ASM 1994 Part 2

Apr 25, 1994

Press Release

Zone 2 now, well, I don't know where zone 2 is, but we'll Do you feel basically the same about your investment in Guinness now as when you made the investment in terms of the company? Well, I wouldn't like to comment on anything that we own in terms of how we rate them as desirability or anything. I mean, whether it's Coke or Gillette or anything, we made decisions at a given time, at a given price, which you can figure out by looking at our purchases. But we may be buying or selling any of those securities right as we talk. And we simply don't think it's in the interest of Berkshire shareholders as a group to be talking about things that we could be buying or selling. Okay. Hi, David Winters from Mountain Lakes, New Jersey. Just World Books had a tough time lately, and I'm wondering if there's things you're doing to try to improve that. And also, the Buffalo News has been fabulous, And I'm kind of wondering what's driving the Buffalo News. Buffalo News is doing what? Fabulously. Yeah. Well, it's doing well. Right. Well, I would say you got to give credit to Stan Lipsky. I'm not sure whether Stan's here right now, but who's been running the news. World book, in terms of unit sales, as we put in the report, have fallen off significantly the last few years. It's actually surprising, in a sense, how well the profits have held up because they've done a good job, a very good job in that respect. And as we put in the report, we don't know the answer precisely. We are Ralph Shea has taken some actions, is taking some actions that he thinks will improve the operations. Ralph's record as a manager is absolutely at the top of the list. I mean, I wrote about it in the 1992 report. In 1993, Ralph did even better. I mean, it was fabulous, I think, probably, there have been 110 or so 1,000,000 pre tax on 90 some 1000000 of average equity capital or or something of sorts. So it's a fabulous record. But Encyclopedia Britannica, as you probably know, ran at a loss last year. The encyclopedia business has been very has been poor. Could be due to electronic competition. Could be due to recruiting problems for salespeople. Obviously, it can be a combination of many factors. If we knew the answer, we'd have you wouldn't be seeing those figures right now. But it is a top item of attention for Ralph. He takes anything that's not performing as well as before very seriously. And we will see what happens. But I don't have a prediction on it. I wish I knew the answer. I don't see any variables to, in any intelligent way, tell you. We put in a report the best we could do on that. The profitability, like I say, has been pretty good. But obviously, current trends of new sales will catch up with us at some point unless we boost unit sales. I don't think our market share, if you look at print encyclopedias, has fallen, but I can't be sure of that. But think that's probably true. But there are an awful lot of encyclopedias going out there as part of a bundled product with computer sales. How are we going to do this? Is there We got 3 now. Okay. I'll let you hand the mic to whomever. Lee again from Palo Alto. By Omaha standards, you are a relatively young man. And every year, you point out that Berkshire's size now precludes you from making the great relatively small trades which made your reputation? How much thought have you given to breaking up Berkshire into smaller entities? How much what? How much thought have you given into breaking up Berkshire into smaller entities, which will allow you to make those nice, small, wonderful trades that you've made from the beginning? It wouldn't do any good to break up smaller entities because I'd still own you know, we'd still have $10,000,000,000 plus of capital to be responsible for wherever it would be. So we could distribute it out to the shareholders and let them make their own decisions, obviously. And any time we thought that we weren't going to get more than a dollar of value per dollar retained, that obviously would be the course to follow. But there's no magic to creating multiple little I mean, we could call Berkshire II, Berkshire III, Berkshire IV, but you still got the problem. There's $10,000,000,000 to invest and it doesn't really solve anything. Charlie, do you have any thoughts on that? No. Berkshire is incredibly decentralized in terms of power and decisions resting in the operating divisions. In terms of the marketable securities, it's incredibly centralized. And so far, we have not had any big penalty from not being able to do the things that we did when we were young. Eventually, we will reach the penalty. Yeah. I think we're there's no question we could earn higher percentage returns working with $100,000,000 other than $10,000,000,000 But, yeah, but it hasn't hurt us as much as we thought it would as size has increased. But your universal opportunity shrinks, but it shrinks no matter, I mean, you can set it up in 20 bank accounts or 1 bank account, but you still, the universe still has to fit the 10,000,000,000 in aggregate. Now how are we doing this? Do we have another zone over there? Yeah. Michael Bagnonier, New York City. Two questions. 1, last year you discussed in your annual report your investment in General Dynamics, and you also gave your proxy to the company and its management. This year, it appears you have sold the stock. This year what? This year, it appears that you have sold the stock in General Dynamics. What has changed that you sold 20% of your stake? This is clincher number 1 and I have number 2. Probably inappropriate to be talking about what we're buying or selling, except to the extent that we make a public have to make a public announcement, which on something like General Dynamics, we've got 13 gs requirements if we change by more than 5% and we also have, as long as we own more than 10%, we have monthly reporting requirements under Form 4. We think the management of General Dynamics has done an absolutely sensational job. Obviously, also, it isn't the kind of business basically that we have a 20 year view on or something of the sort. So the shareholders of General Dynamics have been extraordinarily well served by the management of that company. And we're thankful because we prospered accordingly. But should I take from this comment that you have changed your view about the business itself? Pardon me? Should I take from your comment that you have changed your view about the business itself? No. No. I think you can take my comments, Hussein, is what I've said. Okay. Question number 2. Could you comment? I think we want to give people a chance around the room, and then when in the zone you're in, when a second question comes along, we'll be fine. But we want to get as many people in this hour as we can because this is the hard core here. Zone 1? It appeared to me that in 1993, the variation between the stock price for the high and the low was much greater in years than years in the past. Would you mind commenting on that? Well, there was more volatility in the price of Berkshire last year. And as I put in the annual report, the stock over performed the business last year. Now, over any 10 or 20 or 30 year history, every year, the stock is going to perform a little differently, at least, in the business. I mean, it may slightly underperform or slightly overperform. We would prefer that those variations be as small as possible. But there was more variability last year than historically has been the case, although we've had 1 or 2 other we had a few years like that. Our best way to handle that is to give all the information we can to shareholders and prospective shareholders and follow policies that we think will induce the investment oriented with long time horizons to join us and not to encourage other people. But occasionally, you know, we can't guarantee that result. One of the things that was interesting to me, I don't whether it was 3 months ago or when, but I happened to be talking to the specialist, terrific specialist, Jimmy McGuire. He had to leave, but he was here earlier in the session. And I think at the time, the stock was around 16,000 or something like that. And he had some rather significant stop loss orders on the books at 15.5 or thereabouts, involving some hundreds of shares. And that, to me, is a signal that, you know, we have some people that, in my view, are not really the kind of owners that we would like to attract because why somebody wants to put an order to sell something for 15,500 that they don't want to sell at 16,000 is beyond me. But the idea of people using stop loss orders with Berkshire obviously tells me that we've got some people in that are using it as a trading vehicle of some sort or have some totally non investment type calculations in their mind. I don't think we have very many of them. But obviously, if we have enough people like that, you will have a more volatile stock than if you have a whole bunch of people who look at it as something that they're going to hold for the rest of their life. And the stock did go down at that time and hit 15,500. And there were that I think it was close to 300 shares, which is $4,500,000 worth of stock. And somebody made a decision apparently that they or some small number of people made a decision that they wanted to sell something at 15,500 and said that they could have sold for 16,000. The lower it went, the better they liked it, apparently. I mean, the better they liked the sale, which, you know, has always struck me as like having a house that you like and you're living in and, you know, it's worth $100,000 and you tell your broker, you know, if anybody ever comes along and offers $90,000 you want to sell it. I mean, it doesn't make any sense to them. But it has I would say that there has been some small I think relatively small tendency for people to get relatively few people but to get more interested in the price of the stock than in terms and thinking of it in terms of whether it's going to go up or down in the next 6 months than might formerly been of the case. I think we're unusually well blessed in that respect in that we've got people who basically want to own it for a very long time. But to the extent that you get people who were owning it because they think the stock market's going to go up or something of that sort is going to happen, that is that is not good news from our standpoint and it will increase the volatility in it. We will do nothing to encourage that. Zone 2. Yes. Mr. Buffet, Steve Lang from Toronto. I was just curious about when you were saying that one of the best things that could happen to shareholders is the market goes down and you're able to buy good businesses at foolish prices. And then a little later on, you were saying that we could judge your ability to do what it is that you feel you should be doing by how much cash you have in the account at any given point in time. By what? By the amount of cash that you have in the account. In other words, I guess what you feel you're supposed to be doing is investing the cash in good businesses. So I'm just wondering about that kind of dichotomy. Where does the cash come from if the market does go down if you've been successful in your first ability? Would that be from the cash flow on the operations of the business from the float? Yes. So really, the success of the company then is to some degree the fact that you're able to dollar cost average into the market on an ongoing basis. Is that right? Well, it is not precise, but, a, we do generate cash in the considerable amounts. So that we will not husband cash simply because we think the market's going to go down or to buy something. But obviously, as cash comes in, we're always looking for things to do. And the cheaper that the market is generally, the more likely it is that we will find something that we understand and that we like and that the price will be attractive and that we will do. But it isn't like we could change around the whole portfolio then because that doesn't gain us anything. I mean, we'd be selling things at lower prices to buy things at lower prices. But to the extent that we have net cash coming in, which we do and which we will have, on balance, we are adding to our businesses at more attractive prices than would be the other case. And it's no prediction on any given company, I mean, whether it's Gillette or Coke or anything. It might be something we already own. It might be something we don't own. But we welcome the chance to buy more shares. We're not wishing it on anybody. But if you asked us next month whether Berkshire would be better off if the whole stock market were down 50% or where it is now, we would be better off if it was down 50%, whether we had any cash on hand now or not because we would be generating cash to buy things. Byron Randstale from Raleigh, North Carolina. Thanks for your hospitality this weekend. Oh, we thank you for coming too. My question concerns Solomon Inc. And more specifically, Solomon Brothers. I know that you won the board of directors, I think, from 87 to the current time. Very much interested in compensation. They are maybe on the compensation committee. Between 1987 and 1992, Solomon's financial results were quite dismal, in a very lumpy way, but overall quite dismal. In your opinion, if the compensation had been rational during this time, would Solomon have shown results that would make it quite decent business? Solomon, the compensation If the past compensation decisions had been more rational, 'eighty seven to the current time, would Sullivan have done better? Is that it? Yes, sir. Well, I would yeah. I would say that if the present people and the present compensation philosophy, which allows for very large payments for very large results, I think the company would have done better. You're going to see very big numbers paid in Wall Street. That's the nature of it. The trick is to pay them only when you're getting very big results for the owners. I mean, there's no way you're going to pay numbers that look like numbers in other industries and get great results for owners. But if you pay these big numbers, I think you should be getting very good results for owners. And the old system was not I mean, it wasn't totally off the mark on that, but it was far from an ideal system, in my view. So on 1. Warren, I have one question. Last year, you were using Coca Cola puts as a way to increase income and convergently if they were exercised as a way of increasing your position. Do you still use puts in this type on investments you wish they had to? 5,000,000 shares, as I remember, of Coke. Sometime early fall or there, but I don't remember exactly, last year. And the puts, I think the premium was around $7,500,000 and they're priced around 35. We have not done that very often and we're unlikely to do very much of it. For one thing, there are position limits on puts which don't apply to us, but they apply to the brokers for which we do them. And those position limits were not clear before that, but we could probably write puts on that same amount by doing it through a bunch of different brokers. It's not something we're really very likely to do. I was happy to do it. And in that particular case, we made $7,500,000 but we're better off probably if we like something well enough to write a put on it, we're probably better off buying the security itself. And particularly, since we can't do it in the kind of quantities that really would make it meaningful to Berkshire, There are securities I would not mind writing puts for 10,000,000 shares or something, but that probably it's probably allowable for us to do it. It's not allowed we probably have to do it through multiple brokers to get the job done. And on balance, I don't think it's as useful a way to spend my time as just looking for securities to buy outright. Charlie, do you have anything? No. Zone 2. Mister Buffet, I'm from West Point. My name is Rogers. A couple of months ago, there were stories in the World Herald that Berkshire Hathaway had taken a large position in Philip Morris and UST. But in your annual report, I don't see anything about that. Can you comment? Yeah. I would say in the last 2 years maybe, I'm just approximating, I've probably seen reports in either the Wall Street Journal, USA Today, maybe picked up by the Associated Press or in The Herald, but in papers of some significance, I've probably seen stories that we were buying maybe any one of 10 companies in aggregate over that period of time. I would say a significant majority were erroneous. We don't correct the erroneous ones because if we don't correct the erroneous ones if we correct the erroneous ones and don't say anything about the correct ones, in effect, we're identifying the correct ones too. So we will never comment on those stories, no matter how ridiculous they are. And it's interesting because, you know, they keep getting printed. And frankly, from our standpoint, the fact that most of them are inaccurate is probably useful to us. We don't do anything to encourage it. But the fact that people are reading that we are buying A, B, C or X, Y, Z when we aren't, You know, that's I don't think people should be buying stocks because they're reading in the paper that we're buying something. But if they do, they may get cured of it at some point. Maybe the newspapers will even get cured of writing the stories when they don't know what, you know, what the facts are. But it's something we live with and we'll probably continue to live with. And I would say that based on history, if you read something about us buying or selling something other than through reports we filed with the SEC or regulatory bodies, the chances are well over 50%. That I can tell you based on history is correct. Well over 50% that it's wrong. Zone 3? Do you expect that Berkshire would become one of the Standard and Poor 500 stocks or Dow Jones stock? Well, I think it's unlikely that ever becomes a Dow Jones stock. I don't know what the criteria are for the S and P 500, but I imagine there's some reason why we don't fit. I don't know whether they have questions about number of shares outstanding or I've never checked with S and P. I wouldn't be surprised if we have the largest market capitalization of any company that isn't in the S and P, although I don't know that. But they may have some criteria, a variety that preclude Berkshire being part of it. I've always thought it'd be very interesting for those of you who like to think about such things that if we were part of the S and P 500 and enough people became indexed so that 60% of the market was indexed, And if Charlie and I wouldn't sell, which we wouldn't, it'd be an interesting proposition as to how the index funds would ever get their 60% if they tried to replicate the S and P. I don't know whether they have rules even about concentration of ownership. That same line of thinking might have applied to Walmart or some company. Because just take the extreme example of a company that had 90% of its stock owned by 1 individual and 12% of the money in the market were indexed, and the 90% wouldn't sell it, it would bring back the Northern Pacific corner or something of the sort. Anyway, I don't think that's going to be a problem. And I don't think we are going to end up being in either index. Yes, Zone 1. Mr. Buffet, my name is Aaron Morris. I'm from California. What I wanted to know was how you think about how large a position you're willing to take in a given security, both in your case where you have new cash coming in that you can invest and in the case of an investor where they have a fixed amount of capital and they're trying to decide what's the most they should put in the security that they really love? Well, Charlie and I have probably at our present size, we will never find anything that we get as much money into as we want. I think that's probably true, Charlie, if we really like it. Yeah, I think that's quite like it. Yeah. So we will probably never hit the limit. We would love to. We'd love to find something we felt that strongly about and occasionally we do, but we won't get as much money into it as we would wish or as if we were running $1,000,000 of our own money or some number like that. So we are willing to put a lot of money into a single security. When I ran the partnership, the limit I got to was about 40% in a single stock. I think, Charlie, when you ran your partnership, you had more than 40%. And sure. And we would do the same thing if we were running smaller partnerships or our own capital were smaller and we were running that ourselves because now we're not going to do that unless we think we understand the business very well and we think that the nature of the business, what we're paying for it, the people running it, and all of that lead up to virtually no risk. And, but you find those things occasionally. And we would put assuming it were that much more attractive than the second, third, and fourth choices, we would put a big percentage of our net worth in it. We only advise you to do that. Well, We value and something that you really feel you know enough to buy the whole business if your funds were sufficient and was being offered to you. You ought to really understand the business. But people do that all the time incidentally in private businesses, which have got terrible prospects. I mean, they buy dry cleaning establishments or filling stations or whatever, and they put very high for franchises of some kind. They put a very high percentage of their network into something that a business is very risky, basically. I mean, it people put all their money in a farm. It's a business. It's subject to all kinds of business risks. So it's not crazy if you understand the business well and if the price is sufficiently attractive to put a very significant percentage of your net worth in. If you don't understand businesses, then you're better off diversifying and fairly widely diversifying. Sir, no, go ahead. Sorry. Berkshire has a substantial shareholder whose father accumulated the original position. And when he died, he left a very large estate, frankly, all of which was in 2 securities, Berkshire and one other outstanding company. And a bank was co trustee and the bank trust officer said, you've got to diversify this. And it was a very large estate and the young man who was co trustee with the bank said, well, he says, you know, if my father had believed the way you do, he might have been a trust officer in a bank instead of leaving this larger state. And that young man holds the virtue to this day. And I suppose the bank is still giving the same advice. John 2. Mr. Buffett, this is Chuck Peterson from Omaha. And I was just wondering if you could comment on the Coca Cola Company. Haven't really talked about it too much today in regards to what you foresee over the next 5 years earnings per share growth and where this growth is perhaps going to come from? Was that the question about the growth of Coke? Yeah. You really have to come to your own conclusion. Coca Cola Company writes their annual reports are extremely good. I mean, they're very informative. You know, you my guess is that at least if you read a few of the reports, you absolutely know as much about the Coca Cola Company as I would. But in the end, you have to make your own decisions about growth, potential profitability, potential and all that. But the one thing I can assure you is that probably if you spend a relatively small amount of time on it, the facts that you will have available to you for making a decision on that question will be just as good, essentially, as the facts you'd get if you'd worked at the Coca Cola Company for 20 years or if you were a food and beverage analyst in Wall Street or anything of the sort. That's the kind of businesses we like to look at are things that we think we can understand that way and there are also businesses that usually I think you could understand that way. But we don't like you to give you our answers. I mean that would not be a good idea. Zolton Frey? David, I'm sorry, David Schwab from Austin, Texas. I have a question pertaining to the convertible bonds that were outstanding for about 4 years. Any thoughts on if you're a teacher to grade, if that was a good deal, bad deal, how the money was employed compared to the cost of getting out of the bonds? Any thoughts? We want to know if you think, in retrospect, your deal with the Lions was a good deal for Berkshire. No. I would say that if I knew everything at the time that we did the Lions Day, which was a convertible Sheryl coupon debenture. If I knew everything now then that I know now, would we have done it? Probably pretty close. We had relatively few bonds converted when we called them. And so that it really wasn't a negative in that sense. But if we had more we could have easily had a lot more converted. And that would not have been so good, obviously, if we'd ended up selling a lot of stock at 11,800 or whatever it was. It's very hard to measure exactly what we did with the $400,000,000 or so that we took in at the time. So money being fungible, separating that $400,000,000 from other resources to measure the what happened on the plus side from having the money is hard to do. But my guess is, if you could play the whole hand over again, it probably was maybe a tiny minus to have issued them. What do you think, Charlie? Certainly close to a wash. And you can ask about U. S. Air and that is when we would have been well to duck. And I might say, Charlie had nothing to do with that decision. He didn't even know about it until I did it. And when he knew about it Mr. Buffet, I'm Joe Sertivan from Toronto. With respect to Berkshire's non permanent but large and therefore illiquid holdings, what is your strategy for managing market impact on sales, given the intense scrutiny that Berkshire is under by the market? I didn't get that either. I'm not hearing that very well. Yes. I don't know whether you're too close to we're having a little trouble on Speak a little more slowly. Or maybe the monitor could repeat that. Would you repeat the question? Okay. Sorry. Just with respect to Berkshire's large non permanent holdings that are therefore illiquid, I'm just wondering what your strategy is for managing market impact when you do decide to sell portions of those holdings, given the intense scrutiny you're under? Yeah. Question about the things we might sell and what's going to happen to the market when we sell them, that depends. I mean, it can be a very significant impact. It can be a negligible impact and depends on market conditions. It depends on whether we might sell in a couple of large blocks to some institutions. It depends on there could be a tender offer or something of the sort we would sell through. So it's hard to measure, but it is a disadvantage. Size is a disadvantage. You're absolutely correct in the basic point, both in buying and in selling. And we don't know any way around that. So we allow for it in terms of what we expect, you know, the kind of possibilities we need to see. And we do we sell so infrequently that it's not a crusher of a negative point, but it's a negative we have that you do not. Phone 2. My name is Anais Ripley. I'm from Roanoke, Virginia. Does Berkshire Hathaway or any of its subsidiaries have keyman insurance on you and Mr. Munger? Does Berkshire have Keyman insurance on? No, no. We have no life insurance to my knowledge on anyone except maybe standard group life contracts people have. We have no key man insurance. It really doesn't it wouldn't be material. I mean, if we have a market value of $18,000,000,000 or something like that and if it really didn't if it made a 1% difference, it'd be $180,000,000 And basically, the math of intelligently selling insurance is better than the math of intelligently buying insurance. Zone 3. Mr. Buffet, I'm Barry Ziskin from Mesa, Arizona, longtime admirer of yours. Question pertains to Guinness. I remember reading in a publication I greatly respect, Outstanding Investor Digest by Henry Emerson in New that back in I think it was 'fifty 8 or 'fifty 9 you made an investment in Cuba, decided never to make an investment outside the United States again at that time, have subsequently invested in Guinness. I'm a fellow investor in Guinness. I've invested in Guinness for and its sister company, Louis Vuitton Moet Hennessy for over 5 years. And I'm very happy with those investments by the way. There's been a restructuring as you know of the Guinness LVMH relationship where Guinness no longer owns 24% of LVMH, rather it owns only its distilling or I should say alcoholic beverage related to the The Moi Hennessy part. Right. The Moi Hennessy part. The other parts of LVMH are showing better results these days, namely the Louis Vuitton luggage as well as the Christian Dior perfume. They've also expanded into the newspaper business this past year, business that you understand. Do you intend to look at the possibility, first of all, of participating in those businesses that you no longer own now with the restructured Guinness LVMH deal through some other form? And the second question relates to the currency risk inherent in the Guinness investment, having bought it at about $1.80 as you mentioned, £1.30 now down to about 1.48 dollars The cost of hedging foreign currency through the FX has diminished through the combination of lower interest rates in the U. K. And the higher interest rates most recently in the U. S. To just about 0. I take it we're all investors in companies, not speculators in currencies. So the second part of the question is, do you intend to do anything about the currency risk portion of that investment? Well, LVMH, which as you mentioned, was 24% owned by Guinness, you know, that's one of thousands of securities that we could be a buyer or seller. So I really don't want to comment on LVMH's specific attractiveness or lack thereof. And, Guinness, I think what Guinness did was quite likely. I mean, their interest in that operation was basically through the distribution advantages that it gave to Guinness's own brands around the world to be hooked up with Moet Hennessy and vice versa. So I think what they did was logical. You can the question of the exchange rate and all of that, the exchange rate in terms of what they got in the spirits business versus what they gave up in the luggage businesses and Christian Dior and a few things, you can you can form your own opinion on that. But I think the logic was sound. But in terms of whether we want to be an LVMH by itself, that's like any other security which we really can't answer. 2nd question related to hedging. The answer to that is we don't. And Coca Cola, as I mentioned, gets 80% their earnings from a variety of currencies, the yen and the mark being 2 very important ones. They're going to be getting a very high percentage 5 years from now, 10 years from now. They do certain currency transactions, but it's a practical matter. If you own Coca Cola, you own a bunch of foreign bonds with coupons on them denominated in local currencies that go on forever. Should you try and engage in currency swaps on all those coupons? You don't know what those coupons are yet because you don't know how much they're going to earn in Japan or Germany, but you do know it's going to go on for decades and it's going to there can be very significant sums. Should you try and engage in a whole bunch of currency swamps to go on out and convert all that stream into dollars. We basically don't think it's worth it. We don't think our opinion on currencies is any good. We don't think we think the market probably know what we know it knows as much about it and probably knows more about currencies, but we don't know we do not know more than the market does about currency. So there are costs to hedging. And even though interest rate structures may cause the curve to look flat going out forward so that and the fact there's no contango on it, it's still there's still the cost there are costs in it Now it's a relatively efficient market, so they're not huge. But we see no reason to incur those costs with what we regard as a totally a fifty-fifty proposition. And it really doesn't go out that far anyway. I mean, we could do it for a couple of years. But if you take that the way we look at businesses being the discounted flow of future cash out between now and judgment day, we can't really hedge that kind of a risk anyway. We could keep rolling hedges, but there's a cost to it that we don't want to incur. We don't we wouldn't worry a whole lot about whether some portion of our earnings, whether it's from Guinness, whether it's from Coke, whether it's from Gillette, are denominated at some mixture of marks and pounds and yen and dollars or whether they're all in dollars. We'd slightly prefer it if it were all in dollars, but we don't lose sleep over the fact that it may be coming from a mix of currencies like that. We wouldn't like it in terms of obviously some very weak currencies. Zone 1? Lawrence Robb in Mill Valley, California. On Page 13 of the annual report, talking about the insurance operation, you say that it possesses an intrinsic value that exceeds its book value by a large amount, larger in fact than is the case in any other Berkshire business. To refine an earlier question that was asked, could you tell me whether you mean that it is larger in by a percentage or in absolute dollars that is? By absolute dollars. That's what you're referring to. Yes. It's very hard to stick a percentage figure on the insurance business because we have so much capital in there that and we have other businesses. I think that we've got businesses with a book value of in the tens of 1,000,000 that are worth in the many 100 of 1,000,000. So you couldn't apply that to the insurance company base. So it's absolute dollars. But in terms of absolute dollars, we think the excess of intrinsic value over carrying value, at least I do, is substantially greater for the insurance business than any other business we own. Charlie, do you have any thoughts on that? No, I think that's exactly right. Joel Little, Vancouver, Canada. Does the management succession issue for the top job at Coca Cola concern you? Management, you do what with the The management succession issue over the next several years. Oh, yeah. Top job. At Coca Cola? Yeah. I think any announcement that from that would come from Coca Cola. He said, do you like it? Does it concern you? Oh, I'm not concerned at all. No. Coca Cola is very well managed. Stone 3. Yeah. Chris Stavrou from New York. According to the latest Solomon Brothers proxy, if Derek earns 30% on allocated equity of Salomon Brothers provided that, that's at least 10% above the return for competitors, he could earn a bonus of $24,000,000 My question is whether that return number is reduced by a charge for preferred dividends? I, Charlie, do you remember on the comment section? I can't remember the detail of that. I think the equity, I'm fairly sure, but I'm not positive that the equity figure would include our preferred but not non convertible preferreds and it would apply to the earnings applicable to the to our preferred plus common but not but it would be after dividends on non convertible preferred. But I, you know, I'm not on the Comp Committee and I have not read the description that carefully. CHIEF Well, I am and I can't remember. But I will tell you one thing I do remember about that and that is a target which would be, 1, would be hellishly hard to hit. It'd be unbelievable. Let me You're talking about Babe Ruth Squared. Yeah, doing 150 home runs in a season instead of if that happens, you'll be very glad to pay the money. Under either calculation. Yeah, it really it but it you know, I'm glad it's there. I hope Derek's paying attention to it. Going 1. Chris Davis again from New York. I wanted to ask if you I feel there's such a huge discrepancy between the valuation of some of your holdings versus others in terms of the market valuation, in terms of price to earnings, price to book. In your opinion, do the growth prospects of Salomon Brothers or the quality or your anticipation of your ability to clip the coupons at Salomon Brothers justify such a dramatic discount to the growth prospects of Coca Cola or Gillette in terms of our ability as Berkshire shareholders to clip those coupons? And if you could explain or perhaps share your thoughts on why the market perception, if it is, justifies that distinction? Yeah. I'm not sure I can answer that question without getting into a discussion of the relative merits of the 2 companies or the 3 companies you mentioned at these prices. But Solomon and Coca Cola are obviously very different kinds of businesses. There's Solomon and Gillette. And Charlie and I do our best to try to understand the businesses. Obviously, it's easier to understand the future of a Coca Cola than it is a Solomon, but that doesn't mean it's a better buy. And, what you see at any given time in our holdings is partly the historical accident even of when we bought and when we had money available and all that. But it reflected an affirmative decision at that point, obviously. And our guess would be that, you know, we would feel reasonably good about anything that we owned in terms of the price at which we bought it and the facts at the time we bought it and the facts change over time. Solomon, I think, is a better company now than it was some years back, but it's still in a business that can be very volatile and it has a small amount, as does any investment banking firm and does any commercial banking firm, of systemic risk? I mean, you can't get rid of that. Charlie, you want to? No, I've got nothing to add. Zone 2. Thank you. Sean Barry, Regina Canada. Mr. Buffet, you've indicated that most of us in this room could acquire a lot of the information that you and Charlie acquire through the annual reports. Yet you both also indicated that the GAAP rules a lot of times leave a little to be desired. Could you perhaps give an indication as to how you and Charlie come up with the economic value or the intrinsic value of the businesses that you finally decide to invest in? And a little bit about the process that you go through with that? Thank you. Well, in the 1992 annual report, we discussed that a fair amount. But the economic value of any asset essentially is the present value, the appropriate interest rate of all the future streams of cash going in or out of the business. And there are all kinds of businesses that Charlie and I don't think we have the faintest idea what that, that future stream will look like. And if we don't have the faintest idea what the future stream is going to look like, we don't have the faintest idea what it's worth now. So if you think you know what the price of a stock should be today but you don't think you have any idea what the stream of cash will be over the next 20 years, you've got cognitive dissonance, I guess, is what they call it. So we are looking for things where we feel fairly high degree of probability that we can come within a range of looking at those numbers out over a period of time and then we discount them back. And we are more concerned with the certainty of those numbers than we are with getting the one that looks absolutely the cheapest, but based upon numbers that we don't have any they don't have great confidence in. And that's basically what economic value is all about. The numbers in any accounting report mean nothing per se as to economic value. They are guidelines to tell you something about how to get at economic value, but they don't tell you anything. There are no answers in the financial statements. There are guidelines to enable you to figure out the answer. And to figure out that answer, you have to understand something about business. You don't have to understand a lot about mathematics. I mean, the math is not complicated. But you do have to understand something about the business. But that's the same thing you would do if you're going to buy an house or a farm or any other small business you might be interested in. You would try to figure out what you are laying out currently and what you are likely to get back over time and how certain you felt about getting it and how it compared to other alternatives. That's all we do. We just do it with large businesses, basically. The accounting figures are very helpful to us in the sense that they generally guide us to what we should be thinking about. And, of course, if we find numbers where it looks like people are taking the most optimistic interpretation of things that they can under GAAP and all of that, we get very worried about people who who look like they, massage the numbers in any way. And there are plenty of people that do. Zone 3. I'm Howard Baskin from Kansas City. When you are estimating a growth rate on a company, I meant, of a very predictable company, I imagine you apply a big margin of safety to it. What kind of rate do you generally apply? I mean, high single digits? In the margin of safety or What kind of growth rate would you on a predictable company might you stay back? We are willing to buy companies that aren't going to we are looking we are looking at objecting numbers out as to what kind of cash we think we'll get back over time. But, would you rather have a savings if you're going to put $1,000,000 in a savings account, would you rather have something that paid you 10% a year and never change? Or would you rather have something that paid you 2% a year and increased to 10% a year? Well, you can work out the math to answer those questions, but you can certainly have a situation where there's absolutely no growth in the business and it's a much better investment than some company that's going to grow at very substantial rates, particularly if they're going to need capital in order to grow. There's a huge difference in the business that grows and requires a lot of capital to do so and the business that grows and doesn't require capital. And I would say that generally, financial analysts do not give adequate weight to the difference in those. In In fact, it's amazing how little attention is paid to that. Believe me, if you're investing, you should pay a lot of attention to it. Charlie? I agree with that. But it's fairly simple, but it's not so simple. It can all be explained in one sentence. Some of our best businesses that we own outright don't grow, But they throw off lots of money which we can use to buy something else. And therefore, our capital is growing without physical growth being in the business. And we are much better off being in that kind of a situation, being in some business that itself is growing but takes up all the money in order to grow and doesn't produce that high returns as we go along. A lot of managements don't understand that very well. Excellent. Zone 1. Byron Wynne from New York. You said that, you decentralized the operating decisions but centralized the capital allocation decisions. What kind of staff do you have in Omaha to help you with the capital allocation decisions and the stock selection decisions you make? Or do you and Charlie do that pretty much by yourselves? Yeah. We don't have any staff to help us on it. I mean, basically, we tell them to mail all the money to Omaha and then when we get there, we put our arms around it and we allocate all the capital ourselves. I mean, that is our job. And we don't feel we should delegate. I mean, we wouldn't do it anyway. Our personalities aren't such that we wouldn't delegate our allocating our own money to somebody letting somebody else allocate our own money. But we feel that's our job. And it's interesting and I've written about this in the past that that's an important job for most managements. There are some companies where it's not, but it's it usually is a very important job for most managements. And if you take a CEO that's in a job for 10 years and he has a business that earns, say, 12% on equity and he pays out a third, that means he's got 8% per year of equity. I mean, when you think of his tenure in office, how much capital he's allocated, it's an enormous factor over time. And yet, probably relatively few chief executives are either trained for or are selected on the basis of their ability to allocate capital. I mean, they get there through other routes. So I've said it's like, you know, somebody playing the piano all their life and then getting to Carnegie Hall and they hand them a violin. I mean, it is a different function than most than the route than the functions that exist along the routes to the CEO's job at most companies. And so many CEOs, when they get there, think they can solve it by either having a staff that does it or by hiring consultants or whatever it may be. And in our view, that is and that's a terrible mistake because it's it is, if not the key function of the CEO, it's 1 of 2 or 3 key functions that say 80% or 90% of all companies. And if you can't do it yourself, you're going to make a lot of mistakes. You may make a lot of mistakes even if you do it yourself. But if you, you know, you wouldn't want anybody in any other position of that importance in the company essentially saying, I don't know how to do this, so I'm going to have somebody else do it. What is their key responsibility? But that's the way it works in business. And Charlie and I take responsibility for all capital allocation decisions other than just sort of routine expenditures at the operating businesses. And we don't get into those at all. I mean, if our managers are spending $3,000,000 or $4,000,000 a year on machinery or one of them is, I mean, on machinery, equipment, plants, new leases, we have no review process on them. We don't have a staff at headquarters. We don't waste the time to do that. We think those people know how to allocate the money that relates to the actual operations of their business. We think in terms of the capital that is generated above that, that that's our job. Charlie? I would say we have practically nobody at headquarters in Omaha. One of the reasons Warren shines up so well is, you know, he's being compared to practically nobody. I might say, one interesting, when we're having this meeting, for example, I think there's one person there in the office. I mean, the rest of them are down here helping on the meeting. I mean, here. Yeah. Here we are. Warren and I are selling candy and encyclopedias and so forth. The Chief Financial Officer of Berkshire Hathaway is handling the microphones. I mean, this makes Southwest Airlines look like they don't understand cost accounting. It's a very old fashioned place. And by the way, speaking of hawking our merchandise, if any of you have safety deposit boxes full of Berkshire Hathaway certificates and have children or grandchildren who don't have World Book in print in the house, you are making a very serious error. That is a marvelous thing for to have in a house of And the discount only applies today. I think that's right. It is. That is it. It may not be selling too well because of the current vogue for encyclopedias on computers. And by the way, those encyclopedias that are available are inferior compared to World Book, which is very user friendly for children. And I like it that way myself. And that is one product you really ought to buy. We both use it personally. I mean, I keep a set at the office and a set at home. I give away more of that product than any other product that Berkshire Hathaway makes in any subsidiary. It's a perfectly fabulous human achievement. The editor thing to make that user friendly with that much wisdom encapsulated. It's a fabulous thing. Zone 2. From Houston, Texas. From time to time, you have quoted John Maynard Keynes, the British economist. So I would assume that you have read his investment writing very extensively. What are 2 or 3 investment relations in your opinion one can learn from that economist? Well, I forget which I think it's chapter 8 of the general theory. Remember, Charlie? There's a chapter No. There's one chapter in the general theory that relates to markets and the psychology of markets and the behavior market participants and so on. But probably aside from Ben Graham's 2 chapters 820 in the Intelligent Investor, investments. And you'll know it when you see it in the general theory. It's a chapter that jumps out to you about securities and so on. And it could be Chapter 8, but I may be wrong on that. But I would recommend reading that. Keynes and and Graham from vastly different starting points came to the same conclusion at about the same time in the thirties as to the soundest way to invest over time. They differed some on their ideas on diversification. Keynes believed in diversifying far less than did Graham. But Keynes started off with the wrong theory, I would say, in the '20s and essentially tried to predict business cycles and markets and then shifted to fundamental analysis of businesses in the '30s and did I think Janet Lowe in her book on Ben Graham actually has a little correspondence that took place between Keynes and Ben. So I would advise you to read that. And there are some letters of his that he of Keynes' that he wrote to co trustees of life insurance societies and colleges and so on that I think you'd find interesting too. It's 115 and Charlie and I have to go to our directors meeting at Berkshire, which starts in about 15 minutes. So we thank you all for coming.