual report or you I'm sorry, you reviewed financials for a brief period, like what you saw. And then you met with Mr. Melvin Wolf for 2 hours and struck a deal. And you you wrote, you had no need to check leases, work out employment contracts, etcetera. Right. I think that most companies, when they do acquisitions, would feel the need to do, significant amount of legal due diligence to do things like check the leases, check into things like undisclosed environmental liability or perhaps threatened litigation. And I guess my question is, have you ever been burned by your approach? We've never been burned by the we've been burned only in the sense that we've made mistakes on judging the future economics of the business, which would have had nothing to do with due diligence. We regard what people normally refer to due diligence as really sort of boilerplate in most cases. It's a process the big companies go through and they feel they have to go through it and they're ignoring, oftentimes, in our view, they're ignoring what really counts, which is evaluating the people they're getting in with and evaluating the economics of the business. That's 99% of the deal. You may run into an environmental liability problem one time in 100 or you may find a bad lease. I asked Melvin about, do you have any bad leases? I mean, that's the easiest way to do it. And I can read them all and try and look for every clause or something, but it isn't going to that is not the problem. We've made lots of bad deals. We made a bad deal when we bought Hochul Cone, for example, a department store operation back in 19 66. But it had fine people, but we were wrong on the economics of the business. But leases didn't make any difference. That sort of thing just was not important. And I can't recall any time that what other people referred to as due diligence would have avoided a bad deal for us. I can't either. No. That's 30 some years. And I the key thing, you just don't want to do I go into I'm on various public company boards. I've been on 19 public company boards And, you know, their idea of the due diligence is to send the lawyers out and have a bunch of investment bankers come in and make presentations and all that. And I regard that as terribly diversionary because the Board sits there, you know, entranced by all of that and everybody reporting how wonderful this thing is and how they've checked out patents and all that sort of thing. And nobody is focusing really on where the business is going to be in 5 or 10 years. And business judgment about economics and people to some extent, but the business economics, that is 99% of deal making. And the rest, people may do it for their protection. I think too often they do it as a crutch just to go through with a deal that they want to go through with anyway. And of course, all the professionals know that. So believe me, they come back with the diligence whether due or not. And we are not big fans of that. We have I don't know how many deals we've made over the years but I cannot think of anything that traditional due diligence has had a thing to do with. And No. We've had surprises on the favorable side a couple of times. That is true. That is true. The kind of people that we've generally dealt with have usually told us the bad things first and the good things after we made the deal. We made a deal with a fellow over in Rockford in 1969, Eugene Abig, the Illinois National Bank and Trust Company. I made that deal in a couple of hours. And I mean, there was just wasn't any way that Gene was going to be hiding anything then. For the next 10 years, when I went over there, every time I go to lunch, he'd point out some building down that we owned that wasn't on the books or some foundation we had that had money in it that he hadn't told me about. And he even gave me some bills, one of which I carry in my pocket, that he had still sitting around with the, that were issued by the bank that were our own money, which he never told me about yet. And we could cut them out like paper dollars. I mean, Gene was not a guy to show all his cards. And those are the kind of people we've generally dealt with. And I would certainly say that Melvin and Shirley put that description in spades. We're now at 3:30. It's been a lot of fun this weekend. I'm glad you came and I hope to see you next year. Thank you.

• Press Release