Berkshire Hathaway Inc. (BRK.A)

ASM 2003 Part 1

← View all transcripts

May 3, 2003

We promise not to sing. Good morning, and we're delighted to have you all here. One of the things that makes it fun to run Berkshire is that we see real shareholders, that we have we probably have a larger proportion of our shares held by individuals and not by institutions than virtually any large company in America. And that's the way we like it. And that's, we love it when you come. We get to see you. You buy our products. There's still a few things left downstairs. So feel free to leave any time during the meeting when Charlie's talking to go down and make a few purchases. Now we're going to do as we've always done. First of all, I'd like to I would like to give very special thanks to Andy Hayward. Andy, would you stand up if you will, please? Andy is the man that there he is. Andy does those cartoons. He recruits Walter Cronkite and Bill Gates and he does the script. He gets, Charlie and me to do recordings. And it's just wonderful the production he's put on. And for those of you last year, I mentioned a program that's on public broadcasting called Liberty's Kids. It's running consecutively. There's, I think, 40 episodes. It tells the story, really, of the founding of the country. And it's a marvelous way to learn history. I've watched a number of the sessions myself. And it, you know, kind of comes back to me from my early days, grade school and high school. And Andy's done, I think the parents of America and the country, a real service in producing this. And I will predict that a 100 years from now, people will be watching Liberty's Kids. So I really salute Andy Hayward and, be sure to catch it on public broadcasting and Andy, thanks for a wonderful production. Now, we're going to follow our usual procedure of leisurely proceeding through the formal part of the business in 3 or 4 minutes. And then we will I'll have a few comments actually on our business, and then a couple of acquisitions. And then we will spend the rest of the day until 3:30 with a break for lunch. We will spend here to answer any questions you have. We have microphones in various zones. We will proceed around and try to get every and any subject that's on your mind, fire away and I'll answer the easy ones and Charlie will answer the tough ones. So now we will go through the formal part of the business. They've written a little script for me and I will go through this. The meeting will now come to order. I should introduce Charlie over here, not that he needs an introduction, but, Charlie. Charlie and I have been partners of one sort or another since 1959. We both grow up a good bit here in Omaha, but we didn't know each other at the time. We both worked at the same grocery store. We had a similar experience. We found that neither one of us liked hard work. And if you go down to the Western Heritage Museum, they just opened an exhibit of that grocery store. It's a permanent exhibit. And naturally, I loved it. Charlie worked there a few years before I did in the past. But we didn't actually meet until I was 28 or 29. And Charlie was a few years older as he still is. And we have worked together now for in one way or another for 44 years. We've never had an argument. And we disagree sometimes on things. You have to learn to calibrate Charlie's answers. When I asked him whether he liked something, if he says no, that means we put all our money in it. I mean, that is a huge if he says that's the dumbest idea I've ever heard, that's a more moderate investment that we make and then you have to calibrate his answers. But once you learn to do that, you get a lot of wisdom. We have our directors with us, and I'll introduce them. We have if you'll stand, please, as I call your name, and then you can it'll be hard to do, but you can withhold your applause till they're all standing. Susan T. Buffet, Howard G. Buffet, Malcolm G. Chase, Ronald L. Olson and Walter Scott, Jr. In addition to Charlie. Those are the directors of Berkshire Hathaway. As we mentioned in the annual report, we will be adding some directors who meet the 4 tests that I laid out in the report. We'll be adding some of those probably within the next year when we're required whenever we're required to do so, we will be doing it. And we will have people who have a lot of their own money on the line just like you do in Berkshire and they will prosper or suffer in relation to how Berkshire does and not in relation to their director's fees or other things. So they will be selected for business savvy which they will have. They will be selected for interest in the company, which is almost guaranteed by their holdings. They will be selected by their shareholder orientation, which again, I think that their holdings, will produce. And we will have those people on board probably by our next meeting. Also with us today, our partners in the firm of Deloitte and Touche, our auditors. They are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire. And I might say that almost any question would be appropriate. Mr. Forrest Crutcher is secretary of Berkshire. He will make a written record of the proceedings. Ms. Becky Amick has been appointed inspector of elections at this meeting. She will certify to the count of votes cast in the election for directors. The named proxy holders for this meeting are Walter Scott Jr. And Mark D. Hamburg. We will conduct the business of the meeting and then adjourned to the adjourn the formal meeting. After that, we will entertain questions that you might have. Does the secretary have a report of the number of Berkshire shares outstanding entitled to vote and represented at the meeting? Yes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 5, 2003, being the record date for this meeting, there were 1,309,423 shares of Class A Berkshire Hathaway common stock outstanding with each share entitled to 1 vote on motions considered at the meeting and 6,763,493 shares of Class B Berkshire Hathaway common stock outstanding with each share entitled to onetwo hundredth of one vote on motions considered at the meeting. Of that number, 1,071,967 Class A shares and 5,228,700 and 5 Class B shares are represented at this meeting by proxies returned through Thursday evening, May 1. Thank you. That number represents a quorum, and we will therefore directly proceed with the meeting. First order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott, who will place the motion before the meeting. I move that the reading of the minutes of the last meeting of the shareholders be dispensed with and the minutes approved. Do I hear a second? The motion has been moved and seconded. Are there any comments or questions? We will vote on this motion by voice vote. All those in favor, say aye. Opposed? You can signify by saying I'm leaving. The motion is carried. The first item of business at the meeting is to elect directors. If a shareholder is present that wishes to withdraw a proxy previously sent in and vote in person on the election of directors, he or she may do so. Also, if any shareholder that is present has not turned in a proxy and desires a ballot in order to vote in person, you may do so. If you wish to do this, please identify yourself to meeting officials in the aisles who will furnish a ballot to election of directors. I move that Warren E. Buffet, Charles T. Munger, Susan T. Buffet, Howard G. Buffet, Malcolm G. Chase, Ronald L. Olson and Walter Scott Jr. Be elected as directors. Sounds good to me. It has been moved in second of the Warren Buffett, Charles Tee Munger, Susan T Buffet, Howard G Buffet, Malcolm G Chase, Ronald L. Olson and Walter Scott Jr. Be elected as directors. Are there any other nominations? Is there any discussion? The nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the election of directors and allow the ballots to be delivered to the Inspector of Elections. Will the proxy holders please also submit to the Inspector of Elections a ballot on the election of directors voting the proxies in accordance with the instructions they have received? Ms. Amick, when you're ready, you may give your report. My report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast not less than 1,000,000 58,098 votes for each nominee. That number far exceeds a majority of the number of the total votes related to all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes, including the additional votes to be cast by the proxy holders in response to proxies delivered at this meeting, as well as any cast in person at this meeting will be given to the secretary to be placed with the minutes of this meeting. Thank you, Ms. Amick. Warren E. Buffet, Susan T. Buffet, Howard G. Buffet, Malcolm Munger, Ronald L. Olson and Walter Scott Jr. Have been elected as Directors. The next item of business is a proposal put forth by Berkshire shareholder, Christopher J. Fried, the owner of 2 Class B shares. Mr. Fried's motion is set forth in the proxy statement and provides that the shareholders request the company allows Class B shareholders who own at least 7 registered shares of Class B stock to become eligible to participate in the shareholder designators contributions program. The directors have recommended that the shareholders vote against this proposal. We will now open the floor to recognize Mr. Fried or his designee to present his proposal. Thank you, Mr. Buffet. Good morning, my fellow shareholders. My name is Chris Fried, I am here to present a shareholder proposal. This proposal is designed to extend the shareholder designated contribution program to include Class B shareholders. Let me first start off by saying, in our shareholders' owner manual, there is a statement that I would like to quote at this time. Although our firm is corporate, our attitude is partnership. Charlie Munger and I think of our shareholders as owner partners and of ourselves as managing partners. We do not view the company itself as the ultimate owner of our business assets but instead view the company as a conduit through which our shareholders own the assets. With that in mind, I present the following proposal for a vote. This proposal would extend the shareholder contribution program to Class B shareholders who own at least 7 registered shares of Class B stock. Under my proposal, each Class B stock would be allocated onethirty the value of the Class A donation rate. Currently, the Class A rate is $18 which translates to $0.60 per Class B share. The required minimum 7 registered shares results in no less than $4.20 being donated by a Class B shareholder. This figure is important for when inflation is taken into account, the donation rate will be on par with the original 1981 donation level when the shareholder proposal designated program was initiated. I do understand that there are certain perks involved with owning a Class A share. However, those perks should only be limited to voting rights and the ability to convert Class A shares to Class B shares. Therefore, I believe that it is inappropriate to extend the shareholder designated program to Class B shareholders. If Berkshire Hathaway is to truly follow, truly follow what it preaches about this firm being a partnership among all of its shareholders, then Class B shareholders must have the right to at least have the option to take part in the shareholder designated contribution program. Thus, I ask my fellow Berkshire Hathaway shareholders to vote in affirmative on this matter. Thank you for your time. Thank you, Mr. Fried. And, you're absolutely right that Charlie and I do regard our shareholders as partners and we have ever since we really started. In fact, Berkshire in a sense evolved out of a couple of partnerships. Charlie had a partnership. I had a partnership. We made an investment in certain things and a lot of our original partners are still with us as shareholders. The partnership, Albert, partnerships have partnership agreements. And when we set forth or when we issued the Class B shares some years ago, we set forth the relative terms of the partners and the class A and the class B are, are quite similar in economic terms, but they're not identical. And at the time we issued those shares to a new group of partners, class B partners, we explained quite clearly, I believe exactly what differences there were. There was a difference in voting rights. There was a difference in the Class A could be converted to B, but not the reverse. And there was a difference in the shareholder designated contribution program. Ever since we issued those shares, I don't know, maybe 6 or 7 years ago, we in effect have had a compact with both the A and B shareholders that they that we would treat the 2 classes in a way consistent with what was explained at the time of issuance. So if we were to change the vote, the conversion ratio or the shareholder designated contribution program, we would in effect be changing a deal that was made and that has been recognized as having been made ever since the B shares were issued. People have bought the A shares in preference to B because of certain reasons. People have bought the B shares for other reasons. But they have relied on the fact that we would abide by what we said we would do at the time we issued those shares. We'll not take anything away from the B. We'll not take anything away from the A. We'll run things just as they are. And in the future, I happen to have shares my holdings concentrated in A shares. But the A will never get any advantage over the B except for the ones we laid out at the time of issuance of the B. It would actually be unfair to A shareholders and particularly to A shareholders who have bought since the B was issued to tell them that the economic relationship between the A and B was being changed even though only in a slight way to the benefit of the A benefit of the B and the detriment of the A. We wouldn't do that in either direction. So that's why we recommended a vote against it. Charlie, do you want to add anything? Well, not only is all of that true, but the cost of getting down to all the B would it would be a very inefficient process. Yes. That well, of course, and that's the reason back when we issued the B, I mean we anticipated that. So it just it seemed like something that would offer very little value to the B at a significant cost to the company. And therefore we spelled it out quite clearly, I believe, in the original prospectus and it's been spelled out in every annual report subsequently. So it's the deal. And the deal is also that we never change things to benefit the A in any way over the B except as originally explained in the original prospectus and subsequently in all the annual reports. Is there a second to Mr. Fried's motion? What do we do if we don't get a second, Charlie? It dies. Okay. I guess it just died. But there is nothing inappropriate about bringing something like that up, Mr. Ray. I mean, I understand exactly what you are thinking about, but I think you have to think of fairness to both classes. Moving right along, figuring out where we are. I guess we're moving along to adjournment of the meeting. And after that, we will have the questions we talked about and also tell you a little bit about the business since the annual report came out. Walter Scott, do you have a motion to put forward the meeting? Do we have a second? Motion to adjourn has been made and seconded. We will vote by voice. Is there any discussion? If not, all in favor say aye. All opposed say no. The meeting is adjourned. Now, I'd like to bring you up the date on a couple of things and then we will proceed with questions. We have 8 microphones placed around the auditorium here. And we will proceed regularly around and just keep going around and around. And Mark, do we have anything in the any microphones in the music hall or not? I'm not Maybe if Mark could come up and inform me whether there's music hall or not, we can there's 2 microphones in the music 9 and 10. 9 and 10 are in the music hall. And are there quite a few people there? It's full. It's full? Yes. Oh, okay. We haven't put microphones out on the sidewalks yet, but we'll get to that someday. We've contracted to make 2 acquisitions this year. You just read about 1, perhaps in this morning's paper, it went on the tape at 7:45 yesterday morning Central Time. And that involved the contract to buy McLean's from the Walmart company. McLean's is a very large, wholesaler to, all kinds of institutions, but convenience stores, quick serve restaurants, the Walmart operation itself, theaters, restaurants. And this year, we'll probably do something like $22,000,000,000 of business. So it's a very substantial enterprise with distribution centers around the country with much in the way of transportation equipment. Walmart had owned McLean's since about, I believe, 1990. It grew substantially while they owned it. It's been run by a terrific manager who's here with us today, Grady Rozier. And Grady took the business from $3,000,000,000 to $22,000,000,000 or thereabouts. Walmart, for very good reasons, wants to specialize in what they do extremely well. And through Goldman Sachs and Company, we were approached by them a little while back, about the possibilities of buying the business. It's a bit it really makes sense for both sides because Walmart, knows what to do with the capital very, very well in their own business and has lots of opportunities. And this was something of a sideline to them. On the other hand, their ownership of, McLean's, resulted in certain people that would be logical customers of McLean's not wanting to do business because they didn't want to do business with a competitor. And we plan to see all those people very soon and explain to them that that's no longer the case and they can sleep well at night doing business with us and not worry about benefiting their competitor, Walmart. So this deal, a representative of Walmart came up last Thursday to Omaha. We could go this past Thursday, a CFO and we made a deal in maybe an hour or 2 and shook hands. And when you shake hands with Walmart, you have a deal. And so the time remaining until yesterday morning, contract was drawn was put together and it must go through the Hart Scott Rodino process and to be cleared, but there's obviously no conflict. So we fully expect that in just a few weeks that Maclean's will become part of Berkshire. And it serves presently about 36,000 of the 125,000 or so convenience stores. If you take the 50 largest convenience store chains in the country, it does 58% of the business with those companies sells each convenience store an average of perhaps 300,000 or a slight bit more of product a year which those convenience stores then resell to the consumer. It also serves about 18,000 quick serve restaurants primarily those operated by yum brands, the Taco Bell and Pizza Hut and Kentucky Fried Chicken Group. And it will have opportunities to serve many more as we go along. So we're delighted if any of you get a chance to see Grady or better yet if any of you own a convenience store step forward and we'll be glad to give you our card. It's really, you know, Walmart knows that we will be a good owner. They know we'll be good for the people that work at McLean's. They know our check will clear that we won't, make a proposition and then run into financing difficulties or try to jiggle around the contract later on. And it's just an ideal way to do business. And we're delighted to add MacLaine's to the Berkshire Group of Companies. It's a very narrow margin business, obviously. I mean, when you get up to $22,000,000,000 of sales and you've got Hershey and Mars and people like that on one side and you've got buyers like 711 and Walmart on the other side, they're not going to leave a lot in between. But you have to perform a valuable service for them in order to earn, you know, say, 1¢ on the dollar pretax. But, McLean's knows how to do it. It's a very efficient operation and, it will continue to deliver value to both, their vendors and their customers. The other the other acquisition that is in the works is Clayton Homes. Clayton is the class of the manufactured home industry and the acquisition came about in kind of an interesting way. Every year for the last 5 years, a group of about 40 finance students from the University of Tennessee in Knoxville would come up to Omaha and they would have a lot of fun in Omaha. They go to the furniture mart and then in the afternoon, they'd come to Keywood Plaza and the 40 students or so with their professor Al Ochsner would have a session with me. We just have a classroom session for a couple of hours and wonderful group of students. And generally at the end of the session, they would give me a football or a basketball. They've got a great women's basketball team at the University of Tennessee. And so we'd have a good time together. And matter of fact, a year ago when they came up, Bill Gates by chance was in town. So I presented him as a substitute teacher, which is a post he's always wanted. And students got quite a surprise. This year when they came, 40 or so students, we had a good session together a couple of hours at Kiewit Plaza. And when they got through, they gave me a book and it was the autobiography of Jim Clayton who started and ran Clayton Homes and built it into a huge success. And he'd written a nice inscription inside and I mentioned to the students and the professor that I was an admirer of Clayton. I followed the manufactured home industry in other ways, not always so successfully. And, I'd seen what Clayton had done. And so I said I was, you know, I looked forward to reading the book, which I did. And then I called Kevin Clayton, Jim Clayton's son and Kevin is the CEO of the company and, I told him how I'd enjoyed his dad's book. And I said we still had a little money left in Omaha. And if they ever decided to do anything, you know, we would be interested. And I, suggested at what price we might be interested. And a phone call or 2 later, a couple of phone calls, we made a deal. And I had not been to Knoxville. I checked out a few manufactured homes, suggested that my family buy a repo. But that deal came about in that manner and that's the way things tend to happen at Berkshire. The phone rings or we pick up the phone in this particular case And the manufactured home industry got into significant trouble, very significant trouble, because credit terms that well they went crazy on credit 4 or 5 years ago. And when you go crazy on credit you suffer in a very big way. And that's what happened in that industry. Conseco that some of you may have read about ended up holding or servicing I should say the $20,000,000,000 worth of manufactured home credit. And they got in big trouble for that and other reasons. And, Oakwood, where we own some junk bonds, went into bankruptcy. They're a big operation in the country. Most of the couple of the other biggest players in the industry are losing significant money. Manufactured home companies have lost the ability to securitize the receivables they get when they sell these, when they sell homes. And so the industry has been in the tank. This year or this past year, there were maybe 160,000 new manufactured homes sold, but there were also about 90,000 repos came back and that depresses the market enormously. And like I say, financing sources have dried up. A lot of people that lent money have left the field. So for the strong as Clayton is and particularly with a financial, backer like Berkshire, it should be a good field. 20% or so of all the new single family homes are manufactured homes in this country. I mean, you can we can put you in one for about $30 a square foot. And if you compare that to a site built home, it's, it's quite a deal. I mean, I was amazed. They have They have 2,500 square foot homes, 2 stories. I mean, it's changed a lot over the last 30 or 40 years. And we've got an operation that is that even the competitors would admit it's clearly their class of the field. But even for Clayton, financing was getting more difficult. I mean, the lending community got burned very badly in manufactured homes and people have sworn off them, from the lending standpoint. And, Clayton did securitize an issue in February of this year, but they had to keep more of the bottom layers of the securitization themselves. So it's a good marriage and it's one where we will be useful to them and we should do very well together in the future. The Q1, I'll just I don't have final figures yet and we'll put this what I say today, we'll put it on the website so that that you have that everyone has the information before the opening on Monday. But the economy, as you know, has been quite sluggish. It's really been sluggish for a very long time. It's interesting. I wrote in a letter that's also on the website right after September 11th, I put something up there and I said that we were in a we had been in a recession, which was not something that was generally acknowledged at that time and I thought would be longer and deeper than most people anticipated. And what has happened is that really since late 2000, housing and autos have done quite well. But the rest of the economy has just been plain sluggish and it continues. And during that time, we've dropped the federal funds rate dramatically down to 1.25%. Charlie and I probably wouldn't have predicted that we might ever see that in our lifetime and maybe it'll even go lower. And we're running a huge budget deficit now, but business continues to be sluggish. So our non insurance businesses generally did not do great in the Q1. Our insurance businesses did extraordinarily well and we will show when the Q1 report is published, we will show an underwriting profit of about $290,000,000 pretax which is after, about $140,000,000 of charges for retroactive insurance. The acquisition costs on that, which I'm sure many of you that, don't love accounting. All I can tell you is that it's a charge that many companies don't bear, but that we willingly bear because it gives us benefits. But our $290,000,000 is after that charge. Our float grew by probably at least $1,300,000,000 So we're up to $42,500,000,000 or so of float. And people that means people have are letting us use that money. And as I mentioned, as I said in the Q1, did it not only cost us nothing to use the money, but in effect, people paid us to use the money, which we would like them to continue to do. And I don't see our float growing much from this point. Charlie said last time that it was impossible for it to grow, but it probably would. I don't know whether he'll change his opinion on that. But I think I really think our insurance businesses are in exceptionally good shape. We have some of the best insurance businesses in the world. GEICO's premium volume was up a little over 16% in the Q1. In April, it was up just right at 17%. It had a 6% roughly underwriting profit in the Q1. January, thanks to an incredible job by Joe Brandon and Tad Montres has turned the corner in a big, big way and showed an underwriting profit in the Q1. Jane made so much money, I don't want to even tell you about it. Some of our primary operations yes, you should give him a hand. I mean that when you get Charlie to clap, you know he's made us a lot of money. And our primary businesses, particularly U. S. Liability and national indemnity primary operations and our Homestay company, they've all done they're all doing remarkably well. And I you never know what's going to happen in insurance. I mean, there could be a there could be an 8.0 earthquake in California or Tokyo or there could be 1 in New Madrid, Missouri as there was a couple 100 years ago. And it could happen tomorrow. There could be huge hurricanes this summer, whatever. But I can't imagine having a much better group of companies or managers than we have. And I and they're all they're all working well now. For a while, Gen Re was a drag, but that's not true now. And I think that we have an excellent chance of having very low cost and perhaps even no cost or negative cost, float over the next 5 years or so or really as far as the eye can see. Now that doesn't mean it won't fluctuate around, but if you average it out, I think we will have our float at a very cheap price. And it's, you know, as Martha would say, having 42.5000000000 for nothing is a good thing. Now with that, I think we've covered the Q1 was a good quarter. Overall, it's the best operating earnings we've ever had. Now we've got more capital now than we've ever had. But nevertheless, it will be a good quarter. And I would estimate I think it's fair to say, Mark, that from operating earnings, we will have something like $1,700,000,000 in the range of $1,700,000,000 We had some securities gains too, but I don't count those because they can do anything from quarter to quarter. We don't pay any attention to the timing of those. But we, from a straight operating standpoint, dollars 1,700,000,000 or so after tax. Am I safe with that number, Mark? Okay. What could he say? We don't change numbers at Berkshire. I promise you that. There are a lot of companies do, but fewer now than did a few years ago. So we're going to get the questions. Charlie, do you have anything to add about acquisitions or operations or anything else you'd care to say? Well, I hate to be an optimist, but Does he ever? We have really added a lot of wonderful businesses to Berkshire in the last few years. It's been some delightful business. That's all you're going to get out of them, folks. Okay. We're going to start around and we've added 2 microphones to the music hall. And let's start with zone 1, which is over on my right. And do we have the first question? Good morning. I'm George Brumley from Durham, North Carolina. My first question is related to Executive Jet. It's been almost 5 years since the acquisition of Executive Jet, a purchase in a much different economic and geopolitical environment. What business metrics do you use to measure success in an industry with as much flux as this one? And what has changed in those metrics since the time of acquisition? What are the prospects for Europe and have those prospects changed? While none of the competitors approach executive jet in terms of scale and scope, what impact are they having on the competitive environment? And lastly, would you please explain the long term aspect of the business model as many of the jets age out of the program? Okay, George, I got through college answering fewer questions than that. But George's uncle was best man at my wedding, so he gets all he wants. The NetJets, as you will see, in the Q1, had a significant loss. A large portion of that loss was caused by the write down of planes because they're of I love it. They call it in the trade. They call them pre owned planes. I call them used planes. But the, they did the same thing in manufactured homes. So they call them pre owned homes instead of used homes. But in any event, putting aside the euphemisms, there the used plane market, well, the entire business aircraft market is very soft. The used plane market has far more planes for sale than say 3 or 4 or 5 years ago. That's going to affect the production of new planes, already has. And it affects pricing in used planes. And we have bought back planes from people leaving the programs which we do and will continue to do. But we have bought during a declining market some of those and we have had write downs in connection with those planes. And you will see in our Q1 report, I believe that that's probably the only operation we have that's losing money. And we have it's a popular product. It's a growing business. It's going to be a very big business, in my opinion, over the years. And we see it every day. I mean, we write a lot of business and customers are joining us. There are 3 main competitors. I think it's fair to say that they're losing significant money from operations forgetting about any markdowns they might have on their own inventories. Our market share, we get figures from the FAA as to registrations and as to people that are selling their planes. And our share of market, which was always the largest, has gone up dramatically in the last couple of years. It's gone up to roughly 75% in terms of value of planes. And we're talking 75% of the for company market. It's gone up even higher than that in terms of net planes. In other words, new planes sold, less planes coming back. But the price, the pricing we are receiving, does not in the U. S, it's it would be absent this one write down. It would be very, very modestly profitable. In Europe, we have lost and we are losing significant amounts of money. Business jets in Europe, the total is about 1 and I'm talking about ours, I'm talking about all, about roughly 1 tenth the number as in the United States even though the population is similar. So we have grown from a small base quite rapidly over there. Nobody else will be taking us on. It's part of a service that will be part of a very big business worldwide in my view over the years. I don't think anybody else can come in after us. So I think it's integral and it is integral to our operation. Half the roughly half the miles flown in Europe arise from American owners and that will just do nothing but get bigger over the years because our number of every month our number of owners goes up, goes up significantly. We have people here from Marquis, who have essentially, they've become a customer of ours and then they resell cards for 25 hours and they have added 40 or 50 customers a month in recent months. So it's a popular service. It will be a much bigger business. I think there will be a shakeout at some point and maybe, fairly soon. You can look at the Raytheon prospectus and or the Raytheon 10 ks and you will find some interesting information about their operation. And you can it's not hard to figure out what's going on. I don't know the answer as to when the shakeout will occur, but I can assure you that we will not be one of the shook. Charlie, do you want to comment on it? No. He'll comment on the profitable operations. He gives me the one. The long term business model is that basically we believe that perhaps 10 times the number of people that are now flying us with us will be flying with us some years in the future that having the best service, the best record and the best policies for safety and security will leave us very dominant in the field and that people will pay an appropriate price for the service. And we see all kinds of evidence of that, but we do not see a profit this year in my view at NetJets. Let's go to number 2. Good morning. I'm Mark Rabunov from Melbourne, Australia. I had 2 related questions for you gentlemen. Basically, both are related to float. Float, as you indicated, has become a very large part of our asset base. Assuming our policyholders continue to renew with us and we keep control of our combined ratio, can we count the float as pseudo equity when calculating the intrinsic value of Berkshire? And the related question was, can we not expect the float to keep growing at, say, 10% per annum for the next 5 to 10 years, given that we're still really a minority player in this segment? Thank you. Well, I wish it would grow at 10% or so, at least if it were profitable, which I do have a belief that it's likely to be. Our float is $42,500,000,000 on March 31, roughly. I think the entire float of the American property casualty industry could be something in the roughly in the area of 500,000,000,000. So we may be some figure like you know 8% or a little bit more maybe even 9% somewhere in that range of the total PC flow to the United States. Now it's true we have a little outside the country too. But the big part of the world PC market is in the United States. When we started out in 1967 I think maybe we had 10,000,000 afloat. So to go from 10,000,000 to 42,000,000,000 dollars frankly surprises me. But it also it's going to be much harder to grow at significant percentage rates in the future. And our goal, we love the idea of growing, but what we really want is cost free float. I mean that is the goal. And, growth is not at the top of the list at all. I mean I hold our managers responsible not for delivering more float. I hold them responsible for delivering profitable float. And that is key in our mind at all the time. If it comes along we love it. But we will find out whether it comes along or not. The first part of your question, if indeed the $42,500,000,000 can be obtained at no cost or even better yet at a profit, its utility to us is like equity. Now you couldn't realize it upon liquidation necessarily. Oh, you wouldn't realize it on liquidation and you couldn't necessarily realize it on sale. That would depend. So I'm not telling you how to count it as in terms whether you count it in terms of intrinsic value. You have to make that decision. But it has the utility to us of, of 42.5000000000 of funds derived from equity without issuing common shares. And that's one of the reasons we've always been so enthused about it now for, what, 35 or 36 years. It's a great business for us. And every now and then we get off the track. You know, we got off the track in the early 80s. We had a problem or 2 in the mid 70s and we had a problem with Gen Re for a few years. So there's nothing automatic about it. And I will say this, I think for most companies in the PC business, the PC business is not a great business. It's a commodity business to too big a degree. So I do not think most companies in the PC business will get float at an attractive cost. We have to be an exception. But we have some exceptional companies and some exceptional managers and I truly believe that we will obtain our float at considerably less cost than the industry. And that is the goal. GEICO, if it would continue to grow at 16% for example this year that adds a $1,000,000,000 of premium volume. Well that doesn't generate as much float at GEICO as it generates at Gen Re but it generates float. So GEICO's float will grow. I would, you know, I'd bet my life on that. But certain of our other transactions are more opportunistic in nature and that float could even shrink. And if the float shrinks, you know, that is that's fine with me as long as we produce underwriting profits. We'll go wherever it goes. Charlie? Yes. With interest rates as low as they are now, this float we have so laboriously built up isn't worth so much to us on a short term basis. After all, what if we have $16,000,000,000 of cash on hand, earning a very low rate of return. So the incremental dollar afloat doesn't look all that advantageous now, but we have a more long term view than that. We figure that eventually we'll do a hell of a lot better than 2%. We're not getting 2% on that $16,000,000,000 Charlie. We do have incidentally on March 31, we have roughly $16,000,000,000 in cash, not counting any cash in the finance operation because that's a little bit phony in terms of its utility. I mean, it's offset by borrowed money. But other than the finance operation, we have right at $16,000,000,000 in cash and cash equivalents, and we also have a lot of bonds and things of that sort. On that $16,000,000,000 we are probably getting about 7 tenths of 1%, 3 quarters of 1%, call it, after tax on $16,000,000,000 which does not make us salivate. But we would rather avoid salivation than to encounter problems. And we will use Walmart put out the figure yesterday of roughly 1,500,000,000 dollars for a combination of a small trucking company plus what they sold us. And we will use money, but money keeps coming in too. If we earn $1,700,000,000 in the first quarter, that $1,700,000,000 is pretty much all cash. And then on top of that, we had the $1,300,000,000 or so float increase. So float increase plus retained earnings, not counting securities gains, maybe $3,000,000,000 Now we're not going to keep that up. But there's a lot of money coming in, but we are getting some chances to deploy it. And if we deploy if we get it at less than at 0 or less cost, it has it's very close to and it has the utility of equity in a very big way. Let's go to number 3. Good morning, gentlemen. My name is Hugh Stevenson. I'm a shareholder from Atlanta. You had indicated in the past that you did not think that the volatility base to Black Scholes models for options pricing was correct. Would you share with us how you would evaluate those options as you use them in the business or seem in the marketplace? And also, if you would update us on your thoughts on the asbestos tort situation, given the recent development of National Settlement Trust, etcetera. Yes. We, Charlie and I have thought about options all our life. My guess is Charlie was thinking about that in grade school. And you have to understand, you don't have to understand Black Scholes at all, but you have to understand the utility and in a general sense the value of options. And you have to understand the cost of issuing options, which is very unpopular subject in certain quarters. Any option has value. I mean, I bought a house in 1958 for $31,500 And let's assume the seller of that house had said to me, I'd like an option on it, good in perpetuity at $200,000 Well, that wouldn't have seemed like it cost me much if I'd given it to him. But an option has value. Any option has value. And that's why some people who are, you know, kind of slick in business matters sometimes get options for very little or for nothing. I'm not talking about stock options. I'm just talking about an option to purchase anything. They get options for far less than really a market value would be. Black Scholes is an attempt to measure the market value of options and it cranks in certain variables, but the most important variable that cranks in that might be subject well might be a case where if you had differing views you can make some money. But it's based upon the past volatility of the asset involved and past volatilities are not the best judge of value. I mean if you'd looked at a 5 year option on Berkshire stock at various times, Berkshire stocks had a fairly low beta as they call it. Beta is a measure that people in academia always like to give Greek names of things that are fairly simple and so that they have sort of a priesthood. So it's like priest talking in Latin or something. I mean it kind of cows the laity. But they beta is a measure of past volatility, but Berkshire's had a low volatility. But that didn't mean that the option value of it to anybody that really understood the business was lower than a stock with a higher beta. And I think what Charlie said is that last year is that for longer term options in particular, Black Scholes can give some silly results. I mean, it misprices things, but it's a mechanical system. And any mechanical system in securities markets is going to misprice things from time to time. And that's we made one as I mentioned last year, we made one large commitment that basically was had somebody on the other side of it using black shoals and using market prices took the other side of it and we made $120,000,000 last year. And we love the idea of other people using mechanistic formulas to price things because they may be right 99 times out of 100 but we don't have to play those 99 times. We just play the one time when we have a differing view. Charlie, you want to comment on? Yeah. Black Scholes is what I would call a know nothing value system. If you don't know anything at all about value compared with price, in other words, if price is teaching you all that can be known, then Black Scholes on a very short term basis is a pretty good guess over what a 90 day option may be worth in some stock or another. The minute you get into longer term options where you don't have the know nothing factor so extreme, It's crazy to use Black Scholes. People use it just because they want some kind of a mechanical system. But at Costco, for instance, within a fairly short period, we issued stock options at $30 and we also issued stock options at $60 And Black Scholes valued the options we issued at $60 was the strike price way higher than the options we issued at 30. Well, this is insane. CHIEF J. But we like a certain amount of insanity. HON. R. C. Yeah. Well, it's good for Warren who picked up this extra $120,000,000 But so he's he's founder of this kind of insanity than I am. No. We will pay you real money if you will deliver to our offices at Kiva Plaza somebody who wants to use the Black Scholes model and is willing to price 100 options for 3 years, willing to using the Black Scholes model and letting us pick and choose among those. Because as Charlie says, it's a know nothing affair. And we are know nothing guys in respect to an awful lot of things. But every now and then, we find something where we think we know something. And anybody that's using a mechanistic formula is going to get in trouble in that situation. But options have value. I mean, we issued options in a sense last year when we sold those the $400,000,000 of bonds. And we know what we're giving up when we sell those bonds. I mean, we may have gotten what a negative coupon of sorts, but that's because we gave up option value. And it isn't truly a negative cost instrument at all because options have value. Let's go to number 4. Hello. My name is Martin Wiegand from Bethesda, Maryland. And first, I'd like to thank you and all the folks working here at the microphones and staffing the booths for hosting this wonderful shareholders weekend. We enjoy your efforts. Thanks, Martin. My question is about a company getting its employee compensation aligned with shareholder interest. Charlie Munger in one of his outstanding Investor Digest interviews cites the case of FedEx getting it right. In the newspapers, we've all just read about American Airlines, Bethlehem Steel and a lot of other companies getting it wrong. I find precious little written about compensation systems. Would you share with us how you get it right at Berkshire Companies? Also, your old golf coach and racetrack friend Bob Dwyer asked me if you would like to share with us your pick in the Kentucky Derby. Is Bob back there with you, Martin? No. In the middle. Oh, Bob. Yeah. Bob and I did spend a lot of time at the racetrack in high school. He was not only the basketball coach at Woodrow Wilson High, but he was also the golf coach. And whenever I wanted to go to the races, he would, he would write an excuse to my other teachers saying that we had to go out for the golf team. And then we would head off to Charleston or Robert Agraw or Pimlico or some place And he cleaned up his act subsequently. It's good to have Bob with us. He was known for his famous 3 iron shots. He was known as trolley wired wire in those days. Charlie, do you want to talk about comp a little? Well, as the shareholders know, our system is different from that of most big corporations. We think it's less capricious that the stock option system will give extraordinarily liberal awards sort of by accident to some people and it will deny other people any reward at all at some different time in spite of great contributions made by the people who are getting nothing. So except where we inherit it, we just don't use it. But we must be in a minority far less than 1%, right? It's where we like to be, right? It's interesting, we inherited some stock options at Berkshire primarily in the General Re transaction And not through any failing of anybody or there's no aspersions to be cashed, but at all. But those options turned out to be quite valuable. They would not have been valuable if General Re had been left alone as a standalone company. They profited from the fact that other parts of Berkshire did well and the money went to the people that had these options, who delivered nothing to the performance of Berkshire for a while. Now that's that's that is not an indictment of anybody in the least of January. It's an indictment of an option system, which represents a lottery ticket and also a royalty on the passage of time because as you know, an option holder has benefits from retained earnings and benefits not at all from dividends. And that puts his interest maybe quite contrary to that of the shareholders. So we believe in paying for performance, but we believe in tying performance to what is actually under the reasonable control of the person that's being measured. And we to give a lottery ticket on the overall results of Berkshire Hathaway to someone who is running a business that's 1% of the whole is really crazy. And I would say that you have seen probably more misdirected compensation throughout the corporate America in the last 5 years than in the 100 years before that. It's been extraordinary. And there was wealth creation in the '90s just like in the '80s and the '70s and the '60s and the '50s. But there was a wealth transfer like, had never been experienced before. And you know, you can't blame people for wanting to cash in on it. You know, if anybody wants to walk up and hand me a half a dozen lottery tickets for the Nebraska lottery, you know, I'll accept them. But it will have nothing to do with how I do in terms of running Berkshire. Actually, Charlie and I think a properly designed option system, which includes cost of capital and some other factors and ties it to the performance of the people involved, we think that can make sense when we've used various incentive programs that are similar to that. But the idea of just passing them out and telling people that for 10 years they get a free ride and then repricing, You know, if your stock goes down, their stock doesn't go down, their option price goes down. You know, that is not our idea of a great compensation system. If we are right with our general approach, It has considerably important implications because the natural implication is that more than 99% of corporate compensation systems are more than a little crazy in America. And I want to emphasize that Berkshire is not illiberal. I mean, we've got various incentive systems out where people make tens of 1,000,000 and they make 100 of 1,000,000. So we're not against rewards for people who make vast contributions. But a system that's basically capricious and which doesn't tailor the results per person and per activity very well. We just think it's crazy. We love to see people that are associated with Berkshire making money as long as they're making money for you at the same time. It's very simple. And but we don't want them to get a free ride off your money. Compensation is an interesting subject and I'm going to write about it next year or some. But you know, it's not a market system. You can read all you want. I mean, you know, the PR people will tell you, you know, that Joe Smith's compensation was determined by a market system and he's just like a baseball player or any of the sort. But he's not just like a baseball player. And the baseball player negotiates with somebody who's spending his money to hire the baseball player and making a calculation whether he's better off laying out the money out of his own pocket, the owner of the team, to get that player. But when you get a comp committee at a large American corporation, you have somebody with an enormous interest in the amount of comp on one side of the table and you've got somebody on the other side of the table who was not picked because they were the Doberman of the board. Believe me. And who is dealing with what many times is what my friend Tom Murphy would used to call play money. I mean it it's almost meaningless to the person on one side of the table, whether somebody gets 100,000 shares of restricted stock or a 1000000 shares of restricted stock. And it's not meaningless to the guy on the other side of the table. Almost every other negotiation in American business, you have some parity of concern, but you do not have a parity of concern, you know, in terms of the, in terms of comp at the top levels. You have parity of concern when you get down to labor unions. I mean, the management wants to keep down the prices and the union wants to get more money. And that's a real negotiation. And you have lots of other real negotiations in American business. But the compensation in many companies, not all obviously, but in many, many companies has not been a real negotiation at all. And the management has hired comp consultants to come in. And I have never seen a comp consultant come in and say, we ought to reduce this guy's salary. I've also never seen a comp consultant come in and say, why don't you get rid of this bozo? I mean, they can't all be wonderful. But can you imagine a comp consultant doing that, never getting another assignment? It wouldn't happen. So it's a bad system and it needs improvement. And it may be getting a little improvement. And as I wrote in the annual report this year, what happens with comp is the asset test to corporate reform. Because frankly, the CEOs of America, they don't care whether their boards are diverse or not diverse or anything of the sort. They care about how much money they make in a great many cases. And you, the owners, and big owners in particular, have to provide some countervailing force or you'll have what you've had in the last 20 years, which is an enormous disparity in the rates of compensation of people at the top compared to people at the bottom. And also a disconnect between the comp of people running businesses and the results of the owners who gave them the money. So arise, General shareholder. Let's go to number 5. Good morning. My name is Matt Sauer, and I'm from Durham, North Carolina. In a 1977 Fortune Magazine article titled, Inflation Swindells the Equity Investor, you argued that corporate earnings in aggregate acted like a bond coupon, and thus were negatively impacted by high inflation. Due to high inflation at the time, you posited a world where a 12% return on corporate equity was reduced to 7% after taxes and netted out to 0% in real terms. You have been sounding downcast about the prospects for equities for several years, much of which we assume relates to extreme starting valuations. If inflation was decidedly bad for investors in 1977, isn't the relative lack of it in today's economy at least one mark in the plus column for equity owners? Is there also a future inflation expectation component in your warnings that investors are likely to be disappointed by equity results? Well, there's no question that the lack of inflation is a plus for owners. I mean, the real return you will obtain, in my view, from owning American business, if purchased at similar prices, the real return will be higher if we have long periods of low or close to no inflation than if we had long periods of high inflation. I don't think there's any question about that because that article went on to explain how he got taxed on nominal returns and fictitious returns in real terms. So your question is about which period is better for investors, a low inflation period over any long period is better for investors. And the problem, as you pointed out also, was the starting point in terms of predicting modest returns for equity investors. The returns weren't necessarily so modest I presume they were just modest compared to what people had begun to think returns would be during that long bull market from 1982 to 1999. There were polls taken by Gallup working with, I think, Paine Webber at the time, now they've moved it over to UBS Warburg, that showed the expectancy of people, in the stock market. And those returns that people expected got up to 14% or 15% as I remember. And they were thinking they were going to get 14% or 15% in a low inflation environment. Well, that was dreaming. And, there's nothing wrong in a low inflation environment at all in earning 6% or 7%, that's probably as well well, it is as good as will happen because in a low inflation environment, how much is GDP going to grow? Well, GDP, if you have a 2% inflation and even 3% real growth, you're talking about 5% in nominal terms GDP growing. GDP grows at that rate, over time corporate profits will grow more or less at that rate. And if corporate profits grow at 5% a year, the value of those corporate profits, the capitalized value will probably grow at something like that over any long term with a sort of a normal starting point. And add that to dividends and you will get 6% or 7% before frictional costs. Investors incur a lot of frictional costs. They don't have to, but they do. And that often is 1.5%, 2% of their investments. So the math isn't bad. It's just bad for those people that got used to or expected very high returns based on looking in the rearview mirror back in 1998 or 1999. Charlie? My general attitude is just slightly more negative than Warren's. You've heard it, folks. That isn't the end of the world. I mean, in effect, if the people who own American business get 5% to 6% of the pie, dollars 10,000,000,000,000 economy now, someday a $20,000,000,000,000 economy, but if we get 5% or 6% of the pie, those of us who put our capital out to produce goods and services for American business, for American consumers, American population. Is that an you know, I don't know whether that's you know, that's exactly what somebody who designed the universe would come up with, but it doesn't strike me as crazy in either direction. You know, I think that, that's a lot of goods and services to go to people to put up the capital, but you and you've got it, you know, 100,000,000 plus people in the working force that are working to turn that out for you using your capital and it provides a what I would regard as a pretty decent real return if you have low inflation. If you get into high inflation as I wrote about back in 'seventy seven, you could easily have the real return to investors get to a very, very low number and perhaps negative. I mean inflation can swindle the equity investor as I wrote back then and I use 7,000 words to explain why I will be glad to send you a copy of that article if anyone is still interested. But inflation is the one thing that over a long period of time can turn investors results in aggregate into a negative figure. And it's the investor's enemy. Charlie, does that bring forth any further thoughts? I don't think you'll get perfect help on these subjects from the economics profession either. They have certain standard formulas. To an economist, when a manufacturing job goes to China, that's just so much productivity increase. And if you ask 1, we'll suppose all of the manufacturing jobs in America went to China. Wouldn't that be a little too much efficiency increase? And the answer would be no. And people get actually get paid for thinking like this in major universities. What would get across the point, of course, is if all the teaching of economics got exported to China in which that point a new insight would appear. Number 6. Jack Hurst, Philadelphia. I have a question about the managers and a comment on a question about the insurance operation. These meetings are a lot more fun with more subsidiaries and more managers. I also think more educational because you get to interact with them. Do you get any feedback from the managers that they enjoy coming here and they get anything out of the meeting? Well, we have a number of our managers here. And I do well, we don't but we don't we don't require anybody to come. I mean, we have managers that very, very seldom have come to a meeting. And I don't keep names. I can't even tell you which ones they are. But some, if they enjoy it, they come. Many of them of course have operations down below selling you things and some of them come to help out in that respect. But we've got a we have a sensational group of managers. They run their own businesses. They're extraordinary at doing what they're doing. We don't get in their way. We don't demand virtually that they do anything except work for the owners. But you will I hope you meet some of them here today because they, you know, the ones that are here obviously enjoy interacting, with the shareholders. And it's fun to, it's fun to put faces to functions. I mean, it, I enjoy it. I think they and a lot of them enjoy coming here. And the people that work down are working downstairs, you know, they volunteer to come and they enjoy seeing the shareholders and they enjoy bragging about their companies and they've got a lot to brag about. And I hope I hope you thank them when you see them because, it's a lot of effort for them. When I got here at 6 o'clock this morning, but there were people that were here a lot earlier than that. They were working yesterday to get ready for this. And I want to thank them myself. Charlie. I don't think our managers who come to this meeting are picking up new tricks. Most of our managers know all the tricks that are related to their businesses, But this is a very interesting place and it gets more interesting every year. And part of what makes it interesting is not this creditable. And I think people like being part of it. Our managers in a few respects will occasionally work together. Sometimes a manager, Subsidiary A, will check with some of the others, not through Omaha, directly themselves and they will say, you know, what are you paying for software or what are you paying for UPS or whatever it is and can we make a better deal if we pool our efforts or there are times when we have saved money, sometimes pretty real money, but that has never been instituted by Omaha. It's never been overseen by Omaha. It's because manager A decides to call manager B and they like each other and they can they can make their own operation better sometimes by combining purchasing power and occasionally by just having an idea here or there. But there's no organized way of going at that in Berkshire and nobody has to play. Number 7. I'm John Bailey from Boston. I'd like to ask about our consumer businesses, which means that I have to ask about the consumer in general. The situation, as I understand it, is that, over the last 30 years or so, the median consumer has seen his income rise only a little faster than inflation and much slower than GDP overall. Income inequality is at a 400 year high. The present value of lifetime income for the median person has improved slowly, yet the size of his lifetime liabilities such as healthcare, housing, education and retirement has ballooned. The economic net worth then of the consumer may be poorer than they think. To cope, the median guy has put his wife to work, borrowed against the house and also the credit cards. So I think this may have some implications for the sustainability of consumer businesses and seeing that we've been buying a number of them recently. How do we think about this problem? And are there any non obvious risks that we should be considering? The American consumer overall is better, but not dramatically as better off than 10 years ago, even somewhat better off than 20 years ago. But you're quite right in that there's been considerable inequality in terms of the progress of people financially during that period. We don't have broad ideas about I mean we don't make decisions on what business we buy based on some sweeping future projections about things. We think America will do pretty well over time. In fact, we're quite sure it will do pretty well over time and that our kids will live better than we live. My kids would say that wouldn't be so difficult. But the and the grandchildren will live better. You know, that has been the history of the American economy. The real income per capita grew 7 fold I believe in the 20th century. That is huge. It cost $18 as I remember to make a 3 minute station to station call from New York to San Francisco 40 years after the telephone was invented. And at the time, the $18 was more than the average weekly wage in the United States. You know, think of some little kid that picked up the phone on the other end and there went the whole weekly wage while you tried to get, you know, your daughter on the phone or whatever. So people will be better off in this country decade after decade, but we don't we're not big on being futurologists or anything at Berkshire. I will tell you this, in terms of our consumer businesses right now they're very soft. Our furniture and jewelry businesses generally, candy business, businesses dealing with consumer day by day are soft and the Q1 the earnings were down. One of the things you have to think about and people don't, they don't focus on this very much, but you read about GDP and this is one reason I think, I really think we've been in a recession now, not a huge one, but not a violent one, but for over 2 years. When the government talks about GDP, a, they talk about GDP, we'll say going up 2%. But of course the population of the country, you know, goes up something over 1% per year. So it's per capita GDP that counts and, that has gone very close to no place. But the the more important factor to some extent is that GDP counts the people that you know have you take off your shoes when you go to the to get on an airplane. It you know it counts extra police. It counts all of these things that don't really translate into any they translate into goods and services that the country wants, but they are not goods and services. I mean, they're goods and services we wish we didn't want. And they all of that counts the same way. If there's a 20 guards at the airport instead of 3 guards, that goes into GDP. But does it make you feel any better about how you're spending your paycheck every month? Probably not. And when you get into a war, for example, if you drop planes into the ocean, you know, that's part of GDP, the cost of manufacturing those planes, but it doesn't do anything for you at your house. So in terms of what I would call desirable GDP, I think my guess is that on a per capita basis that has gone no place in the last few years as we've diverted resources to other things that don't really translate to what goes into your house or onto your table. And the quality of GDP is something that is not really talked about very much when you pick up the economic reports every day. Charlie? CHAIR POWELL. CHARLIE KUNDERS Yeah. And the type of figures you gave us about inequality tend to obscure a basic and important fact. If the same families were permanently at the top of the economic heap, there'd be huge resentments about current inequality. But when the coupon Clippers and the DuPont family go down and somebody creates something like pampered chef and comes up in a real sense, something wonderful is happening in terms of equality, even though at the end, it looks like there's been no progress. That much churn makes people think the whole system is fair. We prefer not to be part of the churn, though, actually, at this point. I mean, we were much more in favor of churn 30 or 40 years ago. Number 8, please. My name is Johann Freudenberg. I come from Germany. I would like to know the accounting book you like best. Thank you. Well, it's been a long time since I've read an accounting book. I read Finney back when I was in college. I remember that. And I always liked accounting. And for any of you interested in business, you know, you basically can't get enough accounting. But I don't, you know, I am not really up to date on accounting books. Maybe Charlie's been reading some of those lately. I would hope actually that if you read the Berkshire reports over time that you get certain perhaps lessons on on accounting, but I think you learn more accounting probably in terms of why we want you to know the basics of it by reading good business articles that deal with accounting issues, accounting scandals, that sort of thing. I mean, that's what you really need to know is you need to know how the figures are put together, the underlying principles of it and then you have to know what can be done with those and and you start with the accounting figures as the raw material of understanding a business, but you have to bring something additional to that. And I can't think of any good books on that subject. I think I've read a lot of good magazine articles that contributed to my knowledge over the years. And I've just, I've just, you know, I've read a lot of annual reports and seen what people can do with accounting. And as I've said before, if I don't understand it, I figure it's probably because the management doesn't want me to understand it. And if the management doesn't want me to understand it, there's probably something wrong going on. I mean, people don't obfuscate with numbers, usually without a purpose. And when you run into that, the best thing to do is just stay away. Charlie? Yes. Asking Warren what good books he knows about accounting would be it's like asking him what good books does he have about breathing. What the implication of that is, is that you start by learning the basic rules of bookkeeping, which are sort of like the basic rules of addition and subtraction. And then you have to spend a lot of time before that accounting gets related to the larger reality. And that's a lifelong process. Okay. We're going to try and go to the music hall, number 9. Is this working? I believe so. Okay. Good. Phil Ackman from New York City. And my question is as follows. Insurance companies, could you comment on insurance companies taking on credit risk through the sale of credit derivatives, the adequacy of the accounting for these derivatives? And finally, could you explain why the financial guaranty insurers who are the primary sellers of these derivatives have the same AAA rating Berkshire has despite their more than 141 leverage and the correlated nature of the risk that they take on? Well, I think you should go to work for Standard and Poor's or Moody's. The question about credit insurance or credit guarantees of one sort or another, and that's become very popular and it's become actually popular with sort of the standard insurance, property casualty insurance companies in recent years. And I would say that that in many cases, the people participating in that business don't really know what they're doing. It's so easy in insurance business. It's the curse of the insurance business. It's also one of the benefits of it is that people hand you a lot of money, for writing out a little piece of paper. And what you put on that piece of paper is enormously important. But the money that's coming in and seems so easy can tempt you into doing very, very foolish things. We had a situation here in Omaha 15 or 20 years ago in the mid eighties, where Mutual of Omaha, largest health and accident association in the world at least at one point and they decided to go into the reinsurance property, casualty reinsurance business. And in a very, very, very short time, they wrote not very many contracts and it resulted in wiping out half of the net worth of everything that had been built up over many, many decades. If you are willing to do dumb things in insurance, the world will find you. I mean you do not, you can be in a rowboat in the middle of the Atlantic and just whisper out, I'm willing to write this and then name a dumb price and you will have brokers swimming to you, you know, with their fins showing incidentally. They it's it is brutal. I mean, if you are willing to do dumb things, there are people out there and it's understandable, but they will find you and you will get the cash upfront. You will see a lot of cash and you won't see any losses and you'll keep doing it because you won't see any losses for a little while. So you'll keep taking on more and more of this, you know, and then the roof will fall in. And I mentioned in the annual report how GEICO had taken in, you know, dollars 70 odd $1,000 $70,000 of premiums in the early eighties for a few policies and they thought they were just picking cherries at the time and they reinsured a lot of it. And so far we've lost $93,000,000 Now the most we could make was 70 odd 1,000 and I don't know what the most we can lose is, but I know that 93,000,000 has gotten my attention. When you're playing in a game like that, you can't afford to make a mistake. I mean, it's a a single mistake or a few mistakes that are correlated, as you've mentioned, because these things do correlate. A few mistakes will overcome a lifetime of savings. I mean, it is you will make a few cents on the dollar when you're right and you will lose incredible sums when you're wrong. And in credit insurance, when you go around guarantee, a lot of people went around guaranteeing credits based on ratings and they said, well, we'll guarantee a whole bunch of single a ratings or we'll create these structured arrangements that involve a rated credits. And they would use a lot of studies that would show that x percent of a rated credits defaulted per year and you go back to the 30s and all these back tested arrangements. But the problem with that is that what the questioner mentioned is correlation. And when things go bad, all kinds of things correlate that no one ever dreamed correlated in. What you had of course in the in the debt field was you had a whole bunch of, say, telecoms or energy companies that were all rated similarly, but they were correlated in a huge way and you weren't getting a diversification. You were getting a concentration that you didn't realize. And there's nothing more deadly than unrecognized concentrations of risk. But it happens all the time. So I would say we see a BAA credit enhanced to a triple a credit by somebody guaranteeing it and they may guarantee it for 10 or 15 basis points and yet the spread and market yield might be a 100 basis points. That does not strike us as smart. And I would say this about the triple a rating. Those those they have a triple a rating for claims paying but they don't carry I don't think general triple a. There's only I think 8 or 9 triple a's left in the United States. Berkshire Hathaway is one of them, but I believe there's only one other insurance company which is AIG. And then there's a half a dozen other companies. So those companies are not in the same class credit wise as Berkshire nor are they recognized as being in the same class. But I would say you could get into a lot of trouble at 140 to 1, at some point, ensuring credits. Charlie? Yeah. He also asked about the quality of accounting. And in my view, at least, the quality of accounting in America for derivative transactions is still terrible and it's terrible and that it's too optimistic. And one of the places where it's most terrible is when you talk about guaranteeing future credits way, way out years ahead. That sort of thing just lends itself to people getting very optimistic in their assumptions and in their audited figures. And people pay attention to the audited figures, not the underlying reality. So therefore, if the accounting is lousy, the business decisions are lousy. And I think that's going on mightily as we sit here. Yeah. There are dozens of insurance organizations or trading organizations in the country that have written creditor guarantee contracts in derivative form in the last few years, in fact, on a huge scale. I will guarantee you virtually that every single one of those contracts that was written in the 1st week whoever wrote it, you know, recognized some sort of an income account or income entry and that somebody got paid a little bit of money for writing each one of them. And you know that many of those are going to go bad and maybe as a category that it's going to be a terrible category, but nobody ever wrote a contract and recorded a loss at the time they wrote it. I mean, they just don't do it. And I will tell you that there are a lot of those contracts that if somebody wrote them for me, 10 seconds later, I would have paid somebody to take them off my hands so that I would have regarded them as having a build in loss. Nobody ever records a build in loss on a derivative contract. In fact, I find it extraordinary that you have 2 derivative dealers and dealer A and dealer B write a ticket and dealer A records a profit and dealer B records a profit, particularly if it's a 20 year contract. I mean, that is the kind of world I'd love to live in, but I haven't found it yet. Number 10. Good morning, Charlie, Warren. Jerry McLaughlin from San Mateo checking in from the music hall. You should see yourselves over here. We're about 12 feet from wall size images of both of you, which is interesting, but the See's candy box is so big, I understand what Tantalus went through now. How many people do you have in the Music Hall? We probably want to get a cop to estimate, but I'd say it's a couple of 1,000. Anyway, moving right along. Hoping I can get a 2 for here. One is, at Brander, small company we run, we're seeing we're spending a lot more on employee benefits anymore. Health insurance in particular is going up and up again. And lots of times in the press years ago and now again a little bit you're hearing a drumbeat of a healthcare crisis and what it costs employers to provide health insurance. I got to figure that's on the minds of a lot of Berkshire operating company managers. I'm wondering whether both of you feel I mean, is crisis the right word with respect to cost? Looks like bigger percentages of our GDP are going to healthcare. Is that because we think we're getting better healthcare? Or is it really just sort of inflationary? Second thing is, at the risk of you thinking we're all bunch of coups over here, a couple of people over in this side of the hall have asked me to ask you, Warren, whether you're seriously considering being cryogenically frozen at some point, I think, hopefully in the distant, distant future. Cryogenically frozen. We had that last year. Yes. And the guy who asked the question last year has put me up to a follow-up form. Hey, and finally, unrelated to those 2 Do I look like I'm closer to where I need it? Last thing is, when you guys look at companies and you're thinking about earnings into the future, just do you have any rule of thumb, how far in the future do you think you can look typically with a company you believe in, you think you understand the business? Is it 5 years, 10 years? Do you really think you've got sort of the perpetual into Infinity income stream to calculate the value on? Yes. Well, we don't project as far out as we might have to if we thought we could be successfully frozen. But we really, we're going to own these businesses forever. So we want a business that we think is going to have, if run well, some kind of competitive advantage over many decades. I mean we're not going to resell them and we better have something that is not only good now but it's going to stay good. So we don't buy hula hoop companies or pet rock companies and we don't buy companies in industries that we think will have great explosions in demand, but where we don't know who the winners will be. So we look along, we try we like to think we're looking a long way into the future. On health care costs, the only company wide managers meeting, we had far fewer managers then, but we had a meeting of most of the then smaller number of managers 15 or 20 years ago, where we did talk about what the various companies were doing on health costs because they were then the fastest increasing part of our cost structure and today workers compensation costs would probably be and some other insurance costs unrelated to health would be also would at least in the last couple of years have moved up even more dramatically than health costs. But health costs are huge for us in many cases, you know running $6 or $7,000 per employee, but moving up at a fast rate. And, you know, that is an inflationary part of the U. S. Economy that we can't solve and our employees can't solve. And it becomes a big part of the kind of cost. It's a raw material cost. We had we had higher energy costs in the Q1. But health costs are the ones that are going to just keep coming and coming in my view. And I don't have any great answers for it. Charlie runs a hospital and knows more a lot more about the health system than I do. So we'll see what he has to say. Well, I would argue that the quality of the medical care delivered, including that from the pharmaceutical industry, has gone up enormously. And of course, the cost has too, but it's a much richer country. And I don't think it's crazy if United States wants to spend 15% of GDP on health care. And if I went to 16 or 17, I wouldn't consider it the end of the world. Eventually, of course, there would be a place where it wouldn't be smart to spend so much. Do you think if we're spending 13% or 14% and other countries that seem to have fairly good systems are spending 7% or 8% that we're getting our money's worth relative then? Well, certainly, they're getting more value per dollar out of their 7% than we're getting out of our 15%. Percent. But does that mean that it's crazy for us to spend 15 percent? I don't know. I would guess not. But I don't see any sign from anything I see that it isn't continuing to go up. I don't know how much we we never aggregate figures around Berkshire from various companies because it wouldn't mean anything. But we spend a lot of money on healthcare. And certain states it's far higher than others. It makes a lot of difference where you're located. Number 1. Hello, Mr. Buffet and Mr. Munger. My name is Justin Fung. I am 13 years old from California. This is my 3rd consecutive year in attendance. First of all, I would like to wish you the best of health so we can continue to Omaha for many years to come. Thank you for answering my question on friendship last year. My question this year is how do you define success and happiness? Are they related? And how would one achieve that? Thank you. Well, I tell I tell college students that when you get to be my age, you will be successful if the people that you would hope to have love you, do love you. I mean, if, Charlie and I know a few people that have got a lot of money and they get testimonial dinners and they get their names on buildings and the truth is nobody loves them. And you know, not their family, not the people who named the buildings after them. You know, it's, it's sad. And it's unfortunately, it's, you know, it's something you can't buy. I mean, Charlie and I have talked a lot of times if we could just buy $1,000,000 worth of love, you know, I mean, it would be so much more satisfactory than to try and be lovable. But it doesn't work that way, you know. The only way to be loved is to be lovable. It's it's it's, and I hate to tell you that at 13, but and but the nice thing about it of course is that, you know, you always get back more than you give. I mean that, I don't know whether it was Oscar Hammerstein or who said, you know, a bell's not a bell till you ring it. A song's not a song till you sing it. Love isn't in the heart, isn't put there to stay. Love isn't loved till you give it away. And basically, you'll always get back more than you give away. And if you don't give any, you don't get any. It's very simple. I don't know anybody my age that is loved by a lot of people. We had a dinner the other night, Don Kuehl was there. Everybody loves Don Kuehl, you know, and for good reason. And there's nobody I know that has, that commands the love of people around and people they work with, their family, their neighbors that is other than a success or feels other than a success. I don't know how the people feel that that where they know that nobody loves them. But I can't believe they feel very good. So it's it's very simple. You can't get rid of love. If you try to give it out, you get it back more than you've given. And it's the best thing. Charlie, what do you speak for? Well, you don't want to be like the motion picture executive in California. And they said the funeral was so large because everybody wanted to make sure he was dead. And there's a similar story about the minister saying at the funeral, won't anybody stand up and say a good word for the deceased? And that was his long silence. And finally, one guy stood up and he said, well, he said his brother was worse. Look, I would say this, look around at, people older than you are. Look around at your older relatives or whatever. And you will not see an unhappy person who is loved by those around them. I mean, it's most people in this room are going to do very well financially. Most of the college students I talk to are going to do well financially and some of them are going to have very few friends, real friends, as they get older and others, people won't be able to do enough for. And I see it around me all the time. So that's our advice for the day on that. Number 2. Hello. My name is Kevin Truitt. I'm a shareholder from Chicago, Illinois. Mr. Buffet and Mr. Munger, thank you for putting on this marvelous event for your shareholders and partners. I thoroughly enjoy and love coming here. I get so much education from this and the people here are just wonderful. I have 3 hopefully short questions. The first two questions are for you and mister Munger and the third question is for you. My first question is, mister Munger, you are largely credited with moving Warren away from the cigar butt approach to investing as it was practiced by Ben Graham. It's been stated that it was the purchase of See's Candy that taught you this important lesson of buying good businesses. At what point did you realize that this concept of buying good businesses was a better long term investment strategy? And what was it in your discussions with Warren that allowed you to persuade him to move in that direction? Mr. Buffett, what was it in Mr. Munger's arguments for buying good businesses that persuaded you to abandon the cigar butt approach and move in his direction? My second question is, in both your experience, have you or Mr. Munger ever known of a company that has regained or replaced its competitive advantage once it was lost? My third question for you, Mr. Buffet, is early in his career, Richard Rainwater sought you out and asked you what it took to become a successful investor. Can you tell us what he asked you and what you told him? Thank you. The last question I don't I don't remember at all. I mean, Rainwater called me a couple of times, but I don't I don't I don't really remember the conversation. There's a lot of years ago and then I probably said the same. I would have said the same thing to him as if I got a question asked in this meeting. So I really had no contact with Richard Rainwater over the years. Like I say I think I met him once I believe and he called a couple of times. So, Charlie do you want to answer the first question about how you? Yeah. Well, I think there's some mythology in this idea that I've been this great enlightener of Warren Buffett. Warren hasn't needed much enlightenment, but we both kept learning all the time so that the man we were 5 years earlier was less sensible than the man who ultimately was there. And See's Candy did teach us both a wonderful lesson. And it'll teach you a lesson if I tell you the full story. If See's Candy had asked $100,000 more, Warren and I would have walked. That's how dumb we were at that time. Dollars 10,000 more. And one of the reasons we didn't walk is while we were making this wonderful decision, we weren't going to pay a dime more. Ira Marshall said to us, you guys are crazy. There are some things you should pay up for, multi business quality and so forth. You're underestimating quality. Well, Warren and I, instead of behaving the way they do in a lot of places, we listened to the criticism. We changed our mind. And that is a very good lesson for anyone. The ability to take criticism constructively is a well, think of all the money we made from accepting that one criticism. And if you count the indirect effects from what we learned from buying C's, you can say that Berkshire has been built partly by learning from criticism. Now, we don't want any more today. We also like the peanut brittle. So Charlie is playing it out. I have learned investment and got enormous benefit out of that learning from a fellow who concentrated on the quantitative aspects, Ben Graham, and who didn't dismiss the qualitative aspects, but he said you could make enough money focusing on quantitative aspects, which were a more sure way of going at things and would enable you to identify the cigar butts. He would say that, you know, the qualitative is harder to teach. It's harder to write about. It may require more insight than the quantitative and besides the quantitative works fine, so why try harder. And on a small scale, you know, there was a very good point to that. But Charlie really did wasn't just Ira Marshall, but Charlie emphasized the qualitative, much more than I did when I started. He had a different background to some extent than I did. And I was enormously impressed by a terrific teacher and for good reason. But it makes more sense, as we pointed out, to buy a wonderful business at a fair price than a fair business at a wonderful price. And we've changed our or I've changed my focus anyway and Charlie already had it, over the years in that direction. And then of course, we have learned by what we've seen. I mean, we it's not hard when you've watched businesses for 50 years to learn a few things about them as to where the big money can be made. Now you say, when did it happen? It's very interesting on that because what happens even when you're getting a new important idea is that the old ideas are still there. So there's this flickering in and out of things. I mean, there was not a strong bright red line of demarcation where we went from cigar butts to wonderful companies. And it but we've moved in that direction, occasionally moved back because there is money made in cigar butts. But overall, we've kept moving in the direction of better and better companies and now we've got a collection of wonderful companies. In terms of competitive advantage and then regained lost and then regained, there aren't many examples of that. In the property casualty company, I've got a friend who always wants to buy lousy companies with the idea is going to change them into wonderful companies. And I just ask him, you know, where in the last 100 years he's seen it happen. I mean, GEICO got into trouble in the early seventies, but it had a wonderful business model. It did get off the tracks, but it wasn't because the model went astray. It's because they started reserving incorrectly and went crazy on growth and a few things like that. But the basic model was still underlying it. You might argue that the one company that lost its competitive position and then came back, in a different way actually was Pepsi Cola. I mean, they they were twice as much for a nickel too. They were selling on a quantitative basis. The fact that you got to guzzle more of the stuff for a nickel twice as much as the slogan went. And they lost that edge, post World War II when costs went up a lot. And so they basically changed their marketing approach successfully. And that's very, very seldom done. But you have to give them credit for that. To some extent, Gillette lost its competitive position somewhat in the 30s, lost market share against what they called penny blades and all that and then regained it in a very big way, in the next 10 or so years when their market share went up enormously. But generally speaking, if you lose your competitive position, the Packard Motor Company had the premier car in the mid thirties. The Cadillac was not the premier. It was a Packard. And then they went downscale 1 year and they never came back. They jumped their sales at 1 year because everybody wanted to own a Packard and now you could own 1 a little cheaper, but they never regained that upscale image again. And certain department stores have done that too. They've had an upscale image and you could always juice up your sales, particularly if you've got a great upscale image by having this sale or that sale and going down market. It's very hard to go back up market again. And you've seen some great department stores that have had that or specialty stores have had that problem. Charlie, you got any thoughts on that? No more. Okay. Number 3. Hi. I'm Bruce Gilbert, a stockholder from New York City. And about 4 or 5 years ago, I put most of my family's portfolio actually, all of it into Berkshire Hathaway. And over the past 4 or 5 years, the stock price has remained rather steady. And I've withstood the year 2000 when friends were making 50%, and I was losing 50% on my investment. But I have to admit, when I read your Fortune article last year and you referred to the stock price as expensive, world. And I'm going to be a little bit more cautious about the future. And I'm going to be a little bit more cautious about the future. And I'm going to be a little bit more cautious about the quantitative aspects of things. And I guess I would like you, with your self reflective position and knowing that I'm asking you to do something like maybe talking about your breathing, what went into that comment to call the stock price expensive in terms of your weights and measures? What price? What value? What do you think about the company and its stock price when you say it's expensive? I think if you I don't remember the exact wording of that article, but I'm quite sure that I told the author of that article and I'm almost positive it was in the article that I said it was I thought it was more attractive than owning the general market or the S and P. So I was saying that I preferred it to the general market. I'm certainly happy having 99 and a large fraction percent of my net worth in it. I've never sold a share. I am not the least bit uncomfortable about holding until the day I die and quite a bit thereafter. But I have not thought stocks were cheap at all for some time. And I've never wanted to encourage anybody, particularly in the last few years, to buy Berkshire or any other stock because the market I felt that I felt we had a great bubble. And I think Berkshire's value has improved. I think Charlie does too fairly significantly in recent years. And I would if I had a chance to swap tax free my Berkshire for the S and P 500 or for any mutual fund or anything. I wouldn't even I wouldn't give it a thought. But that does not mean I think either Berkshire stocks are cheap. Charlie? I've got nothing to add to that. I don't think we've ever recommended the purchaser or sale of Berkshire that I can remember. We did say at one time we would repurchase shares, which has a certain underlying message to it. And we said at other times we wouldn't buy shares. That doesn't mean we'd sell shares at all, but we wouldn't have bought them under the prevailing conditions. But we stayed away from recommending actually not only the purchase or sale not only of Berkshire but just of any other specific shares. We've only given our views occasionally on what we think about the level of the stock market generally. But I do think if you go back and look at that article, I wish I had it here, but I think you'll find that I said I preferred it to equities generally. It, I do think that there's a lot to be said for developing a temperament that can own securities without fretting. I think that the fretful disposition is the it's an enemy of long term performance. Well, it's almost I think it's almost impossible if you're to do well in equities over a period of time. If you go to bed every night thinking about the price of them. I mean, Charlie and I, we think about the value of them. But we would be happy just as in that movie. If they close the stock exchange tomorrow, Dick Grasso wouldn't be happy and Jimmy McGuire, our specialist wouldn't be happy. It wouldn't bother me and Charlie at all. We would keep selling bricks, selling deli bars, selling candy, writing insurance. You know, a lot of people have private companies and they never get a quote on them. You know, we bought See's Candy in 1972. We haven't had a quote on it since. Does that make us wonder about how we're doing with See's Candy? No, we looked at the company results. So you there's nothing wrong with focusing on company results. Focusing on the price of a stock is dynamite because it really means that you think that the stock market knows more than you do. Now, the stock market may know more than you do, but then you shouldn't be in stocks. I mean, you should have the stock market is there to serve you and not to instruct you. So you need to formulate your ideas on price and value. And if the price gets cheaper and you have funds, you know, logically, you should buy more. And we do that all the time. Where we make our mistakes, frankly, is where we focus on price and value and we start buying and the price goes up a little and we quit. You know, like Charlie referred to, we might have done on See's Candy. A mistake like that cost us $8,000,000,000 in the case of Walmart stock a few years ago because it went up in price. And, you know, we are not happy when things we're buying go up in price. We want to go down and down and down and we'll keep buying more. And hopefully, we won't run out of money. Of course, that's a different story. Charlie, number 4. Hi, David Anglin from St. Louis, Missouri. Thanks have lost their AAA ratings. Girling is out of the ballpark. Will the reinsurance business at Berkshire become unintentionally exposed to higher risk because it is now a major reinsurer still holding a AAA rating even though it practices a very severe underwriting discipline? No, the AAA can't increase our risk because it should not affect what we do. It may affect what gets offered to us. Logically, we should get business offered to us first. And last, I mean, we are the reinsurer that's going to pay sure 5 years from now, 10 years from now. So when you I mean, we have contracts, we have structured settlements with paraplegics that are counting on us to make a payment to them 50 years from now. Those people are in wheelchairs. They may be on oxygen, all kinds of things. And they are depending on a little piece of paper that has our name on it and it says we're going to pay them for the rest of their life. And it's very, very important to them whose name is on it. But that doesn't cause us to do it shouldn't cause us to do anything at all stupid. It just means that people that care about security of future promises should come to us. But there's no reason at all because Munich or Swiss Re loses their AAA that we should underwrite in any way differently than we do now. It just should mean that we have more to choose from. And I can assure you that as these companies lose their AAA and a number have in the last year, year and a half, we have been tightening our underwriting very materially at Gen Re. Now it needed tightening. But we are now, in my view, we have the right we have a great underwriting culture at Jan Re. And historically, it had it most of the years. It drifted away from that. But I think it's back in spades now. So I don't think you have to worry about that. Charlie? Well, I certainly hope we are better underwriters than Munich Re. Let's not name names. No, no. Munich is a fine company. The rule at Berkshire is we praise by name and we criticize by category. And I do think Munich is a fine company, but they lost their AAA, frankly, because they probably had, they were too exposed on the equity side, on the asset side and equities relative to net worth. And I think they probably agree with that. But they have a very strong and important position in insurance. And we do a lot of business with Munich Re. And we'll continue to do so. But there are others we won't do business with incidentally. I mean, there are some very weak reinsurers in the world. And if there were to be a major natural catastrophe or if there were to be a major financial catastrophe, there are a number of reinsurers, in my view, that would not pay. And we conduct our affairs so we'll always be able to pay. Number 5? Good morning, gentlemen. My name is Olaf Heine from Germany. And not surprisingly, I have a question concerning the German reinsurance market fitting nicely in the context of the questions before. When you acquired General Re, I believe you inherited also a substantial stake in Cologne Re. Now in your last letter to your shareholders, you hinted that a major reinsurance company might be in trouble, widely believed to be gallingry just mentioned. You also mentioned about an hour ago that Germany was kind of a drag insurance wise, If you if I understand you correctly, I don't I mean, I don't believe I didn't mean to say that Okay, but it's it's it helps to formulate the question. Okay. Well for the purpose of your question will assume I said it Yeah, but I didn't say it So now January decided to exercise a call option on the remaining shares of Colon Re, another German reinsurance company. And my question simply is what motivated you to do so? Yeah, that's a good question. And it was it was miss it was sort of somewhat misreported in the press what happened on that. What really happened is that January, I don't know whether it would be about 6 or 7 years ago now, acquired a significant position in Cologne from the controlling shareholder with a put and call arrangement for the remainder. I don't even know the history exactly of why they went for this 2 step transaction, but basically it was a 2 step purchase. So that all along, we have accounted for Cologne as if we were going to exercise the option because in effect if we didn't exercise they would exercise and it was fate accompli that we would buy that stock right from the start. So we made no affirmative we made an affirmative decision 6 or 7 years ago to buy a very significant percentage of cologne. We now have about 80 we will have about 89% when the options exercise. But there's nothing new in the fact that we are now doing it. The put and call arrangement as I remember became effective essentially this year. So this was the year that something had to be done and was planned to be done all along. And it reflected no new judgment, no new decision about Cologne in the year 2003. It reflects a decision that was made in 1996 or 97 whenever the original purchase was made. And Cologne is an integral part of General Re. I mean we knew all along that we would own 89% of it pursuant to this contract and that's always been in our thinking from the moment we sat down with the General Re management to make a deal some years ago. So the press has sort of implied that there's something new in this transaction that's occurring this year and there really isn't. Number 6, Charlie, you don't have anything on that. Good morning, Mr. Buffet. This is Abhishek Dalmia coming from the land of Mr. Ajit Jain, which is India. The question is If you have any more like Ajit over there, send them. We need them. Right. My question pertains to the allocation of a company's free cash. And the question is, under what circumstances would Berkshire consider parting with its money for a share buyback program as opposed to retaining it for future acquisitions? Thank you. Yes. That's a good question. And we addressed that a bit back a couple of years ago. In fact, I think our annual report for 1999 came out on March 12. I believe it was March 12, on a Friday night or a Saturday morning. That was the day the NASDAQ hit its high and Berkshire hit its low on the exact day. And we said we would next morning on the Internet on a Saturday morning, we said we would repurchase, but we wanted you to have the annual report first, but we might repurchase at those levels. And the NASDAQ never saw its level of 5,100 again and Berkshire never saw its level of whatever it was, 41,000 or thereabouts. Our preference, and we say that this 20 years ago, is to buy businesses. We want to add businesses of equality with managers of equality equal to those we already own at prices that make sense. And that's our number one preference. If we thought Berkshire was significantly undervalued and we thought the likelihood of using the money to buy businesses, the probability was low, we would be buying stock in. We probably wouldn't be able to buy a lot of stock in, but we would only buy stock in if we thought the stock was selling significantly below intrinsic value. And there is no magic figure for intrinsic value. Intrinsic value is a range. Charlie would name a different number than I would name, but our ranges would be quite similar if we were to write them down on a piece of paper now. But they wouldn't be identical. So we leave us we would leave a significant margin of safety and want to buy at a what would be a clear cut to us discount from the lower levels of intrinsic value we might calculate. It's not our number one preference to be. We would rather add business. We love it when we add good businesses to Berkshire. But we would have to the stock, we could add intrinsic value per share by repurchasing and we've given all the shareholders relevant information about the value so that we weren't putting anything over on them that they had the same information we had. We would buy in stock. I think it's unlikely that happens that we don't find other opportunities to do things at a time like that. But it could happen and it almost happened in March of 2000. And then things turned around very, very abruptly. Charlie? I've got nothing to add. Number 7. Good morning. My name is Ken Goldberg from Sharon, Massachusetts. What is your long term vision for Mid American Energy and specifically assuming the repeal of the Public Utility Holding Company Act, what is the nature of the type of assets that you would be interested in acquiring, be they generation, transmission, distribution type properties? Yes, Mid American already is a big part of Berkshire. I would say it's likely to become much bigger. It will be easier to have it become much bigger if the Public Utility Holding Company Act, which was enacted in 1935, if it were repealed. Public Utility Holding Company Act, which is melodiously named called Puka, was enacted in 1935 in a reaction to what Sam Insull and people like that had done in the 1920s. It is very understandable. But I really think it is quite outdated now. I mean it is now 68 years later. And I think we bring something to the utility field. In fact, I think we brought it in the last year. There might well be a couple of companies that wouldn't would be in bankruptcy now that if we hadn't been in a position to act very quickly on certain things. So but with or without the repeal and I think there's a reasonable chance it'll be repealed. But with or without repeal, Mid American which is big now will become quite a bit bigger and it could become a whole lot bigger. Now in terms of what kind of assets we'll buy, we don't have any clear cut preference for example as to whether it would be a natural gas pipeline or whether it would be a domestic utility or conceivably a utility even in some country that we felt good about. We will look at things as they come along. We're always ready to act. I would say that it's certain we'll look at a few big deals this year. Whether we get one done or not depends on competition, depends on the sellers and some things like that. But something will happen with Mid American over whether it's this year or next year or the year after, we'll get a shot at doing something significant. And the nature of the energy field is you're talking big money always. I mean, these are not lemonade stands. And we're talking in the billions frequently on the kind of assets involved. So it will be a we got a fabulous management. We've got 2 people running that and Dave Sokol and Greg Abel who are terrific business people. And incidentally, I should mention this publicly. They have done things that have made Berkshire significant money that had nothing to do with Mid America. They have spent their time and energy and weekends putting together a couple of things that Mid American itself could not do, but Berkshire could. And they didn't get paid a dime for that and Mid America did not get paid a dime for that. So they have contributed to Berkshire's welfare beyond what they've contributed simply as managers of Mid America. So it's a terrific asset. We love the idea of pouring money behind them and you'll see something happen. Charlie. Well, the really interesting thing about it is the fact that the field is so big. I mean, you're talking about an enormous field. One thing a modern civilization needs is energy. So we'll be very disappointed if there aren't more activities. Number 8. When we get through with number 10, we're going to break for lunch and then we'll come back and start all over again after 30 or 40 minutes. But I'd like to get through 8, 9 and 10. 8? I'm Norman Renthrop from Bonn, Germany. Mr. Buffet and Mr. Munger, I have a thank you and a question for you. Thank you for allowing us shareholders to invest with you on equal terms with almost no management fee and no performance fee. I came to fully appreciate it when I compared my 10 years of holding Berkshire Hathaway to a private equity fund, which over the same 10 years earned 19.8% before fees and 11.2% after fees. Now my question. Back in the 19 fifties and 1960s, when you had a partnership, Mr. Buffett, you asked for and got a performance fee of 25% of what was earned above 6% a year. Correct. What caused you to switch from that performance fee to that no fees we are enjoying today? Was it the wisdom that to give is better than to receive? Try again. And do you feel that this switch from performance fee to no performance fee, that that is fully appreciated? And what did it mean to you personally? Well, I appreciate what you had to say and I will I would pay to have this job I have. I would pay a lot of money and I hope I don't get tested on that. But I, you know, it's why in the world, if I can work with people I like and get the same result they have and end up with all kinds of money, why do I need to make some further override on them? I was changing my position in life significantly when I started that partnership in 1956. A couple of the people that, well, I guess, Doris may be the only original partner here, but Doris, would you stand up? She joined on May 5, 1956, wherever she is. And the you know, those people gave me their money, but I wasn't I needed some money then too. And I did get an override, which I thought was fair. I got no management fee at all, though. I never I never charged today. Most of the people who run hedge funds charge 1% a year and then some percentage of profits. I did not do that. And I did have all my money in after 1962 so that the downside would be equal to the upside. But I've always felt about the people as partners and when we got into Berkshire originally we got into Berkshire, Berkshire was owned by the partnership. So if I'd taken a salary then I would have been double dipping in effect by getting money out of Berkshire before in turn the partnership participated. And frankly by the time I got wires running Berkshire I had all the money I needed. And you know I'd rather get the same result as my partners than have me get a different result. And it's it can't make any difference. I mean, it's it'll make a difference in the size of my foundation someday perhaps, you know, but so what I like living the way I live. Charlie? Well, you raise a very interesting question and it has parallels if you go back. Carnegie was always very proud that the bulk of his fortune had been earned where he took no salary at all from Carnegie Steel. John D. Rockefeller, the first, took practically nothing in salary Over the years, the original Vanderbilt prided himself on living on his dividends and taking no salary. And it was a common culture in a different era. And you realize that all those people have the psychology of being the founder. And maybe that's what influenced Warren. What influenced you, Charlie? Charlie doesn't take anything either. So I was delighted to get rid of the psychological pressure brought on me by getting fees based on performance. I think Warren was too. If you're highly conscientious in your relations with other people and you hate to disappoint, you're going to suffer more if you are liberally rewarded with performance fees. So I think there was an enormous advantage to us. So I guess we should be thanking you. I should Bill Gates has never taken an option at Microsoft and takes a very small salary and you'll find it interesting. The only reason he takes the small salary is if he feels that if there's a bad year at sometime in the future, he wants to be able to take a cut in salary at the same time he's asking other people to cut back. And that's and that's the that is the reason. I mean, he takes peanuts as it is, but he just figures that that Bill is a very conservative guy and he figures that some year there'll be a bad year and he wants if he's asking other people to take a 5% cut, he wants to be able to take a 90% cut or something himself. But he's never taken an option and I don't believe Steve Ballmer has either. They have gotten rich with their shareholders and not off their shareholders and that's an attitude we admire. Number 9. Good morning. I'm Whitney Tilson, a shareholder from New York City. There was a lot of talk among the Berkshire faithful when you took what I believe was the unprecedented step of pre releasing a portion of your annual letter published in Fortune, which focused primarily on the dangers of derivatives, which you called financial weapons of mass destruction. I have two questions related to this. The first to you, Mr. Buffett, could you tell us the story of how the Fortune article came about? Were you trying to draw extra attention to something that you feel strongly is a great risk to our financial system? And the second question to both of you, since your warning about derivatives, there's been a huge rally in the credit markets in general. Does this reflect investors' lack of concern for these systemic risks? Or is it caused by other factors? The first question, my friend Carol Loomis is the editor of the Berkshire report and we wouldn't get out the report without her. I mean, she is the world's greatest editor in addition to being the world's greatest business writer. So when I gave the report to her, to add it and it did not come back unmarked I might add. She and I talked about I was interested in having the section on derivatives because I thought it had a broader, I hoped it would have a broader audience than just the Berkshire annual report and I felt that publishing it which had no relationship to the Berkshire business basically except the history of Gen Re's involvement would not be in any way compromising fair disclosure in terms of Berkshire's results itself. So the primary reason for having in Fortune was I hope for a wider audience basically by having it in Fortune. And you know, Charlie and I think there is a low but not insignificant probability and low sometime maybe in 3 years, maybe in 5 years, maybe in 20 years and very possibly never, that derivatives could accentuate in a major way a systemic problem that might even arise from some other phenomenon. And we think that's inadequately recognized. We think the problem grows as derivatives get more complex and as their usage increases. So it was, it was a call, what we hope was a mild wake up call, to the financial world that these things could be very troublesome. And of course, we saw it in the energy field in the last 2 years. It almost destroyed or destroyed certain institutions that never should have been destroyed. And we also saw in 1998, the whole financial system almost become paralyzed, particularly in the credit markets, you know, by the action of a firm which was not solely based on derivatives, but would not have gotten into as much trouble as it did without derivatives. So it's a subject that no one quite knows what to do with. Charlie and I would not know how to regulate it, but we think we have had some experience in seeing both the firm's specific, dangers in that field. And we think we have some insight into the systemic problems that could arise. And you know, that people, people really, they don't want to think about it until it happens. But there are some things in the financial world that are better thought of before they happen, even if they're low probabilities. And we're thinking about low probabilities all the time in terms of Berkshire. I mean, we don't want anything to go wrong in a big way at Berkshire. And and we therefore, I think think about things that a good many people don't think about, simply because we worry about that. And when we get our social hats on, we think about it in terms of something like, derivatives for financial systems of the world. And we have had some experience at both Solomon and and at, January. And Charlie was on the audit committee at Solomon and he saw some things in the audit committee in relationship to trading itself and derivatives in particularly that that made him wonder why in the world people were doing these sort of things. I'll let Charlie expand on that. Yeah. In engineering, people put big margins of safety into systems, atomic power plants being the extreme example. And in the financial world and derivatives, it's as though nobody gave a damn about safety. And they just let it balloon and balloon and balloon in usage and number of trades and size of trades. And that ballooning is aided by this false accounting where people are pretending to make money they're not really making. I regard that as very dangerous and I'm more negative than Warren in the sense that I'll be amazed if I live another 5 or 10 years if we don't have some significant blow up. They've been advertised and sometimes by some in a fairly prominent way, they've been advertised as shedding risk for participants in the system and reducing risk for the system. And I would say that I think they have long crossed the point where they decrease risk to the system and now they enhance risk because you the truth is the Coca Cola company can bear the foreign exchange risks that they run or the interest rate risks that they run and all of that sort of thing. But when the Coca Cola company starts laying those off and every other company in the world, major company does with just a relatively few players, you have now intensified the risks that exist in the system. You have not shed risk at all. You have transferred it and you have transferred it to very few players and those players have huge interdependences with each other. And to some extent, central banks and all of those and similar institutions are are vulnerable to the weaknesses of those institutions. When Charlie and I were at Solomon, you know, they hated it if we brought up and so therefore we didn't do it, that we were too big to fail. But the truth was that if Solomon failed at that time, the problems for the rest of the system could well have been significant. They might have been who knows exactly what they would have been, but they could have been quite significant. And when you start concentrating risks in institutions which are highly leveraged and who intersect with a few other institutions like that, all bearing same risks, all having the same motivations and the trading departments to take on more and more esoteric things because they can book more and more immediate profits. You are courting danger. And, that's why I wrote about it this time. And I, it's not a prediction. It's a warning. And number 10 and then we will break for lunch right after this. Good morning. My name is Ho Nam from San Francisco, California. I have a 2 part question regarding how you evaluate your managers. In your annual report, you wrote that Berkshire Hathaway owns good to great businesses and employees great to great managers, and we're thankful for that. When you hire a manager or evaluating the management team of a business you're thinking about buying, what are the qualities you look for? And some of your managers were entrepreneurs, who started their businesses from scratch when their business models were unproven, and some of them took over businesses that were already performing well when they took charge. What are the qualities of a great entrepreneur that might be different from those of a manager who can be great at running a company that's established but may not be able to start a business from scratch and tinker around with a business model and figure out how to make it successful? Yeah. Well, we love managers that have a passion for their business. And when we're buying a business, we have to ask ourselves, do they love the money or do they love the business? If they love the money, there's nothing wrong with that. But they probably wouldn't be running the business for us a year or 2 down the road. I think one difference is that people that create their own businesses, the entrepreneurs probably on average would have a significantly greater degree of passion for those businesses than somebody that was just brought in a few years ago and sees themselves as making a profit in a few years on reselling the business and leaving. You'll find exceptions in both camps. But we've had terrific luck with the entrepreneurs and basically love their businesses the way I love Berkshire. I mean they they are not going to let anything happen to their businesses. They can you know they'll tell me to butt out if I'm going to screw up something in their operations and and they they don't regard them. I mean, in a certain sense, I mean, they know they're part of Berkshire, but they regard them in a certain jealousy almost as being their businesses and we love it that way. And we can spot it when we see it and when we also can avoid it. We have never I just got one in the other day, some from an investment banker on somebody that wants to resell a business they bought a few years ago. Well, you know, the chances that they haven't doctored up the figures in some way or trying to sell. I mean, you know, they're it's a piece of meat to them. And if it's a piece of meat to them, you know, what am I going to do with it? So we if we make the proper judgment about the passion they have for their business, they're going to keep running. They may have a lot of money in the bank, but they're going to keep running the businesses for us because they love those businesses. And they they really are motivated the same way I am. I know it wouldn't make any difference what I get paid. You know, I I I'm identified in my own mind with how Berkshire does. I really don't care how the rest of the world thinks about how Berkshire is doing. I mean, in other words, when we look like we were out of step a few years ago, that really doesn't make any difference to me as long as I feel okay about how Berkshire is doing. But I do, you know, that's how I measure what I'm doing every day. Not by the price of the stock, but by what's going on in the business. And that's what we have a group of managers like that. And there, I don't think there's, well, there can't be a company in the country, in my view, that if you could figure out some way to measure the passion involved in terms of running their business. I don't think there's anybody that could come close to matching the quantity that we have managed to marshal together at Berkshire. It's been accidental over time, but it's really almost unique. I think it is unique. Charlie? Well, it's very interesting to think about what matters most, the passion or the competence that was born in. Certainly, Berkshire is full of people who have a peculiar amount of passion in their love for their own business. And I would argue that probably the passion is more important than the brainpower. Yeah. By the time they get to us, if they were passionate but incompetent, they don't get to us. I mean, we they're not going to be there unless they're competent. But the question is whether they had a passion for money or a passion for their business to some degree. And like they all like money. I mean, and and and the reason and they like it partly because it enables them to build the business they love. But they don't we're not going to see an incompetent, but passionate manager by the time we start laying out a lot of money for a business. They got weeded out a long time ago. So I don't have to weed those out. But I do have to weed out the ones who want to cash a big paycheck and go off and do something else at some time. And like I say, we've had great luck at that. But we have literally, I mean, we see lots and lots of businesses owned by usually owned by financial operator types where it's absolutely clear that they have come in, they've leveraged it up, they played games with the accounting, That is about run out you know and they want to sell it. And interestingly enough some fairly often those are built by bought by other financial operators who think they're going to play the game a second time. We are not interested in any of those at all. But what we are interested in is lunch and we're going to have that right now and I'll see you back in about 30 minutes.

• Press Release