Thank you. Thank you, and good morning. That's Charlie. I'm Warren. You can tell us apart because he can hear and I can see. That's why we work together so well. We each have our specialty. I'd like to welcome you. We've got a lot of Out-of-Towners here, and I'd like to welcome you to Omaha. It's a terrific city. Charlie's lived in California now for about 70 years, but he's still got a lot of Omaha in him. Both of us were born within two miles of this building that you're in. Charlie, as he mentioned in his description of his amorous triumphs in high school, Charlie graduated from Central High, which is about one mile from here. It's a public school. My dad, my first wife, my three children, and two of my grandchildren have all graduated from the same school.
In fact, my grandchildren say they've had the same teachers that my dad had. It's a great city. I hope you get to see a lot of it while you're here. In just a minute, we will start a question period, hopefully a question and answer period, that will last till about noon, and then we'll take a break for an hour or so. We'll reconvene at 1:00 P.M., and then we'll continue with the question and answer period till 3:30 P.M., and then we'll break for 15 minutes or so. Then we'll convene the annual meeting of Berkshire, which we have three propositions that people wish to speak on. That could last perhaps as long as an hour. Before we start, I'd like to make a couple of introductions. The first being Carrie Sova, who's been with us about seven years.
Can we have a light on Carrie? I think Carrie, are you there? Carrie. Stand up, Carrie. Come on. Carrie puts on this whole program. She came with us about seven years ago, and a few years ago, I said, "Why don't you just put on the annual meeting for me?" She handles it all. She has two young children, and she has dozens and dozens and dozens of exhibitors that she works with. As you can imagine, with all of what we put on and all of the numbers of you that come, the hotels and the airlines and the rental cars and everything, she does it as if she could do that and be juggling three balls at the same time. She's amazing, and I want to thank her for putting on this program for us.
I also would like to welcome and have you welcome our directors. They will be voted on later. I'll do this alphabetically. They're here in the front row, and if we could just have the spotlight drop on them as they're introduced. Alphabetically is Howard Buffett, Steve Burke, Sue Decker, Bill Gates, Sandy Gottesman, Charlotte Guyman. We have Charlie Munger next to me. Tom Murphy, Ron Olson, Walter Scott, and Meryl Witmer. Yeah. One more introduction I'm going to make, but I'll save that for just a minute. Our earnings report was put out yesterday. As we regularly explain, the realized investment gains or losses in any period really mean nothing. We could take a lot of gains if we wanted to. We could take a lot of losses if we wanted to.
We don't really think about the timing of what we do at all, except in relation to the intrinsic value of what we're buying or selling. We do not make earnings forecasts. On March 31st, we have over $90 billion of net unrealized gains. If we wanted to report almost any number you can think of and count capital gains as part of the earnings, we could do it. I would say that we have a very slight preference this year if everything else were equal. Well, it's true in any year, but it's a little more so this year. We would rather take losses than gains because of the tax effect if two securities were equally valued.
There's probably just one touch more of emphasis on that this year because we are taxed on gains of 35%, which means we also get the benefit, the tax benefit of 35% of any losses we take. I would say that there's some chance of that rate being lower, meaning that losses would have less tax value to us after this year than this year. That is not a big deal, but it would be a very slight preference, and it may get to be more of a factor in deferring any gains and perhaps accelerating any losses as the year gets closer to December 31st, assuming, and I'm making no predictions about it, but assuming that there were to be a tax act that had the effect of reducing the earnings. In the first quarter, insurance underwriting was the swing factor.
There's a lot more about this in our 10-Q, which you can look up on the internet. If you're seriously interested in evaluating our earnings or our businesses, you should go to the 10-Q because the summary report, as we point out every quarter, does not really get to a number of the main points of valuation. I would just mention two factors in connection with the insurance situation, which I love. In the first four months, not the first three months, but the first four months, GEICO has had a net gain of 700,000 policy holders, and that's the highest number I can remember. There may have been a figure larger than that somewhere in the past. I did not go back and look at them all. Last year, I believe that figure was like 300,000.
This has been a wonderful period for us at GEICO because several of our major competitors have decided, and they publicly stated this. In fact, one of them just reiterated it the other day, although they now changed their policy. They intentionally cut back on new business because new business carries with it a significant loss in the first year. There's just costs of acquiring new business. Plus the loss ratio, strangely enough, on first year business tends to run almost 10 points higher than on renewal business. Not only do you have acquisition costs, but you actually have a higher loss ratio. When you write a lot of new business, you're going to lose money on that portion of the business that year.
We wrote a lot of new business, and at least two of our competitors announced that they were lightening up for a while on new business because they did not want to pay the penalty of the first year loss. Of course, that's made to order for us, so we just put our foot to the floor and try to write as much good business as we can. There are costs to that. A second factor. Well, it's not a factor in the P&L, but an important event in the first quarter is that we increased our float. On the slide, I believe it shows it year-over-year, $16 billion. $14 billion of that came in the first quarter this year. We had a $14 billion increase in float.
For some years, I've been telling you it's going to be hard to increase the float at all, and I still will say the same thing, but it's nice to have $14 billion or more. Which is one reason if you look at our 10-Q, you will see that our cash and cash equivalents, including Treasury bills, now has come to well over $90 billion. I feel very good about the first quarter, even though our operating earnings were down a little. One quarter means nothing. Over time, what really counts is whether we're building the value of the businesses that we own. I'm always interested in the current figures, but I'm always dreaming about the future figures. There's one more person I would like to introduce to you today, and I'm quite sure he's here. I haven't seen him, but I understood he was coming.
I believe that he's made it today, and that is Jack Bogle, who I talked about in the annual report. Jack Bogle has probably done more for the American investor than any man in the country. Jack, could you stand up? There he is. Jack Bogle, many years ago, he wasn't the only one that was talking about an index fund, but it wouldn't have happened without him. Paul Samuelson talked about it. Ben Graham even talked about it. The truth is it was not in the interest of the investment industry of Wall Street. It was not in their interest, actually, to have the development of the index fund because it brought down fees dramatically.
As we've talked about some in the reports and other people have commented, index funds overall have delivered for shareholders a result that has been better than Wall Street professionals as a whole. Part of the reason for that is that they've brought down the costs very significantly. When Jack started. Very few people, certainly Wall Street, did not applaud him, and he was the subject of some derision and a lot of attacks. Now we're talking trillions when we get into index funds, and we're talking a few basis points when we talk about investment fees in the case of index funds, but still hundreds of basis points when we talk about fees elsewhere. I estimate that Jack, at a minimum, has left in the pockets of investors without hurting them overall in terms of performance at all, gross performance.
He's put tens and tens and tens of billions into their pockets, and those numbers are going to be hundreds and hundreds of billions over time. Jack's 88th birthday on Monday. I just say happy birthday, Jack, and thank you on behalf of American investors. Jack, I've got great news for you. You're going to be 88 on Monday, and in only two years, you'll be eligible for an executive position at Berkshire. Hang in there, buddy. Okay. We've got a panel of expert journalists on this side and expert analysts on that side, and expert shareholders in the middle. We're going to rotate, starting with the analysts somewhere here. Here we go. We'll do this through the afternoon.
If we get through 54 questions, which would be six for each journalist, six for each analyst, and 18 more for the audience, then we will go strictly to the audience. I don't think I've got any information as to what the situation is on overflow rooms. We'll go to at least one of them. Let's start off with Carol Loomis of Fortune Magazine, the longest serving employee in the history of Time Inc., I believe, with 60 years. Carol, go to it.
Thank you. Thanks from all of us journalists up here. I know that there are many, many people out there who have sent us questions that aren't going to get answered, and I just want to say that it's very hard to get a question answered. The one thing I could suggest is you follow Warren's thought in the annual report that he wants everybody to go away from this meeting more educated about Berkshire than they were when they came. One way you can do that is keep your questions quite directly Berkshire related or relating to the annual letter. Even then, it will be hard to get your question answered. The three of us only have 18 questions in total. I encourage you to think in the Berkshire related direction when you're submitting a question next year.
My first question, it's about Wells Fargo, which is Berkshire's largest equity holding, $28 billion at the end of the year. This question comes from a shareholder who did not wish to be identified. In the wake of the sales practices scandal that last year engulfed Wells Fargo, the company's independent directors commissioned an investigation and hired a large law firm to assist in carrying it out. The findings of the investigation, which were harsh, have been released in what is called the "Wells Fargo Sales Practices Report." You can find it on the Internet. It concludes that a major part of the company's problem was that, and I quote, "Wells Fargo's decentralized corporate structure gave too much autonomy to the community bank's senior leadership." End of quote.
Mr. Buffett, how do you satisfy yourself that Berkshire isn't subject to the same risk with its highly decentralized structure and the very substantial autonomy given to senior leadership of the operating companies?
Yeah, it's true that we at Berkshire probably operate on this We certainly operate on a more decentralized plan than any company of remotely our size, and we count very heavily on principles of behavior rather than loads of rules. It's one reason that every annual meeting you see that Salomon description, and it's why I write very few communiques to our managers. I send them one once every two years, and it basically says that we've got all the money we need. We'd like to have more, but it's not a necessity, we don't have one ounce of reputation more than we need, and that our reputation at Berkshire is in their hands.
Charlie and I believe that if you establish the right sort of culture That culture, to some extent, self-selects who you obtain as directors and as managers, that you will get better results that way in terms of behavior than if you have a 1,000-page guidebook. You're going to have problems regardless. We have 367,000, I believe, employees. Now, if you have a town with 367,000 households, which is about what the Omaha metropolitan area is, people are doing something wrong as we talk here today. There's no question about it. The real question is whether the managers are worrying and thinking about finding and correcting any bad behavior, and whether if they fail in that, whether the message gets to Omaha, and whether we do something about it.
At Wells Fargo, there were three very significant mistakes, there was one that dwarfs all of the others. You're going to have incentive systems at almost any business. There's nothing wrong with incentive systems, you got to be very careful what you incentivize. You can incentivize bad behavior, and if so, you better have a system for recognizing it. Clearly, at Wells Fargo, there was an incentive system built around the idea of cross-selling and number of services per customer, and the company in every quarterly investor presentation highlighted how many services per customer. It was the focus of the organization, a major focus, and undoubtedly people got paid and graded and promoted based on that number, at least partly based on that number. Well, it turned out that that was incentivizing the wrong kind of behavior. We've made similar mistakes.
Any company is going to make some mistakes in designing a system, it's a mistake, and you're going to find out about it at some point, and I'll get to how we find out about it. The biggest mistake was that, and obviously I don't know the facts as to how the information got passed up the line at Wells Fargo. At some point, if there's a major problem, the CEO will get wind of it, and at that moment, that's the key to everything because the CEO has to act.
That Salomon situation that you saw happened because on April 28th, the CEO of Salomon, the president of Salomon, the general counsel of Salomon, sat in a room, and they had described to them by a fellow named John Meriwether some bad practice, terrible practice that was being conducted by a fellow named Paul Mozer, who worked for him. Paul Mozer was flimflamming the United States Treasury, which is a very dumb thing to do. He was doing it partly out of spite because he didn't like the Treasury, and they didn't like him. He put in phony bids for U.S. Treasuries and all of that.
On April 28th, roughly, the CEO and all these people knew that they had something that had gone very wrong, and they had to report it to the Federal Reserve Board in New York, or Federal Reserve Bank of New York. The CEO, John Gutfreund, said he would do it, and then he didn't do it. He undoubtedly put it off just because it was an unpleasant thing to do. On May 15th, another Treasury auction was held, and Paul Mozer put in a bunch of phony bids again. At this point, it's all over because the top management had known ahead of time, and now a guy that was a pyromaniac had gone out and lit another fire, and he'd lit it after they'd been warned that he was a pyromaniac, essentially. It all went downhill from there.
It had to stop when the CEO learns about it. They made a third mistake, actually. Again, it pales in comparison to the second mistake. They made a third mistake when they totally underestimated the impact of what they had done once it became uncovered because there was a penalty of $185 million. In the banking business, people get fined billions and billions of dollars for mortgage practices and all kinds of things. The total fines against the big banks, I don't know whether it totals $30 or $40 or billion or whatever the number may be. They measured the seriousness of the problem by the dimensions of the fine, and they thought a $185 million fine signaled a less offensive practice than something involving $2 billion, and they were totally wrong on that.
The main problem was they didn't act when they learned about it. It was bad enough having a bad system, they didn't act. At Berkshire, we have the main source of information for me about anything that's being done wrong at a subsidiary is the hotline. We get 4,000 or so hotline reports. We get communications on the hotline, perhaps 4,000 times a year, and most of them are frivolous. The guy next to me has bad breath or something like that. There are a few serious ones. The head of our internal audit, Becky Amick, looks at all those. A lot of them come in anonymous, probably most of them. Some of them she refers back to the companies, probably most of them. Anything that looks serious, I will hear about.
That has led to action, we'll put it more than once. We spent real money investigating some of those. We put special investigators sometimes on them. Like I say, it has uncovered certain practices that we would not at all condone at the parent company. I think it's a good system. I don't think it's perfect. I'm sure they've got an internal audit at Wells Fargo, and I'm sure they've got a hotline, and I don't know the facts, but I would just have to bet that a lot of communications came in on that, and I don't know what their system was for getting them to the right person, and I don't know who did what at any given time.
It was a huge error if they were getting, and I'm sure they were, getting some communications and they ignored them, or they just sent them back down to somebody down below. Charlie, you followed it. What are your thoughts on it?
Well, put me down as skeptical when some law firm thinks they know how to fix something like this.
Yeah.
If you're in a business where you have a whole lot of people under incentives very likely to cause a lot of misbehavior, of course you need a big compliance department. Every big wire house stock brokerage firm has a huge compliance department. If we had one, we would have a big compliance department, too, wouldn't we, Warren?
Absolutely.
Absolutely. It doesn't mean that everybody should try and solve their problems with more and more compliance. I think we've had less trouble over the years by being more careful in whom we pick to have power and having a culture of trust. I think we have less trouble, not more.
We will have trouble from time to time.
Yes, of course.
Yeah.
We'll be blindsided someday.
Charlie says an ounce of prevention. He says when Ben Franklin, who he worships, said an ounce of prevention is worth a pound of cure, he understated it, that an ounce of prevention is worth more than a pound of cure. I would say a pound of cure promptly applied is worth a ton of cure that's delayed. Problems don't go away. John Gutfreund said that problem originally was, he called it a traffic ticket. He told the troops there at Salomon was a traffic ticket. It almost brought down a business. Some other CEO the other day described the problem that he had encountered as a foot fault, and it resulted in incredible damage to the institution and so on. You've got to act promptly. Frankly, I don't know any better system than hotlines and anonymous letters to me. I get anonymous letters.
I've gotten three or four of them, probably in the last six or seven years that have resulted in major changes. Very occasionally they're signed, almost always they're anonymous, but it wouldn't make any difference because there will be no retribution against anybody, obviously, if they call our attention to something that's going wrong. I will tell you, as we sit here, somebody is doing, quite a few people are probably doing something wrong at Berkshire, and usually it's very limited. It may be stealing small amounts of money or something like that. But when it gets to some sales practice like was taking place at Wells Fargo, you can see the kind of damage it would do. We will now shift over to the analysts and Jonathan Brandt.
Hi, Warren. Hi, Charlie. Thanks for having me. You've addressed the risk of driverless cars to GEICO's business, but it strikes me that driverless trucks could narrow the cost advantage of railroads, even if the number of crew members in a locomotive eventually declines from two to zero. Is autonomous technology more of an opportunity or more of a threat for the Burlington Northern?
Oh, I would say that driverless trucks are a lot more of a threat than an opportunity to the Burlington Northern. I would say that if driverless cars became pervasive, it would only be because they were safer, and that would mean that the overall economic cost of auto-related losses had gone down, and that would drive down the premium income of GEICO. I would say both of those, autonomous vehicles widespread would hurt us, if they spread to trucks, and they would hurt our auto insurance business. I think my personal view is that they will certainly come. I think they may be a long way off, but that will depend. It'll probably frankly depend on experience in the first early months of the introduction in other than test situations.
If they make the world safer, it's going to be a very good thing, but it won't be a good thing for auto insurers. Similarly, if they learn how to move trucks more safely, there tends to be driver shortages in the truck business now. It obviously improves their position vis-a-vis the railroads. Charlie?
I think that's perfectly clear.
Finally approval. All these years. Okay, station one, the shareholder.
Hi, Warren and Charlie. My name is Brian Martin, and I'm from Springfield, Illinois. In the HBO documentary, "Becoming Warren Buffett," you had a great analogy comparing investing to hitting a baseball and knowing your sweet spot. Ted Williams knew his sweet spot was a pitch right down the middle. When both of you look at potential investments, what attributes make a company a pitch in your sweet spot that you'll take a swing at and invest in?
Well, I'm not sure I can define it in exactly the terms you would like, but we sort of know it when we see it, and it would tend to be a business that for one reason or another, we can look out five or 10 or 20 years and decide that the competitive advantage that it had at the present would last over that period, and it would have a trusted manager that would not only fit into the Berkshire culture, but that was eager to join the Berkshire culture. Then it would be a matter of price. When we buy a business, essentially, we're laying out a lot of money now based on what we think that business will deliver over time. The higher the certainty with which we make that prediction, the better we feel about it.
You can go back to the first. It wasn't the first outstanding business we bought, but it was kind of a watershed event, which was a relatively small company, See's Candy. The question when we looked at See's Candy in 1972 was would people still want to be both eating and giving away that candy in preference to other candies? It wouldn't be a question of people buying candy for the low bid. We had a manager we liked very much, and we bought a business that was paid $25 million for it net of cash, and it was earning about $4 million pre-tax then. We must be getting close to $2 billion or something like that pre-tax that we've taken out of it. It was only because we felt that people would not be buying necessarily a lower priced candy.
It does not work very well if you go to your wife or your girlfriend on Valentine's Day, I hope they're the same person and say, "Here's a box of candy, honey. I took the low bid." It loses a little as you go through that speech. We made a judgment about See's Candy that it would be special in probably not in the year 2017, but we certainly thought it would be special in 1982 and 1992. Fortunately, we were right on it. We're looking for more See's Candies, only a lot bigger. Charlie?
Yeah. It's also true that we were young and ignorant then.
Now we're old and ignorant.
Yes, that's true, too. The truth of the matter is that it would have been very wise to buy See's Candies at a slightly higher price, and if they'd asked it, we wouldn't have done it. We've gotten a lot of credit for being smarter than we were.
Yeah. To be more accurate.
Yeah.
If it'd been 5 million more, I wouldn't have bought it. Charlie would have been willing to buy it. Fortunately, we didn't get to the point where we had to make that decision that way. He would have pushed forward when I probably would have faded. It's a good thing that the guy came around. Actually, the seller was the grandson of Mr. See, wasn't he, Charlie? Larry See's son. Am I correct? Or Larry See's brother. He was not interested in the business. He was more interested in girls than grapes, actually. He almost changed his mind, well, he did change his mind about selling. I wasn't there, but Rick Guerin told me that Charlie went in and gave an hour talk on the merits of girls and grapes over having a candy company. This is true, folks.
The fellow sold to us. I pull Charlie out in emergencies like that.
We were very lucky early in the habit of buying horrible businesses because they were really cheap. It gave us a lot of experience trying to fix unfixable businesses as they headed downward toward doom. That early experience was so horrible, fixing the unfixable, that we were very good at avoiding it thereafter. I would argue that our early stupidity helped us.
Yeah. We learned we could not make a silk purse out of a sow's ear.
No, we learned that.
We went around looking for silk after that.
You have to try it for a long time and fail and have your nose rubbed in it to really understand it.
Okay, Becky. Becky Quick.
This question comes from a shareholder named Mark Blackley in Tulsa, Oklahoma, who says, "There has been more news than usual in some of Berkshire's core stock holdings. Wells Fargo and the incentive and new account scandal. American Express losing the Costco relationship and playing catch up in the premium card space. United Airlines and customer service issues. Coca-Cola and slowing soda consumption." How much time is spent reviewing Berkshire's stock holdings? Is it safe to assume if Berkshire continues to hold these stocks, that the thesis remains intact?
Well, we spend a lot of time thinking. Those are very large holdings. If you add up American Express, Coca-Cola, and Wells Fargo, you're getting up well into the high tens of billions of dollars. Those are businesses we like very much. They have different characteristics. In the case of, you mentioned United Airlines, we actually are the largest holder of the four largest airlines, and that is much more of an industry thought. All businesses have problems, and some of them have some very big pluses. You mentioned American Express. If you read American Express's first quarter report and talk about their platinum card, the platinum card is doing very well.
The gains around the world, I think there were 17% or something of that in billings in the U.K. and 15% is the original currency or the local currency, Japan, Mexico, and very good in the U.S. There's competition in all these businesses. We did not buy American Express or Wells Fargo or United Airlines, Coca-Cola, with the idea that they would never have problems or never have competition. Why we did buy them is we thought they had very strong hands, and we liked the financial policies in the case of many of them. We liked their position. We bought a lot of businesses, and we do look to see where we think they have durable competitive advantage. We recognize that if you've got a very good business, you're going to have plenty of competitors who are going to try and take it away from you.
Then you make a judgment as to the ability of your particular company and product and management to ward off competitors. They won't go away. We think I'm not going to get into specific names on it, but those companies generally are very well positioned. I've likened essentially if you've got a wonderful business, even if it's a small one like See's Candies, you basically have an economic castle, and in capitalism, people are going to try and take away that castle from you. You want a moat around it, protecting it in various ways that can protect it, and then you want a knight in the castle that's pretty darn good at warding off marauders. There are going to be marauders, and they'll never go away.
If you look at the, I think Coca-Cola was 1886, American Express was 1851 or 1852, starting out with an express business. Wells Fargo, I don't know what year they were started. Incidentally, American Express was started by Wells and Fargo as well. These companies had lots of challenges, and they'll have more challenges. The companies we own have had challenges. Our insurance businesses had challenges, but we started with National Indemnity as an $8 million purchase in 1968. Fortunately, we've had people like Tony Nicely at GEICO, and we've had Ajit Jain, who's added tens of billions of value, and we've got some smaller companies that you probably don't even know about but really have done a terrific job for us.
There'll always be competition in insurance, but there'll always be things to do that a really intelligent management with a decent distribution system, various things going for them, can do to ward off the marauders. To the specific question, how much time is spent reviewing the holdings? I would say that I do it every day. I'm sure Charlie does it every day. Charlie?
Well, I don't think I got anything to add to that either.
We'll cut his salary if he doesn't participate here. Okay. Jay Gelb.
This question is on Berkshire's retroactive reinsurance deal with AIG, which was the largest ever of its kind. Based on AIG's track record of reserve deficiencies and the opportunity for Berkshire to invest afloat, what is your level of confidence that this contract covering up to $20 billion of AIG's reserves in return for $10 billion of premiums will ultimately be profitable for Berkshire?
Well, at the time we do every deal, I think it's smart, and then sometimes I find out otherwise as we go along. The deal, as Jay knows but might be unfamiliar to many people, is that AIG transferred to us the liability for 80% of excess of $25 billion. In other words, they had to pay the first $25 billion, and then on the next $25 billion, we had to pay 80% of what they paid up to a limit of $20 billion, 80% of 25. We got paid $10.2 billion for that. This applies to their losses in many classes of business earned before December 31st, 2015. Ajit Jain, who has made a lot more money for you than I have, but he evaluates that sort of transaction. We talk about it a fair amount ourselves. I just find it interesting.
I particularly find the $10.2 billion that they're going to give us interesting. We come to the conclusion that we think we'll do well by getting $10.2 billion today with a maximum payout of $20 billion over some indefinite between now and Judgment Day on this large piece of business. AIG had very good reasons for doing this because their reserves had been under criticism, and this essentially, probably, it should have, I think, put to bed the question of whether they were under-reserved on that business. We get the $10.2 billion, and the question is how fast we pay out the money and how much money we pay out.
Ajit does 99% of the thinking on that, and I do 1%, and we project out what we think will happen, and we know whatever our projection is that it will be wrong, but we try to be conservative. We've done a fair amount of these deals. This is the largest. The second largest was a creature that was formed out of Lloyd's of London some years ago. We've been wrong on one transaction that involved something over $1 billion of premium, clearly wrong. There are a couple of others that may or may not work out depending on what you assume we have earned on the funds, but they're okay. They probably didn't come out as well as we thought they would, though. Overall, we've done okay on this. It's less okay when we're sitting around with $90 plus billion of cash.
The incremental $10.2 billion we took in in the first quarter, is earning us peanuts at the moment. Peanuts is not what fits into the formula for making this an attractive deal. We do have to assume we'll find uses of the money, but the money will be with us quite a while. I think our calculations are on the conservative side. They're not the identical calculations that AIG makes. We come up with our own estimate of payouts and all of that. Actually, I think it was quite a good transaction from AIG's standpoint because they did take $20 billion of potential losses off for $10.2 billion, and I think they satisfied the investing community that they were quite unlikely to have adverse development in the period prior to 2015 that was not accounted for by this transaction. Charlie?
Well, I think it's intrinsically a dangerous kind of activity. That's one of its attractions. I don't think there are any two people in the world that are better at this kind of transaction than Ajit and Warren, and nobody else has had the experience we've had. Just get me in a lot more of those businesses, and I'll accept a little extra worry.
There's one thing I should mention, too. We actually were the only insurance operation in the world who would write that sort of a contract and that where it would be satisfactory to the other party. When somebody hands you $10.2 billion and says, "I'm counting on you to pay $20 billion back, even if it's 50 years from now on the last dollar," there are very few people that they want to hand $10.2 billion to. There's limited people on the other side. There's not that many people remotely that have that kind of size deal.
Very few is a good expression. He means one.
Yeah. Okay, we'll go to station two.
Hello, Mr. Buffett, Mr. Munger. My name's Grant Gibson. I'm from Denver, Colorado, and this is my fifth consecutive year here, so thank you for having us.
Thanks for coming.
Appreciate it. With all due respect, Mr. Buffett, this question is for Mr. Munger.
It's a button.
In your career of thousands of negotiations and business dealings, could you describe for the crowd which one sticks out in your mind as your favorite or is otherwise noteworthy?
Well, I don't think I've got a favorite, but the one that probably did us the most good as a learning experience was See's Candies. It's just the power of the brand, the unending flow of ever-increasing money with no work.
Sounds nice.
I'm not sure we would've bought the Coca-Cola if we hadn't bought the See's. I think that a life properly lived is just learn all the time, I think Berkshire's gained enormously from these investment decisions by learning through a long period. Every time you appoint a new person that's never had big capital allocation experience, it's like rolling the dice, I think we're way better off having done it so long. The decisions blend, the one feature that comes through is the continuous learning. If we had not kept learning, you wouldn't even be here. You'd be alive probably, but not here.
Yeah. There's nothing like the pain of being in a lousy business to make you appreciate a good one.
Well, there's nothing like getting into a really good one. That's a very pleasant experience, and it's a learning experience. I have a friend who says, "The first rule of fishing is to fish where the fish are, and the second rule of fishing is to never forget the first rule." We've gotten good at fishing where the fish are.
Yeah. That's only metaphorically. I went to fish with Charlie one time.
There are too many other boats in the damn water but the fish are still there.
Yeah. We bought a department store in Baltimore in 1966. There's really nothing like being in the experience of trying to decide whether you're going to put a new store in an area that hasn't really developed yet enough to support it. Your competitor may move there first. Then you have the decision of whether to jump in. If you jump in, that kind of spoils it. Now you've got two stores where even one store isn't quite justified. How to play those games, those business games, you learn a lot by trying. What you really learn is which ones to avoid. If you just stay out of a bunch of terrible businesses, you're off to a very great start because we've tried them all.
You can really learn because the experience is a little like eating cockleburs . It really gets your attention.
Well, we won't expand on that. Andrew Ross Sorkin.
Good morning, Warren. This question comes from a longtime shareholder who I should tell you accosted me last night in the lobby of the Hilton Hotels & Resorts with this question. Warren, for years you stayed away from technology companies, saying they were too hard to predict and didn't have moats. Then you seemed to change your view about technology when you invested in IBM, and again when you recently invested in Apple. On Friday, you said IBM had not met your expectations and sold a third of our stake. Do you view IBM and Apple differently, and what have you learned about investing in technology companies?
Well, I do view them differently, but obviously when I bought the IBM, started buying it six years ago, I thought it would do better in the six years that have elapsed than it has. Apple, I regard them as being quite different business. I think Apple is much more of a consumer products business in terms of sort of analyzing moats around it and consumer behavior and all that sort of thing. It's obviously a product with all kinds of tech built into it, but in terms of laying out what their prospective customers will do in the future, as opposed to, say, on IBM's customers, it's a different sort of analysis. That doesn't mean it's correct, and we'll find out over time.
They are two different types of decisions, and I was wrong on the first one, and we'll find out whether I'm right or wrong on the second. I do not regard them as apples and apples, and I don't quite regard as apples and oranges, but it's somewhat in between on that. Charlie?
Well, we avoided the tech stocks because we felt we had no advantage there, and other people did. I think that's a good idea not to play where the other people are better. If you ask me in retrospect, what was our worst mistake in the tech field, I think we were smart enough to figure out Google. Those ads worked so much better in the early days than anything else. I would say that we failed you there, and we were smart enough to do it and didn't do it. We do that all the time, too.
Yeah. We were their customer very early on with GEICO, for example, These figures are way out of date, but as I remember, we were paying them $10 or $11 a click or something like that. Anytime you're paying somebody $10 or $11 every time somebody just punches a little thing where you've got no cost at all, that's a good business unless somebody's going to take it away from you. We were close up seeing the impact of that. Incidentally, if any of you don't have anything to do in your hotel rooms tonight, just keep punching Progressive or something. Don't really do that. The thought just happened to cross my mind. You've almost never seen a business like it.
I think for LASIK surgery and things like that, I think the figures were $60 or $70 a click with no incremental, no cost. I knew the guys. I mean, they actually designed their prospectus. They came to see me a little bit after the original one when they went public, a little bit after Berkshire even. I had plenty of ways to ask questions or anything of the sort and educate myself, I blew it.
We blew Walmart, too.
Yeah.
When it was a total cinch, we were smart enough to figure that out, and we didn't.
Figuring out execution is what counts. Anyway, I could be making 2 mistakes on IBM. It's harder to predict, in my view, the winners in various items or how much price competition we'll enter into something like cloud services and all that. I made a statement the other day which it's really remarkable, I asked Charlie whether he could think of a situation like it where one person has built an extraordinary economic machine in 2 really pretty different industries almost simultaneously as has happened
From a standing start at 0
from a standing start at 0 with competitors with lots of capital and everything else. To do it in retailing and to do it with the cloud like Jeff Bezos has done, I mean people like the Mellons invested in a lot of different industries and all of that, but he has been in effect the CEO simultaneously of 2 businesses starting from scratch. Andy Grove at Intel used to say, "Think about if you had a silver bullet and you could shoot it and get rid of 1 of your competitors, who would it be?" Well, I think that both in the cloud and in retail, there are a lot of people that would aim that silver bullet at Jeff. It's a different sort of game. At The Washington Post, he's played that hand as well as anybody I think possibly could.
It's a remarkable business achievement where he's been involved actually in the execution, not just bankrolling it, of 2 businesses that are probably as feared by their competitors almost as any you can find. Charlie, any further thoughts?
Well, we're sort of like the Mellons, old-fashioned people who've done all right, and Jeff Bezos is a different species.
We missed it entirely, incidentally. We never owned a share of Amazon. Okay, Gregg Warren.
Warren, my question relates to some recent stock purchases as well. Unlike the railroads which benefit from colossal barriers to entry due to their established, practically impossible to replicate networks of rail and rights of way, the airline industry seems to have few, if any, advantages. Even with the consolidation we've seen during the past 15 years, the barriers to entry are few and the exit barriers are high. The industry also suffers from low switching costs and intense pricing competition, and is heavily exposed to fuel cost, with rising fuel prices being difficult to pass on and declining fuel prices leading to more price competition. Compare this with rail customers who have few choices and thus wield limited buying power, and where fuel charges allow the industry to mitigate fuel price fluctuations.
While you've noted several times since the airlines stock purchase were announced that the two industries are quite different and that comparisons should not be made to Berkshire's move into railroads a decade ago, could you walk us through what convinced you that the airlines were different enough this time around for Berkshire to invest close to $10 billion in the four major airlines? It would seem to me that UPS, which you have a small stake in, and FedEx, both of which have wider economic moats built on more identifiable and durable competitive advantages, would be a better option for long-term investors.
Yeah. The decision in respect to airlines had no connection with our being involved in the railroad business. I mean, you can classify them maybe as a transportation business or something, but it had no connection. It had no more connection than the fact we own GEICO or any other business. You couldn't pick a tougher industry ever since Orville went up and I said that if anybody had really been thinking about investors, they should have had Wilbur shoot him down and saved everybody a lot of money for 100 years. You can go to the internet and type in airlines and bankrupt, and you'll see that something like 100 airlines, in that general range, have gone bankrupt in the last few decades. Actually, Charlie and I were directors for some time of USAir, and people write about how we had a terrible experience in USAir.
It was one of the dumbest things I've ever done, and there's-
Well, we made a fair amount of money out of it, too.
Yeah. We made a lot of money out of it.
It was undeserved.
We made a lot of money out of it because there was one little brief period when people got all enthused about USAir. After we left as directors and after we sold our position, USAir managed to go bankrupt twice in the subsequent period. I mean, you've named a number of factors that just make for terrible economics, and I will tell you that it's a fiercely competitive industry. The question is whether it's a suicidally competitive industry, which it used to be. I mean, when you get virtually every one of the major carriers and dozens and dozens and dozens of minor carriers going bankrupt, it ought to come upon you finally that maybe you're in the wrong industry. It has been operating for some time now at 80% or better of capacity being available seat miles.
You can see what deliveries are going to be and that sort of thing. If you make the I think it's fair to say that they will operate at higher degrees of capacity over the next 5 or 10 years than the historical rates which caused all of them to go broke. The question is whether, even when they're doing it in the '80s, they will do suicidal things in terms of pricing, remains to be seen. They actually, at present, are earning quite high returns on invested capital. I think higher than even FedEx or UPS, if you actually check that out.
That doesn't mean tomorrow morning, if you're running one of those airlines and the other guy cuts his prices, you cut your prices, and as you say, there's more flexibility when fuel goes down to bring down prices than there is to raise prices when prices go up. It is no cinch that the industry will have some more pricing sensibility in the next 10 years than they had in the last 100 years. The conditions have improved for that. They've got more labor stability than they had before because they're basically all going to. They've been through bankruptcy, and they're all going to sort of have an industry pattern bargaining, it looks to me like. They're going to have a shortage of pilots to some degree, but it's not like buying See's Candies. Charlie?
No. The investment world has gotten tougher with more competition, more affluence, and more absolute obsession with finance throughout the whole country. We picked up a lot of low-hanging fruit in the old days where it was very, very easy, and we had huge margins of safety. Now we operate with a less advantageous general climate, maybe we have small statistical advantages, where in the old days, it was like shooting fish in a barrel. That's all right. It's okay if it gets a little harder after you get filthy rich.
Yeah. Charlie's more philosophical than I am on that point.
Well, I can't bring back the low-hanging fruit, Warren. You're just going to have to keep reaching for the higher branches.
Gregg, I think the odds are very high that there are more revenue passenger miles five years from now or 10 years from now. If the airline companies are only worth five or 10 years from now what they're worth now in terms of equity, we'll get a pretty reasonable rate of return because they're going to buy in a lot of stock at fairly low multiples. If the company's worth the same amount at the end of the year and there's fewer shares of stock outstanding, over time, we make decent money, and all four of the major airlines are buying in stock.
You got to remember that the railroads were a terrible business for decades and decades and decades. Then they got good.
Yeah. I like the position. Obviously, by buying all four, it means that it's very hard to distinguish who will do the best. I think the odds are quite high that if you take revenue passenger miles flown five or 10 years from now, it will be a higher number, and there'll be low-cost people to come in and the Spirit Airlines and JetBlue, whatever it may be. My guess is that all four of the companies we have will have higher revenues. The question is what their operating ratio is. They will have fewer shares outstanding by a significant margin. Even if they're worth just what they're worth today, we could make a fair amount of money. But it is no cinch by a long shot. Okay, station three.
Good morning, everybody. My name is Sibylle Arians. I'm from Germany, and I'm member of board of ethecon Foundation Ethics & Economy. I'm very happy that I can put my question here. Maybe you are not as happy as I am to listen to it.
Well, we'll try to stay happy. Thank you for coming.
Thank you. Mr. Buffett, a few years ago, I saw a movie in which you proclaimed that the print on the dollar bill, "In God we trust," does not really oppress your philosophy. In your opinion, only cash counts, and your credo is, "In the dollar I trust.
I don't think I've ever said that, actually.
Well, I can show you the movie. That will prove.
Oh, well, send me a clip.
Always behind a joke, there is also a truth. Well, you laughed heartily at that moment. You, as one of the most richest men of all times on this earth, a good humored, friendly, elderly gentleman. Whatever motivated those who designed the dollar notes, they certainly wanted to say that there is something higher than the value of this printed paper. Regrettably, you have shown many times in your life that you see this differently. You have accumulated billions of dollars, showed extraordinary cleverness and skill. You know better to pick up than many others who, like you, use the rules which are inherent to capitalism for their own intentions.
Have you ever given a thought to what troubles and sacrifices, slavery and destruction of Mother Earth, and even diseases and deaths stick to the dollar bills which you gather so eagerly? Let's take Coca-Cola. ethecon Foundation Ethics & Economy from Germany has awarded the Black Planet Award to the members of the board of directors, as well as to the large shareholders, Warren Buffett and Herbert Allen, because you are co-responsible for all of what makes this group make so much money, isn't it? Among other things, Coca-Cola deprives people-
Well, at some point-
of their drinking water in drought-prone areas of the world.
Are you asking a question?
The bottlers contaminate the groundwater in these areas.
I don't want to interrupt you, are you making a speech or asking a question?
I put my question right now.
Okay, good.
Will you give up your Coca-Cola shares if the destruction of the environment, the monopolization of the right to healthy drinking water, and the shameless exploitation of the workers continue?
Huh.
Well, that's more of a speech than a question.
Yeah. I don't think that quote you had earlier. I've said once or twice that it should say "In the Federal Reserve we trust" because they print the money, and if they print too much of it could decline in value. To my knowledge, I've never said anything like you originally said. I would say this, I think I've been eating things I like to eat all my life. This Coca-Cola is 12 ounces. I drink about five a day. It has about 1.2 ounces of sugar in it. If you look at what different people get their sugar and calories from, they get them from all kinds of things. I happen to believe that I like to get 1.2 ounces with this, and it's enjoyable.
Since 1886, people have found it pleasant. I would say that if you pick every meal in terms of what somebody in some recent publication has told you is the very best for you, I offer you that. I say go to it. If you told me that I would live one year longer, and I don't even think of that, I would live one year longer if I'd eat nothing but broccoli and asparagus and everything my Aunt Alice wanted me to eat all my life, or I would eat everything I enjoyed eating, including chocolate sundaes and Coca-Cola and steak and hash browns. I would rather eat in a way I enjoy for my whole life than eat some other way and live another year. I do think that choice should be mine.
If somebody decides sugar is harmful, maybe you'd encourage the government to ban sugar. Sugar in Coca-Cola is not different than eating sugar put on my Grape-Nuts in the morning or whatever else I'm having. I think Coca-Cola's been a very, very positive factor in America and the world for a long, long time, and you can look at a list of achievements of the company. I really don't want anybody telling me I can't drink it. Charlie?
Well, I've solved my Coca-Cola problem by drinking Diet Coke. I swill the stuff like other people swill I don't know what. I've been doing it for just as long as you've been taking all those Coca-Colas. I've had breakfast with Warren when he has Coca-Colas and nuts.
Pretty damn good, too.
Yeah. If you keep doing that, Warren, you may not make 100.
Well, I think there's something in longevity to feeling happy about your life, too.
Absolutely.
Okay, Carol?
This question is from Franz Tromberger of Austria, and it concerns intrinsic value, Warren may amend my definition here, but which is neither a company's accounting value nor its stock market value, but is rather its estimated real value. The question is: at what rate has Berkshire compounded intrinsic value over the last 10 years, and at what rate, including your explanation for it, please, do you think intrinsic value can be compounded over the next 10 years?
Yeah. Intrinsic value can only be calculated or gains in retrospect. The intrinsic value pure definition would be the cash to be generated between now and judgment day, discounted at an interest rate that seems appropriate at the time. That's varied enormously over a 30 or 40-year period. If you pick out 10 years, and you're back to May of 2007, we had some unpleasant things coming up. I would say that we've probably compounded at about 10%, and I think that's going to be tough to achieve. In fact, almost impossible to achieve if we continued in this interest rate environment. That's the number one question. If you ask me to give the answer to the question, if I could only pick one statistic to ask you about the future, before I gave the answer, I would not ask you about GDP growth.
I would not ask you about who was going to be president. A million things I would ask you what the interest rate is going to be over the next 20 years on average, the 10-year or whatever you wanted to do. If you assume our present interest rate structure is likely to be the average over 10 or 20 years, then I would say it'd be very difficult to get to 10%. On the other hand, if I were to pick with a whole range of probabilities on interest rates, I would say that that rate might be somewhat aspirational, and it might be doable.
You would say, "Well, we can't continue these interest rates for a long time." I would ask you to look at Japan, where 25 years ago we couldn't see how their interest rates could be sustained, and we're still looking at the same thing. I do not think it's easy to predict the course of interest rates at all, and unfortunately, predicting that is embedded in giving a good answer to you. I would say the chances of getting a terrible result in Berkshire are probably as low as about anything you can find. Chances of getting a sensational result are also about as low as anything you can find.
My best guess would be in the 10% range, but that assumes somewhat higher interest rates, not dramatically higher, but somewhat higher interest rates in the next 10 or 20 years than we've experienced in the last seven years. Charlie?
Well, there's no question about the fact that the future with our present size is, in terms of percentage rates of return, is going to be less glorious than our past. We keep saying that, and now we're proving it.
Do you want to end on that note, Charlie, or would you care to?
Well, I do think Warren's right about one thing. I think we have a collection of businesses that on average has better investment values than, say, the S&P average. I don't think you shareholders have a terrible problem.
I would say we probably, well, I'm certain, we do have more of a shareholder orientation than the S&P 500 as a whole. This company has a culture where decisions are made as an owner, as a private owner would make them. Frankly, that's a luxury we have that many companies don't have. They are under pressures today sometimes to do things. One of the questions I ask the CEO of every public company that I meet is, "What would you be doing differently if you owned it all yourself?" The answer is usually this, that, and a couple of other things. If you would ask us, the answer is we're doing exactly what we would do if we owned all the stock ourselves. I think that's a small plus over time. Anything further, Charlie?
I think we have one other advantage. A lot of other people are trying to be brilliant, we're just trying to stay rational. It's a big advantage.
Trying to be brilliant is dangerous, particularly when you're gambling.
Okay, Jonathan.
If corporate tax rates are reduced meaningfully, Berkshire will enjoy a one-time boost to book value because of its sizable deferred tax liability, its go-forward earnings should be higher too, at least in theory. How much of the reduced tax rate will be passed along to Berkshire's customers through, for instance, lower electricity rates or lower railroad shipping rates? How much will go to Berkshire shareholders?
Yeah, the question is, in the case of our utility businesses, all benefit of lower tax rates goes to customers, and it should be because we are allowed a return on equity in general. I am simplifying a little bit, we are allowed a return on equity that is computed on an after-tax basis, and the utility commissions would presumably give us higher rates to compensate for that. If taxes are lowered, they would say you are not entitled to make more money on equity just because tax rates have been lowered. Forget about the utility portion of the deferred taxes.
The deferred taxes that are applicable to our unrealized gains in securities, we would get all the benefit of because I mentioned we had $90 billion plus of unrealized gains. If the rates were changed on those, in either direction, our owners, dollar for dollar, will participate in that. Then you get into the other businesses. You mentioned the railroad, but it can be all of our other businesses. To some extent, if tax rates are lowered, to different degrees in different industries, depending on the number of players, the competitive conditions, some of it almost certainly gets competed away. Some of it would likely not be competed away. Economists can argue about that a lot, I have seen it in action in a lot of cases. You have had a big decline in rates, for example, in the U.K. We have had them over my lifetime.
We had 52% corporate rates. We have had a lot of different numbers. I have seen how economic behavior works, and I would say that it is certain that some of any lower rate would be competed away, and it is virtually certain that some would inure to the benefit of the shareholders, and it is very industry and company specific in how that plays out. Charlie? With dollar for dollar, there is $90 or $95 billion. If the rate were to drop 10%, that $9.5 billion is by 10 percentage points. That $9.5 billion is real. On the other hand, if it goes up as it did, went up from 28% to 35%, they can take it away from us, too.
Well, I think it is true that we are peculiar in one way. If things go to hell in a handbasket and then get better later, we are likely to do better than most others. We do not wish for that, we do not want our country to have to suffer through it, we fear what might happen if the country went through the ringer like that. If that real adversity comes, we are likely to do better in the end. We are good at navigating through that kind of stuff.
Yeah, occasionally there will be.
A lot. In fact, we're quite good at it.
There will be occasional hiccups in the American economy. It doesn't have much to do with who's president or anything like that. Those people may get blamed or given credit for different things, but it is the nature of market systems to occasionally go haywire in one direction or other. It's been ever thus, and it'll be ever thus. It's not on a regular sine wave type picture or anything of the sort, but it's certain to happen from time to time, and we will probably have a fair amount of money and credit at that time, and we're not affected. When the rest of the world is fearful, we know America's going to come out fine, and we will not have any trouble psychologically acting at all. Then the question is, how much do we have in the way of resources?
We'll also never put the company in any kind of risk just because we see a lot of opportunities. We'll grab all the ones we can that we can handle and not lose a day of sleep. I didn't quite get that. In any event, we will now go to station 4, and if the person yelling Are you up there? Are you in station 4?
Yes. Dr. Bruce Hertz from Glenview, Illinois. I wanted to thank you for allowing me to attend. I feel both honored and blessed. My question for Mr. Buffett is, you've always advised us to purchase equities that appreciate in value, yet a few years ago, you sold your used Cadillac at a tremendous profit. How can you justify selling a depreciating asset for a significant profit? Thank you.
Yeah. Well actually, I gave it to Girls Inc., and they sold it. That was kind of an interesting A very nice guy bought it for $100 and some thousand, and Girls Inc. got the money, and he came later actually with his family, and he drove it away without any plates. He was driving back to New York, and he got picked up by the police in Illinois. He started giving this explanation about how he'd given this money to Girls Inc. and was driving the car back, and he had this nice-looking family with him. The cops were quite skeptical. Fortunately, I had signed the dashboard for him as part of the deal. They looked at that, and then they just said, "Well, did he give you any stock tips?" They let him go.
I can't recall ever selling a used car at a profit, but I don't think I've ever sold any personal possession. Well, I've got a house for sale.
You don't have any personal possessions.
Yeah. Anything you see with a figure attached like that.
You're a fatter version of Mahatma Gandhi. Mahatma Gandhi.
The guy was a very nice guy that bought it, and the check cleared, so we're fine. Becky?
I'd like to ask a question that can serve as a follow-up to the question that Carol had asked, and Charlie in that response said that he thinks that Berkshire's businesses on the whole will do better than the S&P 500. Clark Cameron from Birmingham, Alabama, who owns 281 shares of Berkshire B, writes in and asks, "Why have you advised your wife to invest in index funds after your death rather than Berkshire Hathaway? I believe Munger has counseled his offspring to, quote, 'not be so dumb as to sell.'
Yeah. She won't be selling any Berkshire to buy the index funds. All of my Berkshire, every single share will go to philanthropy. I don't even regard myself as owning Berkshire, basically. It's committed. Far, about 40% has already been distributed. The question is, somebody who is not an investment professional will be, I hope, reasonably elderly by the time that the estate gets settled. What is the best investment, meaning one that there would be less worry of any kind connected with, and less people coming around and saying, "Why don't you sell this and do something else?" and all those things. She's going to have more money than she needs. The big thing then you want is money not to be a problem.
There will be no way that if she holds the S&P, or virtually no way, absent something happened with weapons of mass destruction, but virtually no way that she won't have all the money that she possibly can use to have a little liquid money so that if stocks are down tremendously at some point, they close the stock exchange for a while, anything like that, she'll still feel that she's got plenty of money. The object is not to maximize. It doesn't make any difference whether the amount she gets doubles or triples or anything of the sort. The important thing is that she never worries about money the rest of her life.
I had an Aunt Katy here in Omaha, who Charlie knew well and worked for her husband, as did I, and she worked very hard all her life and had lived in a house she paid, I think, $8,000 for at 45th and Hickory all her life. Because she was in Berkshire, she lived to 97. She ended up with a few hundred million, and she would write me a letter every four or five months, and she said, "Dear Warren, I hate to bother you, but am I going to run out of money?" I would write her back and I'd say, "Dear Katy, it's a good question because if you live 986 years, you're going to run out of money." Then about four or five months later, she'd write me the same letter again.
I have seen there's no way in the world if you've got plenty of money that it should become a minus in your life. There will be people, if you've got a lot of money, that come around with various suggestions for you, sometimes well-meaning, sometimes not so well-meaning.
If you've got something that's certain to deliver, it was all in Berkshire, they'd say, "Well, if Warren was alive today, he would be telling you to do this." I just don't want anybody to go through that, and the S&P will be. I think actually what I'm suggesting is a very high percentage of people should do something like that, and I think there's a chance they won't have as much peace of mind if they own one stock and they've got neighbors and friends and relatives that are trying to do some, like I say, sometimes well-intentioned, sometimes otherwise, to do something else. I think it's a policy that will get a good result and is likely to stick. Charlie?
Well, as Becky said, the Mungers are different. Yeah. I want them to hold the Berkshire.
Well, I want to hold the Berkshire, too.
I recognize the logic of the fact that S&P algorithm is very hard to beat. A diversified portfolio of big companies, it's all but impossible for most people. I'm just more comfortable with the Berkshire.
Well, it's the family business.
Yeah.
Yeah. I've seen too many people as they get older, particularly being susceptible and just having to listen to the arguments of people coming along.
Well, if you're going to protect your heirs from the stupidity of others, you may have some good system, but I'm not much interested in that subject.
Okay. Okay, Jay
Berkshire reportedly partnered with 3G in Kraft Heinz's attempt to acquire Unilever for $143 billion. How much was Berkshire willing to invest in this deal? Does this mean Berkshire's next large acquisition is likely to be in partnership with 3G?
Well, you'd have to distinguish between two situations. Kraft Heinz was a widely owned company in which we and 3G act as a control group and have a little over 50% of the stock. As originally contemplated, no certainty that this exactly is what would have happened, we would have invested an additional $15 billion, 3G would have invested an additional $15 billion if a friendly agreement could have been reached. If the deal had been made, if the independent directors of Kraft Heinz had approved the transaction, the likelihood is that we would have invested $15 billion, but it would have required the approval of the independent directors as well.
Kraft Heinz, in going forward with making that offer, wanted to be sure that there would be enough equity capital in addition to the debt that would be incurred to make the deal, informally, we had basically committed the $15 billion. It only was approved on the basis that it'd be a friendly deal with Unilever, initially we thought they would be at least possibly interested in such a deal. When we found out otherwise, we withdrew the offer. It would have been $15 billion of additional money in all probability. Okay, station 5.
Dear honorable Mr. Buffett and Mr. Munger, I am Tian Dehua from China. My company, AI Holdings, is spreading value investing philosophy in Asia. My business partner, Ken Chi, Zhou Guiying, and I are committed to awake 100 million Chinese people to return to rational way of investing. The hardest thing in this world is to change people's values or belief system, we should like to awake investors to change from speculate in the market to investing in the market. It's like changing the speculators' values or belief system. May I ask you, Mr. Buffett, can you kindly advise us what we should do to spread your value investing philosophy, is there any word of encouragement? Thank you.
Yeah. In any system, Keynes wrote about this in 1936, I think it was, in the "General Theory," or 1935. I think it's chapter 12. He talked about investment and speculation and the propensity of people to speculate and the dangers of it, and worded eloquently. There's always some speculation, obviously, and there's always some value investors and all of that sort of thing in the market. When speculation gets rampant and when you're getting what I guess Charlie would call social proof that it's worked recently, people can get very excited about speculating in markets, and we will have it from time to time in this market.
There's nothing more agonizing than to see your neighbor, who you think has an IQ about 30 points below you, getting richer than you are by buying stocks, and whether it's internet stocks or whatever. People succumb to it, and they'll succumb in this economy just as elsewhere. There's also a point which gets to your question. I would say that early on in the development of markets there's some tendency for them, I think, to be more speculative than markets that have been around for a couple of hundred years. Markets have a casino characteristic that has a lot of appeal to people, particularly when they see, like I say, people getting rich around them. Those who haven't been through cycles before are probably a little more prone to speculate than people who have experienced the outcome of wild speculation.
Basically, in this country Ben Graham was, in the book I read in 1949, was preaching investment, and that book continues to sell very well. If the market gets hot New issues are doing well and people on leverage are doing well. A lot of people will be attracted to not only speculation, but what I would call gambling. I'm afraid that will be true in the U.S. I think that China being a newer market, essentially, in which there's widespread participation, is likely to have some pretty extreme experiences in that respect. We will have some in this country, too. Charlie?
Well, I certainly agree with that. The Chinese will have more trouble. They're very bright people. They have a lot of action, sure they're going to be more speculative. It's a dumb idea. To the extent you're working on it, why, you're on the side of the angels, but lots of luck.
Well, it will offer the investor more opportunities, actually, if they can keep their wits about them, if you have wild speculation. Charlie just mentioned earlier, if we get into periods that are very tough, Berkshire certainly will do reasonably well because we won't get fearful. Fear spreads like you cannot believe until you've seen a few examples of it. At the start of September 2008, you had 35 million people with their money in money market funds with $3.5 trillion in them, and none of them were afraid that that dollar wasn't going to be a dollar when they went to cash in their money market fund. Three weeks later, they were all terrified, and the $175 billion flowed out in three days. The way the public can react is really extreme in markets. That actually offers opportunities for investors.
People like action, and they like to gamble. If they think there's easy money to be made, a lot of them, you'll get a rush to it. For a while, it will be self-fulfilling and create new converts until the day of reckoning comes. Just keep preaching, investing, and if the market swings around a lot, you'll keep adding a few people here and there to a group that recognizes that markets are there to be taken advantage of rather than to instruct you as to what is going on. Okay, Andrew? You have any more on that, Charlie?
We've done a lot of preaching, Warren, without much effect.
Right. That's probably good from our standpoint. Okay. Andrew?
Thank you, Warren. This question comes from Ryan Prince. President Donald Trump and his advisers have talked about proposing a substantial investment tax credit to provide incentives for long-term corporate fixed capital investment. In BNSF, Berkshire owns a sprawling infrastructure portfolio requiring regular routine maintenance investment of substantial scale. What impact would an investment tax credit have on BNSF's capital investment decision-making from a return on investment capital perspective, as well as in terms of timing? Just as importantly, given the current economy and employment picture, would such a tax credit amount to a subsidization of otherwise mandatory maintenance capital investment or a proper incentive to stimulate investment?
Yeah. Well, it would all depend on how it was worded because we've had investment tax credits in this country, we've had bonus depreciation, which is another form of it, and we do get extra first-year depreciation. That does not enter into our calculation very much. In fact, certainly at the Berkshire level, I've never instructed anybody to do anything different because of investment tax credits or accelerated depreciation, although there may be some calculations done down at the operating company level. It's certainly true in something like wind projects and solar projects. They are dependent on the tax law currently. There may come a time when they aren't, but they wouldn't have been done without some subsidization through the tax law.
I would say if you change the depreciation schedules and double depreciation, triple depreciation, we're going to do what we need to do at the railroad to make it safer and more efficient if we just had ordinary depreciation. I doubt if there'd be any dramatic differences. Obviously, if you were going to, say, buy a bunch of planes and the law was going to change on December 31st, and the math made it better to wait till January 1st or do it this December 31st, you make that kind of calculation.
I can't recall in all the years that I've ever sent out anything to our managers saying, "Let's do this because the tax law is being changed or might be changed or something of the sort." As I mentioned earlier, it changes just a little bit if you think there's going to be a change in capital gains rates at a given time. Obviously, if the rate's going to be lower, you would take losses ahead of time and defer gains maybe a little. That's why it's useful, actually, if the tax committees in the Senate and the House are working on something it might be useful if the chairmen would say that if we do make any changes, we're likely to use this effective date or something of the sort, and I think they've done that a few times in the past.
The big tax-driven item is in wind and solar, that is a specific policy because the government has decided they want to move people, or society has decided they want to move people toward those forms of electric generation, the market system wouldn't do it. There may come a time when the market system will do it all by itself. We won't make big changes. It's so speculative anyway in terms of even what the law would be. Beyond that, if it becomes less speculative as to the law, it really looks like something is going through, it doesn't change us big time at all. Charlie?
Nothing to add.
Okay. Gregg?
We're not going to change anything at the railroad for some little tax jiggle.
If we need a bridge repaired, we're going to repair the bridge. We need a lot of track maintenance all the time and that sort of thing. I don't think Matt and I have ever had a talk about it since we've owned the railroad. Gregg?
Warren, my question also relates to Burlington Northern. Despite the current administration's belief that they can bring the coal industry back, market forces continue to lead to the industry's demise. 90% of U.S. coal consumption is driven by electricity generation, natural gas has been both cheaper and cleaner burning, and renewable electricity generation has remade parts of the market as wind and solar have gained scale and become cheaper alternatives. This has created problems for Burlington Northern, with coal shipments accounting for just 18% of volume and revenue for the railroad last year, down from an average of 24% for both measures the previous 10 years. Some of this was due to a large buildup of coal supplies the past couple of winters, which finally seem to be working their way out, what are your expectations for the contribution coal can make to BNSF longer term?
I know that the rail will currently handle some export shipments going through Canada's Pacific Coast ports, but will there be enough growth there to offset domestic demand, or will BNSF need to rely more heavily on segments like intermodal to offset lost coal volumes?
Yeah, the answer is coal is going to go down over time. I don't think there's much question about that. The specifics of any given year relate very importantly to the price of natural gas. Right now, the demand is somewhat up, a fair amount up from last year because natural gas is at $3.15 or $3.20, and the utilities can produce electricity, in many cases, quite a bit cheaper with coal than with natural gas. Whereas with the $2, it would be natural gas. Over time, coal, in my mind, is essentially certain to decline as a percentage of the revenue of the railroad. The speed at which it does, you don't create generation plants overnight, and so you can't predict the rate. If natural gas is cheap enough, you'll see a big conversion back to natural gas.
Coal is going to go down as a percentage of revenues significantly. Certainly over 10 years, it will be quite significant, and who knows exactly year by year. We are looking for other sources of growth than coal. If you are tied to coal, you got problems. Charlie?
You go out over the extremely long term, I think that all the hydrocarbons will be used, including all the coal. I think that in the end, these hydrocarbons are a huge resource for humanity, and I do not think we have got any good substitute, and I am never reminded saving them for the next generation. I do not like using them up very fast. I am off on a little road on my own on this one. People think that all these hydrocarbons are going to be stranded and the whole world is going to change. I think we are going to use every drop of the hydrocarbon sooner or later. We will use them as chemical feedstocks. I regard all these things as very hard to predict, and I am not at all sure of it. I would eventually expect natural gas to be pretty short in supply.
A change in storage would make a big difference. We will produce, within a few years, as much electricity in Iowa, or virtually as much electricity in Iowa from wind as our customers use, but the wind only blows about 35% of the time or something like that, and sometimes it blows too hard. The storage, having it 24 hours a day, seven days a week, is a real problem, even if we have got the capability of producing, like I say, a self-sufficient amount, essentially, in Iowa before very long. Our shipments of coal are up fairly substantially this year on the BNSF, but they were very low last year. As you said, stockpiles grew and have come down somewhat. They are still on the high side. Charlie has got a longer-term outlook on this.
In my mind, we are going to be shipping a whole lot less coal 10 or 20 years from now than we are now. On the other hand, I think there is some decent prospects in other long hauls. It is a pretty cheap way to move bulk commodities long distance, rail is, and I think it is a good business, but the coal aspect of it is going to diminish. Okay. Station six.
Hi, good morning. Good morning. It is Marcus Burns from Sydney, Australia. My question, Mr. Buffett is, you used to buy capital-light, cash-generative businesses, but now buy lower growth capital-consumptive businesses. I realize Berkshire generates a lot of cash flow, but would shareholders have been better off if you had continued to invest in capital-light companies?
Well, we would love to find them. There is no question that buying a high return on assets, very light capital-intensive business that is going to grow beats the hell out of buying something that requires a lot of capital to grow. This varies from day to day, but I believe, and I don't think it is sufficiently appreciated, I believe that probably the five largest American companies by market cap, and some days we are in that group and some days we aren't. Let's assume we are not in that group on a given day. They have a market value of over $2.5 trillion. That $2.5 trillion is a big number. I don't know whether the aggregate market cap of the U.S. market is, but that is probably getting up close to 10% of the whole market cap of the United States.
If you take those five companies, essentially you could run them with no equity capital at all. None. That is a very different world than when Andrew Carnegie was building a steel mill and then using the earnings to build another steel mill and getting very rich in the process, or Rockefeller was building refineries and buying tank cars and everything. Generally speaking, for a very long time in our capitalism, growing and earning large amounts of money required considerable reinvestment of capital and large amounts of equity capital, the railroads being a good example. That world has really changed, and I don't think people quite appreciate the difference.
You literally don't need any money to run the five companies that are worth collectively more than $2.5 trillion, and who have outpaced any number of those names that were familiar if you looked at the Fortune 500 list 30 or 40 years ago, whether it was Exxon or General Motors or you name it. We would love. There is no question that a business that doesn't take any capital and grows and has almost infinite returns on required equity capital is the ideal business. We own a couple of businesses, a few businesses that earn extraordinary returns on capital, but they don't grow. We still love them. If they were in fields that would grow, believe me, they would be number one on our list. We aren't seeing those that we can buy and that we understand well.
You are absolutely right that that's a far, far, far better way of laying out money than what we're able to do when buying capital-intensive businesses. Charlie?
Yeah. The chemical companies of America at one time were wonderful investments. Dow and DuPont sold at 20 times earnings, and they kept building more and more complicated plants and hiring more PhD chemists, and it looked like they owned the world. Now, most chemical products are sort of commoditized, and it's a tough business being a big chemical producer. In comes all these other people like Apple and Google, and they're just on top of the world. I think the questioner is basically right that the world has changed a lot and that the people who have made the right decisions in getting into these new businesses that are so different from the old ones have done very well.
Yeah. Andrew Mellon would be absolutely baffled by looking at the high cap companies now. The idea that you could create hundreds of billions of value essentially without assets-
Fast
without tangible assets.
Fast.
Fast. Yeah.
Yeah.
That is the world. When Google can sell you something where GEICO was paying $11 or something every time somebody clicks something, that is a lot different than spending years finding the right site and developing iron mines to supply the steel plants and railroads to haul the iron to where the steel is produced and distribution points and all that sort of thing. Our world was built, and when we first looked at it, our capitalist system basically was built on tangible assets and reinvestment and all that sort of thing, and a lot of innovation and invention to go with it. This is so much better if you happen to be good at it. To essentially be able to build hundreds of billions of market value without really needing any capital, that is a different world than existed in the past.
Incidentally, I think it's a world that's likely to continue. I don't think the trend in that direction is over by a long shot.
A lot of the people who are chasing that sort of thing very hard now in the venture capital field are losing a lot of money. It's a wonderful field, but not everybody's going to win big in it. A few are going to win big in it.
Okay, Carol?
This question is from a shareholder in California, in the Silicon Valley area, who didn't want his name mentioned because he said he wasn't looking for publicity, but whose picture makes him appear to be a millennial. Every Berkshire shareholder knows about the stock market value of Berkshire. My question is about the value of Berkshire to the world. For instance, the value of Apple to the world has been iPhones. The value of GEICO is cost-effective auto insurance. The value of 3G, and I will tell you that there are some shareholders who would be arguing about here, but the value of 3G is improved operations. About Berkshire, I just don't know. In managing Berkshire's subsidiaries, as Mr. Munger once famously said, "You practice delegation just short of abdication." Hands-on management can't be the answer.
That means the majority of Berkshire's subsidiaries would do just as well if they were to stay independent companies. That's my question. What is the value of Berkshire to the world?
Yeah. I would say the question about that, I'm with him to the point where he says that, which he accurately describes as delegation to the point of abdication, but I would argue that that abdication actually, in many cases, will enable those businesses to be run better than they would if they were part of the S&P 500 and the target perhaps of activists or somebody that wants to get some kind of a jiggle in the short term. I think that our abdication actually has some very positive value on the companies. You'd have to look at it company by company, that we've got probably 50 managers in attendance here, and naturally, they're not going to say anything publicly on television or anything where they knock us or anything.
Get them off in a private corner and just ask them whether they think their business can be run better with a management by abdication from Berkshire, but with also all the capital strengths of Berkshire, that any project that makes sense can be funded in a moment without worrying whether the banks are still lending, like in 2008, or whether Wall Street will applaud it or something of that sort. I think our hands-off style actually, I think, can add significant value in many companies. But we do have managers here you could ask about that. We certainly don't add the value by calling them up and saying that we've developed a better system for turning out additives at Lubrizol or running GEICO better than Tony Nicely can run it or anything of the sort. But we have a very objective view about capital allocation.
I would say that we might very well free up at least 20% of the time of a CEO who would otherwise have a public company, just in terms of meeting with analysts and the calls and dealing with banks and all kinds of things that essentially we relieve them of, so that they can spend all of their time figuring out the best way to run their business. I think we bring something to the party, even if we're just sitting there with our feet up on the desk. Charlie?
Yeah, we're trying to be a good example for the world. I don't think we'd be having these big shareholder meetings if there weren't a little bit of teaching ethos in Berkshire. I've watched it closely for a long time. I'd argue that that's what we're trying to do, is set a proper example. Stay sane, be honest. Yeah. I'm proud of Berkshire, and I don't worry too much if we sell Coca-Cola.
I would say GEICO is an extraordinarily well-run company, and it would be extraordinarily well-run if it were public. But it has gone from two and a fraction percent of the auto insurance market to 12%. Part of the reason, a small part, the real key is GEICO and Tony Nicely, but part of the reason is that when at least two of our big competitors said that they would not meet their profit objectives if they didn't lighten up their interest in new business eight or 10 months ago, I think our business decision to step on the gas is a better business decision, but I think that GEICO, as a public company, would have more trouble making that decision than they do when they're part of GEICO, because we are thinking about nothing but where GEICO's going to be in five or 10 years.
If that requires new business cost to penalize our earnings in the short term. Other people have different pressures. I'm not arguing on how they behave because they have a different constituency than GEICO has with Berkshire and what Berkshire has with its shareholders in turn. I think in that case, our system's superior. It's not because we work harder. Charlie and I don't do hardly anything. Jonathan?
Could you please talk about your periodic payment annuity business? The weighted average interest rate on these contracts is 4.1%, which doesn't sound particularly attractive given the current interest rate environment. Is the duration of these liabilities long enough to make that an attractive cost of funds? Were these contracts executed primarily when rates were higher?
Well, those contracts, these are what are called structured settlements primarily. When somebody young has a terrible auto accident or whatever it may be, perhaps urged by the court, urged by family members who really do have the interest of the injured party at heart, they may convert what could be a large sum settlement, probably against an insurance company, maybe $1 million, maybe $2 million, into periodic payments for the rest of the life of the injured party. We issue those for other insurance companies.
In fact, sometimes the court directs that Berkshire or hints strongly that Berkshire should be the one to issue those because you're talking with somebody's life 30 or 40 or 50 years from now, and the court or the lawyer or the family may want to be very sure that whoever makes that promise is going to be around to keep it. Berkshire has a preferred position in that. To get to your question, Johnny, we look for taking the longer maturity situations, we always have. We have to make assumptions about mortality, and then we have to decide at what interest rate we'll do it. The 4.1 is a mix of a lot of contracts over a lot of years obviously. We write maybe $30 million of these, $20 million-$30 million a week, looking for the long maturities.
If you take an average of 15 years or something of the sort, that's how we come up with that sort of a figure. We adjust them to interest rates at all times. When doing that, we're making an assumption that we're going to earn more money than is inherent in the cost of these structured settlements. I think we've got $6 billion or $7 billion up now. We'll keep doing them. Incidentally, probably a significant percentage of the $6 billion or $7 billion, we're not yet paying anything on. Somebody else may have the earlier payments. They're certainly weighted far out. It's a business that we'll be in 10 or 20 years from now. We've got some natural advantage because people trust us more than any other company to make those payments.
The test is whether we earn over time a return above that which we're paying to the injured party. That's a bet we're willing to make. If interest rates continued at present levels for a long time, we would, assuming we kept the money in fixed income instruments we'd have some loss in that. We've got an allowance in there, for the expenses, incidentally, because we do make monthly payments to these people eventually. We have to keep track of whether they're still alive or not because you cannot count on the relatives of somebody that's deceased when a check is coming in every month to notify you promptly that the person has become deceased. That number will go up over time. If interest rates stay where they are, that 4.1 will come down a little bit as we add new business. Okay, station 7.
Thank you, Mr. Buffett and Mr. Munger, for all you've done and the opportunity to learn even more from your approach to investing in life. My name's Harry Hong. I'm a respirologist from Vancouver, British Columbia. The question involves back in 2001, you made an initial investment in USG shortly before the company declared bankruptcy due to the mounting asbestos liability. You held those shares through the bankruptcy process even though standard wisdom says that the equity in Chapter 11 is usually worthless. Can you explain why USG's equity was a safe investment?
Well, I don't really remember all the details then.
It was very cheap.
We-
Very cheap.
Yeah, I would say this, USG, we own I'm not sure what percentage, but it's a very significant percentage. I don't know.
20% or something.
Probably 30% or something like that. USG overall has just been disappointing because the gypsum business has been disappointing. I think I may be wrong. I think they went bankrupt twice. First from asbestos going back, and then subsequently because they just had too much debt. It has not been a brilliant investment. Now if gypsum prices were at levels that they were in some years in the past, it would've worked out a lot better.
It hasn't been terrible.
No, it hasn't been terrible, but gypsum has taken a real dive several times, and there has been too much gypsum capacity. Then when it comes back, the managements have been, not necessarily at USG but including USG perhaps, they've gotten more optimistic about future demand than they should have. Going back historically a way, they like to build new plants, and it's a business where the potential supply has been significantly greater than demand in a lot of years. You've seen housing starts since 2008 and 2009 not come back anywhere near as much as people anticipated. Gypsum prices have moved up, but not dramatically. Just put that one down as not one of our great ideas. Not one of my great ideas. Charlie wasn't involved in that. It's no disaster, though.
No, it isn't.
Becky?
Hello? There we go.
Okay.
This question comes from Axel Myersich in Germany, who writes, "If Ajit Jain were to retire, God forbid, be promoted, what would be the impact on the insurance operations, both with regards to underwriting profit as well as the development of float?
Nobody could possibly replace Ajit. It just can't come close. We have a terrific operation in insurance. We really do outside of Ajit, and it's terrific squared with Ajit. There are things only he can do, but there are a lot of things that are institutionalized, a lot of things in our insurance business where we've got extraordinarily able management, too. Ajit, for example, bought a company that nobody here has heard of, probably called Guard Insurance a few years ago. Workers' comp primarily. It's based improbably in Wilkes-Barre, Pennsylvania, and it's expanding like crazy in Wilkes-Barre. It's been a gem. Ajit oversees it, but we've got a terrific person running it. We bought Medical Protective some years ago. Tim Kenesey runs that.
Ajit oversees it, Tim Kenesey can run a terrific insurance company with or without Ajit, but he's smart enough to realize that if you've got somebody like Ajit willing to oversee it to a degree, that's great. Tim is a great insurance manager all by himself, and Medical Protective has been a wonderful business for us. Most people don't know we own it. The company goes back into the 19th century, actually. We've got a lot of good operations. If you look at that section in the annual report called Other Insurance Company, in aggregate, that is a wonderful insurance company. There's very few like it. GEICO is a terrific company.
Ajit has made more money for Berkshire than I have probably, but we've still got what I would consider the world's best property casualty insurance operation even without him, and with him, I don't think anybody comes close. Charlie?
Well, a few years ago, California made a little change in its workers' compensation law. Ajit saw instantly that it would cause the underwriting results to change drastically. He went from a tiny percent of the market, about 10% of the market, which is big, and he just grasped a couple of billion dollars at least out of the air, like with snapping his fingers. When it got tough, he pulled back. We don't have a lot of people like Ajit. It's hard to just snap your fingers and grab a couple of billion dollars out of the air.
Actually, the California workers' comp, though, Guard has moved into that. We have got a lot of terrific insurance managers. I don't know of a better collection anyplace. Ajit has found some of those. I've gotten lucky a few times. Tom Nerney at US Liability, that goes back.
Yeah
what, 15, 16 years. He is a terrific operation. Not as huge, but it is so well managed. People don't even know we own these things, but you look at that last line, and now we've added Peter Eastwood with Berkshire Hathaway Specialty. These are really good businesses, I got to tell you. When you can produce underwriting profits and on top of that, just hand more float. Look, we don't have many businesses like that. Those are great business. We've got $100 billion plus of money that we get to earn on, while at the same time, overall, on balance, we're likely to make some additional money for holding it. If you can get somebody to hand you $104 billion and pay you to hold it while you get to invest it and get the proceeds, it's a good business.
The problem is that what I just described tempts lots of people to get into it, and recently people have got into it really just for the investment management. It's a way to earn money offshore, and we don't do that, but it can be done for small companies with investment managers. There's a lot of competition in it, but we have some fundamental advantages in certain areas, plus we have absolutely terrific managers to maximize those advantages. We're going to make the most of it. I've just been handed something Kraft Heinz came out with. They just came out with it commercially a few days ago, maybe a few weeks ago. At the directors' meeting, they had this. I have three of these.
I'm sure that there's a member or two of the audience that may not approve of it, but I got to tell you, folks, it's good. It's a cheesecake arrangement with topping and Philadelphia Cream Cheese special on, so you create your own cheesecake. I thought that I can eat it while Charlie's talking and you'll be able to get it at the halftime. It's selling very well, and I think just so you don't feel too guilty, I think it's 170 calories for this cherry one. Like I say, I had three of these. I don't mind having 500 or 600 calories for dessert. I'll let somebody else eat the broccoli, and I'll have the dessert. We'll be eating this, but you too, at halftime. I think they brought 8,000 or 9,000 of these. I'll be disappointed if we don't run out.
Actually, I'll be disappointed in you, not them. Okay. Jay?
This question is on the topic of succession planning. Warren, there seem to be fewer mentions by name of top-performing Berkshire managers in this year's annual letter. Does this mean you're changing your message regarding the succession plan for Berkshire's next CEO?
Well, the answer to that is no. I didn't realize there were fewer mentions by name. I write that thing out and send it to Carol, and she tells me, "Go back to work." I don't actually think that much about how many personally get named. I would say this, and this is absolutely true. We have never had more good managers now because we got more good companies, but we have never had more good managers than we have now. It has nothing to do with succession. Charlie?
Well, I certainly agree with that. We don't seem to have a whole lot of 20-year-olds.
Certainly not at the front table.
No.
We've got an extraordinary group of good managers, which is why we can manage by abdication. It wouldn't work if we had a whole bunch of people who had come with the idea of getting my job. If we had 50 people out there, all of who wanted to be running Berkshire Hathaway, it would not work very well. They have the jobs they want in life. Tony Nicely loves running GEICO. You go down the line. They have jobs they love, and that's a lot better, in my view, than having a whole bunch of them out there that are doing their job there or hoping the guy that's competing with them will fail so that when I'm not around, they'll get the nod. It's a much different system than exists at most large American corporations. Charlie got any?
Mm-mm.
Well, we'll go to station eight.
Hi, Warren and Charlie. My name is Vicky Wei. I'm an MBA student from the Wharton School of Business. This is my first time to be in the annual meeting. I'm really excited about it. Thanks for having us here.
Thanks for coming.
My question is, where do you want to go fishing for the next three to five years? Which sectors are you most bullish on, and which sectors are you most bearish on? Thank you.
Charlie and I do not really discuss sectors much, nor do we let the macro environment or thoughts about it enter into our decision. We're really opportunistic, and we obviously are looking at all kinds of businesses all the time. It's a hobby with us almost, probably more with me than Charlie. We're hoping we get a call, and we've got a bunch of filters, and I would say this is true of both of us. We probably know in the first five minutes or less whether something is likely to or has a reasonable chance of happening. It's just going to go through there, and the first question is: Can we really ever know enough about this to come to a decision? That knocks out a whole bunch of things. There's a few.
Then if it makes it through there's a pretty good reasonable chance we may do something. It's not sector specific. We do love the companies, obviously, with the moats around the product, where consumer behavior can be perhaps predicted further out. I would say it's getting harder, for us anyway, to anticipate consumer behavior than we might have thought 20 or 30 years ago. I think that that's just a tougher game now. We'll measure it, and we'll look at it in terms of returns on present capital, returns on prospective capital. A lot of people give you some signals as to what kind of people they are, even in talking in the first five minutes, and whether you're likely to actually have a satisfactory arrangement with them over time. A lot of things go on fast.
We know the type of business we'd kind of like to end up in, but we don't really say we're going to go after companies in this field or that field or another field. Charlie, you want to?
Yeah. Some of our subsidiaries do little bolt-on acquisitions that make sense, and that's going on all the time. Of course, we like it when I would say the general field of buying whole companies, it's gotten very competitive. There is a huge industry of doing these leveraged buyouts. That's what I still call them. The people who do them think that's kind of a bad marker, so they say they do private equity. It's like maybe even a janitor calling himself the chief of engineering or something. At any rate, the people who do the leveraged buyouts, they can finance practically anything in about a week or so through shadow banking, and they can pay very high prices and get very good terms and so on. It's very hard to buy businesses.
We've done well because there's a certain small group of people that don't want to sell to private equity. They love the business so much they don't want it just dressed up for resale.
We had a guy some years ago, came to see me. He was 61 at the time. He said, "Look, I've got a fine business. I got all the money I can possibly need." He said, "There's only one thing that worries me when I drive to work." Actually, there's more than one guy that's told me that's used the same term. He said, "There's only one thing that bothers me when I go to work. If something happens to me today, my wife's left." I've seen these cases where executives in the company try to buy them out cheap, or they sell to a competitor. He says, "I don't want to leave her with the business. I want to decide where it goes, but I want to keep running it.
I love it." He said, "I thought about selling it to a competitor. If I sell it to a competitor, their CFO is going to become the CFO of the new company, and on down the line. All these people who helped me build the business, a lot of them are going to get dumped. I'll walk away with a ton of money, and some of them will lose their job." He said, "I don't want to do that." He says, "I can sell it to a leveraged buyout firm," who would prefer to call themselves private equity, "but they're going to leverage it to the hilt, and they're going to resell it, and they're going to dress it up some. In the end, it is not going to be in the same place.
I don't know where it's going to go." He said, "I don't want to do that." He said, "It isn't because you're so special," he says, "there just isn't anyone else." If you're ever proposing to a potential spouse, don't use that line. That's what he told me, and I took it well. We made a deal. Logically, unless somebody has that attitude, we should lose in this market. You can borrow so much money so cheap, and we're looking at the money as pretty much all equity capital, and we are not competitive with somebody that's going to have a very significant portion of the purchase price carried in debt, maybe averaging 4% or something.
He won't take the losses if it goes down. He gets part of the profit if it goes up.
Yeah. His calculus is just so different than ours, and he's got the money to make the deal. If all you care about is getting the highest price for your business, we are not a good call. We will get some calls in any event, and we can offer something that, wouldn't call it unique, but it's unusual. The person that sold us that business and a couple of others that have Actually, it's almost word for word the same thing they say. They are all happy with the sale they made. Very happy. They have lots and lots of money, and they're doing what they love doing, which is still running the business. They know that they made a decision that will leave their family and the people who work with them all their lives In the best possible position.
In their equation, they have done what's best. That is not the equation of many people, and it certainly isn't the equation of somebody who buys and borrows every dime they can with the idea of reselling it after they maybe dress up the accounting and do some other things. When the disparity gets so wide between what a heavily debt-financed purchase will bring as against an equity-type purchase, it gets to be tougher. There's just no question about it. It'll stay that way.
It's been tough for a long time, and we've bought some good businesses.
Yeah. Okay, Andrew?
Warren, this comes from a shareholder, who I think is here, who asked to remain anonymous, writes, "Three years ago, you were asked at the meeting about how you thought we should compensate your successor. You said it was a good question, and you would address it in the next annual letter. We've been patiently waiting." "Can you tell us now, at least philosophically, how you've been thinking about the way the company should compensate your successor so we don't have to worry when the pay consultants arrive on the scene?
Yeah. Well, unfortunately, at my age, I don't have to worry about things I said three years ago, but this guy, obviously much younger, remembers. Well, I'll accept his word that I said that. There's a couple possibilities, actually. I don't want to get into details on them. You may have, and I actually would hope that we would have somebody, A, that's already very rich, which they should be, been working a long time and got that kind of ability, that's very rich, and really is not motivated by whether they have 10 times as much money that they and their families can need or 100 times as much. They might even wish to perhaps set an example by engaging for something far lower than actually what you could say their true market value is. That could or could not happen.
I think it'd be terrific if it did, but I can't blame anybody for wanting their market value. Then if they didn't elect to go in that direction, I would say that you would probably pay them a very modest amount and then have an option which increased in value or increased in striking price annually. Nobody does this, hardly. Graham Holdings has done it, the Washington Post Company did a little bit. Would increase because assuming that there were substantial retained earnings every year, because why should somebody retain a bunch of earnings and then claim they actually improve the value simply because they withheld the money from shareholders? Very easy to design that. In private companies, people do design it that way. They just don't want to do it in public companies because they get more money the other way.
They might have a very substantial one that could be exercised, where the shares had to be held for a couple of years after retirement, so that they really got the result over time that the majority of the stockholders would be able to get, not be able to pick their spots as to when they exercised and sold a lot of stock. It's not hard to design. It really depends who you're dealing with in terms of actually how much they care about money and having money beyond what they can possibly use. Most people do have an interest in that, and I don't blame them. I don't know, what do you think, Charlie?
Well, one thing I think is that I have avoided all my life compensation consultants. To me, I hardly can find the words to express my contempt.
I will say this, if the board hires a compensation consultant after I go, I will come back. Mad.
I think there's a lot of mumbo jumbo in this field, I don't see it going away.
Oh, it isn't going to go away.
Yeah.
No, it's going to get worse. The way compensation gets handled, everybody looks at everybody else's proxy statement and says.
I know.
We can't possibly hire a guy that hasn't been.
It's ridiculous
So on. The human relations department who work for the CEO come in and suggest a consultant. What consultant is ever going to get another assignment if he says you should pay your CEO down in the fourth quartile because you're getting a fourth quartile result? It isn't that the people are evil or anything, it's just the nature of the situation, it produces a result that is not consistent with how representatives of the owner should behave.
It's even worse than that. Capitalism is the golden goose that we all live on, and if people generally get so they have contempt for it because they don't like the pay arrangements in the system, your capitalism may not last as well. That's like killing the golden goose. I think the existing system has a lot wrong with it.
I think there is something coming in pretty soon, I may be wrong about this, where companies are going to have to put in their proxy statement the CEO's pay to the average pay or something like that. That isn't going to change anything.
It won't change a thing.
It won't change a thing, and it'll cost us virtually-
By the way, it won't get any headlines either.
Oh.
It'll be tucked away.
It'll cost us a lot of money with 367,000 people employed around the world. We'll hope to get something that makes it somewhat simpler so we can use estimates or something of the sort. To get the median income or mean income or however the rules may read.
That's what consultants are for, Warren.
Yeah. It is human nature that produces this. I write in this letter to the managers every two years. I say, "The only excuse I won't take on something is that everybody else is doing it." Of course, everybody else is doing it is exactly the rationale for why people did not want to count the cost of stock options as a cost. It was ridiculous. All these CEOs went to Washington, and they got the Senate, I think, to vote 88 to nine to say that stock options aren't a cost. Then a few years later, it became so obvious that they finally put it in. It was a cost. It reminded me of Galileo or something. I mean, all these guys.
Worse. It was way worse. The Pope behaved better to Galileo, didn't he?
Well, anyway, I would hope, like I say, somebody. I'm not talking about the current successor or anybody else. These successors down the line are probably going to have gotten very wealthy by the time they're running Berkshire. The incremental value of wealth gets very close to zero at some point, and there is a chance to use it as a different sort of model. I don't have any problem if a system is devised that recognizes retained earnings. I've never heard anybody talk about it at the 20 boards I've been on.
If you and I were partners in a business, and we kept retaining earnings in the business, and I kept having the value to buy a portion of you out at a constant price, you'd say, "This is idiocy." Of course, that's the way all the option systems are designed, and it's better for the CEO and for the consultants. Of course, usually there's some correlation between what CEOs are paid and what boards are paid. If CEOs were getting paid at the rate that they got paid 50 years ago, adapted to present dollars, director pay would be lower. It's got all these built-in things that to some extent sort of kindle the.
No Berkshire director is in it for the money.
Well, they are. They own a lot of stock, and they bought it in the market just like the shareholder did.
No, it's a very old-fashioned system.
I looked at one company the other day, seven of the directors had never bought a share of stock with their own money. Now, they've been given stock, not one of the I shouldn't say not one. Seven of the directors had never actually bought a share of stock. There they are, making decisions on who should be CEO and how they should be paid and all that sort of thing. They've never felt like shelling out $1 themselves. Now, they've been given a lot of stock. We're dealing with human nature here, folks. What you want is to have a system that works well in spite of how human nature is going to drive it. We've done awfully well in this country in that respect. American business, overall, has done very well for Americans generally.
Not every aspect of it is exactly what you want to teach your kids. Okay, Gregg?
Warren.
Yep.
Between 2010 and 2015, intermodal rail traffic enjoyed double-digit rates of revenue growth as shorter haul freight converted from truck to rail. During the past year or so, though, cheaper diesel prices and more readily available truckload capacity have made trucking more competitive, leading to a decline in intermodal rail traffic. While carload growth is expected to be solid longer term, helping to offset weakness in other segments like coal, what impact do you expect the widening of the Panama Canal, which was completed last year, to have on the West Coast port shipments that BNSF has traditionally carried through to exchange points for the Eastern U.S. railroads, as shippers look to have goods unloaded at ports in the Gulf of Mexico or up the Eastern Seaboard?
While a loss of volumes is never a good thing, could there be a small trade-off here as the bottleneck in Chicago, where most east-west cargo is handed off, eases a bit over time as some of the current traffic gets rerouted?
Well, yeah. Chicago has got lots of problems, and it's going to continue for a long time. That requires a big solution. When you think of how the railroads developed, Chicago was the center, and they laid the rails, and there were a whole bunch of different railroads 100 years ago. The city grows up around them and everything. Chicago can be a huge problem. Getting to intermodal, I think intermodal will do very well. You are correct that car loadings actually hit a peak in 2006. Here we are 11 years later, and the investment of the 5 big class 1 railroads, four of the biggest. If you look at their investment beyond depreciation, it's $tens and tens of billions, and we're carrying less freight, the four in aggregate, than we were in 2006. Coal will continue to decrease.
It's a good business, and it has big advantages over truck in many respects. Truck gets much more of a free ride in terms of the fact that their right of way, which is the highway system, is subsidized to a much greater degree beyond the gas tax than the railroad industry. It has not been a growth business in physical volume to any great degree. I think it's unlikely to be. I think it's likely to be a good business. I think we've got a great territory. I like the West better than the East. As you mentioned, there will be some intermodal traffic that gets diverted to eastern ports perhaps, or so on. Overall, we've got a terrific system in that respect, and we will do well.
It would be more fun if we had something where you could expect aggregate car loadings to increase 2% or 3% or 4% a year, I don't think that's going to happen. I do think our fundamental position is terrific, however. I think we'll earn decent returns on capital, I think that's the limit of it. Charlie?
Nothing to add.
Okay, station 9.
I'm Shankar Anand from Gurnee, Illinois. Thank you for doing everything you do for us. I have a question. The two of you have largely avoided capital allocation mistakes by bouncing ideas off of one another. Will this continue along into Berkshire's future? I'm interested in both at headquarters and at subsidiaries.
It can't continue very long. Don't get defeatist, Charlie. Any successor that's put in at Berkshire, capital allocation abilities and proven capital allocation abilities are certain to be uppermost in the board's minds, or in the current case, in terms of my recommendation or Charlie's recommendation for what happens after we're not around. Capital allocation is incredibly important at Berkshire. Right now, we have $280 or $90 billion, whatever it may be, of shareholders' equity. If you take the next decade alone, nobody can make accurate predictions on this, but in the next 10 years, if you just take and depreciation right now is another $7 billion a year, something on that order. The next manager in the decade is going to have to allocate maybe $400 billion or something like that, maybe more. It's more than already has been put in.
10 years from now, Berkshire will be an aggregation of businesses where more money has been put in in that decade than everything that took place ahead of time. You need a very sensible capital allocator in the job of being CEO of Berkshire, and we will have one. It would be a terrible mistake to have someone in this job where really capital allocation might even be their main talent. It probably should be very close to their main talent. Of course, we have an advantage at Berkshire in that we do know how important that is, and there is that focus on it. In a great many companies, people get to the top through ability and sales. Sometimes they come from the legal side, all different sides. They then have the capital allocation sort of in their hands.
They may not establish strategic thinking divisions, and they may listen to investment bankers and everything, but they better be able to do it themselves. If they come from a different background or haven't done it's a little bit, as I put in one of my letters, I think it's like getting to Carnegie Hall playing the violin, and then you walk out on the stage, and they hand you a piano. Berkshire would not do well if somebody was put in who had a lot of skills in other areas but really did not have an ability of capital allocation. I've talked about it as being something I call a money mind.
People can have 120 IQs or 140 IQs or whatever it may be, very similar scoring abilities in terms of intelligence tests, and some of them have minds that are good at type 1 thing and some of them another. I've known very bright people that do not have money minds, and they can make very unintelligent decisions. They can do all kinds of other things that most mortals can't do. It just isn't the way their wiring works. I've known other people that really would not do that brilliantly. They do fine, but on an SAT test or something like that, but they've never made a dumb money decision in their life. Charlie, I'm sure, has seen the same thing.
We do want somebody, and hopefully they've got a lot of talents, but we certainly do not want somebody that if they lack a money mind. Charlie?
Well, there's also the option of buying in stock.
Yeah.
It isn't like it's some hopeless problem. One way or another, something intelligent will be done.
A money mind will recognize when it makes sense to buy in stock and doesn't. In fact, it's a pretty good test for some people in terms of management, how they think about something like buying in stock. It's not a very complicated equation if you think straight about that sort of a subject. Some people think that way and some don't, and they're probably miles better at something else. They say some very silly things when you get to something that seems so clear as whether, say, buying in stock makes sense. Anything further, Charlie?
No.
Okay, Carol.
This question comes from Steve Haberstroh of Connecticut. Warren, you've made it very clear in your annual letter that you think the hedge fund compensation scheme of two and 20 generally does not work well for the fund's investors. In the past, you have questioned whether investors should pay, quote, "financial helpers," unquote, as much as they can. Financial helpers can create tremendous value for those they help. Take Charlie, for instance. In nearly every annual letter and on the movie this morning, you describe how valuable Charlie's advice and counsel has been to you, and in turn, to the incredible rise in Berkshire's value over time. Given that, would you be willing to pay the industry standard, quote, "financial helper fee" of 1% on assets to Charlie? Would you perhaps even consider two and 20 for him? What is your judgment about this matter?
Well, I've said in the annual report that I've known maybe a dozen people in my life, and I said there are undoubtedly hundreds or maybe thousands out there, but I've said that I've known personally a dozen where I would have predicted or did predict in a fair number of those 12 cases, I did predict that the person involved would do better than average in investing over a long period of time. Obviously, Charlie is one of those people. Would I pay him? Sure. Would I take financial advisors as a group and pay them 1% with the idea that they would deliver results to me that were better than the S&P 500 by 1%, and thereby leave me breaking even against what I could have done on my own? There's very few.
It's just not a good question to ask whether I'd pay Charlie 1%. That's like asking whether I'd have paid Babe Ruth $100,000 or whatever it was to come over from the Red Sox to the Yankees. Sure, but there weren't very many people I would have paid $100,000 to in 1919 or whatever it was to come over to the Yankees. It's a fascinating situation because the problem isn't that the advisors are going to do so terrible, it's just that you have an option available that doesn't cost you anything that is going to do better than they are in aggregate. It's an interesting question. If you hire an obstetrician, assuming you need one, they're going to do a better job of delivering the baby than if the spouse comes in to do it, or if they just pick somebody up off the street.
If you go to a dentist, if you hire a plumber, in all the professions, there is value added by the professionals as a group compared to doing it yourself or just randomly picking laymen. In the investment world, it isn't true. The active group, the people that are professionals in aggregate, are not, cannot do better than the aggregate of the people who just sit tight. If you say, "Well, in the active group, there's some person that's terrific," I will agree with you, but the passive people can't all pick that person, and they don't know how to identify them.
It's even worse than that. The expert who's really good when he gets more and more money in, he suffers just terrible performance problems.
Yeah.
You'll find the person who has a long career at 2 and 20, and if you analyze it, net, all the people have lost money because some of the early people have had a good record, but more money come in later and they lose it. The investing world it's a morass of wrong incentives, crazy reporting, and I'd say a fair amount of delusion.
Yeah. If you ask me whether those 12 people I picked would do better than the S&P working with $100 billion, I would answer that probably none of them would. That would not be their perspective performance. When I was talking of them or referencing them, and when they actually worked in practice, they dealt generally with pretty moderate sums. As the sums grew their relative advantage diminished. It's so obvious from history. The example I used in the report, the guy who made the bet with me, and incidentally, all kinds of people didn't make the bet with me because they knew better than to make the bet with me. There were hundreds, at least a couple hundred underlying hedge funds. These guys were incented to do well. The fund-to-fund manager was incented to pick the best ones they could pick.
The guy who made the bet with me was incented to pick the best fund to funds. Tons of money, and just with those five funds, a lot of money went to pay managers for what was subnormal performance over a long period of time. It can't be anything but that. It's an interesting profession when you have tens of thousands or hundreds of thousands of people who are compensated based on selling something that in aggregate can't be true, superior performance. It'll continue, and the best salespeople will tend to attract the most money. Because it's such a big game, people will make huge sums of money, far beyond what they're going to make in medicine or you name it, repairing the country's infrastructure. The big money, huge money, is in selling people the idea that you can do something magical for them.
If you even have a billion-dollar fund, and get 2% of it for terrible performance, mate, that's $20 million. In any other field, it would just blow your mind. People get so used to it in the field of investment that it just sort of passes along. $10 billion, $200 million fees. We've got two guys in the office that are managing $11 billion. No, they're not. I'm sorry. They're managing $20 billion, between the two of them, $21 billion maybe. We pay them $1 million a year, plus the amount by which they beat the S&P. They have to actually do something to get contingent compensation, which is much more reasonable than 20%. How many hedge fund managers in the last 40 years have said, "I only want to get paid if I do something for you.
Unless I actually deliver something beyond what you can get yourself, I don't want to get paid." It just doesn't happen. It gets back to that line that I've used, when I asked a guy, "How can you, in good conscience, charge two and 20?" He said, "Because I can't get three and 30." Any more, Charlie, or we used up our
I think you've beaten up on them enough.
Yeah. Well, Jonathan.
Precision Castparts represents the second-largest acquisition Berkshire has ever made. There wasn't much qualitative or quantitative information about it in the 2016 annual. Would you be willing to update us here with how it is doing currently, what excites you about its prospects, and what worries you most about it? I'm also curious if there were any meaningful purchase price adjustments beyond intangible amortization that negatively impacted Precision's earnings in 2016, as was the case with Van Tuyl in 2015. Finally, are there any opportunities in sight for bolt-on acquisitions?
Yeah, we've actually made acquisitions, we will make more that fit there because we've got an extraordinary manager, we've got a terrific position, in the aircraft field. There will be the chance for sensible acquisitions, we've already made two anyway, we will make more over time. The amortization of intangibles is the only big purchase price adjustment. That's something over $400 million a year, nondeductible. In my mind, that's 400 and some million of earnings. I do not regard the economic goodwill of Precision Castparts being diminished at that rate annually. I've explained that in some degree. As a very long-term business, you can worry about 3D printing. I don't think you have to worry about aircraft being manufactured. Aircraft deliveries can be substantially altered in relation to any given backlog in most cases. The deliveries can be fairly volatile.
I don't think the long-term demand is anything I worry about. The question is whether anybody can do it better or cheaper or, like I say, whether 3D printing at least takes away part of the field in some respect. Overall I will tell you, I feel very good about Precision Castparts. It is a very long-term business. We have contracts that run for a very long time, like I say, the initiation of a new plane may be delayed or something of the sort. If you take a look at the engine that's in the other adjoining room here and in our exhibition hall, if you were putting that engine together with a 20 or 25-year life or whatever it may have, carrying hundreds of people, you would care very much about your supplier.
You'd care not only in the quality, which would be absolutely you'd care of the work being done, but you also, if you were an engine manufacturer or an aircraft manufacturer further down the line, you would care very much about the reliability of delivery on something because you do not want a plane or an engine that's 99% complete while somebody is dealing with the problem of faulty parts or anything else that would delay delivery. The reliability is incredibly important, I don't think anybody has a reputation better than Mark Donegan and the company for delivery. I love the fact we bought Precision Castparts. Charlie?
Yeah. Well, what's interesting about it too is that it's a very good business purchased at a fair price. This is no screaming bargain.
No
like the old days.
No.
For quality businesses, you pay up now a lot more than we used to.
Yeah, that's absolutely true, you don't get a bargain price. The $400-plus million incidentally, goes on for quite a while too. We'll explain it in the report just as we'll explain that the depreciation charge at a railroad would not be adequate. It's the way accounting works. I don't even want to tell you about this one, starting the first of next year, accounting is going to become sort of a nightmare in terms of Berkshire and other companies, because they're going to have us mark our equities to market just like we were a Wall Street trading firm or something. Those changes in the value of Coca-Cola or American Express or anything are going to run through the income account every quarter. In fact, they run through it every day in this area, so that it really will get confusing.
It's our job to explain things so that you aren't confused when we report GAAP earnings, but GAAP earnings as reported will become even more meaningless looking only at the bottom line than they are now.
That was not necessarily a good idea.
No, I think it's a terrible idea, but we'll deal with it.
Yeah.
It's my job to explain to what extent GAAP accounting is useful to you in evaluating Berkshire and the times when it actually distorts things. Accounting, it's not supposed to describe value. On the other hand, it's a terribly useful tool if understood in order to estimate value if you're analyzing businesses. In a certain way, you can't blame the auditing profession for doing what they think is their job, which is not to present value.
You can blame the audit profession.
What's that?
You can blame the audit profession for that one.
Okay. Well.
That was really stupid.
Yeah. Well, I agree with that, actually. We will do our best. We're always going to give you the audited figures, then we're going to explain their shortcomings in either direction and what you should use and what you probably should ignore in looking at those numbers and using them to come to a judgment as to the value of your holdings. I'll explain it to you the same way I would explain it to my sisters or anybody else that we want you to understand what you own, and we try to cover the details that are really important in that respect.
There's a million things you can talk about that are just of minor importance when you're talking about a $400 billion market value, but they're the things that if Charlie and I were talking about the company, they'd be the figures or the interpretations or anything that we would regard as important in sort of coming to an estimate of the value of the business. You can't knock the media. They've only got a few paragraphs to describe the earnings of Berkshire every quarter. If they simply look at bottom-line numbers, what can be silly this year will become absolutely ludicrous next year because of the new rule that comes into effect for 2018. Okay. Station 10.
Hello, Warren. This is a question from China.
Pardon me?
I am James Chan. I'm a pension fund manager from China, Shanghai.
Yeah.
My question is quite simple. What is the probability of duplicating your great investment track record in China stock market the next decades or two in terms of investment parcel? That's all. Thanks to my friends from fund management house for guiding me in writing this question. Thank you.
Charlie, you're the expert on China.
It's like determining the order of presidency between a louse and a flea.
Yeah.
I do think that the Chinese stock market is cheaper than the American market. I do think China has a bright future. I also think that there'll be growing pains, of course.
Well, Charlie,
We have this opportunistic way of going through life. We don't have any particular rules about which market we're in or anything like that.
Charlie's delivered a headline anyway now. Munger predicts China market will outperform U.S. I've just been informed it's 12:15 P.M., so I apologize if you're hungry for holding you over for 15 minutes. We'll reconvene around 1:15 P.M., and I'll see you then. Thanks.