Okay, you'll all be seated. I can't see whether Ronald Olson is in the front row or not. Ron, a re you here? Okay. Ron wanted to, we'll get your mic. Because we're transcribing, we want to get it all corrected. Ron has one point or two points that he wants to correct in terms of dates that I used. We're going to give the microphone to him.
Not that they're all that telling, but I thought since we are creating a record, I wanted to clarify two points. The Berkshire law firm, namely Munger, Tolles & Olson, worked with the Lubrizol counsel in pulling together what Warren described as Lubrizol's proxy, describing the background of the transaction. We, as counsel for Berkshire, started to work on that, gathering the facts pertaining to Berkshire's involvement, essentially, David Sokol's and Warren's, during the week of March 15. Warren, in speaking to you about the facts this morning, I believe, placed the beginning of that work in the subsequent week. I simply wanted to clarify that as we gather the facts, and though gathering included several interviews of David Sokol during that week.
Secondly, in describing internal policies at Berkshire to protect against misbehavior or negligent behavior, Berkshire maintains something that those in the trading business describe as restricted lists. On that restricted list are any securities in which Berkshire is buying, selling, has a peculiar interest. That prohibits any of the corporate officers or the top officers of the subsidiaries of Berkshire from participating in trades in those securities without the consent of the CFO, Marc Hamburg. That is what I wanted to clarify, Warren.
Thanks, Ron. Okay, we'll move right along and we're going to go to 3:30 P.M. and then we'll adjourn for a couple of minutes and then we'll go to the regular meeting. Carol again leads off.
Warren and Charlie, both of you expressed a very positive view of BYD and its Chairman, Wang Chuanfu , when MidAmerican bought its stake in 2008. Does BYD remain as attractive a long-term investment now as it was when you acquired your stake? If so, why? Has BYD's recent pattern of unexplained product launch delays affected your confidence in the operation?
Charlie is the BYD expert, so I'm going to let him start on that one.
Of course, the price is still way higher than the price Berkshire paid, and so, by almost by definition, it's not quite as cheap as it was then. Any company that tries to move as fast as BYD does, and on as many fronts, is going to have various delays and glitches. I would say I'm quite encouraged by what's going on, and I expect delays and glitches. They got in trouble in the auto distribution, but they tried to double auto sales every year for six years, and it worked the first five times. Yeah.
I have nothing to add. Okay, number 10.
Hi, Warren and Charlie. My name is Catherine Brewer. I'm from Los Angeles, California. I invest primarily in commodities and commodity equities. I started out back in 2007 buying oil. In the summer of 2008, we reached the peak of the oil bubble. That's when I reversed my holdings and started shorting oil. I made a nice profit. In 2009, I started buying oil again and oil equities, and I've been doing pretty well. Given the status of the world today and the price of oil, I'm questioning my investments. Is this another oil bubble? Has oil reached its peak? Should I keep my holdings? Should I short oil? Should I exit oil altogether and move into other commodities or other investments? My question to you is, what are your sentiments regarding oil?
I would say you've done a whole lot better than we have. I think the crowd would rather hear from you. We actually did take a position in oil, I don't know how many years ago.
A long time ago.
Long time ago.
It was $10 a bbl
It wasn't that long ago, incidentally. That was in the 1990's. Although we've seen oil a lot cheaper than that. East Texas oil sold for $0.10 a 1 bbl in 1932. We really don't know. I mean, obviously, you're dealing with a finite resource. I don't know whether the world's up to 88 million bbl or was down to 85 million bbl , but there's got to be some comeback. I wouldn't be surprised if the current figure is getting pretty close to 88 million bbl a day. That's a lot of oil to take out of the ground every day. Of course, there are new frontiers that have been found, but you've sucked a lot of straws into the earth. It is a finite number. The one thing I can promise you, almost promise you, is that oil will sell for a lot more someday.
Interestingly enough, you know how many producing oil wells do you think there are in the United States? The answer is something like 500,000. Now, you know there's these stripper wells. There's wells out near Charlie that have been going for 100 years. Yeah. We have looked in a lot of places now. What's happening, of course, from the standpoint of the United States companies is that the smaller countries where oil is being found now are quite a bit smarter about how they grant their concessions than people were 50 or 75 or 100 years ago. They drive much more intelligent deals than that was originally the case when we went exploring around the world. I have no idea. You know we traditionally, BNSF had hedged a certain amount of oil because they obviously use huge quantities of diesel.
I suggested to them, although how they run the BNSF is up to them, I just, I really didn't think we could guess the price of oil. I thought if we couldn't guess the price of oil, we didn't need to run the railroad. I mean, it took a lot of effort and time to run that railroad. If we knew how to make money just sitting in a room trading oil, why not do that instead? I don't really, we don't hedge. In terms of Berkshire 's parent company policies, we don't hedge anything in the way of commodities. Some of our subsidiaries do, and that's fine. They're responsible for their businesses. There are very, very few commodities that I've ever thought I was going to know the direction of their movement in the next six months or a year.
The one thing I'm quite convinced of, as we talked about this morning, is the fact that the dollar will become less valuable over time, so that the dollar price of most things will go up and maybe go up very substantially. Whether they go up enough so that you have the same amount of purchasing power after you pay tax on your nominal gains is another question. I really think that an intelligent person can make more money over time thinking about assets, productive assets, rather than speculating in commodities or, for that matter, fixed dollar investments. That's maybe my own bias. Charlie.
If we'd done nothing but oil from the very beginning, I am confident that we would not have done nearly as well as we have. To me, that's perfectly obvious. I think what we've done is much easier than what you're trying to do.
We like easy.
Yeah, we're not trying to make it any more difficult than we have to.
I really don't know any way to have an edge in that sort of activity. If you are going to try and figure out when to be long or short oil or natural gas or copper or cotton or whatever, I don't know of people who I feel would have an edge in trying to do that over the next 10 years. I do know people where I think they'd have a very significant edge in investing in common stocks and maybe distressed bonds for that matter, too.
Yeah, trading oil worked best of all for the people who bribed Nigeria. That's not our milieu.
That's an insight I hadn't heard before. Becky? Oh, got Ron here.
I wanted to clarify my clarification. Sounds like a lawyer, doesn't it?
It sounds like a lawyer.
Marc Hamburg was concerned that when I spoke of our insider trading policy and mentioned that we had a restricted list, that somebody may interpret that as suggesting that Lubrizol was on that restricted list. It was not. What goes on our restricted list are securities that we have a position in that we publicly reported. I just simply wanted to clarify that point. Lubrizol was not on the restricted list.
Okay, Becky?
Charlie, I got several variations of this question, but this one comes from Peter Kerr in Waterloo, Canada. He says, could you please let us know a couple of the most important things you learned during the last year?
I'll let Charlie go first.
I hate to admit this because I've ignored high tech all my life, but I actually read that book, In the Plex about Google, and I found it a very interesting book. Here I am at my advanced age, and I find it interesting the way people have created these engineering cultures, which are quite peculiar and differ from most of what we have at Berkshire . Will I ever make any use of this? I doubt it. I certainly enjoyed learning it, and if I enjoy learning it, I regard it as important because I think that's what you're here for, to go to bed every night a little wiser than you were when you got up.
I'm just trying to hold my own, actually. What I learned in the last year is that I'm going to have Charlie write the next press release.
Warren, I approved that damn press release with no objections. The Berkshire shareholders are going to be in terrible trouble if they're relying on me to fix your errors.
Okay, let's go to number 11.
Yeah.
Getting too close to confession time up here.
Good afternoon, Warren and Charlie. My name's Phil Duff, and I'm here with my wife, Tina, and our good friends, Grummies and the Hendricksons. We're all from Indianapolis, and we're all small business people. We are not too big to fail. Our question basically is simply this: do either of you gentlemen think that we might be headed down the same type of path years from now when we get into a situation as taxpayers that we might have to bail out a company on Wall Street that is too big to fail? If so, have we done anything to avert that?
There are institutions around the world that I think governments should properly, although people won't like it, but I think that there are institutions around the world that governments would properly, I think bail out has got a little bit of a pejorative term on it in the sense that stockholders should not be saved, managers should not be saved, but certainly the institutions, in some cases, should not be allowed to collapse immediately. Right now we're continuing to follow that policy, for example, with Freddie Mac and Fannie Mae. They have not reconstituted themselves as many of the banks and the auto companies. Chrysler is even paying back, which you know surprises me, but my hat's off to them. I mean that sincerely. I was really on the fence on saving the auto companies, but I think the administration did the right thing.
They weren't saving the auto companies per se. They were still working at saving a very fragile economy. Like I say, and particularly in retrospect, they certainly, in my view, made the right decision. Right now, in Europe, they're deciding whether countries are too big to fail. I think that problem will always be with us. I think for that reason that you have to do things to reduce the propensity to fail. Among those things, I think you have to make it so that the CEO and to some extent the board, but not to the draconian degree that I'll suggest for the CEO, I think that any institution that requires society to come and bail it out for society's sake should have a system in place that leaves their CEO basically and his spouse dead broke. I think that the upside and downside incentives are vastly different.
I think the board of directors of those institutions should suffer severe penalties, nothing like that. They certainly should give back the last, say, five years of directors' fees or whatever it may be that they receive. If you run an institution that actually needs, society can suffer such a blow if you fail. The society needs to come in and save you. You ought to have somebody running that institution, and you ought to have incentive practices in place that make it very, very, very painful to the people involved for the failure if it indeed happens. You also ought to reduce leverage in the system, and I think we've gone to some degree in that direction. There will be too big to fail institutions 10 years from now or 20 years from now. Right now, Freddie Mac and Fannie Mae are sort of too big to figure out.
We just sit there, and there's nothing wrong with that. It's more important to come up with the right solution than it is to come up with an immediate solution on those. Particularly, I would say in Europe, there are banking institutions and countries that people are facing the question of whether they are too big to fail. Charlie?
My answer is that the past panics and depressions, by and large, started on Wall Street or in stock brokerage. They tended to involve great waves of excessive speculation and bad behavior in the people who were profiting from those waves as salesmen or market makers or promoters or what have you. I think that this last mess, which created so much danger, should have caused something like happened in the aftermath of the '30s, where we prevented a new mess for a long, long time. Of course, it hasn't done that. I think you can confidently expect a new mess or two before your career is over. I think it is really stupid for our country to have allowed this. Partly, the failure is not one of evil, it's one of stupidity. Part of the stupidity is in our great academic institutions who believe in a whole lot of things that aren't true. That is a really hard problem to solve.
You're talking about, particularly in finance?
Yes, of course and economics, too. No, those are not hard sciences, finance and economics. Finance really attracts people who should have gone into snake charming.
If there's anybody we've forgotten to insult, just pass a note up and we'll get to you. Okay, Andrew.
This question comes from a shareholder based in Washington, D.C., who's asked to remain anonymous. This person says, "Warren, in the past year, you and Melinda Gates resigned from the board of the Washington Post. What does this say about Berkshire 's intention to hold the Washington Post stock over the long term? Is this related to the problems at its for-profit education business, Kaplan?
No, I made this statement actually publicly, and they may have only run it in the Post. I'm not sure about it elsewhere. I made the statement that we would not be selling any stock. It had nothing to do with that, that I'm a phone call away from Don Graham or anybody else at the Post, and they can just save a lot of directors' fees, and I can save a lot of travel. If at age 80, I decide that I'd rather spend a few more days at Berkshire and less on the road. We will not be selling any Post shares. Normally, I won't comment about what we'll do on market-level securities, but I'll be unequivocal about that. My enthusiasm for the Post itself and the management is 100% what it's always been.
I am just available a lot cheaper than before if the Post management wants any advice. I don't think Melinda did it on the basis of age. You'll have to ask her. I really decided at 80 that I'd been there since 1974 with an interruption when I was at CapCity's ABC, and it's just a lot easier this way. Charlie, do you have any thoughts on serving on boards generally? Charlie's on the Costco board.
I really admire Costco. That's one of the pleasures of my life, interfacing with those people. That's the only one where I don't have a big ownership interest. I think generally speaking, serving on a lot of different boards is for the birds.
Yeah, I agree. Okay, area 12.
Good afternoon, Mr. Buffett and Mr. Munger. I'm Mark Rabinov from Melbourne, Australia. As an investor from the Asian region, I am concerned that a weaker dollar will erode the value of my Berkshire stock. However, Berkshire is highly productive with real pricing power. Can I be confident that over the long term, any fall in the dollar will be offset by a rise in the value of my Berkshire stock? By that, I mean in addition to any intrinsic growth in the underlying business.
The answer is no. It'd be a lot easier if you just had the Australian dollar go down. The Australian dollar was one of two currencies that we did own last year that contributed to the $100 million profit. No, I cannot tell you what policies will be followed in the U.S. and what policies will be followed in Australia, what they will be and how they will affect the relative value of those two currencies, say, 10 years from now. I think the movement could be quite dramatic, and I think it actually could be dramatic in either direction. That's why I don't know what to do. The only promise you'll get from Charlie and me about Berkshire is that we do every day, as I said in the annual report, try to think about increasing the earning power and the intrinsic value of Berkshire .
To the degree we increase it, the shareholders will, or to the degree we decrease it, the shareholders will share in exactly the same proportion as Charlie and I do. Our interests are 100% aligned. We will make or lose money through our stock. Luck, to some extent, will determine how well we do. We know we can't do remotely as well in the future as we have in the past. There is no way to compound, there's no way we know to compound the kind of sums we're working with now at rates that are anywhere close to what we were able to do when working with much smaller sums. You'll get our best efforts, Charlie.
I can't add to that. Australia has these fabulous open-pit mines. At a time when Asia is just totally booming with its demand for metals, I can't tell you how Berkshire s tock is going to perform mines in Australia. I think we'll do pretty well compared to companies here in the United States.
Yeah, I think so too. Carol?
This shareholder wishes to be known only by his initials, A.J. The importance of Berkshire 's equity portfolio has diminished over the past few decades. Today, I viewed Berkshire 's appetite for equity as an afterthought and instead see its focus as being on large acquisitions. Would you agree with this, and where do you see the equity portfolio going over the next five or 10 years?
I prefer large acquisitions, but it's not an afterthought at all in terms of the portfolio. I mean, Charlie and I spend, we probably spend more time thinking about the portfolio because it's only occasionally that we get a chance to think about acquisitions that are sizable and that are available to us. We are equally interested in both aspects of Berkshire 's operations. Where we hope we really get lucky is in adding significant companies to what we have already and having the companies that we already own make various bolt-on acquisitions. We've had several of those already this year that you don't read about. A lot of our companies have the potential to earn considerably more money five or 10 years from now than they're earning now. Both the development of those businesses, which really resides with the managers, Charlie and I don't contribute anything on that.
We spend as much time thinking about the portfolios as we ever did. You know it's important. I mean, if you talk about $150 billion in cash and marketable securities, the performance of that particular segment is going to have a lot to do with how well Berkshire does over time. Charlie?
Yeah, we'll always have a fair amount of marketable securities because of our insurance subsidiaries. As we get forced by our size into the bigger and bigger stocks, of course we're going to do less well than we did when we had a bigger universe of practical things to consider.
A lot less well. I mean, it really is the nature of things. We are buying securities where we have to put billions of dollars in them in most cases. That is not a field that is unlooked at by other analysts, so it's impossible to have a big edge. We hope we have a small edge.
On the other hand, when we were doing so well in marketable securities, nobody called us and said, "I have a wonderful business and you're the only place in the world where I would want to transfer it." Now that happens, what, a couple of times a year at least?
Yeah.
I really prefer in some ways this part of the game to the earlier game. It's more fun to create permanent partners doing constructive things than just outsmart other people in shuffling little pieces of paper.
It's fun to do both, actually.
Yeah, but I don't see you holding back.
Okay, let's go to the other room, 13.
Hi, I'm Whitney Tilson, a shareholder from New York. Thank you for including in your latest annual letter such complete and clear valuation information regarding Berkshire . You stated that the operating earnings of the insurance businesses are excluded from your earnings table. I know you said this morning that 2011 is going to be a break-even year at best. In light of the disclosure in the annual report that Berkshire Hathaway earned $17 billion in profit over the last eight years without a single money-losing year, are you being overly conservative? Don't you think the intrinsic value of your insurance businesses is more than just their float, especially GEICO, for the reasons you discussed this morning?
Yeah, I'd agree with that, Whitney. It's very hard to estimate what the normal underwriting profit might be over the next 20 years or something of the sort. I agree with you. I don't know whether I'd call it overly conservative. I would say it's conservative to assume break-even underwriting. As you will, if we had another Katrina or something of the sort and forget about, you know, winter storms in Europe and all that, we could lose significant money in underwriting this year. We expect to lose significant money in underwriting, maybe every fifth year, every tenth year, whatever it might be. I think you're right in saying that it would not be inappropriate to include some normalized underwriting profit in addition to the calculation that I made in the annual report.
Whitney, let me help you by asking another question of Warren. Is there any other large casualty insurance operation in the world that you know of that you would trade for ours?
No, not remote. No, nothing close. I mean, however we lucked into it, we have an unbelievable insurance operation. I mean, GEICO is fabulous. You know, if you think about since 1936, the idea has been out there. With all the strength that all the other companies had and the agency plants and everything else, GEICO has now moved to where it's the third largest in the United States and gaining ground every day on the two ahead of them and doing it very profitably. GEICO's combined ratio, GEICO had an underwriting profit of close to 8 points, as I remembered in the first quarter. Now, that's going to be probably the best quarter of the year, I should add. It's a marvelous business. Ajit has built a business from scratch in the reinsurance business that in many respects, he operates all alone.
He may not see a lot of transactions in any given period of time, but there are certain things where if somebody wants huge amounts of insurance and a quick answer, or even a slow answer sometimes, we'll give them a quick one. There's really nobody else to call. It's a little like Charlie mentioned on acquisition opportunities. He's done it. It didn't exist when he got there. Tad Montross has got a magnificent operation at Gen Re. It had to get shaken out to quite a degree, but Tad has got a very, very disciplined business there. We have a group of smaller companies that some of them have some very unusual franchises. They're really, you know, I didn't have anything to do with it. I can brag about these people, but they have really done a job in building an insurance company that I don't think anything, I don't think there is anything like it.
Some of you people that have been around a long time, you invested with an Omaha boy, and you ended up owning part of the best in casualty insurance business in the world.
If you go to 30th and Harney, you'll see a building there, National Indemnity. We paid $7 million for National Indemnities, $1 million for its sister company, National Fire and Marine. That's the same building that we operated out of in 1967. We're operating out of it today. The only difference is that today it's got more net worth than any insurance company in the world.
Yeah, so.
It's not that great a business as a business, casualty insurance It's a tough game. There are temptations to be stupid in it. It's like banking. If you're in it, I think we've got the best one.
Okay, that ws modest statements. We'll run to Becky .
This question comes from Mark Jordan in Charleston, South Carolina. He writes, "In a period of high inflation, which particular businesses owned by Berkshire Hathaway will perform the best and which will perform the worst and why?
The businesses that will perform the best are the ones that require little capital investment to facilitate inflationary growth and that have strong positions that allow them to increase prices with inflation. You know, we have a candy business, for example, and the value of the dollar since we bought that candy business has probably fallen at least 80%- 85%. That candy business sells 75% more pounds of candy than it did when we bought it, but it has 10x the revenues and it doesn't take a lot more capital. That kind of a business, any business that has enough freedom to price to offset inflation and doesn't require commensurate investment or a huge investment to support it, will do well.
Businesses like our utilities, which get in effect a bond-like return, require, you know, if you're going to build a generating plant and it costs twice as much per kWh of capacity, and all you're going to get is a fixed return and yields on bonds go up perhaps dramatically if you get high inflation, is not going to do that well in an inflationary period just because it has certain aspects of a bond-like investment and bonds generally are not going to do well in inflation. Charlie?
Our insurance operations, our capital intensity railroad business is certainly one of the best railroads in the world. Our utility operations are certainly one of the best utility operations in the world. It isn't all bad to be up there world-class in your main businesses.
Our railroad, the government's talked about building a high-speed rail system in California. I think they're talking about 800 mi of track, and their estimated cost was about $43 billion. Estimated costs on constructions and things like that go up dramatically, much more often than they get reduced even by a minor amount. Of course, we paid $43 billion, counting debt assumed, for a rail system which has 22,000 mi of main track and 6,000 locomotives and 13,000 bridges if you ever want to buy a bridge. The replacement value of that asset during inflationary already is huge, and it would grow dramatically. The world, our country will always need rail transportation. It is a terrific asset to own. I'll just leave it at that. Okay, area one again.
I'm Martin Greenberger, UCLA Anderson School, where I work in disruptive technologies, not finance.
You're forgiven. Go ahead.
My friend Walt would like to know if Berkshire Hathaway has been considering splitting its Type A shares like it did its Type B shares. If so, what are the pros and cons in your opinion? What would be the short-term and longer-term effects?
In effect, we've already split it, you know, $1,500 for one by having to be available. You know, we have a situation where the company will never be sold. If any transaction involves the A stock, the B shares are going to get treated exactly the same. There's really no disadvantage to owning the B stock except it has somewhat less voting power than the A stock. In every other way, it's the same instrument. We already have a split stock available. I would tell Walt that he really should not count heavily on the A stock getting split. Charlie?
Yeah, Warren used to cheer up his old friends by telling them, "May you live until the A stock splits.
I would love to make that deal myself, Andrew.
This question comes from Matthew Palmer of North Andover, Massachusetts. He writes, "Mr. Buffett, you have praised Ajit as a possible successor. Since he may be in line as our next CEO, can you give us a concrete example of a policy that he's written that's impressed you? Can you talk a little bit about the way he thinks since we rarely get an opportunity to hear from him?
Yeah, Ajit is not exactly a publisher of his own. I can't think of any decision he's ever made that I think I could have made better. I'm not privy to all of his transactions anymore. There are lots of them that are not of huge size or of great interest. He tells me about all the interesting things that come along and all the very big things that come along. I would say this, you'd be better off voting with him than with me after listening to any proposition he brings up. He is as rational a thinker as Charlie is, as anybody I've met. He loves what he does. He's creative. He's very creative. We have moved into one area after another in reinsurance. When people came in copying us in one area of business that we would be operating in, Ajit comes up with something else.
Lately, we've been much more active in life reinsurance. Who knows what tomorrow brings? If there happens to be a huge cat in the third quarter of this year or something of the sort, that might open up all kinds of opportunities in writing covers if capacity got strained. Who knows what will happen? All I know is that Ajit's mind works like a machine, day after day. He does love what he does, which is an important part of doing well in any activity. I really don't know what his best deal was. I know what my best deal was, which was hiring him. Charlie?
Yeah. Sir William Osler, who created a model medical school for the world, used to say that the secret of success in a field was getting very interested in it. Ajit is really interested in what he does. Many of you don't know this, but every Thanksgiving, Ajit flies to London because they don't have a Thanksgiving holiday.
We give him Christmas off, though. Now, Ajit, we just, you know, I say how invaluable he is, and I'm not exaggerating when we talk about him. He is, to an extraordinary degree, he thinks of Berkshire Hathaway first. Ajit, at various periods when insurance companies became popular for one reason or another, that was, you know, it was the big thing about Bermuda Company some years ago, Ajit could have monetized himself to an incredible degree. He still could do it. I mean, people would hand him a significant percentage of any company being formed with lots of money so that immediately he could create, I would guess, in the hundreds of millions of wealth without lifting a finger, just by somebody putting up, you know, a couple billion dollars and saying, "You've got 20% of it," or whatever it may be. I mean, listen, he's smart.
He knows that. It doesn't cross his mind to do anything like that. We have, in copy, always, he always thanks me for what I do at the end of the year. I feel I've left off a zero, you know, when I get all through. He's just a remarkable human being. We are very, very lucky that I think he has a lot of fun in what he does at Berkshire Hathaway. He's got a cadre of about 30 people that work with him. There's many more that are settling claims and doing that sort of thing on runoff business. You won't find anything like it, in my view, not only in the insurance world, but really in almost any part of the business world.
Let's go ahead and answer the question. Maybe you avoided it on purpose. Is what are our worst businesses?
What are our worst businesses? Generally speaking, and this is general, I have made certain mistakes in going into smaller businesses that really never had the potential of becoming big. I would say overall, probably I would call retailing, you know, Dexter was our worst business. I have the furniture mart, obviously, is a terrific operation. We have not made, despite being in numerous retailing, quite a few retailing businesses, for quite a while, we have not created major earning power there. Wouldn't you agree on that, Charlie?
Yeah, luckily, it's a small part of the operation.
Yeah.
You're right. That's been the hardest game for us, and you know, if we were a little smarter, we could have figured that out better.
If we were a little smarter, we could have done a lot of things.
Yeah, right.
Yeah. Of course, See's is a retailing business to some degree.
Yes.
You know, we had enormous success there. Maybe we started thinking we were geniuses. We were like the duck on the pond when it was raining. We thought we were rising in the world because of merit. It was just because it was raining. Okay, we'll go to number two.
Joel Telling Hess, Boston, Massachusetts. What's the proper way to think about goodwill and return on capital? Berkshire's manufacturing, service, and retail businesses earn pretax returns on tangible capital over 20%, which suggests either skilled managers or fantastic businesses. The return on allocated equity is in the single digits, which looks drab. Accountants treat intangibles similarly because they have different economics. For an indestructible brand like See's or Coca-Cola, I can see why the intangibles should not be amortized because it's worth more every year. Your comments on GEICO policyholders were one way to think about that.
All the tobacco companies have billions of dollars of goodwill, and unit sales of cigarettes decline every year in developed countries. Perhaps they should be amortized. For Time Warner AOL, goodwill definitely needed to be amortized.
Goodwill, you mentioned AOL, Time Warner, something you've tried. It should be written off, actually. It was just a mistake in purchase price. The goodwill should not be used in evaluating the fundamental attractiveness of a business. There, you should look at return on tangible assets. Even then, there are some minor and some other adjustments you may want to make. Basically, in evaluating the businesses we own, in terms of what the management are doing and what the underlying economics of the business are, forget about goodwill. In terms of evaluating the job we're doing and allocating capital, you have to include goodwill because we paid for it.
If we buy, you know, Coca-Cola goes back to 1886 and John Pemberton at Jacob's Pharmacy in Atlanta, and there was not a whole lot of goodwill put on the books when he sold that first Coca-Cola. If you were to buy the company now, the whole company, you would be putting a figure, $100 billion or something like that on it. You shouldn't amortize that. You shouldn't, in judging the economics of the business, look at that. In terms of judging the economics of the business that purchased it, we'll call it Berkshire, then you have to allow for the goodwill because we are allocating capital and paying a lot for it. I don't think the amortization of goodwill makes any sense.
I think write-offs of it, when you find out you've made the wrong purchase and the business doesn't earn commensurate with the tangible assets employed plus the goodwill, I think write-offs of it make sense. When looking at businesses as to whether they're good businesses, mediocre businesses, or poor businesses, look at the return on net tangible assets. Charlie?
I think that's right. As the gentleman says, when we buy a business, a whole business, we never get a huge bargain. Of course, we may get down toward 10% pretax earnings on what we pay. That isn't so awful as you think when a lot of the money comes from insurance float that costs you nothing. In other words, if you have $60 billion of float and God gives you $6 billion a year of earnings, it's not all bad.
On Lubrizol, we're paying close to $9 billion for the equity, and it earns, and you should make adjustments for debt, but it's not an important factor there. The current rate of earnings is probably $1 billion pretax. Lubrizol itself is employing far, you know, they're employing, you know, call it $2.5 billion of equity to earn that $1 billion of pretax. It's a very good business in terms of the assets that are employed. When we end up paying the premium we pay to buy into it, it becomes $1 billion pretax on something close to $9 billion. You have to judge us based on close to a $9 billion investment. You have to judge James Hambrick in running the business based on the much lower capital that he's been employed.
It can turn out to be a very good business, and we can turn out to have made at least a minor mistake if it isn't as good a business as we think it is now, but still is a very satisfactory business based on the tangible capital employed. Charlie, can you make that clearer?
We are not going to buy, in the climate we're in now, operating businesses that are all decent for low prices. It's just not going to happen.
Carol?
In the book about Charlie, "Damn Right," by Janet Lowe, Charlie talks about his view on teaching finance. He says that he would use the histories of 100 or so companies that did something right or wrong as a basis for teaching the course. Could each of you, and since this concerns Charlie, could each of you, we'll start with Charlie, give us an example or two from either category, right moves or wrong moves?
I predict Charlie's going to talk about Costco. Go ahead, Charlie.
Costco, of course, is a business that became the best in the world in its category. It did it with an extreme meritocracy and an extreme ethical duty, self-imposed, to take all its cost advantages as fast as it could accumulate them and pass them on to the customers. That created ferocious customer loyalty. It's been a wonderful business to watch. Strange things happen when you do that and do that long enough. Costco has one store in Korea that will do over $400 million in sales this year. These are figures that can't exist in retailing, but they do. That's an example of somebody having the right managerial system, the right personnel selection system, the right ethics, the right diligence, et cetera, et cetera. That is quite rare. If once or twice in a lifetime you're associated with such a business, you're a very lucky person.
The more normal business is a business like, say, General Motors, which became the most successful business of its kind in the world and wiped out its common shareholders, what, last year? That is a very interesting story. If I were teaching a business school, I would have Value Line type figures that took people through the entire history of General Motors. I would try and relate the changes in the graph and in the data to what happened in the business. To some extent, they faced a really difficult problem, heavily unionized business combined with great success and very tough competitors who came up from Asia and elsewhere, and to some extent from Europe. That is a real problem, which, of course, to prevent wealth from killing you, your success turning into a disadvantage is a big problem in business. There are all these wonderful lessons in those graphs.
I don't know why people don't do it. The graphs don't even exist that I would use to teach. I can't imagine anybody being dumb enough not to have the kind of graphs I yearn for. So far as I know, there's no business in school in the country that's yearning for these graphs. Partly the reason they don't want it is that if you taught a history of business this way, you'd be trampling on the territories of all the little professors and subdisciplines. You'd be stealing some of their best cases. Bureaucracies, even academic bureaucracies, people will protect their own turf. A lot of that happened in General Motors.
Yeah, I really think the world, that's the way it should be taught. Harvard Business School once taught it much that way. They stopped. I'd like to make a case study as to why they stopped. I think I can successfully guess. It's that, of course, in the history of business, trampled on the territory of barons of other disciplines, like the baron of marketing, the baron of finance, the baron of whatever. IBM is an interesting case. I mean, there's just one after another that are utterly fascinating. I don't think they're properly taught at all because nobody wants to do the full sweep. Charlie and I were on a plane recently that was hijacked.
With what?
It was hijacked. I'm telling them about our experience on that hijacked plane when the hijackers picked us out as the two dirty capitalists that they really had to execute. They were a little abashed about it. They didn't really have anything against us. They said that each of us would be given one request before they shot us. They turned to Charlie and they said, "What would you like as your request?" Charlie said, "I would like to give once more my speech on the virtues of Costco with illustrations." The hijacker said, "That sounds pretty reasonable to me." He turned to me and said, "And what would you like, Mr. Buffett?" I said, "Shoot me first.
Yeah.
Okay, number three.
Yeah.
Sumit Mehra from Kashmir in India. Mr. Buffett, hope you enjoyed your first trip to India.
I sure did.
Here's my question. One of the most important things that drive people are incentives. If you live in a rich society, it's very hard to get your kids to work hard and reach their full potential because they just don't need to. If you or Charlie decide to have a kid in the next five years.
It will take more than a decision.
How would you incentivize him or her?
I thought you were going to say, how would you? No, it's a good question. I apologize for interrupting. How would you incentivize him or her to compete against the hungry and highly motivated kids from emerging markets like China, Brazil, Russia, or India?
Yeah, I think certainly that if you are very rich and you bring up your kids to think that they are more important in society or that they have some special privilege simply because they came out of the right womb, that's just a terrible mistake. Charlie has raised eight children that I know quite well, most of them. I don't think any of them have that sense. If you really are going to raise your kids to think that other people should do all the work for them and that they will be entitled to sit around and fan themselves for the rest of their lives, you will probably not get a good result. In my case, Charlie's been rich most of the time when his kids, many of his kids were growing up. Some of his kids were growing up.
I've been rich while my kids were getting, certainly when they got into high school and college. I certainly didn't want to give them the idea that they were special just because their parents were rich. I don't think you necessarily have to get a bad result or have children that don't have any incentives simply because their parents are rich. The one thing I don't think you want to give them an incentive to do is try and outdo their parents at what their parents happen to be good at. I don't think that makes sense whether you're a professional athlete or a rich person or whatever it may be, a great novelist or you name it. I really think if you're rich and your kids turn out to have no incentives, I don't think you should point at them. I think you should probably point at yourself. Charlie?
I don't think you can raise children in an affluent family and have them love working 60 hours a week in the hot sun, digging fence post holes or something. That's not going to work. To some extent, you are destroying certain kinds of incentives. My advice to you is to lose your fight as gracefully as you can.
I'm not sure if you're poor if you can get your kids to love the idea of working 60 hours a week. They may have to, but.
The kids that really get interested in something will work no matter how rich they are. It's rare to have an Ajit-like intensity of interest. You know, you are a proctologist. You might not like your day as it went on and on.
I think we better move along, Becky.
This question comes from a shareholder from Central Iowa who asks, "Berkshire Hathaway does well in part because its managers want to be there for non-pecuniary reasons. It seems likely that the next operation CEO will best be filled by someone who insists on a salary of more than $100,000. What kind of compensation structure do you expect for the next generation of Berkshire leadership?
I think the next CEO will make a lot of money and should make a lot of money. I mean, the responsibility for running a company with a couple hundred billion dollars of market value should pay well. I think that whatever the level the board decides then in terms of a base salary should be supplemented by probably an option system that incorporates a couple of things that are put. That's unusual. I don't think the option price, the original strike price, should be less than if the company were for sale, the assets would bring. The idea of giving somebody an option during some depressed part of the stock market at the market price, I think, is crazy because you wouldn't sell your business at that price and why sell part of it on that basis.
I think the base price should be what the business is worth at the time you start. If, because of the compounding feature of leaving money there, you know, no management at all would produce some gain in value over time. I think there should be an increase in the base price annually at some rate and then minus the dividend that's being paid. If you assume a 3% dividend was paid and you wanted to have a hurdle rate of increasing at 7% or 8% a year, then you would have the option price accelerate maybe at 4% or 5%. With that kind of a structure, I think you can give a very large option because if somebody is creating excess value above a given rate on a very large sum, I think they deserve something quite significant in terms of that excess earned.
The present compensation system has no relevance at all to what my successor should earn. The main thing is getting the right person with the right values who interacts well with the managers and who knows how to allocate capital. As you just heard a little earlier, our managers who accomplish a lot, and if they're working with big operations so that it turns into a lot of dollars, they can make a lot of money with Berkshire Hathaway. Nothing has worked off the eccentricities of Charlie and me at the top level. People make well into eight figures sometimes at Berkshire , but they earn it. They don't get it because of any phony targets or anything of that sort. They get it because they really deliver incredible, in some cases, excess value to Berkshire. Charlie?
I hope it will be a long time in the future. I don't regard it as absolutely inconceivable that Warren's spot will someday be occupied by a very rich man who has adopted Warren's system of pay. I think somebody in America has to be the exemplar for not grabbing all you can. I think it's a very important part of the whole scheme.
I don't think you better run an ad, though, after I go there. It says, "CEO wanted, $100,000 pay plus pleasant surroundings." Okay, we'll go to number four.
Hi, Mr. Buffett, Mr. Munger. My name is Vern Cushenbery, and this question is on behalf of a group of investors that made the trip up today from Overland Park, Kansas. Given your interest in renewable energy and natural resources, I wonder if you'd be willing to share your thoughts on how a world of limited and depleting clean water supplies and declining food stocks affects your investment strategies and thinking on the future.
Yeah, I would say it's an important subject, but it doesn't affect our investment strategy to any real degree. In other words, you know, we would love to buy another GEICO. We would love to buy another BNSF Railway. We'd love to buy another MidAmerican Energy. We look at those businesses over a long timeframe, but we are looking at what we expect their earning power to be 3, 5, 10, 15 years down the road compared to what we are paying. I would say that there are a number of societal issues that really do not enter into our investment or purchase of business type decisions. Charlie?
I would advise not paying too much attention to the clean water issue. If there's enough energy, you can always get enough clean water. Israel sometimes goes month after month making half its water from seawater. With enough energy, the water problem goes away. That's very helpful in considering the future. Regarding the agricultural productivity, I think one of the main reasons for being restrained in the use of hydrocarbons is that modern agriculture won't work without them. I'm a great believer in being conservative in terms of blowing all the hydrocarbons on heating houses and running cars. Think of how happy we'd be if we'd taken a bunch of that dollar oil in the Middle East and just carved it here and put it in salt caverns. You can argue we really screwed up the past.
You can argue all the people who think that our main solution is to drill, drill, drill. They're all nuts. It's probably quite wise to use up the other fellow's hydrocarbons while preserving our own. It's not going away because we're not drilling it now. You can see that this will lead into unproductive discussion.
Well. Okay, we'll move right on to Andrew.
This next question actually just came in by email from someone in the audience from their BlackBerry. Actually, a prominent investor asked that his name not be named. This question is the following. He writes, "Your purchase of Lubrizol was done in a negotiated transaction. The board of Lubrizol did not market the company for sale nor run an auction. According to the proxy, you did not permit the company to run a go-shop process despite their request that you allow them to do so. Did the board of Lubrizol breach its fiduciary duty by not running a more competitive process to sell the company? If not, why not?
Let me do this.
Okay, Charlie will.
The answer is no, the board at Lubrizol did not breach its duty because we were not going to participate in the transaction if they didn't do it our way. We basically don't participate in auctions. Actually, just very, very recently, we were asked to participate in one, and we're just not interested. They may end up getting less money than they would have gotten from us. If they want to auction it, the one thing I can guarantee them, you know, is that when they get all through, we will not pay them what we would have paid them originally if they stepped up. They get a very certain deal. They got a very significant price in my view and in the view of two advisors. If they had said we want to conduct an auction, we would have said good luck and we'd have looked at something else.
Has anybody else got an easy question?
Okay, number five.
Hi, Charlie. I think I have an easy question.
Give it to me, then.
My name is Stuart Kaye from Matarin Capital Management in Stamford, Connecticut. Warren, you have often described a big part of your job as allocating capital. Going forward, by just looking at Berkshire Hathaway's financial statements, how can we determine how good of a job you have done at allocating capital?
The real test will be whether the earnings progress at a rate that's commensurate with the amount of capital that's being retained. Over time, our market value test, but markets can be very volatile and capricious. Over time, obviously, unless the market value of Berkshire Hathaway is significantly greater than the amount of capital that we have kept from you, retained, and used to buy businesses, the verdict is against us if we ever start selling at a discount to that factor. You just have to, you know, it is not a perfect measurement and certainly is not on a three-month or six-month or one-year basis. Over time, if we're going to keep your money, we have to earn a better than average return on that money we keep, and that has to translate into the stock selling at a premium over the money we retain from you. So far, we've done okay on that, but the job gets tougher every year. Charlie?
Yeah, we have continued to beat the market averages. We just aren't beating our own past record. I guarantee that will continue, at least the last half of it.
Yeah, I guarantee only the last half of it, right?
Yeah.
Okay, Carol?
This question is from Mike Rifkin. He wants to ask about five transactions you made in recent years with very different terms. Goldman, $5 billion at 10% plus warrants. GE, $5 billion at 10% plus warrants. Dow Chemical, $3 billion at 8.5% convertible to common. Wrigley, M&M, Mars, $4.4 billion at 11.45%. Swiss Re, $2.7 billion at 12%. Now, why the different interest rates, he said, and how about why the warrants in some cases, and why did the rich Mars family need $4.4 billion to do a deal and at 11.45%?
The Mars family can speak for themselves, but in terms of comparing those five deals, it was $3 billion with GE, and the Mars deal actually involved a $2.1 million preferred stock, which has some unusual characteristics. You have to look at it as a package. The important thing is that every one of those deals was done at a different time, although the Goldman and the GE deals were done in close proximity with each other. Market conditions, you know, you heard Charlie in the movie talk about opportunity costs. Our opportunity costs were different in every single one of those five transactions. Incidentally, I could have done a much better job of allocating our money in terms of the post-panic period. I was early on Goldman and GE compared to the situation five months later. We not only don't have perfect foresight, sometimes it's pretty bad.
Each deal, when I did the Swiss Re, I was not thinking about the Dow Chemical deal, which was committed to maybe a year plus earlier. I was thinking about what else I could do with $2.7 billion. That's the way all the decisions are made. They are not related to each other. They go through a mind that is looking at everything available that day, including the amount of cash we have, the likelihood of being able to do something else next week or next month, what else we can do that day. Past deals we've made don't really make any difference. In fact, one of the errors people make in business, and sometimes it can be a huge error, is that they try and measure every deal against the best deal they've ever made.
They say, you know, I've made this wonderful deal for maybe an insurance policy written, it might be a company bought, it might be a stock bought. They're determined that they're never going to make a deal that isn't that attractive in the future. In effect, sometimes they take themselves out of the game. The goal is not to make a better deal than you've ever made before. The goal is to make a satisfactory deal that's the best deal that you can make at the time. Charlie relates it to marriage, and I'll let him expand on that.
No, those are, of course, we're going to make different deals at different times based on different opportunity costs. There's no other rational way to make deals.
Okay, we'll go to number six.
Keith McGowan, Norfolk, Massachusetts. Thank you, Mr. Buffett and Mr. Munger. Thank you for being a role model. Your ethics, frugality, sense of humor, honesty, sharing your ideas on investing, sharing your ideas on business, make this world a better place for everyone. Charlie mentioned in a prior answer about continuous learning. Mr. Buffett, you read about five newspapers a day. You also read many annual reports and other business-related reports. You have the ability to read much faster than the vast majority of people. Reading is a fantastic thing. What advice would you give to children in high school, college, or adults who want to increase their ability to read faster? You know.
That's an interesting question because I do read, as you described, the five papers and lots of 10-Ks and 10-Qs. Unfortunately, I'm not a fast reader, and I'm not as fast as I used to be on reading. I don't know how effective various speed reading classes may be, but if they are effective, I would really suggest anybody that can improve their speed. I wish I could read a lot faster than I can. Charlie can read faster than I can. It's a huge advantage to be able to read fast. There's that old Woody Allen story about how he took the speed reading course, and he met somebody who was telling how wonderful it was. The guy said, "Well, give me an example." Woody Allen said, "Well, he said, I read War and Peace last night in 20 minutes.
It's about Russia." That's the problem I have when I try and read fast. I get all for reading the book, and I say it's about business. I really don't know the effectiveness of speed reading type courses, but if you know of any friends or you can learn more about that, and there are effective techniques. Obviously, the thing to do is to learn them very young because there's really, you know, there's hardly anything more pleasurable than reading and reading and reading and reading. Charlie and I do a lot of it. We continue to do a lot of it, but I don't do it as fast as I would like to. Charlie? I think speed is overestimated. I had a roommate at Caltech who had a very distinguished mind, and I could do problems faster than he could, but he never made a mistake, and I did.
I wouldn't be too discouraged if you have to go a little slower. What the hell difference does it make? I'll pass that peanut brittle one.
Yeah.
Thank you. Thank you.
You may have noticed we have a 15-pound box out for sale in the other room, but Charlie was looking for a 25-pound box. Yeah. Becky?
This question comes from Eric Weissmann, who asks, "Are you worried about Congress playing politics with the raising of the debt ceiling? What would this do to Berkshire Hathaway stock and to the overall economy?
You mean if they didn't raise it?
If they didn't raise it.
It would probably be the most asinine, you know, act that Congress would ever perform. At one time in Indiana, back in the 1890s, I think they passed a bill. I know it was introduced. You can look it up on a search engine. They passed a bill to change the value of pi, the mathematical term pi, to an even 3 because they said it would be easier for the school children to work with. That's the only bill I can think of that would give competition to a refusal to raise the debt ceiling. It's extraordinary. It really is extraordinary that with our deficit running, you know, well over $100 billion a month and all kinds of items that can be changed. Having a debt ceiling to start with is a mistake. The United States of 2011 has a different debt capacity than the United States of 1911.
We're always, it's going to be a growing country, and we're going to have a growing debt capacity. That doesn't mean I think it's a great idea at all to have debt growing as a percentage of GDP. To stick debt ceilings on so that these games get played and all the time that gets wasted and everything, the amount of the number of silly statements that you hear, it just seems such a waste of time for a country that's got a lot of things to do. In the end, they won't, in my view, there's no chance that they don't increase the debt ceiling. I'd love to see them eliminate the idea because it just results in these periodic kind of stalemate operations where everybody uses it for posturing purposes and everything of the sort.
The United States is not going to have a debt crisis of any kind as long as we keep issuing our notes in our own currency. The difference between being able to borrow in your own currency and having to borrow in another currency is night and day. The only thing we have to worry about is the printing press and inflation. If you're a member of the European Monetary Union, you have to worry about, you can't print money. You can go and get your co-members to try and help you out. Giving up the right to issue debt in your own currency is a huge step, and the United States has not done it. I don't know whether we've ever issued U.S. bonds in any other currency, but we certainly haven't made a habit of it.
The Japanese, incidentally, which have a very high ratio of debt to GDP, also have consistently borrowed in their own currency. Believe me, when it's time to pay somebody back, and you have a choice of paying, and you're forced to pay in somebody else's currency versus paying in your own, it's an entirely different proposition. As a matter of fact, Charlie and I, we were trying to buy that bank back in.
Chicago.
Yeah, in Chicago in the late 1960s. This was a time of really tight money, and tight money was different than tight money is today. I mean, tight money meant no money. Somebody wanted to buy this bank, and the only place we could find some money, I think, was in Kuwait in dinars, wasn't it?
Yeah, Kuwait, you got dinars.
Yeah. I thought to myself, and Charlie concurred, you know, who the hell knew what they were going to say the value of the dinar was when we went to pay it back. I mean, it was not something over which we had a lot of control. We decided not to borrow the money in dinars, though, even though I kind of wish we'd bought the bank. Charlie, do you have anything to say on that?
I do think, you know, I remember an era when we had a bipartisan foreign policy and all that. I liked that era. That was the Marshall Plan, and a lot of wonderful, constructive things were done. They were generous things. Now it seems to me that both parties are trying to compete to see who can be the most stupid, and they keep topping one another.
Yeah, you can tell Charlie is a fellow who's always filed an accurate income tax form. He's not worried. Number seven.
Okay, good afternoon, Mr. Buffett and Mr. Munger. I'm John Gory from Iowa City, Iowa, where I'm a happy customer of MidAmerican Energy. Around 2004, Mr. Buffett, you told us of a great attention you had given to limiting Berkshire's exposure to mega-catastrophes so that one could not break Berkshire. Today, MidAmerican Energy is seeking approval to build a nuclear power plant in Eastern Iowa. At the same time, another utility company, Tokyo Electric and Power, faces claims that Merrill Lynch has estimated as exceeding 12 trillion, or $140 billion, to compensate residents and businesses that have been displaced and farmers that cannot produce. Do you believe that the bond-like return that MidAmerican Energy might receive from a nuclear power plant can justify the mega-catastrophe risk that it would pose to Berkshire?
Yeah, I don't think it does pose. I don't know the details of it, and Greg Abel could speak to it better than I can, but I don't think there's anything like the exposure that you refer to. I think nuclear power is an important part of the world's equation, really, in dealing with its problems on emission. It's very long-term because you're not going to change the installed base in any hurry. As you know, France has a very high % of nuclear power, and actually 20% of the electricity generated in the U.S. comes from nuclear power. I probably am getting some of mine from, we have at Port Calhoun, we have a nuclear facility, not we, but the Omaha Public Power District has a nuclear facility I've actually been in. I think nuclear power is important, and I think it's safe.
I think that I have no, I don't think nuclear power is going to go anyplace in the U.S. for a while, maybe quite a while, because of the reaction to what happened in Tokyo, or with Tokyo Electric Power. That doesn't change my view as to the advisability of continuing to develop nuclear power, not only in the U.S., but around the world. I think some people misinterpreted what I said when I was interviewed, when I said that I thought it would have a major setback in its development just because of the popular reaction to what happened in Japan. That has not changed my view that nuclear power is important for the future of this country and the world. Charlie?
Yeah, we can't be so risk-averse that things that have a very tiny chance of making a big dent in one subsidiary are unendurable for us. We have to have a certain reasonable amount of courage in operating this company.
We have gas pipelines. You can dream of all kinds of worst-case situations. We have to carry toxic materials on it. We're required by law to carry those on the railroad. You can picture the wrong place, the wrong time, the wrong everything. We are not bearing any risks, in my view, ever, to threaten the enterprise. That is one thing I think about all of the time. I regard myself as the Chief Risk Officer of Berkshire Hathaway. That is not something to be delegated to a committee, in my view, at all. I think about whether I think about derivative positions, whether I think about leverage, whether I'm thinking about nuclear power plants or anything. We are not doing anything that I know of that's pressing my imagination as far as I can, threatens me losing a nice sleep over Berkshire Hathaway's well-being.
I think you could also count on any new nuclear plant built in Iowa. It'll be a hell of a lot safer than the ones we already have. We are learning as we go along here.
Obviously, more people have lost their lives by far in coal mine accidents than ever in the United States, have suffered no losses from anything involved in nuclear, with it producing 20% of the electricity used by 309 million people.
If a tsunami gets to Iowa, it will be a hell of a tsunami.
Yeah. Our railroad won't do so well either. Andrew?
This question comes from Mary and Jim Beaumont from Springfield, Illinois. They've been Berkshire Hathaway shareholders since 1971. I should note that we received several questions from some long-term shareholders along these lines. This one reads, "Would Berkshire Hathaway ever consider reinstating its shareholder-directed charitable giving program now that you have a big cash position and are urging people to give away their wealth to worthy causes? When you had that program, we were able to support many local schools and charities over the years.
Yeah, I love that program, which we had for maybe 20 or so years. Charlie loved it. A lot of the shareholders loved it. It was interesting because it was a tax-efficient way to let shareholders give away some money to whatever they chose, as long as it was a 501(c)(3). They could pick up to three charities. Some families, for example, used it as a learning device. When they would get the form from us, they'd get their kids around the table and they'd talk about philanthropy and why they were choosing what they did. One thing that was very interesting about it is nobody else copied it. I mean, the rest of corporate America was not interested in having their shareholders' direct contributions. They were much more interested in having the CEO direct contribution. It did not catch on, despite a fair amount of publicity.
We always had a small backlash of sorts from people who didn't like the charities that our shareholders were choosing. Berkshire's name was on the check. The shareholders would tell us, "We want $20 a share," let's say, and they own 10 shares so they can direct $200. They'd say, "We want our $200 to go to more churches and synagogues." Actually, we're number one, but there were schools and there were all kinds of things. We would always get some letters where Berkshire would be contributed to, say, Planned Parenthood of California, and people would say, "We're not going to buy See's Candies because Berkshire is supporting Planned Parenthood in California." Sometimes I would write the people a letter and tell them that when See's bought almonds or milk or anything like that, we didn't get into the charitable preferences of the person that supplied us.
It never really amounted to anything. We bought the Pampered Chef, and that was a different situation because with the Pampered Chef, we operated through 50,000 plus independent contractors. These are women, largely women, who sometimes to supplement their income. We have at least one in the office that's a woman that sells Pampered Chef's products. Sometimes as a main source of income, these 50,000 were independent contractors, and a campaign developed where people said that because Berkshire Hathaway gives money, probably primarily to pro-choice organizations, and that was at the direction. We had other people giving them to pro-life organizations. I mean, these reflected the views of our shareholders, not of Berkshire Hathaway management, but that they were going to boycott these independent contractors.
These were people who depended on the income, who had nothing to do with Berkshire Hathaway's policies, and they were being hurt in terms of their livelihood. In some cities, it became a radio campaign, and in some cities, people regularly started interfering with the parties arranged for our Pampered Chef consultants. It was hurting a whole lot of innocent people who had nothing to do with Berkshire Hathaway's policies, who had nothing to do with Berkshire Hathaway. At that time, reluctantly, we decided to end the program. I didn't mind at all losing some See's candy business or whatever to some people. When we start affecting individuals, most of these people are not high-income individuals, and we're cutting off their livelihood because of something Berkshire Hathaway's doing. It just became apparent to me that it was unfair to continue it.
Reluctantly, we stopped it, and I think it's too bad.
We don't want the parent company involved in distracting arguments about the social issues of the times.
We certainly don't want it where it affects people who are just bystanders, basically, who have counted on us over the years to work with them. It was literally affecting the income of thousands, primarily women, concentrated in certain communities around the country.
Okay. A lot of Berkshire Hathaway stock is given away every year. It isn't like we've lost the flow of charity totally.
No, a huge amount is given away. Partly that's because Charlie and I started our partnerships back in the 1950s and 1960s, and we've got a number of partners that are now in their 80s, and some of them have given away some exceptional amounts of money. You had a question earlier from Dick Holland, for example, and Dick Holland, it's a matter of record is the exact numbers, but he's given away huge amounts of money over the years and continues to. We've got dozens like that that I would say are going to end up giving back 90% or more of all the money they've made in Berkshire Hathaway. Okay. Number eight.
Tanya Leneva, Boston, Massachusetts. When you think about long-term cash flows, do you try to forecast growth, or do you just think about certainty? If you have an indestructible company like Coca-Cola or BNSF Railway, do you try to estimate growth?
We think, are you finished on that?
Yes.
Yeah. Growth is part of the investment equation, and obviously, we love profitable growth. We would love to figure out a way to, say, take a See's candy, to move it geographically into new areas, all kinds of things. If we could find areas for growth with See's, it would be likely to be very, very profitable. If Coca-Cola, which is in 200 countries, they have pursued that policy successfully now for 125 years. Some products travel way better than others. When we look at a business and we're looking out in the future, obviously, if we see growth in that picture and it's growth where it produces a high return on incremental capital involved, we love it. We do not rule out companies where we think there'll be little or no growth if the price is attractive relative to the earning power.
There will be some growth over time in something like lubricants at Lubrizol, but it won't be dramatic growth. Would we love it if it were going to grow 10% a year in units or something of the sort? Sure, but it isn't, that's not going to happen. It's a factor in every investment decision because we're really looking out to the future as to future earning power, but also future capital requirements. We think plenty about whether any business we go into is likely to grow profitably. Sometimes we're right and sometimes we're wrong, but we don't rule out companies that have very slow growth or no growth possibilities. Charlie?
The interesting thing is that in our country, the business schools teach people to make these projections way in the future, and they program these computers to grind these projections out. They use them in their business decision-making, etc., etc. I've always regarded those projections as doing more harm than good. Warren has never prepared one that I know of. Where an investment banker prepares one, we tend to throw them aside without reading them.
We turn them upside down, actually.
What?
We turn them upside down.
I think an enormous false precision gets into things when you program computers to make forward projections for a long period of time. We make rough projections in our head all the time.
Sure.
We don't do any of those formal projections because the fact that they're there in paper and came out of a computer makes some people think they must be significant. I really think they do more damage than they do good.
When we bought The Scott Fetzer Company, which was back in about 1985, it had been shopped by First Boston to more than 30 parties. They never got around to calling us. After shopping it to 30 parties, The Scott Fetzer Company finally was working on a deal with an ESOP after something else had fallen through. I forget the exact details. I sent a letter to Ralph Schey. I'd read about it in the paper. I never met him, never talked to the guy. I sent him a letter. I figured I'd gamble $0.21 or whatever the first class rate was then. I said, "We'll pay $60 a share if you like the idea. I'll meet you in Chicago Sunday. If you don't like the idea, tear up the letter." That took place, and Ralph met me. We made the deal. We paid the $60 a share or whatever it was.
Charlie and I went back to sign up the deal. The fellow from First Boston was there. He was a little abashed since he had not contacted us at all when they were looking for something. Naturally, he had a contract that called for a few million dollars of commission, even though he had not bothered to ever contact us. We made the deal by ourselves. In a moment of exuberance, while he was collecting his few million dollars, he said to Charlie, "We prepared this book in connection with The Scott Fetzer Company.
Since you're paying us a couple million dollars and have gotten nothing so far, maybe you would like to have this book." Charlie, with his usual tact, said, "I'll pay you $2 million if you don't show me the book." I should mention, in connection with Lubrizol, Dave Sokol met James Hambrick, I think, on whatever it was, January 25 or whatever the date. Lubrizol had already made projections publicly out to 2013. Dave told me that James had also given him some projections, I guess, out to 2015 or something. Did I want to see them? I told him, "No." I don't want to look at the other fellow's projection. I've never seen a projection from an investment banker that didn't show the earnings going up over time. Believe me, the earnings don't always go up over time. It's just the old story.
Don't ask the barber whether you need a haircut. You do not want to ask an investment banker what he thinks the earnings are going to be in five years or something he's trying to sell. I pay no attention to that sort of thing. As Charlie says, we are doing projections in our head, obviously, when we look at a business. I mean, when we look at any company to buy or any stock to buy, we are thinking in our mind. We've got a model in our mind of what that place is likely to look like over some period of years. We also have some model in our mind of how far off we can be. I mean, there's some things we can be way off on. There's other things we're likely to be in a fairly narrow range on. All that is taking place. We sure don't want to listen to anybody else's projections.
Those of you who are about to enter business school or who are there, I recommend you learn to do it our way. At least until you're out of school, you have to pretend to do it their way.
Okay, Carol?
On Berkshire's quarterly 13F filings with the SEC, three stocks are held only by the entity recorded on the form as Warren E. Buffett and not by a Berkshire subsidiary company. Please clear up some confusion on this matter. Are these holdings your own personal investments outside of Berkshire, or do they belong to Berkshire Hathaway?
You'd have to tell me what the names are.
Unfortunately, the questioner didn't include those. These are the three that say Warren E. Buffett is the owner.
Yeah. Marc Hamburg prepares those forms. Marc, do you have a microphone that you can?
I think.
Yeah, go ahead.
Those are securities that are owned by certain employee benefit plans. Warren is directed into those plans, but they're not owned by Warren, or there's no indication that they're owned by Warren. Warren's part of the filing because he's considered to be a controlling shareholder of Berkshire Hathaway. Every security listed on there shows Warren as one of the owners.
Yeah, do we file stocks owned by pension plans? Do we?
To the extent that you have directed it.
I got you, yeah.
Right.
No, I don't think I, Marc knows the rules on it better than I do. I own very, very few securities. I really spend my time thinking about Berkshire. I've got a lot of the very security I've been telling you not to buy, which is government bonds. That's not because it's a good investment. It's just a place to have some money and forget about it. I'll work on Berkshire. Area nine.
Mr. Buffett, Mr. Munger, it's an honor and a pleasure. My name is Ben Anderson. I'm from Los Angeles. When you're looking at an investment in China, where the business culture is a lot different than it is here in the U.S., and successful business practices are, again, very different than they are here, what are the characteristics you look for when placing an investment in that company? Is that any different than the general principles at Berkshire Hathaway?
We follow the same principles, but we recognize that we know less about tax laws, about customs, about attitudes toward shareholders. Anytime we get outside the U.S., then we know in the U.S. Now, to varying degrees, we weigh in that uncertainty. At the time I bought PetroChina stock, which I don't know, it was probably 2003 or thereabouts, it was extraordinarily cheap in relation to any calculation of reserves or refining capacity or cash flow or you name it. At the same time, Yukos in Russia was similarly very, very cheap. They were both huge. I am no geopolitical expert or anything of the sort, but I decided I was more comfortable buying PetroChina than I was buying Yukos. Was I as comfortable buying PetroChina as I would have been buying, you know, some domestic company of similar size? No, because I don't know as much.
I didn't know then, and I don't know as much now about all the intricacies of Chinese tax law and what the policies might be. I was fairly impressed, quite impressed when I read the report of PetroChina. For one thing, they said they were going to pay out 45% of, as I remember, 45% of their earnings in dividends. That's more than any company, the oil company in the U.S. would tell me. I regarded that as a plus and an indication of intent that I thought would be fulfilled, and it has been fulfilled. We do make allowances for our lack of understanding, as well as we might in the U.S., various key factors.
The basic principles of trying to value the business, trying to find managements in which we have confidence in both their ability and integrity, and then finding an attractive purchase price, those principles apply wherever in the world we would be investing. Charlie?
We make so few investments in China that trying to draw general lessons from us would be hard. It reminds me of the time a professor went west for the summer, and he came back to his faculty, and he said, "I've learned that Indians always walk single file." They said, "How did you figure that out?" He said, "I saw one, and he did.
How did we get from there to China?
We only had a couple of things in China that were there like the one Indian. You can't draw general lessons from our.
We're willing to look tomorrow. I mean, obviously, if we had a call on something, that could be a significant size investment because it just doesn't make any sense for us to look at things we can just put a couple hundred million dollars in. You know, I love the idea of looking at various ideas. I mean, I find it a fascinating game to hear about companies or businesses that are new to me. The problem now is that the universe has gotten much smaller because of our size. We welcome a call from a lot of countries. There's some countries that are just too small. They're not going to have businesses that could move the needle at a place like Berkshire Hathaway. Those are off the list.
China has at least one private company that makes over $3 billion a year after taxes.
There's some big things out there. I'll get the name from him later, but I don't want you to hear. Becky?
This question comes from Ed Schmidt in Alaska. He's asking about Berkshire Hathaway's cash. He writes, "Where is that money held? All in treasury bills or notes? If so, what will happen in June when the biggest buyer, the Fed, quits buying? Where is all that money on the sidelines? Is it under the mattress we saw two years ago? I don't see how any significant amount of money can be in banks that aren't paying interest, corporate bonds that are risky and not paying much interest, or government bonds that seem less and less sound as each day passes.
He is certainly right that all the choices are lousy for short-term money now. We do not play around with short-term money. We did not own commercial paper in 2008 before problems occurred. We did not own money market funds. When I say we did not own them, there may be small amounts at various subsidiaries. In terms of the big money, which we run out of Berkshire Hathaway, we basically keep it in treasuries. We get paid virtually nothing now for it, and that is irritating. The last thing in the world we would do at Berkshire Hathaway is to try and get 5 or 10 or 20 or 30 basis points more by going into some other things with our short-term money.
It is a parking place. It is an unattractive parking place, but it is a parking place where we know we will get our car back when we want it. Certainly, the case in September 2008, we had committed for some time to put $6.5 billion in Wrigley when the Mars-Wrigley deal occurred. We certainly did not contemplate at the time we made that commitment, which was probably in the summer, that the events would take place like they did in September. We had the money. I knew I had to show up with $6.5 billion. I think it was on October 6th. I had to show up, and I could not show up with a money market fund or some commercial paper or anything of the sort. I had to show up with cash.
The only thing I feel, virtually the only thing I feel good about in terms of having large amounts of ready cash, is treasury bills. That is where we have got, if you look at our March 31st statement, I think you will see $38 million, and overwhelmingly, that will be in treasuries. Charlie?
Of course, I've watched a lot of people struggle who thought it was their duty in life to get an extra 10 basis points on the short-term money. I think it's really stupid to try and maximize returns on short-term money if you're an opportunistic game the way we are, where we want to suddenly deploy money. Some of those pipelines we bought, they came for sale on Saturday, and we had to close on Monday or something.
Yeah.
We don't want to fool around with some dubious instrument when we had sudden needs for money like that.
We bought one pipeline where the seller was worried about going bankrupt the following week. There is a hard Scott Rodino clearance required for the FTC, and they needed the money right away. I wrote a letter, as I remember, to the FTC, and I said that we will do whatever you tell us to do later on. You can look at this all you want. We will give you all the data you want, and if you tell us, you know, to unwind the deal, whatever you tell us, we will do. These guys need the money, so we closed it earlier. Our ability to come up with cash when people need it and when the rest of the world is petrified for some reason has enabled several deals to get done. We do not know whether that could happen tomorrow.
I mean, you know, if Ben Bernanke runs off to South America with Paris Hilton or something, who knows what will happen? We want to be able, at that moment, to have our check clear. We figure we never know what tomorrow will bring, although it will not bring that. I want to leave that off the transcribed part of the report. We are, when somebody comes to us and they say, "We need a deal right now," we can do it. They know we can do it, and it can be big. It just has to be attractive. Okay, area 10.
Hi, Warren. Hi, Charlie. Thank you very much for taking the time to have a terrific shareholders meeting. Four years ago, we announced that we're naming our son after you. We're happy to say hi to both you and Charlie. Charlie, since Berkshire bought Wesco, we wanted to see if you can take some time to host a meeting of your own. It could be anywhere, anytime.
We're going to do that.
Great.
We won't call it a Wesco meeting. We'll call it an afternoon with Charlie.
Great.
It's only for hardcore addicts.
Warren, MidAmerican Energy is investing over $1 billion in wind power. How do you feel about wind power as a source of renewable energy and its economics? Will this scale of investment continue, and what type of returns do you expect to come from wind power?
Yeah, it's terrific, but wind power is terrific, but only when the wind blows. The wind blows about, as I remember, about 35% of the time in Iowa. You never can count on wind power, obviously, for your base load. That is a real limitation. On the other hand, wind power is basically, I guess, the cleanest energy you can come up with, except for the fact that it can't be relied on. The economics only make sense with an incentive credit, tax credit provided by the federal government, which they've been doing for a considerable period of time. It does not, standing on their own, the investment will not return anything like an adequate return on capital. There is a tax credit. Your government has made a decision that it wants to subsidize, in effect, wind power. Iowa has been, Iowa's a good wind state.
This whole central belt is good, and the central part of the country is good. It has made sense to locate a lot of megawatts of generating capacity in Iowa. We have more under construction now. I think we're now, I think, number one in the country in respect to wind power. We'll be doing more. It is dependent in terms of the price you can get, the percentage of the time that your generating capacity actually gets used and everything. It only makes sense with the tax credits. One thing that is kind of interesting, one of the assets of Berkshire Hathaway is that it pays a lot of taxes. That doesn't sound like much of an asset.
In these days, a lot of utilities, when you get both 100% depreciation, which has been put in now by the federal government for a short period of time, and you get these sort of tax credits on wind, they really don't have the tax-paying capacity to be able to use the tax credits. They are in a different position than Berkshire Hathaway, which pays a lot of taxes. We've probably paid something like 2% of all the corporate taxes in the U.S., maybe over the last five years. I want to check that, but it's not, I don't think that's way off. We have a lot of tax-paying capacity. We can use it to build more wind projects. I think it's very likely we will continue to do that. It helps our Iowa customers because these projects are successful. It's enabled us to keep rates, among other things, the reasons it's helped to keep rates absolutely unchanged now for more than a decade, which is very unusual among electric utilities in the U.S. Charlie?
No, I've got nothing to add.
Andrew?
This is not a David Sokol question, but it relates to him. It's actually a NetJets question. This shareholder asks, "I was struck by your statement when you praised Sokol for, quote, having resurrected an operation that was destined for bankruptcy. This really got my attention because I don't recall you or Berkshire Hathaway saying earlier that NetJets was on the verge of bankruptcy at the time that his predecessor, Richard Santuli, had stepped down. In fact, at the time, the company seemed to give the impression it was dealing with a few short-term problems, but it was fundamentally sound. In truth, how close was it to bankruptcy? If that was the case, why didn't you tell us? Finally, was it ethical for NetJets to be asking prospective clients to part with their money at a time when it was, in the eyes of its main shareholder, quote, destined for bankruptcy?
I think I said it was, I mean, we can find the exact words here, but I think I said it was destined for bankruptcy absent the fact that Berkshire Hathaway owned it. If it had been a standalone entity, and Berkshire never had any intent, never would have had any intent of any kind to bankrupt NetJets. If it had been owned as a standalone by somebody else, the public, that's what would have happened to it. With Berkshire's ownership, Berkshire has had two insurance companies that would have gone bankrupt as standalone insurance companies. It never crossed our mind that we would let them do it. We put money into companies that were bankrupt that Berkshire owned to make them whole, basically. Essentially, we were doing the same thing with NetJets when we put it up, we got it up to $1.9 billion.
NetJets, in my opinion, would have been bankrupt absent somebody like Berkshire owning it. I'm almost positive that I said that absent Berkshire's ownership or some words to that effect. Let's see if I can find it. Maybe Charlie can be commenting while I'm looking for this. In any event, I'm not finding it immediately where I even discussed it. I know I talked about it on the bankruptcy thing, but I also know that I conditioned it on not being owned by Berkshire. Charlie?
No comment. No comment.
We pointed that out to Standard and Poor s and Moody's. We look at Berkshire Hathaway as a lot of different companies, but we feel that it's one entity. You know, Moody's or Sanders doesn't look at each one separately and all of that. Charlie and I have not been running this business to walk away from some company. We had one in Louisiana, Southern Casualty, and we had another one in Chicago, both of which, if left to their own devices, would have gone bankrupt. We didn't even think about not making them whole. Area 11?
Good afternoon. My name is Christopher David. I'm an entrepreneur from Arlington, Virginia. My question is about the youth. I work with a lot of high school and college students and recent graduates who are facing a job market with 20% youth unemployment. At the same time, one of the most favorable entrepreneurial environments, it's easier than ever to start a business or get involved with a startup. Considering that these kids are politically savvy, they like studying economics, they're brilliant, and they're willing to learn, what advice can you give them from an investment perspective that could help them chart their own course as opposed to get a 9 to 5 job?
The main thing you could do, and people do it different ways, I used to do it by doing a lot of reading. I practically lived at the Omaha Public Library for three or four years when I was nine or ten or eleven. I mean, anything you can. Improve your own skills. You never know where it's going to pay off later on. I have one diploma hanging in my office. I got a couple of others, but the one diploma I have hanging up there is one I got from a Dale Carnegie course, which cost me $100 back in 1951. It's incalculable how much value I got from that $100. There's nothing like working to improve your own skills. I would say communication skills are the first area I would work on to enhance your value throughout life, no matter what you do.
If I had stayed in the same position I was in, in terms of communicating back in 1950 or 1951, my life would have turned out differently. I started selling securities, and if you can't talk to people, you've got a real problem selling securities. I think if you get lucky, you find your passion early on. You want to work at something you're passionate about, and then you want to work to improve your skills in that. I think if you do both of those things, you're likely to do very well. Charlie?
I think economics is a really tough subject. I think it's easy to teach the basic microeconomics and certain of the basic ideas. The minute it gets into the full range of complexity, you have the difficulty that the experts disagree. I don't think I would hurry if I were trying to learn something into the parts of the fields where none of the experts can agree among themselves. I would master the easy stuff first.
I don't think, yeah, I would not advise taking lots of courses in economics to somebody going to school. I'm just trying to think back. It's been a long time since I took my economics courses at Wharton. I don't regard them as the ones that pushed me forward in any significant way. Carol?
Question from John Brandt. Does Berkshire's equity ownership in Munich and Swiss Re reduce the amount of catastrophe-exposed insurance business you are willing to write directly? If so, assume that prices return to being attractive. Would you then limit the quantity of other reinsurance stocks you buy so that you could do more direct business?
Yeah, we have invested in Munich and Swiss Re less than, let's see what it would be. It's less than $4 billion. We're talking 2.5% of our net worth. Those investments in aggregate are not of a magnitude that would cause me to change at all what we're willing to do, the risk we're willing to bear in the reinsurance field. We're way below sort of capacity in terms of risk that we will tolerate in insurance. I put in the report, I expect our normal earning power to be in the $17 billion or something pre-tax range. That's so unlike any other reinsurance company in the world. We went through the worst quarter in reinsurance history except for Katrina's quarter, and we end up earning very substantial sums. Those investments are no constraint at all on our willingness to write insurance. We would love to have a lot more attractive reinsurance business on the books. We just can't find it at prices that we think are commensurate with the risk. It's not because of an aversion to risk overall. Charlie?
Yeah, insurance, and particularly reinsurance, it's not that easy a business. It's taken you a long time to do as well as you do. If it weren't for Ajit, we wouldn't, it would be a lot smaller business.
It should be pointed out we really didn't succeed at all in the reinsurance business in the first 15 years. Yeah, we started in reinsurance around 1970. We had a fellow that I thought the world of running it, George Young. Net counting the value of float, it was not a good business for us for 15 years until Ajit came along. It is not an easy business. It looks easy most of the time.
That's the trouble with it. It looks easier than it is.
It looks way easier than it is. You know, it's like having a pair of dice and accepting bets on boxcars or something like that. You know, it's going to come up once in 36 x. You can win a lot of bets by giving the wrong odds, but if you keep doing it long enough, you lose a lot of money. These infrequent events, you better have factored into your pricing and not fool yourself by whether you make money in a given year or two years or even three or four years. Most people have a little trouble with that. We had a little trouble with it for about 15 years.
Incidentally, the investment bankers of the world, now that they trade so much for their own account and derivatives, have sold some of these products where most of the time the customer wins. When the customer loses, he really loses big. In other words, they're smarter than the customers. They have caused some of the most horrendous losses to ordinary businessmen. It happened in Korea. It happened in Mexico. Just beware the salesman who's selling a new derivative product.
Or an old one.
An old one too.
Yeah, the new ones are worse.
Yeah.
OK, Area 12.
Hi, my name is Badal Pandh i. I'm from Philadelphia, Pennsylvania. Questions about Todd Combs, the young money manager you hired late last year. For Mr. Munger, I understand you introduced him to Berkshire Hathaway. Could you talk a little bit about how that relationship started? How are we, as shareholders, going to be able to assess his progress?
I hate doing this because I may get more letters than I want. He sent me a letter. That's how it happened. It was like Warren's letter to the guy at Ralph Shea. At any rate, I had a meal with him. I called Warren and said, I think this is a guy you should talk to. We have a very complicated business and very elaborate procedures, as you can tell.
His results will be known over a five-year period or something. You cannot judge an investor by what they do in six months or a year.
Todd has the advantage that he's been thinking about financial companies like Berkshire Hathaway for a great many years. That's useful for us to have around.
As we put in the annual report, it's more likely than not, but not a sure thing, that over time we have more than one investment manager. There's a lot of money at Berkshire Hathaway to be managed. It would not be a bad idea. We have to find the right people. The right people just does not mean a given IQ or a given past record. It means a lot of things. If we end up with two or three, you know, that's a plus. We don't mandate that sort of a result. Becky?
This question comes in from Scott Wilkins. He's from Chicago, but he's sitting in the audience right now. Johnson & Johnson is one of Berkshire Hathaway's biggest holdings. He asks for your thoughts, Warren, on Johnson & Johnson's recent acquisition of Synthes for $21 billion. You were quite outspoken in your opposition to Kraft's deal for Cadbury, particularly because of their use of stock. J&J's deal also is primarily with stock. Do you support this deal?
Yeah, I have not talked to anybody in the Johnson & Johnson management. I have no specific knowledge of the company. Basically, I would like the deal a whole lot better if it was all for cash. The idea, when the management trades away, I think this deal is about 2/3 stock, roughly, and 1/3 cash. Johnson & Johnson has plenty of ability to pay cash for a $22 billion deal. When they trade away their present businesses for some other business, they're either saying their own businesses are pretty fully valued, or they're saying the guy is making a hell of a mistake with selling to them. I would, like I say, if it was all for cash, I would like it a lot better.
I think that it is by using a lot of stock for a deal like this that you can certainly draw the inference that Johnson & Johnson is not valuing its own businesses as attractively as you might think they should be evaluated. If you use your own company stock to pay 20% or more than market for some other company, and there probably are not a lot of synergies involved or anything in the management. There may be some, but there are usually some offsets too. Like I said, I would have much preferred it if they'd done it for cash. Charlie?
Yeah, you also have the disadvantage in reviewing that, that you know a hell of a lot more about chocolate and pizza than you know about medical devices.
You think I know more about chocolate?
At Kraft, I mean, you're talking about businesses that Warren knew a lot about. Neither of us knows much about medical devices.
Yeah, the pizza business has done pretty well since it was sold by Kraft. We go to 13 in the other room.
Hi, I'm Glenn Tung from New York. First off, thank you for a terrific day. My question deals with acquisitions. Pre-Lubrizol, we estimated Berkshire Hathaway's year-end 2011 cash balance could approach $60 billion. I believe you commented recently on an elephant that you thought was too big. What is your acquisition appetite? What size is too big? Has the phone been ringing lately? What, if anything, can we as shareholders do to help?
I got through college answering fewer questions than that. Anything you can do to help, I appreciate, Glenn. You know, it's hard to name a precise figure. This one was way too big, except unless we used a lot of stock, which, like I say, we wouldn't do. Our appetite is always there. We are not going to borrow a lot of money. We are not going to issue shares, except perhaps in some minor amount to make a deal that couldn't get made otherwise. Obviously, we'll never sell a business to buy some other business. Our cash balances will tend to build month to month unless we do something. We can and will sell some portfolio securities. Doing Lubrizol requires close to $9 billion of cash. Obviously, we could do another one of that size. In fact, we're looking at a couple.
They're no more than a gleam in the eye. They would take sums roughly similar to Lubrizol, and we would be comfortable doing those. They would add significantly to Berkshire Hathaway's earning power. They're worth doing. We can't do a really big elephant now, and we won't stretch. We've never really taken any risks because we don't need to. We will not trade something that we have and need for something that we don't have and don't need, even if we kind of like to have it. Charlie?
I certainly agree with all that. We are very reluctant to issue shares. In that, we're different from most places. I have a friend that sold out to a socialist country. They issued shares in a controlled corporation. The socialist executive said, isn't this wonderful? We're getting this business for nothing.
Some people really have that. Of course, there are some companies. We talked about the wave that took place in the late 1960s. Periodically, when certainly it happened during the internet period, companies just could not issue shares fast enough because they basically were trading confetti for real assets. That is a business model that has been applied successfully for some periods of time by certain companies in the past. It usually ends in some kind of a fiasco. I should not say it usually does, but it runs out of gas at some point. Essentially, we have never been in that game. We hate issuing shares. The idea of selling our, when we issue shares, we are divesting ourselves of a portion of every wonderful business we have, from GEICO to ISCAR to you name it. We do not like doing that.
We like owning those businesses. We would like to own more of them. We have a deal, for example, on Marmin where we bought some more of it this year, and we will buy the rest of it in a few more years. We feel good about that. We pay a fair price for it, but we get a business we know, a management we like. That is really what we would like to continue doing at Berkshire Hathaway. In fact, we will continue doing it. Andrew?
This question comes from Larry Petowski, a longtime shareholder. I think he's in the audience from the Goodhaven Fund. He asks, over the years, you built or acquired a significant number of businesses that are related to the residential and commercial real estate markets, including such segments as brokerage servicing, insulation, carpeting, construction products, paint, and furniture. Berkshire's ownership of these businesses would seem to give you a unique window through which to view current conditions. Could you give us some insight into the current state of the housing and commercial real estate market and what we might expect to see in these businesses over, and now this might be a long shot, over the next decade?
The immediate situation is it's terrible. It's been flatlined now for a long time. It affects Shaw. It affects MiTek. It affects Acme Brick. It affects Johns Manville. It affects our home services operation. There has been no bounce at all. You see that in the housing start figures too. I'm not telling you anything that you don't see, except I see it with pain as I look at the monthly earnings figures. Those are good businesses. As I mentioned in the annual report, we bought the largest brick operation in Alabama. I think Alabama uses more brick per capita than any state in the union. That doesn't mean much currently because nobody's using any brick to speak of. We bought it. We wrote a check for cash. We like improving our position. MiTek has bought operations.
Shaw is spending a couple hundred million dollars this year, partly because of a change in the nature of the carpet business. This country, over time, will build houses at a rate that overall and in total is commensurate with household growth. I think we're going to see plenty of household growth in future decades. I think that our companies are well positioned to make significant money when we get to a normalized level of home building. I said in the annual report, I thought we would be seeing the upswing by year-end. I've seen nothing since I wrote the annual report that makes it look like I'm certain to be correct or anything. There's been no movement that I've seen so far in the two months since I wrote the report. I would think it would start occurring by then. If it doesn't, it may be a year later.
I don't think anybody knows the answer on that. If I had to bet one way or the other, though, I think it will be turning up by year-end. It really isn't that important to us. When I made the decision to buy the brick company in Alabama, it was not because I thought brick was going to turn in two months or six months or a year. I thought that over time, being a very important brick manufacturer and distributor in Alabama, adjacent to our strong operation in Texas, would be a good investment at the price that we paid. I feel good about the decision. I won't feel good about our brick results in the next six months. I can be sure of that. Charlie?
One advantage of buying these very cyclical businesses is a lot of people don't like them. What difference does it make to us if the earnings average, say, $300 million a year, if it comes in in a very lumpy fashion? In the big scheme of things, what do we care if it's lumpy as long as it's a good business? We have an advantage on that stuff. Nobody else was bidding for a brick plant in Alabama with no customers this week.
We'll be there if you need brick in Alabama. See's Candies, a wonderful business, loses money roughly eight months of the year. You know, now it just so happens we know the seasonal pattern. We don't worry in July that somehow Christmas won't come. We've got a couple thousand years on our side. That's easy to see. If you just looked at one month of See's earnings or looked at one quarter, you'd think, what are these guys doing in this business? Obviously, cyclical businesses are not going to behave exactly the same as seasonal businesses. Why look at it any differently? If you take the next 20 years, there will be three or four terrible years for residential housing. There'll be a lot of them that are pretty good. There'll be a few that are terrific. I don't know the order in which they're going to appear. I know if I can buy the assets cheap enough to participate in those 20 years, that we'll do OK over that time. That's why we're in the brick business.
Now, let's see. Yeah, we're at 3:30 P.M. We will adjourn for about five minutes, and then we will conduct the business meeting of Berkshire Hathaway. We can turn the lights up, and we'll rejoin you in just a couple of minutes. OK, if you'll settle down, we'll conduct a little business. This morning, I introduced the Berkshire Hathaway directors that are present. Also with us today are partners in the firm of Deloitte and two share auditors. They are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire Hathaway. Forrest Crudder is Secretary of Berkshire Hathaway. He will make a written record of the proceedings. Becky Amick has been appointed Inspector of Elections at this meeting. She will certify to the count of votes cast in the election for directors and the motions 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 Hathaway shares outstanding entitled to vote and represented at the meeting?
Yes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 2, 2011, being the record date for this meeting, there were 942,559 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 1,059,055,810 shares of Class B Berkshire Hathaway common stock outstanding, with each share entitled to one 10,000th of one vote on motions considered at the meeting. Of that number, 663,042 Class A shares and 659,697,109 Class B shares are represented at this meeting by proxies returned through Thursday evening, April 28.
Thank you. That number represents a quorum. 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. I recognize Mr. Walter Scott, who will place the motion before the meeting.
I move that the reading of the minutes of the last meeting of the shareholders be dispensed with, and the minutes 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 is 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 has not turned in a proxy and desires a ballot in order to vote in person, you may do so. If you wish to do this, please identify yourself to 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, Steven Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Don Keough, Tom Murphy, Ronald 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, Steven Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson, and Walter Scott be elected as directors. Are there any other nominations? Is there any discussion? The nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the election of directors and allow the ballots to be delivered to the Inspector of Elections. Ms. Amick, when you are 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 701,770 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, Steven Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson, and Walter Scott have been elected as directors. The next item on the agenda is an advisory vote on the compensation of Berkshire Hathaway's executive officers. I recognize Mr. Walter Scott to place a motion before the meeting on this item.
I move that the shareholders of the company approve, on an advisory basis, the compensation paid to the company's named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including compensation discussion and analysis, the accompanying compensation tables, and related narrative discussion in the company's 2011 annual meeting proxy statement.
Is there a second?
Second the motion.
It has been moved and seconded that the shareholders of the company approve, on an advisory basis, the compensation paid to the company's named executive officers. Is there any discussion? The motion is 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 are 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 720,883 votes to approve, on an advisory basis, the compensation paid to the company's named executive officers. 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. The motion to approve, on an advisory basis, the compensation paid to the company's named executive officers has passed. The next item is an advisory vote on the frequency of a shareholder advisory vote on compensation of named executive officers. I recognize Mr. Walter Scott to place a motion before the meeting with respect to this item.
I move that the shareholders of the company determine, on an advisory basis, the frequency, whether annual, biannual, or triennial, with which they shall have an advisory vote on the compensation of the company's named executive officers set forth in the company's proxy statement.
Is there a second? It has been moved and seconded that the shareholders of the company determine the frequency with which they shall have an advisory vote on compensation of named executive officers, with the options being every one, two, or three years. Is there any discussion? The motion is 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 are 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 112,395 votes for a frequency of every year, 4,615 votes for a frequency of every two years, and 609,699 votes for a frequency of every three years of an advisory vote on the compensation of named executive officers. 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. The shareholders of the company have determined, on an advisory basis, that they shall have an advisory vote on the compensation paid to the company's named executive officers every three years. The next item of business is a motion put forth by Ms. Coward, a Berkshire Hathaway shareholder represented by Mr. Bruce Herbert and Mr. Larry Doris. The motion is set forth in the proxy statement. The motion requests Berkshire Hathaway to establish goals for the reduction of greenhouse gas at its subsidiary's power plants and prepare a report for shareholders on how it will achieve these goals. The directors have recommended that the shareholders vote against the proposal. I will now recognize Mr. Herbert to present the motion. To allow all interested shareholders to present their views, I ask Mr. Herbert to limit his remarks to five minutes. The microphone at, let's have Mr. Bruce Herbert first if you turn up the lights. [crosstalk]
Shall we go on? Thank you. Good day, ladies and gentlemen. My name is Bruce Herbert, and I'm Chief Executive of New Ground Social Investment in Seattle, Washington. It is such a pleasure to be here today representing a lifelong owner of Berkshire Hathaway Class A shares. I stand to present the resolution found on page 12 of the proxy that asks our company to set goals for reducing greenhouse gas emissions at its energy holdings. This is because serious investors know and studies show that climate change creates financial liability. The Investor Network on Climate Risk, whose members manage more than $10 trillion, and the Carbon Disclosure Project, representing more than $70 trillion in assets globally, call on companies to disclose risks related to climate change, as well as the actions taken to mitigate those risks. In 2010, 66% of U.S. electric utilities had already set greenhouse gas emission reduction goals, 66%. Unfortunately, Berkshire Hathaway's MidAmerican was not among them. Now, investors have cause to be concerned. Just last year, the SEC announced that climate risks are material and that they must be disclosed. We do applaud MidAmerican for having the largest wind energy portfolio of any utility in the United States. However, it is also true that MidAmerican generates close to 3/4 of its power burning coal. Investors globally want to reduce risk through cleaner generation. 66% of public utilities have already published their plans for doing so. MidAmerican offers no such plan. Despite the public proclamation via its website that, "We will set challenging goals and assess our ability to continually improve our environmental performance." There is no more important environmental goal for a coal-burning utility than to reduce pollution.
More than this, Berkshire Hathaway is uniquely vulnerable in that the financial burdens of climate change are pushed onto insurance companies. As a major insurer, this has serious financial ramifications for our company. Berkshire Hathaway enjoys a remarkable and well-earned reputation earned over many decades for being practical visionaries. Addressing climate change offers an opportunity for our company both to uphold and to enhance this reputation. In closing, the world's largest institutional investors call on companies to set greenhouse gas reduction goals. Such goals are key tools for managing the extraordinary business risk of climate change. 2/3 of utilities in the United States have already set these types of reduction goals. This resolution, importantly, gives Berkshire Hathaway managers the freedom to determine what those goals should be and to shape the process for meeting them. The major proxy advisory firms have repeatedly recommended voting for similar resolutions.
I will close with a request and a question. The request is for all of you here to please join us in supporting this common sense proposal. The question, gentlemen, is have you evaluated the business risk of climate change to our companies? What did you find out? Thank you.
Thank you, Mr. Herbert. Now, we have a microphone at zone 1. It's available for anyone wishing to speak for or against the motion. You've seen where zone 1 is. I'll wait just a minute or two in case anybody would like. Is there an additional speaker there? For the benefit of those present, I ask that each speaker for or against the motion limit themselves to two minutes and confine your remarks solely to the motion. Go ahead.
Hi, I'm Paul Herman, founder of HIP Investor. HIP stands for Human Impact and Profit. We're a registered investment advisor in the states of California, Illinois, and Washington. Climate change is obviously one of the risks to Berkshire Hathaway conglomerate companies, including MidAmerican Energy and the BNSF Railway, which transports coal, much of which is getting exported to China. We are concerned also about the disclosure, quantification, and impact on profit of greenhouse gases, as well as the quantification of the asset of the carbon credits that might be available for eco-efficient companies. We strongly support this resolution for increased disclosure, increased transparency, and the valuation of the financial returns that are possible or the financial liabilities, especially with your expertise in reinsurance, because reinsurance companies typically put a quantification of the potential carbon exposure and liabilities, whereas traditional insurance companies may not do so.
We strongly advocate for the transparency, disclosure, and quantification as to the potential risks and liabilities. The SEC has encouraged this type of disclosure, though they have not mandated it. Berkshire Hathaway would be a leader in doing this, as companies like GE with their Eco Imagination Initiative, the 10% of revenue that they generate from their Eco Imagination products, and other leaders from Jeff Immelt to leaders of Duke Power that take a positive position on the financial returns that are possible for addressing climate change and carbon efficiency. Thank you.
Thank you. We have some more speakers there.
Mr. Buffett and Mr. Munger, my name is Jefferson Lilly, long-term Berkshire Hathaway shareholder. It's my personal opinion that it's the previous two speakers that are the hot air and the problem around global warming and that we not regulate Berkshire Hathaway to force it to have carbon disclosure or other silly rules. It's fine if the managers of the individual businesses choose to do that on their own. It's completely inappropriate to bring this false religion of global warming to try and regulate Berkshire Hathaway. You guys are doing a great job on your own.
Are there any other speakers there?
Mr. Munger and Warren Buffett, I would just like to say one thing, which I think is really important. Berkshire Hathaway can be a leader in the environment. I'm for transparency, as I know these two gentlemen are, and John Doerr, who is very passionate about the environment. I know if he was here today, he would have the same sentiments as these two gentlemen. It's important that as American citizens, we care about the environment and not keep polluting the environment. I'm with these two gentlemen 100%.
Thank you. Do we have any others that haven't spoken?
Yes. My name is Eric Schlein. I am not for this, so against the motion. I think Berkshire Hathaway has a pretty good reputation at being clean, being environmentally responsible. I don't think anyone is saying that either Mr. Buffett or Mr. Munger somehow doesn't care about the environment. I think most people care about the environment. It doesn't mean that we should force Mr. Buffett, Mr. Munger, or any of the CEOs to tell them how to run their business. You guys care a lot about Berkshire's reputation. If Berkshire's subsidiaries are just polluting oceans and ponds and destroying the reputation in different towns and cities, I don't think that would be too cool with either Buffett or Munger. It doesn't mean you don't care about the environment just because you're not going to somehow regulate and tell other people how to run their busness. Let's just do things voluntarily, do things to make money, and be responsible. In the end of the day, that's what wins. Thank you.
Thank you. Anyone additional?
Yeah, my name is Larry Doris. I support this resolution. I don't think anybody is saying anything other than you're a gentleman of great integrity. This is a dollars and cents issue. The EPA is releasing new rules that are calling for more regulation of greenhouse gas emissions. We're really approaching this from the point of view of a conglomerate that has insurance holdings. It really is insurance companies that are bearing the great cost. I'm looking very much forward to your point of view on this. Thank you.
Thank you. Anyone else?
Yes, thank you. David Hughes, shareholder. It's my opinion that this is the right thing to do. I think that it makes sense to do it as an organization prior to being forced to do it. If this gives you the tools to set the rules your way, as you see fit, then I think that's far more powerful and sets a precedent, as Berkshire Hathaway has done in the past. I am for the resolution.
Thank you. Anyone additional?
Hello, my name is Thomas Denkenberger. My background was in biochemistry. I'm very passionate about the environment. I think it's very important for Berkshire Hathaway to work to be a leader. I'm very much in support of this proposition.
Thank you. We've got somebody else there.
Hi, my name is Sarah Cleveland. I'm from Portland, Oregon. I wanted to also put a voice in favor of this resolution. I think it's not about right or wrong. It's about a willingness to take a look at risks and opportunities and also for Berkshire Hathaway to be a leader and work with the subsidiary companies on specific possibilities.
Thank you.
My name is Sam Roy. This is my first meeting, Mr. Munger and Warren Buffett. I am so impressed how you run your business. I think you will care for the environment as well. I don't know whether we should impose a rule. At least you will, by your act, how the local businesses are run and all the operating goes out and adheres. There is no question that we do everything possibly that we never pollute the air that cannot be changed. It is not hot air. It is something I'm very passionate about. You can do anything with your environmental. If you are not taking charge right now, we don't know what the implications would be for our kids and grandkids. I request you give us a thorough investigation. I think you will do that. Thank you for this opportunity.
Thank you.
Yes, Mr. Buffett and Mr. Munger, my name is Bob Stein. I'm a registered professional engineer. I have a couple of comments. I am a Berkshire Hathaway stockholder. One, I think we all support very sound environmental protection. The science that's being used by the EPA for greenhouse gases is not necessarily sound and is not necessary in the best interests of Berkshire Hathaway shareholders. Also, everything that the EPA has proposed is not practical and has caused a lot of problems making the U.S. competitive in the world industrial market. Thank you.
Thank you.
Jason Fang, Palo Alto, California. For me, one thing that's been really interesting about the issue is that it's something that deserves the passion that people bring to it. I actually side with many of these people on the science of the issue. What concerns me is not necessarily that Berkshire Hathaway agreed to the motion. I'm actually against it. The enterprises under Berkshire Hathaway are able to help evangelize the true science behind what's actually going on and help the American public get a better understanding so that they can also bring about change, rather than simply have it all occur from the executive level.
Thank you.
Good afternoon. My name is Bill Gunther. I'm a shareholder from Newfane, Vermont. I work as a State Forester back home. I want to say, for folks that don't believe global warming is a reality, I wish you would follow me around in the woods. It definitely is. I want to support this resolution. I hope that the rest of the shareholders will feel important enough to see it through. Thank you.
Thank you.
Good afternoon. I'm Liang. I care about energy. I care about energy and the environment more than anybody else because I'm currently still studying energy and environmental issues. I truly believe the power of private sector, the power of free market, and I think it's not your responsibility to put the resources of the shareholder for this issue. It's not your expertise. I can personally do a better job to provide environment, to do environmental advocacy than you do. I'm actually against this resolution. Thank you.
Thank you.
Sorry, I have a friend to say something. I can translate it for him.
Hello. [Foreign Language] .
OK, he says that the development of solar panels has great impact on China. He also thinks that actually Berkshire Hathaway should do something and should think about the implication of that.
Thank you. OK, we have one more.
Hi, I'm Kevin Thompson. I'm a shareholder. I'm for the motion. I'm a career engineer that works with an oil company. What we found when we started looking at greenhouse gas emissions was that what we thought was going to end up costing the company more money actually created more revenue for the company. Those are some of the stories that generally don't get told, but they are out there. I would recommend that you take a look at it because in actuality, what you may be dismissing may actually be revenue for your shareholders. Thank you.
Thank you.
Hello, Mr. Buffett. I'm Mike from Walmart. There's obviously a fine line between cutting down the Amazon forest and just burning some coal. Sometimes you could give up a little, but you can't really give up that much. That's why I don't support the motion.
Thank you.
There do not appear to be any further comments.
OK, thank you. Democracy in action at Berkshire. Hey, a couple of questions that were raised in terms of material information or material risks in respect to Berkshire and specifically to our insurance operation. Annually, in the 10-K, there's a recitation of risks. In my own opinion, in terms of our insurance operation, this question does not pose material risk to Berkshire's insurance operations. The question, one gentleman toward the end mentioned the fact that it might even be more profitable for Berkshire in terms of what might happen if we followed the motion. Ironically, he could well be right if it were in our determination. Just take our three major states in electric utility operation, where we serve almost 2 million customers: Iowa, Utah, and Oregon. It is true of other states as well.
We operate under the dictates of the utility commissions in those three states, each of which sets their own rules regarding operation and each of which we end up obeying. If we were to unilaterally, for example, decide to close down significant coal generation, we would be told to depreciate those plants over a shorter period. That would translate not into cost to Berkshire. It would translate into higher rates for electricity. We are entitled to a return on our investment. The faster the depreciation, the higher the rates have to be in order to achieve allowed returns. There was a woman from Oregon speaking, for example. The burden of any unilateral attempt by us, and we could not do it without the approval of the utility commissions, but the burden would fall on customers. It is true, actually, that we would recoup accelerated depreciation.
We would probably have a much larger investment on which we would be allowed to return in other generating facilities. This is a question, this is not something the stockholders of Berkshire end up incurring the cost of. It is something that the rate or the users of electricity in these various states will pay for. That judgment, quite properly, should be made by the public utility commissions of those various states. Whatever they decide, we will follow. Over time, there is no question, just like we've talked about our wind generation in Iowa, this country will move toward a different composition of electricity generation. As I stated earlier, I personally favor more nuclear over time. That will be determined both at the state level and, in some ways, at the national level. It is our recommendation that the motion be voted down.
I think 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 ballot to be delivered to the Inspector of Elections. Ms. Amick, when you are 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 67,733 votes for the motion and 608,576 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.
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 this meeting be adjourned.
Is there a second?
I second it.
A motion to adjourn has been made and seconded. We will vote by voice. Is there any discussion? If not, all in favor say aye. All opposed say no. This meeting is adjourned. Thank you.