Okay, round two. Gary, you're up.
Am I up yet?
You are.
Okay. A question on General Re. If I look back at the General Re property casualty premiums, it's been cut in half roughly from 10 years ago. Maybe a little more stable recently. Can you give us some idea of how you've had to adjust the personnel over that time? Also, what opportunities are there for General Re to grow as we go forward?
Yeah, Gen Re, I think, got off the track. It may have, probably was off the track when we bought it, and I didn't spot it.
Sure, it was.
Yeah, okay. I was in charge of that part. They had, I think they'd gotten more concerned about growth and satisfying certain personnel in terms of their activities than they had about emphasizing profitability. It took us a while to figure that out. When Joe Brandon came in, he operated 100% in terms of focusing on underwriting profit instead of premium volume. Tad Montross has followed through on that with terrific results. It did mean getting rid of a lot of business that didn't make any sense. They did an awful lot of what I would call accommodation business. It's true that the PC volume dropped very significantly during that period, but it's not volume that we miss. The life business kept growing consistently during that period. Their life business strikes me as very, very good.
They got a little long-term care mix in there that we wish we didn't have. I think Gen Re is, it's right size in terms of people. It's got an underwriting discipline to it. I wouldn't be surprised if it grows at a reasonable rate in the future. There was a major change that had to be made in the culture at Gen Re. You don't make that overnight. You don't keep a lot of the business or some of the business that you got through a wrong culture when you do straighten it out. It's a terrific asset to us now. I think the life business will continue to grow. I would bet the PC business grows too. It will only grow if we see the chance to do it on a profitable basis. That's one we feel enormously better about than we did some years back. Charlie?
It was a major fix-up operation, but we finally got it done.
We don't go looking for those, though.
No.
Okay. Station One.
Hi, Dan Lewis from Chicago. I wanted to get your thoughts on two of my concerns about a post-Buffett Berkshire. Do you worry that some of your key operating and investing managers might leave for more lucrative opportunities once they realize they're working for one of their peers instead of a legend? Do you think it's possible that a large investor or hedge fund could ever gain enough control of Berkshire to force a change in the unique culture and structure?
Yeah, I think that I would say I virtually know that the successor we have in mind will not be the kind that will turn off our managers because the manager in mind as a successor in mind has got the culture as deeply embedded as I do. Our managers would not, I don't think it'd be a question of leaving for more lucrative jobs. I think it would be because they love the kind of environment in which they exist. If that environment didn't exist, it wouldn't be a question of whether the alternative was more lucrative. Many of them, a majority, could retire. They wouldn't need to work at all. They're only going to work if it's more fun for them to work than to do anything else in the world because they've got the money to leave in a great many cases.
The conditions, it's the same reason I work. I mean, I'm 81 years old. I am doing what I find the most enjoyable thing to do in the world. There are a couple of reasons for that. I get to paint my own painting. I have a lot of fun working with the people I work. Our managers work for the same reason. They do get to paint their own paintings. My successor will understand that just as well as I do. There would be a lot of people that might very well manage other companies that I think if stuck in my position would lose a fair number of managers. They just have a different style. Our managers don't need that style. In terms of a takeover, I think that really gets unlikely. The size is a huge factor.
Even because of the A and B shares, the A shares get converted to B shares when I give them away. Even 10 years from now, it would be likely that I would own, or my estate would own, something in the area, you know, perhaps of 20% of the votes or thereabouts. The Buffett family will probably have 10x the voting power for a long time of anybody else. I think it's extraordinarily unlikely for both those reasons, size and the concentration that will exist. The longer we go, the larger we'll get. As the voting power aspect goes down, the size aspect goes up. I don't think there will be a takeover of Berkshire Hathaway. You do not need to worry about my successor. In many ways, he'll be better than I am. He will be totally imbued with the culture. The company's imbued with the culture.
It would reject anything. The board of directors reflect that culture. It's every place you look around. Berkshire Hathaway stands for something different than most companies. That's not going to change. Charlie?
The first $200 billion was hard. The second $200 billion, with the momentum in place, is likely to be pretty easy compared to what's been accomplished in the past. I don't think it's going to hell at all. I think the momentums are in place, and the right kind of people are in place. The culture is by and large pretty well loved, I would say, by the people who've chosen to be in it. Nobody's going to want to change it.
The businesses are in place to take it to $400 billion. I mean, we have the businesses to take it to $400 billion.
In addition to that, I think people of the type who have sold to us when we were the only acceptable buyer, I think will come to our successors because they will be the only acceptable buyer, at least for some significant part of what's done. I don't think it's going to be all that difficult.
Don't make it sound too attractive, Charlie. Carol?
You're interested in businesses that throw off lots of cash, for instance, See's Candy, as well as those where you expect significant capital reinvestment needs, for example, Burlington Northern. What is it about a capital-consuming business that persuades you to forego the cash yield you seem to have historically preferred? How do you balance the expected need for reinvestment in a capital-consuming business against the other possible uses of cash Berkshire may have in the future, such as new investments or stock repurchases?
Yeah, cash-consuming businesses by their nature are unattractive unless the cash they consume gets to earn a reasonable return. In the electric utility business, we can expect cash retained to perhaps earn an average of 12% or something like that, which we regard as quite satisfactory. It's not as exciting as having some business that's going to grow 20% a year and not require any capital. There are a few wonderful businesses like that, but it's perfectly satisfactory. Same way with the railroad business. We are going to invest a lot of capital over the next 10 years in railroads. Every year, we will spend way more than depreciation charges. I think the prospect of earning reasonable returns on that are pretty darn good.
If I had to put a lot of money into some capital-intensive business where all we were doing was staying alive with that money, we would be in a terrible situation. In any meaningful way, we do not have any capital-consuming businesses where I see that as the prospect. It's true. If you go back to a world where we thought we could earn 20% on equity or something of the sort, then there's very few capital-consuming businesses where huge amounts of incremental capital can earn at a 20% rate. That would be disadvantageous. We don't know how to make 20% on equity going forth in the future with the kind of sums we're working with. We will be very happy if we can earn 12% or something like that on equity, particularly when some of that capital that's being consumed is generated by float, which doesn't cost us anything.
We've got some small advantage there. Charlie?
Yeah, I think it's going to work pretty well. There are some Mungers here. I hope you won't listen to the siren songs of others and we'll kind of stay with the family heirloom.
My family's just hoping for an heirloom.
Cliff?
Yes. Actually, along those lines, in regard to float, in your annual letter this year, you say that you expect the rate of growth in your float to slow going forward. How slow? What are the drivers? Is it possible that float could shrink going forward?
The float could shrink because we have lots of retroactive contracts that, by their nature, the float runs off of, although not at a really rapid rate. The float at GEICO is going to grow. The float at our smaller insurance companies will probably net grow over time a little bit, but not a lot of money. In Ajit’s operation where we have a lot of the retroactive stuff, it's very, very tough. You've always got a melting ice cube that you've got to add a little more water to. I have felt, I felt when the float was $40 billion, it probably wasn't going to grow very much. Now we're at $70 billion. We are looking for ways to intelligently grow the float all the time. That's been true ever since I got in the insurance business in 1967. The desire is always there.
We've been reasonably imaginative in figuring out ways to do it and still have the float cost us less than nothing. We've got the smartest guys in the business out there working on it. The numbers are huge now. You do have a natural runoff from the retroactive contract. I just thought that it was fair to tell the shareholders that they really should, when they look at that history of float growth, that they really can't extrapolate that. If we get lucky, we could add a fair amount more. It's also possible that it'll actually dwindle down a little bit, and not at a fast rate. It's certainly more than possible that it won't grow at very much of a rate from here on. Ajit told me that when I put that in the annual report, that it became a challenge to him.
I'm glad I stuck it in there. He wants to make me look like an idiot, which isn't too hard sometimes. I may have to stick some other things in the annual report next year if I get the attention. If I had to bet on whether float will be higher or lower five years from now, I'd probably bet just a slight bit higher. I also want the shareholders to know there's a possibility that it will decline a bit. We're working on things, though. Every day we're working on things to try and figure out how to increase it. Charlie?
Yeah, the casualty insurance business, by its nature, is not a terribly good business. You have to be in the top 10% ready to do it all well in it. I think we're very lucky. We probably have the best large-scale casualty insurance business in the world. Just because it came out of nothing doesn't mean it's nothing now. I don't think it'll be wildly. It won't grow wildly, will it, Warren?
No.
No. If you have something that's very good and it doesn't grow wildly, that's not the end of the world.
It certainly brought us to where we are today. It's done wonders for us. There's been multiple people that have done it. I mean, the jobs that Tony has done at GEICO, he's created billions and billions of dollars of value for Berkshire shareholders. That's true. Certainly with Ajit. It 's huge.
We'll get used to having Ajit work miracles. He'll probably continue to do so for a long time. Matt Rose has to carry some of the future freight. That's all right.
Okay. S tation Two.
Greetings to all of you from the Midwest of Europe. I'm Norman Rentrop from Bonn, Germany. Warren, thank you very much for being so open about your health situation. You are in my thoughts and in my prayers. I wish you a thorough healing.
Thank you.
As I have traveled a long way and can no longer ask questions in Pasadena, I'm hoping for an elaborate answer from you, Charlie, as well. My question is, how do you value declining businesses? You were talking about the encyclopedia business brought down by Encarta or retailing disrupted by Amazon and others by comparison shopping. How do you value declining businesses?
Want me to answer that one? They're not worth nearly as much as growing businesses.
They can still be quite valuable if a lot of cash is going to come out of them.
Generally speaking, it pays to stay away from declining businesses. It's very hard. You'd be amazed at the offerings of businesses we get where they say, you know, it's, I'm an upset Charlie, but they say, you know, it's only 6x EBITDA. Then they project some future that doesn't have any meaning whatsoever. If you really think a business is declining, most of the time you should avoid it. We are in several declining businesses. The newspaper business is a declining business. We will pay a price in that business. We do think we understand it pretty well. We will pay a price to be in that. That is not where we're going to make the real money at Berkshire .
The real money is going to be made by being in growing businesses, and that's where the focus should be. I would never spend a lot of time trying to value a declining business and think, you know, I'm going to get one free, it's what I call the cigar- butt approach where you get one free puff out of the cigar butt that you find. It just isn't, the same amount of energy and intelligence brought to other types of businesses is just going to work out better. Our general reaction, unless there's some special case, is to avoid new ones. We're playing out certain declining businesses by their nature. We started with declining businesses. We started with textiles in New England. We tried U.S.-made shoes. We've.
Department store in Baltimore.
Department store in Baltimore, Howard and Lexington Street.
Great stamp company. We're a specialist in that.
Yeah, we have one business. We have one business that did $120 million or so of sales in 1967 or 1968. What did we do last year? About $20,000?
Yes.
$20,000.
I presided over it myself.
Yeah, I want to say I helped. I mean, he didn't do it all by himself.
No, I sat there in the location and watched the.
We thought of bringing the sales chart down here and turning it upside down to impress you. Charlie is still in charge of this business, and I can't get him to sell it, but make me an offer.
If you think what came out of those three declining businesses, all of which failed, it's so many billions, it's hard to imagine how much came out of them.
Yeah, we're not looking for an opportunity to do it again.
No, but it was in 1966. Maybe we should, because in 1966, Sandy Gottesman, one of our directors, and Charlie and I, we put $6 million into a company. We called it Diversified Retailing, although we only had one operation. It was kind of like Angelo Mozilo calling his one location, you know, in New York countrywide mortgage at the time. We bought a department store at Howard and Lexington Street. In our defense, I would have to say there were four department stores at Howard and Lexington Street in Baltimore, and all four of them are gone. That $6 million has turned into about $30 billion, starting with that.
Failed business.
Failed business, yeah. Yeah. Of course, Blue Chip Stamps was another example of that, because that was another company that, and then of course, Berkshire was the textile business. We were sort of masochistic in the early days. Becky.
Ignorant too.
Yeah, okay. That was the word that came to mind, but I didn't really like to use it.
This question is from Bill Nolan, who's a shareholder from West Des Moines, Iowa. He says, "Many of us are interested in what you, meaning Berkshire Hathaway, are buying, and you won't tell us that. Using Charlie's principle of invert, invert, always invert, maybe you can help us by suggesting what to avoid and stay away from. Specifically, what in the investment world today strikes you as folly, fad, unsustainable, crazy, or dumb?
A lot.
Yeah, I think I would describe it as we try to stay away from the things to start with that we don't understand. When I say don't understand, it isn't that I don't understand, you know, what a certain business does. When I say understand, it means that I think I have a reasonable fix on about what the earning power and competitive position will look like in five or 10 years. I've got some notion of how the industry will develop and where the company will stand within the industry. That eliminates a whole bunch of things. Beyond that, if the price is crazy, even though I understand it, that eliminates another bunch. You get down to a very small universe, and you get down to a particularly small universe when we're working with lots of money as we are now. I would say this.
I can't recall any time in the last 30 years, at least, that we've bought a new issue, have we, Charlie?
I can't think of one.
No, no. I mean, the idea that somebody is bringing something to market today, a seller who has a choice of when to come to market, and that that security, where there's going to be a lot of hoopla connected with it, is going to be the single cheapest thing to buy out of thousands and thousands and thousands of businesses in the world, is nonsense.
When it carries a 7% commission or higher, it's ridiculous.
It's ridiculous. You know it can't be the most attractive thing. You know, people get excited about what's coming and all that sort of thing. I will guarantee you that if you have thousands of opportunities among stocks all over the world, and most of them are not being promoted or being sold with special commissions in them or something else, and then some other security is coming to market that day when the seller picks the time to bring it, as opposed to just this auction market operating otherwise, it just doesn't make any sense to spend five seconds thinking about new issues. We don't think about them. There are industries we know may have a wonderful future, but we don't have the faintest idea who the winners will be. We don't think about those either. There are a whole lot of things we don't think about.
Charlie and I have a number of filters that things have to get through very quickly before we're willing to think about them. Sometimes we're thought of as rude. Probably Charlie's thought of that way a little more often than I am. Sometimes we're thought of as rude because people will call us and they start explaining some idea to us, and it just doesn't make it for the first filter or two. We think we're saving their time if we just politely say that we just have no interest and we don't want to have you finish the sentence. We do that, don't we? We don't have to do very many things that work. That's the beauty of this business. You don't have to be able to spell 500 words or something to get to the end of the spelling bee and beat everybody else.
You just have to do one or two things every now and then where you don't make a big mistake and where every now and then one works out real well. The solution, you'll get a good result. You can't have a big disaster. That is what we try to avoid. We do not ever want to lose a significant percentage of Berkshire 's net worth. So far, we haven't.
I think there are a couple of little rules of thumb. If it's got a really large commission in it,
Forget it.
Don't read it, because the chances somebody is paying a very high commission to give you a big advantage is very low. The other thing that is, I think, helpful in reverse is as a place to look, looking at things that other smart people are buying. That is not a crazy search method. It is a sorting device for opportunities to consider.
Charlie knew me when I used to look at, I grabbed the Graham-Newman reports as fast as they would come out. You know, if Graham-Newman was doing something, it was certainly worth my time to look at.
No, Warren has made a lot of people rich he doesn't even know. He's just copied him.
Don't go into things with big commissions. Jay?
On the subject of regulation, a question I often get from investors is, what are the implications if Berkshire Hathaway ends up being subject to the Investment Company Act of 1940 because of insurance becoming a smaller part of Berkshire 's overall business?
I may be.
That's too remote. That's not going to happen.
Yeah, I used to, I read the Investment Company Act of 1940 probably 20 times because it was quite pertinent when I was setting up my partnership and all that. I don't remember every detail now. I see no way that Berkshire comes close to that. We used to worry about both personal holding company status and investment company status. We made very clear that we steered clear of both of those. I think we're a million miles away from it now.
Yeah, we really need the financial heft we have to make our basic businesses work. We are not just an investment company.
Yeah, we've got 257,000 or 270,000 employees. We own eight companies that each would qualify for the Fortune 500 if standalone. People thought of us as an investment company long after we were nothing remotely.
Like one.
Like one. We had no intention of going in that direction. The background of both of us caused people to hang on to that notion longer than it was appropriate. Station Three.
Hello, Mr. Buffett and Ms. Munger. Good afternoon. My name is Yang. I'm from Toronto, Canada. I appreciate you giving me this opportunity to stand here and ask questions. My question is, how long do you think it will take China to appear a gigantic company like Coca-Cola? In which industry do you think it will be? Thank you.
How long will it take China to do what?
I didn't quite get that one.
Connection to Coca-Cola.
How long will it take China to do what?
Oh, just.
How long do you think it will take China to appear a great company like Coca-Cola? In which industry do you think?
China already has some great companies. It's hard to think of a great branded- goods company, but China has some very great companies already.
Yeah.
I don't know why I can't pronounce them, but they've got some very great companies.
Yeah, so far, it has not been Chinese fast food companies that have been exported to the United States as opposed to, you know, we've got over 500 Dairy Queens now in China. We tend to export certain products well, some consumer products, entertainment products, that sort of thing. China's got some huge companies, and they may eclipse in market value, you know, some of the ones such as Coca-Cola that we're talking about.
See, that was station Three. Andrew?
Okay, this question comes from Larry Pitkowsky from the GoodHaven Fund. Also, another shareholder also asked a similar question that I've tried to combine. Given that you're now in IBM, are there any other entrenched leaders in technology that are, to use one of your terms, inevitable in the same way that Coke and Gillette were? For example, is Google inevitable? Is it reminiscent of the advertising agencies you owned in the 1970s, i.e., a toll bridge on all digital spending that's highly likely to keep growing over time? What are the one or two things about Google, for example, that you think are real risks? What about Apple?
Those are extraordinary companies, obviously. They're both huge companies. They make lots of money. They earn fantastic returns on capital. They look very tough to dislodge where they have their strengths. I would not be at all surprised to see them be worth a lot more money 10 years from now, but I wouldn't want to buy either one of them. I do not have, I do not get to the level of conviction that would cause me to buy them. I sure as hell wouldn't short them either, Charlie.
I think we can fairly say that other people will always understand those two companies better than we do. We have the reverse of an edge, and we're not looking for that.
Now he's going to say, isn't the same thing true in IBM?
I don't think it is. I think IBM is easier to understand.
The chances of being way wrong in IBM are probably less, at least for us, than being way wrong with Google or Apple. That doesn't mean that the latter two companies aren't going to do, say, far better than IBM. We wouldn't have predicted what would happen with Apple 10 years ago. It's very hard for me to predict what will happen within the next 10 years. There's certainly, you know, they've come up with these brilliant products. There are other people trying to come up with brilliant products. I just don't know how to evaluate the people that are out there working either in big companies or in garages that are trying to think of something that will change the world the way they have changed it in recent years.
What do we know about computer science?
There's no reply.
Gary.
Politics sometimes affects your businesses. Recently, we've seen some coal plant closings, turned down of an XL pipeline, all of which seem to have potential effect on BNSF revenues. Can you talk about how you manage that risk or what the impact might be of some of those political issues?
Yeah, BNSF runs their own business very much. I went down to Fort Worth once after we bought it a few years ago, and I haven't been there since. I probably talked to Matt on the phone, I don't know, once every three months or something of the sort. There's no question that railroads, utilities, insurance companies are all very much affected by the political process. Fortunately, I think in the railroad industry, we've got economics on our side. Economics usually win out. I mean, we can move a ton of product 500 mi on 1 gal of diesel. That may be 3x or so as efficient as trucking. That may be why the railroads currently move, say, 42% of all inner city traffic. I don't think our percentage is going to go down, the railroad industry as a whole, no matter what the politics may be.
It's just too compelling to move heavy traffic long distances over steel rail. In terms of congestion, in terms of emissions, all kinds of reasons. We've got a wonderful product. There will always be struggles in the political arena between competitors and railroads and customers and railroads. It's just the nature of the game. There'll be some of that in utilities too. Overall, I like our position in that. They do have to be involved in politics. The railroads, all four of the big railroads are going to be involved in the political process because people who would like to change some of the rules, either as customers or competitors, are going to be in politics too. Things will get decided in state capitals and more important in Washington of importance. They will have lobbyists and they'll play a political game and their opponents will. I like our position.
It would be very dumb for the country to do anything that discouraged the railroad industry from spending the kind of capital that will need to be spent to take care of the transportation needs of this country in the future. If you think about the money that will have to be spent on highways and the costs involved in there and the congestion problems, the emissions problems and everything, the country has a strong interest in the railroad industry having every incentive to invest. The railroad industry pays its own way. We'll spend $3.9 billion this year. A lot of it will go to improve our present system an awful lot. Some will go toward expansion of a type. The country will be better off on that. The federal government will not write a check for it. Charlie?
It's in the nature of things that there are waves of good breaks and bad breaks. Burlington Northern was enormously helped when you could double the container carriage by making the tunnels a little higher and the bridges a little stronger. They were enormously helped when they found all this oil in North Dakota and there weren't any pipelines. They will get some bad breaks too occasionally where somebody will take away a little freight. Averaged out, it's a terrific business with terrific management. I don't think our main problems are political at all.
No, the railroad industry.
For one thing, we're headed by a prominent Democrat.
The railroad industry was, that may not be a help, Charlie. Right after World War II, there was a lot of passenger traffic then, but the railroad industry, I think, had as many as 1,700,000 employees in the U.S. Here we are today, there's less than 200,000. Railroads have become so much more efficient. It's just by a huge factor. It's a fundamentally very good way to move heavy stuff a long distance. It's hard to conceive of anything. It's nice maybe to have barge traffic, but you only have a few rivers that are going to lend themselves to real volume along that line. You have air, pipeline, vehicles, planes, trains. Trains are pretty darn good. Okay. S tation Four.
Section four does not have any questions at this time.
Thank you.
That's a first.
Carol, have you run out?
Unprepared as I am, this is a question about the table on the first page of the annual letter, which shows the relative performance of the S&P 500 index against Berkshire 's book value. This is an unfair apples-to-oranges presentation. An investor in the S&P 500 index can easily earn the returns shown for the S&P, but an investor in Berkshire will not earn the returns implied by the company's book value figure shown. Instead, he or she will earn returns over any given period that depend on the market's assessment, that is, the price-to-book value ratio. We've seen that go down in the last few years. A fairer comparison would be against the annual percentage change in the book value per share of the S&P 500 with dividends included. Wouldn't your shareholders be better served by better information?
You can make the calculation two different ways as alternatives to what we do. You could have the market value of the S&P, which is in there with dividends added back, versus the market value of Berkshire Hathaway. Berkshire would show up better on that table than it does in the table I present. In other words, our advantage over the S&P would be larger if calculated that way because we started at a discount from book value and we ended up at a premium. It would bounce around during the years, but overall, our gain would be probably at least, it'd be about 35% or so higher in aggregate over the time than shown by the book value gain, which is a lot of dollars when you make the calculation.
You could also show the book value of the S&P versus the book value of Berkshire , but that figure will be a wash pretty much because if you take the S&P's price-to-book value, if that maintains the ratio at the beginning to the same ratio at the end, it's a wash as to how that calculation comes out. I think we could show, we could make a calculation that was more favorable to Berkshire . I don't think what the person suggests there would result in a calculation that's less favorable to Berkshire .
Long term, the stock value has tracked fairly well.
The book value.
It has overperformed book value.
Yes, the whole time.
Which is the point this question seems to be.
You've been criticized for making yourself look worse.
Yeah.
It's all right. You can bear it.
I've done the other too.
Cliff?
Thank you. When in studying the collapse of AIG, one of the things that we learned is that there were parts of the company which understood there were certain financial risks in the market and were lowering their exposure. While at the same time, there were other parts of AIG which were actually increasing their exposure to the same risk. In terms of enterprise risk management at Berkshire , how do you share information across units to make sure that the same mistakes aren't made?
I didn't totally get that. Did you get that, Charlie?
He was talking about how do we share information across units.
Oh.
If there's any sharing, they're doing it. We're not.
Yeah, yeah, we don't have any. We're the most uncoordinated pair of individuals operating both in sports or at the executive level. There are certainly some people at Berkshire that have some contact with other people at Berkshire , but there's nothing in the way of an organized way of doing that. I mean, Ted and Tony and Ajit are friends and Don Worcester, and they see each other sometimes. I'm sure they talk insurance. We don't make any attempt. If somebody goes in to get a quote from Gen Re and gets a quote from Ajit, there's no, we have no system that prevents or that coordinates them, our two units, to give the same quote or anything of the sort. We want our businesses to run very autonomously, and we want the managers of those businesses to feel like they're their own business.
That's enormously important at Berkshire . We don't tell the people at Clayton Homes to buy their carpet from Shaw or to buy their paint from Benjamin Moore. We just don't do that. You can say that's kind of silly, but any gains we would get from doing that by selling incremental units, I think, would be far offset by the change in the feeling of the manager as to whether they're really running their own business. We hand people billions of dollars, and they hand us stock certificates. They have been running those businesses for decades, in many cases. We want them to feel the same way the next day when they've got the money and we've got the stock certificates as the day before when they had the stock certificates and we had the money.
The moment we start telling them how to change the way they operate or to coordinate with this guy or get this person's approval or anything like that, that just erodes that advantage, which we think is very substantial, that they have this proprietary feeling about their business. Have I answered that, Charlie?
Yeah, we're trying to fail at what you want us to do as we say that.
I'll have to think about that a little.
Station Five.
Hello, Charlie and Warren.
I'm Warren, yeah.
Yes. My name is Richard Cooper, and I'm from Honor, Michigan. I'm a professional forester. Trees are one of America's greatest resources. It seems that a well-run forest products firm would fit well with Berkshire' s holdings. You've got the transportation system to move the product, the construction firms to use the product, furniture companies, home builders, and you've got insurance companies to cover the insurance end of the holdings. Have you given any thought to getting a forest products firm?
Your question touches on the answer we just gave. We would not really consider the other activities that Berkshire has in determining whether we would get into forest products. We've looked at forest products companies, but we don't think about them in terms of how they may divert their product to some other subsidiaries of ours or how other subsidiaries might benefit from selling them something. To date, we've looked at several. To date, we've really never found any that met our tests for returns against purchase price. It's a business that's easy or reasonably easy to understand, in terms of the economics and its permanence and all of that sort of thing. The math has escaped us in terms of being compelling. Charlie?
A lot of forest products companies convert themselves into flow-through partnerships of some kind so they don't pay normal full corporate income taxes the way we do. Berkshire is actually organized so that we'd be at a disadvantage. We'd be at a disadvantage in bidding for forests.
Yeah, we're at a disadvantage in terms of any kind of activity that people have managed to convert in the past through organizations. Particularly, we'll take REITs, Real Estate Investment Trusts. You know, they have eliminated one tax in their structure that we would bear. Like Charlie says, you have firms like Plum Creek Timber, and those sorts of operations where they have eliminated the federal income tax. We don't have any structure like that. Just going in, we have this structural disadvantage that is really quite significant. Becky?
This question comes from Scott Bondurant, who is from Chicago, Illinois, and he's a shareholder. He asks, "Can you please elaborate your views on risk? You clearly aren't a fan of relying on statistical probabilities, and you highlight the need for $20 billion in cash to feel comfortable. Why is that the magic number, and has it changed over time?
It isn't the magic number, and there is no magic number. I would get very worried about somebody that walked in every morning and told us precisely how many dollars of cash we needed to be, you know, secured at three sigma or something like that. Charlie and I have had a lot of, we saw a lot of problems develop in an organization that expressed their risks in sigma. We even argued sometimes with the appropriateness of how they calculated their risk.
It was truly horrible.
Yeah. They were a lot smarter than we were. That's what it is. It's depressing. We both have the same band of mind whereby we think about worst cases all the time. We add on a big margin of safety, and we don't want to go back to go. I enjoy tossing those papers in the other room, but I don't want to do it for a living again. We undoubtedly build in layers of safety that others might regard as foolish. We've got 600,000 shareholders, and we've got members of my family that have 80% or 90% of their net worth in the company. I'm just not interested in explaining to them that we went broke because there was a 0.01% chance that we would go broke, and the remaining probability was filled by the chance of doubling our money.
I decided that that was just a good gamble to take. We're not going to do that. It doesn't mean that much. We are never going to risk what we have and need for what we don't have and don't need. We'll still find things to do where we can make money, but we don't have to stretch to do it. It's my job, and Charlie thinks the same way. We don't have to talk about it much, but it's our job to figure out what can really go wrong with this place. We've seen September 11th, and we've seen September of 2008, and we'll see other things of a different nature, but similar impact in the future. We not only want to sleep well those nights, we want to be thinking about things to do with some excess money we might have around.
If you're calibrating it in some mathematical way, I would say it's really dangerous. I could give you a couple of examples on that, but unfortunately, I've learned about them on a confidential basis. Some really great organizations have had dozens of people with advanced mathematical training and thinking about it daily, making computations. They don't really get at the problem. It's at the top of the mind always around Berkshire, and your returns in 99 years out of 100 will probably be penalized by us being excessively conservative, and one year out of 100 we'll survive when some other people won't. Charlie?
Yeah, how do these super smart people with all these degrees and higher mathematics end up doing these dumb things?
I think it's explainable by the old proverb that to a man with a hammer, every problem looks pretty much like a nail. They've learned these techniques, and they just twist the problem so they fit the solution, which is not the way to do it.
They have a lack of understanding of history. I would say that one of the things in 1962, when I set up our office at Kiewit Plaza, where we still are, it's on a different floor, I put seven items on the wall. Our art budget was $7, and I went down to the library, and for $1 each, I made photocopies of the pages from financial history. One of those cases, for example, was in May of 1901 when the Northern Pacific Corner occurred.
It's kind of interesting in terms of being in Omaha because Harriman was trying to get control of the Northern Pacific, and James J. Hill was trying to get control of the Northern Pacific. Unbeknownst to each other, they both bought more than 50% of the stock. Now, when two people buy more than 50% of the stock each, and they both really want it, they're not just going to resell it. Interesting things happen.
To the shorts.
In that paper of May 1901, the whole rest of the market was totally collapsing because Northern Pacific went from $170 a share to $1,000 a share in one day, trading for cash because the shorts needed it. There was a little item at the top of that paper, which we still have at the office, where a brewer in Troy, New York, committed suicide by diving into a vat of hot beer because he'd gotten a margin call. To me, the lesson is that that fellow probably understood sigmas and everything and knew how impossible it was that in one day, a stock could go from $170 to $1,000 to cause margin calls on everything else. He ended up in the vat of hot beer, and I've never wanted to end up in the vat of hot beer.
Those seven days that I put up on the wall, life in financial markets has got no relation to sigmas. I mean, if everybody that operated in financial markets had never had any concept of standard errors and so on, they would be a lot better off. Don't you think so, Charlie?
Well, sure.
Here, have some crud.
It's created a lot of false confidence. Now it has gone away. As I said earlier, the business schools have improved. So has risk control on Wall Street. They now have taken the Gaussian curve, and they just changed it.
Throw it away.
They threw it away. They just made a different shape than Gauss did, and it's a better curve now, even though it's less precise.
They talk about fat tails, but they still don't know how fat to make them. I have no idea.
They knew that they learned through painfully.
They learned the other was wrong.
They weren't fat enough.
Yeah, they learned the other was wrong, but they don't know what's right.
We always knew that there were fat tails. Warren and I in the Solomon meetings would look over at one another and roll our eyes when the risk control people were talking.
Okay, Jay?
This question is on Swiss Re. Berkshire's quota share treaty with Swiss Re covering 20% of Swiss Re's property casualty risk ends in 2012. Does Berkshire plan to replace that premium volume through another transaction?
We always hope to get more good volume, but what we do has no relationship to the expiration of that contract. That contract was a five-year contract. It's a big contract, billions of dollars a year. The fact that that expires and our premium volume went down by multiple billions does not cause us to do one thing differently than we would do otherwise. We've got the capacity to write billions and billions of business. We would love to do it if we were expanding the Swiss Re contract, and we don't want to write any dumb business when we lose that contract. It's a non-event in terms of future strategy. It's not a non-event in terms of losing some business that we like, but it's a non-event in terms of any future strategy. We regard every decision as independent.
If money comes in, that doesn't cause us to want to think about doing something today that we weren't thinking about doing the day before. We just don't operate that way. We'll have things that come along that are terrific, and that doesn't mean that the next day we don't want to look for something additionally that's terrific. Every decision is sort of independent.
I don't think there's another large insurance operation in the world that is more cheerful about losing volume than we are. It doesn't make sense.
We don't mind.
The business has to shrink, we let it shrink.
Yeah, yeah, we don't measure ourselves in any way.
By size.
By size, except by the growth in value over time.
Okay. S tation Six.
Wendy Wasserman from Boston. Warren, best wishes on a speedy and complete recovery. My question is regarding Fannie Mae and Freddie Mac. You wrote that you expected the housing model to be improved by now, but that it hasn't improved. You spoke about demographics and the housing-dependent parts of the business. You did not, however, speak about Fannie and Freddie. Fannie Mae, the Federal Reserve, and Freddie Mac are the three largest financial institutions. Then comes JPMorgan and Bank of America. Fannie and Freddie have been in conservatorship for three and a half years, the longest. Initially, they had combined assets of $1.6 trillion, each of Lehman Brothers. Now they have $5.5 trillion, adding $4 trillion of off-balance sheet items and government mortgage modification programs.
They are public companies with operating losses, a negative net worth, owned by the government, acting at times with the power of the government, financed with a blank check from Treasury and taxpayers, who are usually also homeowners. Most near-bankrupt companies shed assets. These two added assets and liabilities. AIG and General Motors have emerged. These two have not. Contrary to popular belief, the securities law did not need the biggest rewriting since the Great Depression. The 1933 and 1934 Securities Act work. Sarbanes-Oxley works. Fannie and Freddie and the 1938 and 1968 governing laws do not. No matter how much they have contributed to U.S. housing standards, what is the solution? How many years can they stay in conservatorship? Can the Resolution Trust Authority be used? Are they truly too big to fail? What role will banks like Wells Fargo and U.S.
Bancorp, who are leading mortgage players, play now that they are well-capitalized? What happens to the MBS market and the mayor's system? How can housing improve even with better demographics without an answer from Fannie and Freddie?
I got through college answering fewer questions than that. I would say that the overall tone of your remark, which indicates that you think that Freddie and Fannie are a mess, is probably justified. Of course, the reason they're a mess is we haven't figured out yet, or we can't get agreement on what the best structure is to have in this country going forward to generally finance mortgages. There's no question that a government guarantee program brings down the overall cost of financing mortgages over time. We had one, of course, we've had several, but we had one in Fannie and Freddie that went wild when we introduced the profit motive into the mix of two institutions that really were half trying to serve a housing mission and half trying to serve a profit mission. Gradually, the profit mission sort of overcame the housing mission.
Congress hasn't sorted that out yet. It's a huge item, obviously. There are roughly 50 million residential mortgages in the United States, you know, and they total $10 trillion or so. It's important that you have a market that does minimize costs for borrowers who have adequate down payments and adequate income and all of that. I think for a while, we were going in that direction with Fannie and Freddie, and then they left the tracks. That's going to get thought out. How long they can stay in conservatorship? They can stay there a long time. They will stay there, in my view, until politically we get some kind of a resolution as to a future policy that both parties can go along with. It looks to me like that's a ways off. Charlie?
Of course, the interesting thing is that Canada, right to the north, kept a more responsible real estate lending system, and they had almost no trouble. We departed completely from sanity and decency and morality in mortgage lending in the United States, and the government of the United States participated in the folly. They did it in a big way. It was wrong not to step on a boom that was obviously so full of fraud and folly. I sometimes say that Alan Greenspan overdosed on Ayn Rand when he was young. He thought if an axe murder happened in a free market, it was probably all for the best. There was a lot of disgraceful behavior we have to regret in terms of what happened, and it caused enormous damage. In a modest little country like Spain, another one called Ireland, you had something somewhat similar.
People just allowed craziness to go unchecked. That was a big mistake. Greenspan was really wrong. It's the duty of the government to step on crazy crooked booms and to prevent them by keeping sound policies as Canada did. You put your finger on a very disgraceful episode in United States history. Once we were into it, I think we had no option but to do exactly as the government did, which was to nationalize Fannie Mae and Freddie and try and make them behave better in the future. That's what's happened.
It's going to be a long runoff.
Yeah.
And Congress,
It wasn't just a fan. Congress did their share in that too, but it was.
Everybody did.
Everybody did. I mean, it—
By the way, we didn't.
Charlie, we resigned from the Savings and Loan League a good many years ago just because we thought such nutty stuff was going on.
It was disgraceful.
Yeah. Charlie got lectured for it too.
Yes, I did.
They made him go to school to learn not to loan money. I think one of the regulators said, what kind of people do you lend money to? I think Charlie said, the one thing we do is we don't lend money to people like you. For some reason, we had regulatory problems after that.
I was not popular because he said, you're using the government's credit and our savings and loan, and therefore you have to make a lot of dumb loans because we're telling you to. I said, we're not using the government's credit as a condition of one of our mergers. Berkshire Hathaway agreed you'd never have trouble with our savings and loan. We're paying you insurance premiums and you're using our credit. This did not make me popular.
No.
He was a floor-inflamed alcoholic. I remember it very well.
I do too.
We left the savings and loan business.
We have more problems when Charlie wins an argument.
It is a lot of fun.
Well.
Okay. Andrew?
Okay, here's the question. Please tell us more about your experience this past year with Todd Combs and Ted Weschler. What did they do well? Did they make any mistakes? Please discuss how you compensate them a bit more. In an interview, you said that Todd Combs was well compensated for the performance of his stock picks last year. Should we be worried about a short-term horizon for compensation? How do you ensure that Todd and Ted don't chase high-flying stocks for the sake of compensation?
We have always been much more concerned about how our record is achieved than the precise record itself. With both Todd and Ted, Charlie and I were struck by not only a good record, but intellectual integrity, qualities of character, a real commitment to Berkshire , a lifelong type commitment. We have seen hundreds and hundreds of good records in our lifetimes. We have not seen very many people we want to have join Berkshire. These two are perfect. We pay them each a salary of $1 million a year, and we give them 10% of the amount by which their portfolios beat the S&P. If they beat the S&P by 10 points, they get one point, for example, and we get nine points. We do it on a three-year rolling basis so that you do not get the seesaw effect.
Each one gets paid 80% based on their own efforts and 20% based on the other person's so that they have every incentive to operate in a collaborative way rather than sit there jealously guarding their own ideas and hoping the other guy does not do very well. I do not think we could have a better structure. It is the same structure on pay basically that we had with Lou Simpson for 20- some years, except he did not have a partner. To the extent that they employ people underneath them, that comes out of their performance record. It has worked far better than either Charlie and I had hoped, and we had pretty high hopes. We had $1.75 billion with each of them at year end, but we have added another $1 billion each on March 31st, 2023. They are running $2.75 billion apiece.
I do not look at what they do. I see it eventually when I look at a GEICO portfolio at the end of the month or something of the sort. They operate through their own brokers. I have told them that the only thing I want to know is if they are getting into a new name, I just want to know the name so that I am certain that it is not something that I am familiar with some inside information on or something so that there is no inadvertent appearance that we would be, or that their purchase would have been influenced by something that I knew about. That has never come up. They cannot, if there is something we would have to file a 13D on, they would have to check with you. Basically, none of that is going to happen. Never happened with Lou either.
They operate in different stocks. They've got a much bigger universe than I have because they're working with $2.75 billion instead of $150 billion. They can look at a lot more things. They cheerfully pitched in for other duties that they don't really get compensated directly on, but that are helpful to Berkshire . You know, they will do a great job for Berkshire when they're running a whole lot more money than they are now. Ted only joined us this year. Todd did substantially better than the S&P last year. He racked up a big performance gain, a third of which was paid to him in the first year, but the two years is deferred and he could lose that back if he were to underperform. I think we've got a good system and terrific people, Charlie.
What's interesting about it is that at least 90% of the investment- management business of the United States. would starve to death on our formula. I think these people will do pretty well with it. Not only that, they'll be terrific for the long pull for Berkshire . They're the kind of people we like having around headquarters.
Yeah, I hope they get into those 400 taxpayers I mentioned. If they do, even under the present law, they'll be paying taxes in the mid-30s. They are doing what they did before, which is they ran hedge funds, but they're going to work every day thinking about the same things, and they get taxed at 35%+ . If they were running hedge funds, they get taxed at 15%. For all of those in the audience who can reconcile that, there'll be a free Dilly Bar.
I think each of them could earn more money in a different format, but with a less desirable lifestyle.
Yeah, we have a little free Coke machine at our office.
I get to hang around with a fellow eccentric of the same type in Warren.
Okay, Gary, before we go too far with this.
My next question is on GEICO, a little bit more detailed question. In the fourth quarter of last year, the GEICO combined ratio went up over 100% for the first time since, I think, some quarter in 2001. I realize a quarter doesn't make a trend, but something unusual happened in the quarter. Can you tell us more about that?
The biggest thing that happened was a decision, or maybe it was a couple of decisions. Tony Nicely could elaborate more on them, but they involved Florida and some interpretation down there, I think, of the PIP coverage that caused us to set up some extra reserves that they were not extra. I mean, they looked called for by what was happening in Florida at that time, but it was a one-time sort of arrangement. In the first quarter of this year, on a comparable basis, as you've probably seen in our Q, we wrote it about 91. The basic business is good. That Florida decision cost us significant money because it changed our potential liability for a bunch of claims already outstanding. My guess is you're more familiar with the exact terms of that than I am, but that is the bottom line answer on it.
GEICO, every metric for GEICO that I've seen this year in terms of retention, combined ratio on seasoned business versus new, all of that sort of thing is quite consistent with our general record. GEICO is a terrific asset for Berkshire . I mean, it is worth a lot of money now. It will be worth a lot more money in the future. Station Seven.
Hello, Charlie and Warren. My name is Stuart Kaye from Matarin Capital Management in Stamford, Connecticut. You mentioned earlier today that one of Burlington Northern Santa Fe's competitive advantages is its environmentally friendly business relative to transportation alternatives. When evaluating other investment opportunities, what financial statement or other publicly available data do you use to gauge whether a company is both environmentally responsible and a good investment?
In terms of what's a good investment, we try to look at every aspect, everything we can that will tell us how the world is going to develop for both that industry and the company in the future. Sometimes we feel a lot of confidence about that. If we're looking at Coca-Cola, we think we know a lot about how the world will look for the Coca-Cola Company over the next five or 10 or 20 years. If we're looking at some retail business or something, we would not have the same degree of conviction at all.
I mentioned the environmentally friendly aspect of it, and it just requires less in the way of the world's resources to move the goods on a steel rail in large containers with only a couple of people involved with 120 cars that train a mile long than it does if you're working with trucks that have many, many, many more people and much more in the way of fuel to deliver the same kind of tonnage. There's no magazine we go to or books we go to or anything like that. We just look at the dynamics of the specific industry and company. Charlie?
Well.
Warren, even though he's an unseasoned young man, was able to figure out that if you used a lot less fuel per tonne of freight, you were causing fewer undesired particles to go into the air.
That's about the limit of my capabilities, folks. Okay, Station Eight. We've gotten into the, we've covered 36 questions from the two panels. We're now going to keep going around the audience as long as the questions last. We're going to give you more than your share at this point.
Good afternoon, Warren and Charlie up here.
Yeah, I see you.
All right, very good. John Norwood from West Moyn, Iowa. We spent a lot of time today talking about two out of the three things you fellas said you spent a lot of time thinking about: one's allocating capital, one's managing risk. We've had just one question related to motivating your people and tied into executive compensation. That's what I'm interested in learning more about: executive compensation, how you motivate Berkshire managers, financial versus non-financial incentives. Can you speak more about that? Thanks.
Yeah. Obviously, Charlie and I have thought a few times about why do we do what we do when we don't need the money at all? We jump out of bed excited about what we're going to do every day. Why is that the case? We get the opportunity to paint our own painting every day. We love painting that painting. It's a painting that'll never be finished. If we had somebody over us that was saying, why don't you use more red paint than blue paint, and we had all the money in the world, we might tell them what they could do with the paintbrush. We get to paint our own painting. Ours overlap. We have more fun doing it together than we would have doing it singly because it is more fun to do it with people around you that are pleasant and interesting to be around.
We also like applause. If that works with us, we say to ourselves, that was not abrasive. If that works for us, why shouldn't it work for a bunch of other people who have long been doing what they like to do and now, in many cases, have all the money they possibly need, but still, they may have to sell us their business for one reason or another, connect with family or taxes, who knows what else. They really like what they've been doing. That's the reason, probably the reason they've been so good at it, part of the reason they've been so good at it. We give them the paintbrush, let them keep the paintbrush, and we don't go around and tell them to use more red paint than blue paint or something of the sort.
We applaud and we try to compensate them fairly because though they aren't primarily doing it for the money in many cases, nobody likes to be taken advantage of. That has not been a big problem at Berkshire . We have not had compensation problems over time. If you think about it over 40- odd years, the times when compensation has been of importance are just practically nil. We don't, we'll just take that we talked about the compensation of two investment people. Those people are making below hedge fund standards, below private equity standards, and having a less favorable tax treatment. They'll still make a lot of money. I mean, huge amounts of money. I hope that they are having a good time doing what they're doing. I think that's why they're here.
I think they'll enjoy it a lot more over the years than going around to a bunch of people explaining why they're worth two and 20 , even, you know, in the years that aren't so good and trying to attract new money when other people are making bigger promises someplace else. It is just a different way to live your life. We want to have our managers enjoying their lives and enjoying their business lives. We get rid of some of the things they don't like, a lot of them. I was with a fellow the other day that had come from England. He has plenty of business problems to work on, and he's spending a significant part of his time talking to investors, which doesn't do any good. I would be talking to customers or, you know, employees or something.
I think a number of managers may have to spend time talking to lawyers or talking to bankers or talking to investors. What they really like to do is run their businesses. We give them the best opportunity to do that. I can't put passion into somebody about their jobs, but I can certainly create a structure that will take that passion away from them. Berkshire is a negative art in that way. We focus on not messing up something that's already good. That is my job. I think the person that follows me will have a very similar job. We have a unique, we have a bunch of managers nobody else can hire. How many companies of size can you say that about, you know, around the country these days? I think we will retain that advantage for many, many decades to come. It works.
People know that it works within the company. It is self-reinforcing. There is nothing like getting proof that what you have designed works to cause your desire to perpetuate it and to build upon it. Charlie?
We don't have any standard formulas like they have in some big companies where X% is on diversity, Y% is on something else, and Z% is on something else. Everybody is putting all this stuff through a big human resources department, and every incentive arrangement with a key executive is different from every other. We can't help you with a standard formula. We don't have one.
Yeah, our businesses are also different. It'd be crazy to try and have some master arrangement that involved return on capital. There are some businesses that don't use any capital in our companies or operating margins. We could hire consultants in compensation to come in and they'd want to.
We never have.
No, we never will. They would want to please the people they were working for and get referred elsewhere. I will guarantee you that you go into many corporations. If you've got a comp committee, it meets periodically and the Human Relations VP comes in and probably suggests a compensation consultant to take. Who does the Human Relations VP want to, whose approval do they want? The CEO's. Whose approval does the compensation consultant want? They want to get recommended elsewhere by the CEO and the Human Relations VP. What kind of assistant do you get? You get what I call ratchet, ratchet, and bingo. We're not going to have any of that at Berkshire . Like I say, it's worked very well. We may have people make lots of money at Berkshire .
We've got numbers in eight figures when, you know, a page and a half or so, I saw it the other day that would be at $1 million or over. We'll have more, but it does relate to logical measures of performance in practically all cases. The amount of time we spend on it is just, you know, I am the compensation committee for 60 or 70 people, and I'm not overworked. Anything further on that, Charlie?
In past years, I've made the remark that about compensation consultants, that prostitution would be a step up for them.
Charlie’s also in charge of diplomacy at Berkshire . We told you we get to everybody in terms of offending them before the day was over. Didn’t even take till 3:30 P.M. Station Nine.
Good afternoon, gentlemen. Arjun McCatherman, Arlington, Virginia. I have a question for you. What will it take to get America growing by 4% again?
Charlie, that's too easy for me. You take it.
A lot.
Doing it a lot. It's not going to be easy.
No, but if population grows 1% a year and GDP in real terms grows 2.5% a year, by the standards of 2,000 or 5,000 years, that would be remarkable. I mean, it would result in a quadrupling of real GDP per capita every century. It's nice to have 4% in real terms, but 2.5% may be slow in getting us out from the slump that we entered into a few years ago, but it's a really remarkable rate of growth for a country that already enjoys a very high standard of living. It's a remarkable rate of growth for a country, a country that has 1% a year gain in population. It is huge over one person's lifetime. I've used this a lot of times, but in my lifetime, the real GDP per capita has increased six for one.
There's nowhere near 4% per annum.
No, it's staggering. It's staggering. We have $48,000 or thereabouts of GDP per capita in the U.S. We are unbelievably rich, you know, but an awful lot of people are not feeling that way, and in many cases, for good reason. We've got a tremendous country to work for, I mean, to work with. It's got all kinds of strengths. It has this huge abundance that if my parents back in 1930, if you'd told my mother and father that when I was 81 years old, that I would be living in a country that had six times the per capita output of their day, they would have thought, you know, that this would be a utopia. It hasn't been bad, I might add. Our country is not a mess. You know, our politics may be a mess, but the output is, you know, it's terrific.
Charlie, if you had to guess at the real growth rate per capita over the next 20 years in the U.S., what do you think it would be?
That's after inflation.
No, no, this is just real.
Right, yeah, real. That's what I mean.
We mean after taking inflation out of it.
Yeah.
If God would make the guarantee, I would settle for a very low figure. I think a very mature economy with a lot of social safety net and a lot of competition from new nations rising, I think 1% per capita in real growth would be a sensational result.
Yeah, which in 20 years means people would be living close to 25% better on average.
Yeah, yeah.
That's not bad.
Absolutely. I think we get it.
That's the next generation. In one generation, they provide.
When you get your expectations too high, when you think that 4% is what the world ought to provide you, you're asking for trouble.
It won't do it.
That's what happened in the housing boom. People got these foolish dreams, and then they just started doing foolish things to try and reach unattainable objectives.
If you had the 1%, you would be talking about each generation living something over 20% better than their parents did.
From this base, it would be a sensational result.
We'll probably get it, in my view, but it won't come in even increments. This system still works. Incidentally, you've actually seen, even after the incredible crash in effect that we had in the fall of 2008, you've seen an enormous amount of resilience here. Of course, you compare it with Europe, and it looks particularly strong.
Yes, but the resilience has been better for the businesses than it has been for the employment situation, which is too bad.
Yeah, business has done extraordinarily well. You know, business profits as a percentage of GDP were right at the height last year. Of course, our own were. I mean, that produces a lot of strains on the political system. We've used enough on that, so let's go to Station 10.
Hi Warren, Arthur Lewis from Denver, Colorado, new home of Peyton Manning. My question is.
It's also the home of Johns Manville.
My question is, with the election coming up, have you thought about making a donation to a Super PAC to try to protect a competitive advantage?
No, I won't. I wish Citizens United never happened. It's very tempting. I will hear this argument put forth to me. People will say, you know, we don't believe in it either, but they're doing it on the other side. You have hundreds of millions pouring in on the other side, and you're going to tie your hands behind your back just over principle. I think the whole idea of Super PACs is wrong. I think the idea of huge money by relatively few people influencing politics, I think we've got enough of a push toward a plutocracy from a lot of other factors that we don't need to throw it into the voting process. I might say that, I'll say this for Sheldon Adelson, who was, you know, he and his wife, I think, probably put $12 million or something like that.
He says this, and I believe him entirely. He says the same thing. He thinks the system is wrong, but he says that's the way the system is. He has to play or other people will play, and he won't be. I can understand that, but I don't want to do it. I just think that you've got to take a stand someplace. The idea that I should toss $10 million into some Super PAC, which is going to spend its whole time kind of misleading people about the opponent's behavior or record, I don't want to see democracy go in that direction. Charlie?
I am ordinarily so negative, and I am extremely negative about the nature of our politics with both parties doing the gerrymandering and requiring this unified thought so that the crazies on each side get all this power. I remember when we did the Marshall Plan with bipartisan support. That's more my kind of a world. I don't like it. That said, I think we're lucky to have two candidates as good as we have. Considering the system, I think we've done pretty well this year.
How would you feel about contributing to a Super PAC if the other side had way more going to their Super PACs?
There are certain subjects where I would give money to a Super PAC if I thought it would work. If I thought I could really reduce legalized gambling in the U.S. by a major amount, I would be willing to spend some money to get it done. I think it does us no good. To the extent we have allowed our securities markets to be more like gambling casinos, I think that's a dumb outcome too.
Yeah. If you got a Super PAC out there, call on Charlie, not me.
11.
Glenn Tongue, T2 Partners, shareholder from New York. In an interview with Becky yesterday, Mr. Munger commented that in the old days, the vast majority of Berkshire 's value was embedded in the investment portfolio, which is presumably worth around book value. Today, the majority is in the controlled businesses, which we believe are worth a substantial premium to book. In light of this, Berkshire Hathaway's intrinsic value as a multiple of book value should be increasing over time. Yet Berkshire 's price to book value has been declining. I'm trying to understand this. Since the beginning of the year, Berkshire Hathaway's investment portfolio, I'm sorry, since the beginning of last year, Berkshire 's investment portfolio has increased in value by $20 billion and you acquired Lubrizol. The controlled businesses are going gangbusters. Yet the stock price hasn't budged. Is Mr. Market simply in one of his manic moods?
Charlie?
I'd say no, but I'd say it's in the nature of things that the market is not going to do exactly what you want when you want it. I think over time, Mr. Market will treat the Berkshire Hathaway shareholders fine, and I wouldn't worry too much about what happens over this six months or this 12 months. I don't think you're really all that welcome in this room if the short-term orientation is what turns you on.
I think you'd agree, though, that probably Berkshire is somewhat cheaper relative to its price than it was a year ago.
Yes, absolutely. If that's your test, should you feel better about the margin of safety in Berkshire ? Yes, it's fine.
Okay, Station One.
Good afternoon. This is Roberta Cole from the Twin Cities of Minnesota. Based on your earlier comments you made this morning, we understand you will buy back shares to help increase share value. Our confusion and appreciate clarification arises to why you are unwilling to distribute a dividend on a sporadic basis when the stock is too expensive to buy back and you have the excess cash so that you could do that, particularly in a low interest rate environment. We look forward to a clarification. Thank you.
By and large, we feel, perhaps unjustifiably, but so far justified, that we can create more than a dollar of present value by investing. Sometimes if the stock is cheap, we can create more than a dollar of present value by simply repurchasing shares. Even if that option isn't available, we feel that for every dollar we retain, overall, we can turn that into greater than a dollar of present value. For 47 years, that's worked. Every dollar retained has turned into more than a dollar of value. If somebody wanted to create their own income stream out of it, they were much better off selling a little bit of stock every year than they were by getting a dividend out of it.
They would have more money working per share in Berkshire if they sold off 2% of their holdings than if we actually paid them out a 2% dividend. The math has been compelling to this point. The question is whether we can keep doing that in the future. At any point in our history, if we'd paid out dividends, and I paid out $0.10 a share back in the 1960s, which was a big mistake. We won't repeat that. If we'd paid out dividends, our shareholders' net would be worth less money than they are by having left it in. I think that will continue to be the case, but who knows? Charlie?
I think the dividends will come in due course because eventually we'll find it difficult to multiply the rabbits. We hope that that evil day is delayed.
Events of the last few years are encouraging in that respect.
Yes, absolutely. Yeah, particularly encouraging.
Yeah, I would feel better about, the last few years have been better than we anticipated in terms of being able to put money to work in ways that we think we created more than a dollar of present value at the time we did it.
You know, MidAmerica may have very unusual opportunities in the next 10 or 15 years to employ an enormous amount of capital at a very reasonable return.
Yeah, perhaps $100 billion.
What?
Perhaps $100 billion.
Perhaps $100 billion. You can see why that doesn't make us too excited about dividends.
We'll think about it when we're older.
A lot older.
Number two.
Hi, Warren and Charlie. This is Thomas Schultz from Germany. You once said that if you had just $1 million to invest now, you could achieve returns of 50% per year. Given what you know now, how would you be able to improve on the already spectacular performance of when you started out with your partnership?
We can't do with our present resources what we did once. There are a lot of things I can't do that I used to do better.
Yeah, you can confess to those, Charlie?
I think he may be driving at the point that have we learned things in managing since we were at that level where we could do even better with $1 million now than we could have done with $1 million then? I would say the answer to that is yes.
Wouldn't you?
Yeah, I think that's true.
Yeah.
There's enough craziness out there. If you have endless time and only a very small amount of money, I think you could find ways to do pretty well.
In the course of 50 or so years, we have probably learned more or been exposed to more that if we were back at the $1 million level, we would know more places to look, I think.
What's interesting about Berkshire, and many of you have been around for so long, you've actually seen it happen. Berkshire's record would have been terrible compared to the way it turned out if Warren hadn't kept learning, learning, learning all the way. I mean, each decade to make the record decent, he had to learn to do some things he didn't know how to do at the start of the decade. I think that's pretty much the human condition. Of course, he's getting old. I worry about him a lot.
I'll resist commenting. Okay. Station Three.
Hi, my name is Jeff Chen. I'm from San Francisco. I'm 26 and I run a software start-up out there. My question is about mistake minimization. I found that I've made a lot of mistakes in my business looking back. I want to know, besides thinking harder and learning from your own mistakes, what are the most effective techniques you've used to minimize the mistakes?
Yeah, we made mistakes. We'll make more mistakes. We think not so much, we think in terms of not exposing ourselves to any mistakes that could really hurt our ability to play tomorrow. We are always thinking about worst case situations. On the other hand, we have a natural instinct to do things big, both of us. We have to think about whether we're doing anything really big that could have really terrible consequences. I would say this, that A, I don't worry much about mistakes. The idea of learning from mistakes, the next mistake is something different. I do not sit around and think about my mistakes and think about things I'm going to do differently in the future or anything of the sort. I would say that you may get some advantage. I think I've learned something over the years.
I haven't learned more about a basic investment philosophy. I got that when I was 19 years old and I said that I think I've learned more about people over the years. I'll make mistakes with people. That's inevitable. I think I'll make more good judgments about people. I'll recognize the extraordinary ones better than I would have 40 or 50 years ago. I think that improves, but I don't think it improves by certainly any conscious sitting around and focusing on what mistake did I make with that person or this person. I just don't operate that way. Charlie?
Warren, I would argue that what you've done and what I've done to a lesser extent is to learn a lot from other people's mistakes. That is really a much more pleasant way to learn hard lessons. We have really worked at that over the years, partly because we find it so interesting, the great variety of human mistakes and their causes. I think this constant study of other people's disasters and other people's errors has helped us enormously. Don't you, Warren?
Oh yeah, that's true. In terms of reading of financial history and all that sort of thing, I've always been absolutely absorbed with reading about disasters. There's no question. I mean, when you look at the folly of humans, you know, I've focused on the folly in the financial area. There's all kinds of folly elsewhere, but just the financial area will give you plenty of material if you like to be a follower of folly. I do think that understanding, and that's what gave us some advantage over these people that had IQs of 180, you know, and could do things with math that we couldn't do. They just didn't have an understanding of how human beings behaved and what happens. 2008 was a good example of that too. We have been a student of other people's folly and it served us well.
As a Station Four, have we got a question yet?
John Boxters, Dartmouth, Massachusetts, which as you know is next door to New Bedford, a former home of Berkshire . My question is, how do you build barriers to entry, especially in industries which have few?
Industries which have?
Few barriers to entry. How do we, how do we build barriers?
Pretty tough.
Yeah, we sort of buy barriers. We don't build them.
Yeah, think about that because it's true. There are some industries that are just never going to have barriers to entry. In those industries, you better be running very fast because there are a lot of other people that are going to be running and looking at what you're doing and trying to figure out what your weakness is or what they can do a little bit better. You know, a great barrier to entry is something like this. If you gave me $10 billion, $20 billion, $30 billion and told me to go in and try and knock off the Coca-Cola Company with some new cola drink, I wouldn't have the faintest idea how to do it. I mean, there are billions of people around the world that have something in their mind about Coca-Cola, and you're not going to change that with $10 billion or $20 billion.
Yeah, our great brands we bought, we didn't create.
We didn't create them. No, we eat them, but we don't create them. Not so many years ago, you remember Richard Branson, he came to this country and he came up with something called Virgin Cola. They say that a brand is a promise. I'm not sure what promise he was trying to convey by that particular branding, but you haven't heard anything about that since. I don't know how many cola drinks there have been in the history. Don Keough would probably know, but there's been hundreds, I'm sure. Those are real barriers. It's hard to do. As Pfizer finds out with Lipitor, the time runs out and what was an absolute gold mine still is a pretty good mine, but it's not what it was by a long shot. We've got a number of businesses that have, well, nobody's going to build another railroad.
We have a competitor and we will have competitors in alternative methods of transportation and all of that. If you're buying something at a huge discount from replacement cost and it's an essential sort of activity, you certainly got a barrier to new competition. The UP is out there fighting for every bit of business every day, of course. Charlie?
Yeah, we have found in a long life that one competitor is frequently enough to ruin a business.
I did find that out. I started with a gas station out at 30th and Redick here in Omaha, and then we had a Phillips station next to Sinclair station, and you know, whatever he charged for gas was my price. I didn't have much choice. You don't like to be in a business like that. Number Five.
Hi, I'm Kyle Miller from Kansas City, Missouri, and I was wondering about the BYD electric car company and if with the new cars going on sale in the U.S., if that will hopefully increase the value of the company.
Charlie is our expert on BYD, and he will now carry forth.
The car market in China is a huge market, and they happen to be located in China. That's the main focus of BYD. I think the first cars they will try and bring here will be for fleets in California where we have environmental troubles and so on. There may be a market for electric cars with that. Of course, there are various subsidies that come to people who use electric cars. I have some relatives who commute into Washington, D.C., and they can only use the fast lane on the freeway if they buy a Prius, and that's been very helpful to Toyota. We'll see a lot more of that sort of thing. Generally speaking, I think BYD is an interesting company. I just stopped to think about it. Here's one of eight children of a peasant that becomes a famous engineering school professor.
Before he's reached 50 years, he's won the equivalent of China's Nobel Prize, and he has created a company which has 180,000 some employees, a land holding about the size of Macau, and a hundred and some million square feet of buildings. He's a very interesting start-up company.
What percentage of the cars do you think in 2030 will be electric?
Not many.
I shouldn't have.
I think society, it's like the wind power that's being subsidized. We should subsidize electric cars in various ways, as they do in Washington, D.C., by letting them use the fast lane on the freeway in order to get the technology going so that we can wean ourselves from oil more quickly. I think there will be more subsidies, and there will be more electric cars, but I'm not expecting a sudden revolution. Yeah. I drove the latest version of BYD's electric car. I was driven around the block Tuesday, and I was flabbergasted at how much improved that car was. It's simply amazing how fast people in China are learning to do what took us a long time to learn. The world is getting very much more competitive.
Okay, Area Six.
Good afternoon, Warren and Charlie. Jay Srinivasan from Mumbai, India, residing in Austin, Texas. I want to thank you for a great show again. Over the few years that I've been here, I've truly enjoyed hearing both of you speak and especially the ability to synthesize and clarify so many issues on important things like, you know, valuation or the philosophy of life, or sometimes even the trivial things, Warren, like you clarifying two years ago about your joke on Charlie Rose about Sophia Loren. They've all been extremely beneficial. My question is regarding some clarification around the insurance business and especially how you value it. Typically, we've had a lot of float information and the underwriting profit or loss info.
One way we've been geared to think about it is the value of the investments that you get, the present value of the investments that you get from the future expected float. I think last year you also talked about the economic goodwill, especially in GEICO, and I think you were using some ratio as 90% of that year's insurance premiums. I was wondering if you could just talk to us a little bit about how the different ways you could look at valuing the different insurance businesses. That would be a huge help. Thank you.
The economic value comes from the ability to utilize float if obtained at a bargain rate. If interest rates were 7% or 8% and float even cost you 2% to obtain, it still would be very valuable. The economic at GEICO, for example, I think it's quite reasonable to expect a fairly substantial underwriting profit on average for as far as the eye can see and growth for as far as the eye can see. Coupled with that is a growing float because float grows with the premium volume. That's the most, you know, that is a very attractive combination of factors that comes about because GEICO is a low-cost producer. It has some real advantages in terms of scale, in terms of the whole method of operation that makes it very hard for other companies to duplicate their cost structure.
It's always good to own a low-cost producer in any business, but it's very, very nice in the insurance business. A Jeep business does not come the same way at all. I mean, at GEICO, we have, you know, almost, we have well over 10 million policies, and that's a statistical- type business. We have, you know, hundreds of thousands of drivers in New York, and we have them by age and profession and all kinds of things. It's a very statistical- type business, and that coupled with the low cost, it's very, very likely to produce a good result over time. The Jeep business, he has to be smart on each deal because something comes along and somebody wants to buy coverage for events causing a loss of more than $10 billion in Japan in the next year.
That is not, you can't look it up in any book, and yet you can't do enough transactions just like that one to even know whether your calculation was right on that specific deal. If you make a hundred calculations on a hundred of these type deals, you'll soon find out whether you got the right person making those calculations or not. The economic goodwill with the Jeep's operation is based much more on the skill to price individual transactions and the ability to find the people even that want those transactions. Whereas at GEICO, it's based, you know, basically on a machine, but it's enormously important how that machine is run. Tony Nicely has absolutely knocked the ball out of the park in terms of managing it.
In the years prior to when he took over, it was, you know, it had gone along at 2% of the market and really hardly gone any place. Tony has quintupled virtually our share of the market while at the same time producing great underwriting results. He took a machine that had a lot of potential, and then he exceeded even the potential that I thought it had. You get the value in different ways. It does relate in the end to a combination of growing and large float and extremely low-cost float. In our case, the cost of float has been negative. People are actually paying us to hold $70 billion of their money, and that's a lot of fun.
I think that the chances of that continuing are really quite high, although I don't think the chances of the $70 billion growing at a fast clip are high at all. I think that we'll be lucky to hold on to the $70 billion, but I think the chances of us being able to get that at a less than zero cost is good. I think that will even be true if interest rates go up to 4% or 5% or 6% or 7%. We may very well be able to do it, and that's a huge asset under circumstances like that. Charlie?
Yeah, we're currently in a low return environment from conventional investment of float, but that won't last forever. There were times in the past when Ajit Jain would generate a lot of one-of-a-kind float and Warren would make 20% or 30% with it before we had to give it back. That was a lot of fun, and we did it over and over and over again. Whether that will ever come again on that scale, I don't know, but it doesn't have to.
You know, when we have 30, presently our cash position, if you counted it at all the companies, it's probably $36 billion or $37 billion. You know, we're essentially getting nothing on that. If you, our earning power today is being affected by the current Fed policies, and that is not going to be a normal rate for many, many, for over the longer term. In that sense, our normal earning power is being depressed by Mr. Bernanke, but probably for very good reason. Seven?
Ollie Larson, Salt Lake City. Five, six years ago, you wrote in the annual shareholders' report that the current account deficit, the trade deficit, couldn't go on indefinitely. Of course, a very large part of that is crude oil import. Now, some people in the energy markets are sort of talking about the United States becoming independent in the energy market. Could you shed some light on how this might affect the trade deficit?
It'll be a huge plus, obviously, if our total energy production increases substantially and what we have to import costs us less. I mean, it is a big factor in the current account deficit. I don't, I mean, we're doing a lot in oil. I don't see us getting self-sufficient in oil, but gas is huge. Our picture has changed a lot in the last three years in terms of energy. Now, Charlie and I might argue that over time, we'd still be better off using somebody else's up and keeping our own for a long time.
That's my view.
Yeah, for a long time. I mean, you know, we were an oil exporter in my lifetime, a substantial oil exporter, and it might have been better if we'd been using Saudi Arabia.
It would have been better.
Yeah.
Yeah, you can't get by with much with Charlie here. It would have been better. Okay, it would have been better if we had been using Saudi Arabia's oil then and just, in effect, treated all of this huge reserves we had in places like East Texas and such as a strategic petroleum reserve, which we just kept around for another century.
It would have been much better.
Yeah, it would have. Our picture has changed for the better, and that means our current account deficit picture has changed for the better. We've still got a ways to go, but it does look better than three or four years ago. Don't you think so, Charlie?
I think those are a very complex interaction. My view is that the single most precious resource of the United States are its hydrocarbon reserves, the ones that are right here. Of course, I want to use up, and I'm a puritan. I always want to suffer now to make the future better, because I think that's the way grown-ups should behave. I'm all for using up the other fellow's oil and conserving our own. I think the idea of energy independence is one of the stupidest ideas I've ever heard grown people talk about. Think of what terrible shape we'd be in if we'd achieved total energy independence way earlier. We wouldn't have any oil and gas left at all. Wouldn't that be a wonderful condition? We don't want energy independence. We want to conserve this stuff.
Thank God other people have some of this precious stuff they're willing to sell. I have the exact opposite idea on this subject from most people. I think I'm right.
This is Charlie's version of saving up sex for your old age. You know,
No, we're going to use the oil.
Okay, number seven. Was that seven?
Jim Powers, Newton, Massachusetts. A few minutes ago, you were talking about per capita GDP. If it went up 1% a year, each generation would be 20%, 25% better off than the previous one. In Boston right now, we have a big controversy where the Executive Officer of Liberty Mutual Insurance Company has been making over $50 million a year in compensation plus other perks. That amount of money in an hour or two is more than 95% of the employees of that company make in the course of a year. The newspapers have been commenting on the concentration of the profits of that mutual insurance company not going to the insurance policyholders who own the company because it's a mutual insurance company, and the lack of compensation going to the average employee.
What good does it do to the average American for the economy to improve 1% of GDP per year if they don't enjoy some of that themselves?
We certainly agree. Without commenting on any specific individuals, obviously, if we start out with $48,000 per capita of GDP and we do increase by 20% or so each generation, you would certainly hope that that would not keep bubbling to the people at the top as it has during the past generation. I mean, the past 20 years, we have not seen the progress that the country overall has made distributed in any kind of way except very, very much at the top. The tax code has encouraged that. The tax code is, you know, the tax code which was taking those people making the $45 million incomes in 1992 was taking 27% or 28% from them. When they got up to $270 million now, you know, it's taking a figure that's more like 18%.
We've got a tax code that has become more and more pro the ultra-rich and coupled with what you see and you've seen in compensation and what the CEO makes in relation to the average worker and all that. We've gone a long way in making sure that what we were promised in the way of trickle-down benefits has not been achieved.
It's also true that most of the great mutual insurance companies, and there are a lot of them in the United States, do not have that kind of compensation abuse in them.
That's true. For example, State Farm or something like that does not have that.
No, no, most of them don't. That's a very egregious example, but Boston has always led in egregious examples.
No, it's the corporate world.
It got there early, you know, it mastered the art.
The corporate world has been, there's been a lot more egregious behavior in the corporate world than the mutual world.
That's why it's so anomalous, really.
Yeah, no wonder it's drawing some attention. The rich like it that way, you have to understand that. The tax code is basically, you know, that is an important place where people decide who actually bears the cost of this government. We have moved away from the rich on that as they have gotten further and further away from the middle class in terms of earnings. There may be a natural tendency in a democracy to work toward democracy. If you think about the effect of money on politics, if you think of the nature of how market systems work, there may be some underlying trends that push a democracy toward plutocracy, and you need countervailing factors to prevent it.
I don't think he ought to be too discouraged about Boston either, because when I first went to Boston, the mayor was running the city from the federal penitentiary.
Yeah. Was that Curley?
Yes, Mayor Curley.
Yeah.
Nobody in Boston saw anything peculiar about it.
If you live long enough, you see everything.
Yeah, right.
Area 8.
Nine, he says.
Nine. Okay, nine. My name is Brian Chilton, also from the Boston, Massachusetts area.
I'm surprised you admitted that, Charlie.
I was tempted. Warren, a lot of today's questions referenced risk. It seems to me one of the biggest risks facing us is the purest sovereign debt levels, both here in the U.S. and in many countries in Europe. The liquidity injections by the Fed and more recently the ECB have given us some breathing room, but how do these large debts get balanced and do they concern you?
The nice thing about sovereign debt is they can, they cannot pay you at the end and you can't grab anything from them, unlike other kinds of debts. The truth is that the world has seen many, many failures of sovereign debt. I remember when Walt Wriston , back in the early 1980s, said, you know, sovereigns don't default. The truth is they've defaulted, you know, many, many times over history. What happens then is you get a big reallocation of wealth. The wealth doesn't go away. I mean, you don't lose the farms, you don't lose the plants, you don't lose the people with their skills and all of that sort of thing. There may be some marginal losses, but I don't know how it plays out in Europe.
We have seen the ECB here recently give the $1 trillion to banks which are loaded with sovereign debt, which really is questionable in many cases. I wouldn't be surprised in some cases if they haven't used some of the borrowing to even buy more of it. It's like giving a guy with a margin account with some perhaps bad assets in it even more money to play with them to further leverage themselves up and make an even bigger bet. When they did that at MF, or whatever it was, Global , you know, that had a bad ending and it might have a bad ending over there. I would much prefer a world that was getting its fiscal house in order, including in the United States.
The counterargument, of course, is that when you're in a recession or close to it, as some or all of Europe might be, that will feed on itself and be destructive in the same way that it was in the early 1930s in the United States. We have been having in the United States, it's very interesting. We talk about the fact that there was a stimulus bill a few years ago, even though they didn't call it that, and whether it was adequate or inadequate and all that. When the government is operating at a deficit that's 8%- 9% of GDP, that is stimulus on a huge, huge level. You don't call it stimulus. You may not call it, but that is by definition huge fiscal stimulus.
We have been having consistent huge fiscal stimulus in this country, and we will have to wean ourselves off of that fairly soon. The interesting thing, I think almost leaders of both parties realize that you probably have to get revenues up to something around 19% of GDP, and you have to get expenses down to 21% of GDP. That will work fine over time. You have a situation where both sides feel they will show weakness by going first. You also have a situation where the leaders probably of at least one party can't speak for their party so that you can't have negotiations in private, which are probably the way to get something like this solved. I would avoid, certainly at these rates, I would totally avoid buying medium-term or long-term government bonds. I think that's the obvious answer.
I wish I had answers that would solve the problem further behind that. In terms of your own situation, I would stay away from medium or long-term government bonds, our own or those of other countries, Charlie?
Of course, he's asking the really intelligent question of the day, and we're having difficulty answering it. It is very hard to know how much of this Keynesian stuff will work after you've lost a lot of your fiscal virtue. You know, you come to a time, if you're a government which has pretty much lost all its fiscal virtue, that the Keynesian stuff won't work and the money printing won't work and it's all counterproductive and you're headed for calamity. We don't know the precise point at which it stops working. Somebody like Paul Krugman, who I think is a genius, but I also think he's more optimistic about doing well with various economic tricks after you've lost a lot of fiscal virtue than I think is justified by the facts. I think it's very dangerous to go low on fiscal virtue.
Here in the United States, we've used up some of our store. It's very important that we not go too far in that direction because we want to be able to do what we did in the Great Recession, where we avoided a huge calamity because we had enough fiscal virtue left so the economic tricks would work. It's a terrible problem. I ask you the question, Warren, is it inconceivable that we could get a very mediocre result in the United States as a result of all this trouble?
I think we'll get a good result over time.
I know you do, but is it inconceivable?
I can have problems, but.
I'm a little less optimistic than he is. I'm roughly in his position.
Right.
There's some slight chance that we can get a pretty mediocre result.
Let's say I came to you right now with a budget that made sense in general and what it achieved, that had a 19% revenue built into it and 21% of expenditures. Would you want to adopt that now?
I think the reason intelligent people disagree on this subject is because it's so difficult. Everybody wants fiscal virtue, but not quite yet. They're like that guy who felt that way about sex. He was willing to give it up, but not quite yet. And.
St. Augustine.
St. Augustine, yes. I think
You're a hero to many of us.
I think these are very, very hard questions. I have one thing I'm sure of, that it is safer if you're going to these deficit financing things to use the money intelligently to build something you're sure to need than it is to just throw it off the end of trains or give it to crooked lawyers. I think we all have an interest in making sure that whatever tricks we play are intelligently used because it will protect our reputation and reality in having this fiscal virtue.
I'll let you design the 21% that gets expended.
If I were doing it, I would expend it sensibly on infrastructure that I knew we were going to need. I would have a massive program. I would have the whole damn country pay more cheerfully like we were so many Romans in the Punic Wars. In one of the Punic Wars, the Romans paid off 2/3 of the war debt before the war was over.
That's our campaign slogan, folks. Punic Wars again.
The answer is that I think we do need more sacrifice. I think we need more patriotism. We need more sensible ways of spending money, and we need more civilized politics. It's still a hard question. I think we should go on to an easier one. Warren's not strained, but I'm at my limit.
Okay, we'll do one more question from Area 10.
This will be an easier question.
Good.
Thank you so much both for being here today. I hope when you're both in your 90s and your 100s, you'll still be here doing these meetings.
Thank you.
I'm Candy Lewis from Denver, Colorado. My question has to do with taxes. What do you feel is the ideal corporate tax rate to get this economy started and excited?
Yeah, the last year, the actual taxes paid were about 13% of profits, as I remember. The corporate rate is 35%, and last year you were allowed to write off 100% of most kinds of fixed asset purchases. I don't think the corporate profits are not the problem, or corporate balance sheets or corporate liquidity is not the problem in the economy moving. I mean, there is money available, huge amounts of money available in the corporate world, including at Berkshire, to push forward on opportunities. We are spending money where we see opportunity, and we spent lots of money in the railroad business. We spent lots of money in the energy business. We built plants elsewhere and did other things. It is not a lack of capital at all that's holding back, nor is it tax rates, in my view, that are holding back at all investment.
I mean, this country prospered in the 1950s and the 1960s when the corporate rate was 52% and people actually paid it. When it was cut to 48%, we all rejoiced, and our GDP per capita grew. It is not a factor holding back. I will tell you, the corporate tax rates last year were 1.2% of GDP. Medical costs were 17% and a fraction percent of GDP. There we have at least a seven percentage point disadvantage against the rest of the world, which is a big multiple of all the corporate taxes paid. If you ask me about the tapeworm of American industry, it's basically our medical costs. We've got a huge cost disadvantage against the rest of the world. Now that's unbelievably tough to address. That is where, you know, as Willie Sutton would say, that's where the money is.
You can fiddle around with corporate tax rates. I don't think that will have any big effect on the economy. You may achieve greater fairness within the corporate tax code. I wouldn't argue about that at all. Incidentally, the Treasury, I think both parties agree that they would like to see a lower overall corporate tax rate, but one that applies more equally across corporations.
Getting from here to there is going to be very, very difficult because it's fine when you talk about it in the terms I just used, but once you put specific proposals out, everyone whose tax rate is going to go up, and some of them have to go up if others are going to go down, everyone whose tax rate is going to go up will fight with an intensity against that bill that far outstrips the intensity with which those on the other side fight. It's a real complex problem that way, but corporate tax rates are not our country's problems in my view. Charlie?
I used to say when I was younger that I expected to live to see a value-added tax. Now I'm not so sure. I think it's going to come eventually, and probably should. It equalizes the import-export effect of the taxes. I think it's quite logical to tax consumption. I think we get in a lot of trouble when we give people the money and then come around later and try and take it back. Human nature really resists that. I think it's much better if you're going to rely on taxes to have taxes that are sort of taken out right off the top, and they don't vary so much from year to year. I come from a state where the state income taxes based on capital gains go way up and then they collapse.
Of course, the politicians spend like crazy when they go up and there's agony when it collapses. It's a crazy way to have a tax system. We have a lot of problems, but I don't think a 52% tax rate, we may have gotten by with it when we sort of led the world, but I'm not so sure it would be a good idea right now to have our taxes 52% and the rest of the world taxing corporate profits at 15% or something. That might have a lot of perverse consequences. Since so little money is involved, it's not where the game should be played. If Warren could save a lot of money on medical expense for everybody, well, he probably would have done it already. It's really hard.
It's hard. We'll end with a hard one. I thank you all for coming. We're going to reconvene in about 10 minutes to conduct the business of the meeting. Thank you. We'll now go to the business meeting. We follow a script here, at least to quite a degree. The meeting will now come to order. I'm Warren Buffett, Chairman of the Board of Directors at the company. I welcome you to this 2012 Annual Meeting of Shareholders. This morning, I introduced the Berkshire Hathaway directors that are present. Also with us today are partners in the firm of Deloitte & Touche , our auditors. They are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire. Forrest Krutter is Secretary of Berkshire. He will make a written record of the proceedings.
Becki Amick has been appointed Inspector of Elections at this meeting, and she will certify to the count of votes cast in the election for directors and the motions to be voted upon at this meeting. The named proxy holders for this meeting are Walter Scott and Marc Hamburg. Does the Secretary have a report of the number of Berkshire shares outstanding entitled to vote and represented at the meeting?
As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 7th, 2012, being the record date for this meeting, there were 934,158 shares of Class A common stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 1,075,302,988 shares of Class B common stock outstanding, with each share entitled to one ten-thousandth of one vote on motions considered at the meeting. Of that number, 640,153 Class A shares and 664,293,280 Class B shares are represented at this meeting by proxies returned through Thursday evening, May 3rd.
Thank you. That number represents a quorum, and we will therefore directly proceed with the meeting. The first order of business will be a reading of the minutes of the last meeting of shareholders, and I recognize Mr. Walter Scott who will place a motion before the meeting.
I move that the reading of the minutes of the last meeting of the shareholders be dispensed with, and the minutes be 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? The motion's carried. The next item of business is to elect directors. If a shareholder is present who wishes to withdraw a proxy previously sent in and vote in person on the election of directors, you may do so. Also, if any shareholder that is present does not turn 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 one of the meeting officials in the aisles who will furnish a ballot to you. I recognize Mr. Walter Scott to place a motion before the meeting with respect to election of directors.
I move that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Don Keough, Thomas Murphy, Ron Olson, and Walter Scott be elected as directors.
Is there a second? It has been moved and seconded that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Don Keough, Thomas Murphy, Ron Olson, and Walter Scott be elected as directors. Are there any other nominations? Is there any discussion? The motions 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. 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 697,021 votes for each nominee. That number far exceeds a majority of the number of the total votes of all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes will be given to the Secretary to be placed with the minutes of this meeting.
Thank you, Ms. Amick. Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Geiman, Don Keough, Thomas Murphy, Ron Olson, and Walter Scott have been elected as directors. The next item of business is a motion put forth by the AFL-CIO Reserve Fund. The motion is set forth in the proxy statement. The motion requests Berkshire Hathaway to amend its corporate governance guidelines to establish a written succession planning policy, including certain specified features. The directors have recommended that the shareholders vote against the proposal. I will now recognize Ken Mass to present the motion. To allow all interested shareholders to present their views, I ask Mr. Mass to limit his remarks to five minutes.
Mr. Buffett, members of the Board of Directors, my name is Ken Mass. I represent the AFL-CIO, a federation of 56 unions representing more than 12 million members. I'm here today to introduce the AFL-CIO shareholders' proposal for succession planning. Our proposal urges the Board of Directors to adopt and disclose a policy on CEO succession planning. Planning for the succession of the CEO is one of the most important responsibilities of the Board of Directors. Having a succession plan in place is particularly important at a company like Berkshire Hathaway, where the CEO has created tremendous value. Shareholders are thankful for Warren Buffett's leadership as CEO. Last year, shareholders became concerned when David Sokol resigned from the company after allegations of improper trading. Mr. Sokol has been rumored to be a possible successor to Mr. Buffett.
We filed our proposal last fall because we feel that an internal CEO candidate is needed to carry out Mr. Buffett's legacy. An internal candidate can help maintain Berkshire Hathaway's strong culture. In Mr. Buffett's letter to shareholders earlier this year, he disclosed that the Board of Directors had identified his successor, as well as two superb backup candidates. We were relieved to hear this news. We are not asking the company to disclose the name of Mr. Buffett's successor. All we're asking for is the Board of Directors update shareholders annually on the status of its succession planning. We are pleased that Berkshire Hathaway has adopted all of these practices we recommended in our shareholders' proposal, except for annual reporting. We hope the company will continue to keep shareholders informed about the status of its succession plan. Thank you again, AFL-CIO, for considering this proposal. Thank you.
Thank you, Mr. Mass. Is there anyone else that wishes to speak? Okay, if there's no one else, I would say, Mr. Mass, you know, we are on the same page. We regard it, and I speak for all the directors, we regard it as the number one obligation of the board to have a successor and one that we're very happy with as to both ability and integrity and that we know well to step in tomorrow morning if I should die tonight. We spend more time on that subject than any other subject that might come before the board. We do not disagree with you on the importance of it. We have taken it very seriously. I note that you do not ask us to name the candidates, and I think there are obvious disadvantages to doing that. Again, we're on the same page on that.
As I understand it, you basically want to be sure that we report annually to you that the subject continues to be at the top of the list. I can assure you that it will. In terms of affirming that fact, I would say that certainly more often than once a year, in some public forum, I get asked questions where I get to answer precisely the question that you want me to address. I think that will continue in the future. We have not built it into any formal item in the proxy statement, which your organization has suggested that we do, but we have covered it in the annual report. We cover it at these meetings. We cover it when I'm interviewed frequently.
I don't think that anything would be gained by putting it in some other form, but I do want to say that I'm glad you take it seriously. We take it seriously. I think we're going to get a result that you will be very happy with, although I hope it doesn't happen too soon. With that, I would say that the motion is now ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the motion and allow the ballots to be delivered to the Inspector of Elections. Ms. Amick, when you're ready, may I give you a report?
My report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast 32,179 votes for the motion and 672,285 votes against the motion. As the number of votes against the motion exceeds a majority of the number of votes of all Class A and Class B shares outstanding, the motion has failed. The certification required by Delaware law of the precise count of the votes will be given to the Secretary to be placed with the minutes of this meeting.
Yes, the vote was about 95%, 5%. Thank you, Ms. Amick. The proposal fails. Does anyone have any further business to come before this meeting before we adjourn? If not, I recognize Mr. Scott to place a motion before the meeting.
I move that this meeting be adjourned.
Is there a second? A motion to adjourn has been made and seconded. We will vote by voice. Is there any discussion? If not, all in favor say yes. Aye. Yes. All opposed say no. This meeting is adjourned. Thank you.