Berkshire Hathaway Inc. (BRK.A)

ASM 2016 Part 1

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Apr 30, 2016

Good morning. I'm Warren Buffett. This is Charlie Munger. I'm the young one. You may notice in the movie incidentally that Charlie is always the one that gets the girl. And he has one explanation for that. But I think mine is more accurate that, as you know, every mother in this country tells her daughter at an early age, if you're choosing between 2 very old and very rich guys, pick the ones that's older. I'd especially, we're webcasting this for the first time. So I'd especially like to welcome our visitors from all over the world. We're having this meeting simultaneously translated into Mandarin. And that poses certain problems for me and Charlie because I'm not sure how sensible all our comments will come out once translated into manner. In fact, I'm not so sure how sensible they come out initially sometimes, but But we're delighted to have people around the world joining us. Now the drill today is that I'll make a couple of introductions and we'll show a couple of slides. And then we'll go on to questions from both our 2 panels and from the audience. We'll rotate them. And we'll do that until about noon, actually about a quarter of 12. I'll give you a rundown on a bet that was made that we report on every year. But then I'll also, in connection with that, explain, and it ties in with it, what I really think is probably the most important investment lesson in the world. So we'll have that about a quarter of 12, and I hope that keeps you around. And then we'll break at noon for an hour for lunch. We'll reconvene at 1 We'll proceed until 3:30 with questions. We'll then adjourn for 15 minutes and at 3:45, convene the formal meeting. I'd like to just make a couple of introductions. I hope Carrie Sova is here. Do we have a spotlight? Carrie puts this whole meeting together. There she is. Wonder Woman. Carrie joined us as a receptionist about 6 years ago, and I just kept throwing more and more problems at her. And she put together the 50th anniversary book, which we've actually expanded further this year. We have a revised edition. Charlie and I autographed 100 of them. We interspersed them among the group being sold. And Carrie, while doing that, she also had a young baby girl, her second baby late in January. But then she's gone ahead to put on this whole annual meeting. It's a remarkable achievement, and I really want to thank her. It's been terrific. Actually, we have one surprise guest. I think my youngest great grandchild, who will be about 7 months old, is also here today. And if he happens to break out crying a lot, and don't let it bother you, it's just his mother is explaining to him my views on inherited wealth. We also have our directors with us, and they're here in the front row. I'll introduce them if they'll stand when introduced, withhold your applause no matter what how extremely urge to applaud them individually. And when we finished, then you can go wild. First of all, Howard Buffett, Steve Burke, Sue Decker, Bill Gates, Sandy Gottesman, Charlotte Guyman, Tom Murphy, Ron Olson, Walter Scott, and Merle Whitmer. And that's our wonderful group. Now, we just have 2 slides to show you now. The first one is a preliminary summary figures for the Q1. And you'll notice that insurance underwriting these are after tax figures by category are down somewhat. The basic underwriting at GEICO is actually improving, but we had some important hailstorms in Texas toward the end of the quarter. We've actually had some since the end of the quarter too. So there were more cat losses in the Q1 than last year. Railroad earnings are down significantly and railroad car loadings throughout the industry, all of the major railroads, were down significantly in the Q1 and probably will continue to be down, almost certainly will continue to be down the balance of the year. We have 2 companies which we added to the manufacturing service and retailing field precision cash parts and Duracell, but they were added during the quarter, so their full earnings aren't shown in these figures. In the other category, we have I don't like to get too technical here and you should read the 10 Q when it comes out next weekend. But when we borrow money in other currencies and the only currency we've done that with is the euro, but we have a fair amount of money that we borrowed in euros. And the nature of accounting is that the change in value, the foreign exchange change in value each quarter is actually shown in interest expense. So if the euro goes up, we have a lot of extra interest expense that are shown that way. It's not a realized factor, but it moves from quarter to quarter. And if the euro goes down, it offsets interest expense. It's a technicality to some extent because we have lots of assets in Europe and they're expressed in euros when they go up, it does not go through the income account. It goes directly to other comprehensive income. So I just that figure, which looks a little unusual, that's the reason for it. And we always urge you to pay no attention to the figures below operating earnings. They will bounce around from quarter to quarter and we make no attempt to manage earnings in any way to have them be smoother. We could do that very easily, but it'd be ridiculous. We make investment decisions solely on the basis of what we think the best investment decision is, not on the basis of how it will affect earnings in any quarter or in any year. And in the Q1, we completed a transaction that was begun over a year ago, whereby we exchanged our Procter and Gamble stock for cash and for Duracell. And that accounts for the large largely accounts for the large capital gain in the quarter. So those are the figures for the Q1. And then to illustrate what we're sort of all about here, I put up a second slide and I started this slide in 1999. The reason being that at the end of 1998, we affected a large merger with Gen Re. And at that point, we sort of entered a different era. After 1998 merger with GenRe, we had a little over 1,500 and some 1,000 A equivalent shares out. And our shares up to that point, we'd increase the outstanding shares by more than 50% over the 30 some years preceding that point. Since that time, as I note here, we've only increased the number of shares over the next 17 years. We've only increased the shares outstanding by 8.2%. So these figures represent a fairly unchanged share count since that point, whereas the share count had changed quite a bit before. And as you'll note, in terms of operations, I've told you that our goal at Berkshire is to increase the normalized earnings, operating earnings every year. And I've said sometimes it'll, we hope it'll only be it'll turn out to be only a little bit and sometimes we can get some fairly decent jumps. But that's the goal. Now earnings will not increase every year because there's such a thing as a business cycle. And in times of recession, we're going to earn less money obviously than in times when things are much better overall. And on top of that, we're heavily in an insurance business and earnings there can be quite, volatile because of, of catastrophes. And this chart shows you what's happened, to the operating earnings since that time, again, pointing out that shares outstanding have gone up very little during that period. You'll notice in 2,001 when we suffered significant insurance losses due to 9.11, we actually were in the red in terms of operating earnings. And you'll notice the figures are very irregular. But over time, by adding new subsidiaries, by further developing the businesses we have, by bolt on acquisitions, by reinvestment of retained earnings, The earnings have moved up in a very irregular fashion quite substantially. I put in also the capital gains we've achieved through investments in derivatives and they total some $32,000,000,000 after tax, close to $50,000,000,000 pretax. Those are not important in any given year. Those numbers can go all over the place. The main advantage from my standpoint in that $32,000,000,000 is it gives us money to buy other businesses. What we really want to focus on, what we hope is that the bigger under operations 5 or 10 or 20 years from now grow substantially, partly because we retain earnings from operations, partly because our operations improve in their own profitability, partly because they make bolt on acquisitions, partly because we have gains from securities, which enable us to buy even more businesses. But we don't manage, as you know, we don't manage to try to get any given number from quarter to quarter. We never make a forecast on earnings. We don't give out earnings guidance. We think it's silly. We do not have budgets at the parent company level. Most of our subsidiaries have budgets, but they don't submit them or they're not required to submit them to headquarters. We just focus day after day, year after year, decade after decade on trying to add earning power, sustainable and growing earning power to Berkshire. So that's a quick summary. Now we'll move on to the questions. I just asked with the audience that you limit your question to one question. The multiple questions have a way of sneaking in occasionally. But, so let's keep them to a single question. We'll start off with the journalist group on my right, and we'll start off with Carol Lummis. Good morning. I'll make my very short little speech about the fact that the journalists and the analysts too have given Charlie and Warren no hint of what they're going to ask. So, they will be learning for the first time what that's going to be also. This question comes from Eli Moises. In your 1987 letter to shareholders, you commented on the kind of companies Berkshire like to buy, those that required only small amounts of capital. You said, Because so little capital is required to run these businesses, they can grow while concurrently making almost all of their earnings available for deployment in new opportunities. Today, the company has changed its strategy. It now invests in companies that need tons of capital expenditures, are overregulated and earn lower returns on equity capital. Why did this happen? Yeah. Well, it's one of the problems of prosperity. The ideal business is one that takes no capital, but yet grows. And there are a few businesses like that and we own some. But we are not able we'd love to find one that we could buy for $10,000,000,000 or $20,000,000,000 that was not capital intensive. And we may, but it's harder. And that does hurt us in terms of compounding earnings growth. Because obviously, if you have a business that grows and gives you a lot of money every year and doesn't take it, it isn't required in its growth, you get a double barreled effect from the earnings growth that occurs internally without use of capital and then you get the capital it produces to go and buy other businesses. And See's Candy was a good example of that. I've used that. Back when the newspaper business was good, our Buffalo Newspaper, for example, was a good example of that. The Buffalo Newspaper was making at one time $40,000,000 a year and had no capital requirement. So we could take that whole $40,000,000 and go buy something else with it. But increasing capital acts as an anchor on returns in many ways. And one of the ways is that it drives us into just in terms of availability, it drives us into businesses that are much more capital intensive. You just saw a slide, for example, on Berkshire Hathaway Energy, where we just announced just in the last couple of weeks, we announced a $3,600,000,000 investment coming up in wind generation. And we pledged overall to have $30,000,000,000 in renewables. Anything that Berkshire Hathaway Energy does, anything that BNSF does takes lots of money. We get decent returns on capital, but we don't get the extraordinary returns on capital that we've been able to get into some of the businesses we require that are not capital intensive. As I mentioned in the annual report, we have a few businesses that actually aren't 100% a year on true invested capital. And clearly, that's a different sort of operation than something like Berkshire Hathaway Energy, which may earn 11% or 12% on capital and that's a very decent return. But it's a different sort of animal than the business to very low capital intensity. Charlie? Well, when our circumstances changed, we changed our minds slowly and reluctantly. In the early days, quite a few times we bought a business that was soon producing 100% per annum and we paid for it and didn't require much reinvestment. If we've been able to continue doing that, we would have loved to do it. But when we couldn't, we went to Plan B and Plan B is working pretty well. And in many ways, I've gotten so I sort of prefer it. How about you, Warren? Yeah, that's true. When something's forced on, you might as well prefer. Yeah. But I mean, we knew that was going to happen. And the question is, does it does it lead you from what looks as a sensational result to a satisfactory result? And we don't we're quite happy with a satisfactory result. The alternative would be to go back to working with very tiny sums of money and that really hasn't gotten a lot of serious discussion between Charlie and me. Okay. From the analyst group, Jonathan Brandt. Hi, Warren. Thanks for having me again. Thanks for coming. My first question is about Precision Castparts. Besides your confidence in its talented CEO, Mark Donegan, what in particular do you like about their business that gave you the confidence to pay historically high multiple? Are there ways Precision can be even more successful as an essentially a private company? For instance, are there long term investments to Yeah, we completed the acquisition of Precision Cash Parts. And Yeah, we completed the acquisition of Precision Cash Parts at the end of January this year. We agreed to we made the deal last August. And you covered the most important asset in your question, Mark Donegan, who runs Precision Gas Parts, is an extraordinary manager. I mean, we've seen very Charlie and I have seen a lot of managers over the years. And I would almost rank Mark as one of a kind. I mean, he is doing extremely important work in terms of making, primarily making aircraft parts. I would say that there are certainly no disadvantages to him to be working as a and for that company to be a subsidiary of Berkshire and not be a public company. And I think he would say, and I think Charlie and I would agree with him, that over time there could be some significant advantages. For one thing, he can spend 100% of his time now on figuring out better things to do with aircraft engines. And it was always his first love to be thinking about that. And he did spend most of his time, but he also had to spend some time, you know, explaining quarterly earnings to analysts and perhaps negotiating bank lines and that sort of thing. So his time, like all of our managers, can be spent exactly on what makes the most sense to them and their business. Mark does not have to come ever to Omaha to put on some show for me in terms of justifying $1,000,000,000 acquisition or plant investment. He doesn't have to waste his time on anything that isn't productive. And running a public company, you do waste your time on quite a bit of stuff that isn't productive. So I would say we've taken the main asset of Precision Cast and made it made him, in this case, even more valuable to the company. In terms of acquisitions, Precision has always made a number of them. But as being part of Berkshire, there's really no limitations on what can be done. So there again, his canvas has been broadened, enlarged with the acquisition by Berkshire. I see no downside whatsoever. If he needs capital, I've got an 800 number. And he wasn't paying much of a dividend before, but he doesn't have to pay any dividend now. And Precision Cash will do better under Berkshire than it would have independently, although it would have done very, very well independently. Charlie? Yeah. Well, in the early days, we used to make wise ass remarks. And Warren would say, we buy a business that an idiot could manage because sooner or later an idiot will. And we did buy some businesses like that in the early days and they were widely available. Of course, we'd prefer to do that. But the world has gotten harder and we had to learn new and more powerful ways of operating. A business like Precision Castparts requires a very superior management that's going to stay superior for a long time. And we gradually have done more and more and more of that. And it's simply amazing how well it works. I think to some extent, we've gotten almost as good at picking the superior managers as we were in the old days of picking the no brainer businesses. We would love to find, we won't be able to find them because they're very rare birds, but we would love to find another 3 or 4 of a similar type to precision gas parts, where they forever are going to be producing something that where quality is enormously important, where the customers depend very heavily on them when there's contracts that extend over many years and where people don't simply just take the low bid in order to get this gadget of one sort or another. It's very important that you have somebody there that has enormous skill running the business and their reputation among aircraft manufacturers, engine manufacturers, is absolutely unparalleled. Okay. Now we go to the audience and we'll go up to Section 1. And if you'll give your name and where you're from, I'd appreciate it. Hi. Good morning. My name is Caspar. I'm Spanish and I come from London. I admire you both in many ways, but I would like to know that when looking backwards, what would you have done differently in life in your search for happiness? Well, I'm 85, and I can't imagine anybody any happier. So I by accident or whatever, I mean, you know, I mean, I'm sitting here eating exactly what I like to eat, doing in life exactly what I love to do with people I love. So it it really doesn't get any better than that. And and I I did decide fairly early in life that my favorite employer was myself. And that I think that presented I've managed to avoid really aggravation of almost any sort. Really, if you or those around you that you love have health problems or something, I mean, that is a real tragedy and and there's not much you can do about it except it, but accept it. But But, Charlie and I have really been blessed. I mean here, Charlie is 92, 85 and he's doing every day something that he finds fascinating. I think he probably finds what he is doing at 92 is interesting, is fascinating, is rewarding, is socially productive, you know, as any period you can pick in his life. And so we've been extraordinarily lucky. We've been, you know, we're lucky it's a partnership. It's more fun doing things as a partnership. So I've got no complaints. It would be very surely should be to have any kind of complaint. And I would say if you're talking about business life, I don't think I would have started with a textile company. Charlie. Well, looking back, I don't regret that I didn't make more money or become better known or any of those things. I do regret that I didn't wise up as fast as I could have. And but there's a blessing in that too. Now that I'm 92, I still have a lot of ignorance left to work on. Okay. Becky Quirk. This question comes from Solomon Ackerman, who's in Frankfurt, Germany. He wants to know why Berkshire has significantly sold down their holdings in Munich Re, which is the world's biggest reinsurance company based in Germany, while sticking with the reinsurance operations within Berkshire, like Berkshire Hathaway Reinsurance and General Re, Would you reduce exposure to Berkshire Hathaway Reinsurance and General Re if they were listed companies? And he's hoping that this can bring out some of your insights as to what's happening in the reinsurance business right now. Yeah, we I said in the annual report that I thought it was very likely that the reinsurance business would not be as good in the next 10 years as it has been in the last 10 years. I may be wrong on that, but that's just a judgment based on seeing the competitive dynamics of the reinsurance business now versus 10 or 20 years ago. Both Munich, we sold our entire holdings, which were substantial, of Munich Re and Swiss Re. We owned about 3% of Swiss Re and we owned more than 10% of Munich Re. And last year, we sold those 2 holdings. They're fine companies. They're well managed companies. I like the people that run them. I think their business, the business of the reinsurance companies generally is less attractive for the next 10 years than it has been for the last 10 years. In part, that's because what's happened to interest rates. A significant portion of what you earn in insurance comes from investment of the float. And both of those companies, and for that matter, almost all of the reinsurance industry, is somewhat more restricted in what they can do with their float because they don't have this huge capital cushion that Berkshire has, and also because they don't have this great amount of unrelated earning power that Berkshire has. Berkshire has more leeway in what it can do simply because it does have capital that's many times what its competitors have. And it also, has earning power coming from a whole variety of non of of of unrelated, areas unrelated to insurance. So it was not it was not a negative judgment in any way on those 2 companies. It was not a negative judgment on their, on their managements, but it was at least a mildly negative judgment on the reinsurance business. Now we have the ability at Berkshire to actually rearrange to a degree. We are certainly affected by industry factors, but we have more flexibility in modifying business models. And we've operated that way, over the years in insurance generally and in particularly in reinsurance. So a Munich, a Swiss, all the major reinsurance companies except for us is pretty well tied to a given type of business model. They don't really have as many options in terms of where capital gets deployed or they have to continue down the present path. And I think they'll do fine. But I don't think they will do as fine in the next 10 years as they have in the last 10. And I don't think if we played the same game as we were playing the last 10, we would do as well. But we do have considerably more flexibility in terms of how we conduct all of our insurance operations, but particularly in reinsurance. We have an extra string to our bow that the rest of the industry doesn't have. The amount of capital that's come in to the reinsurance business, It is no fun running a traditional reinsurance company and having money come in, particularly if you're in Europe, and have money come in and look around you for investment choices and find out that a great many of the things that you were buying a few years ago now have negative yields. That the whole idea of float is that it's supposed to be invested at a positive rate, in a fairly substantial positive rate. And that game has been over for a while and it looks like it will be at least unattractive, if not terrible, for a considerable period in the future. Charlie? Yeah. You know, there's a lot of new capacity in reinsurance and there's a lot of very heavy competition. A lot of people from finance have come over into reinsurance and all the old competitors remain too. That's different from precision cast parts where most of the customers would be totally crazy to hire some other supplier because precision cast parts is so much more reliable and so much better. Of course, we like the place with more competitive advantage. We're learning. To put it in terms of Economics 101 and then that basically in reinsurance, supply has gone up and demand has not gone up. And some of the supply is driven by investment managers who would like to establish something offshore where they don't have to pay taxes. And reinsurance is sort of the easiest, what you might call beard, behind which to actually engage in money management in a friendly tax jurisdiction. And you can set up a reinsurance operation with very few people by taking large chunks of what brokers may offer. It's not the greatest reinsurance in the world and a couple of the operations that have done that have proven that statement to be right. But nevertheless, it is a very, very easy way to have a disguised investment operation in a friendly tax jurisdiction. But that becomes supply in the reinsurance field. And supply has gone up relative to demand. And it looks to me like that will continue to be the case and couple that with the poor returns on float, and it's not as good a business as it was. Now we'll talk to an insurance man about it, Cliff Allen. Thank you. In terms of growth and profitability, GEICO really got whooped by Progressive Direct over the last year. In 2015, Progressive Direct's auto business grew policy count by 9.1%, GEICO only 5.4%. And in terms of profitability, the combined ratio at Progressive was a 95.1% and GEICO's was a 98.0%. Is this evidence that Progressive's investments in technology like Snapshot, investments that GEICO has spurned? Is it making a time and making a difference in a time of difficult loss trends? Why is GEICO suddenly losing to Progressive Direct? Yeah. Well, I would say this. Over last well, I forget what year it was. We passed Progressive and what year it was we passed Allstate. But GEICO's growth rate in the Q1 was not as high as in the past couple of 1st quarters, but it was it was quite satisfactory. Now the Q1 is by far the best quarter for growth, but last year, both frequency, how often people had accidents, and severity, which is the cost per accident, in other words, just how much those accidents cost you. Both of those went up quite suddenly and substantially. And progressives figure showed that they were hit by that less than Allstate and GEICO and and some others. But I don't think you'll see necessarily those same trends this year. The it's an interesting thing. Last year, for the first time in I don't know how many years, the number of deaths in auto accidents per 100,000,000 miles went up. Now, if you go back to the mid-1930s, there were almost 15 people killed per 100 1,000,000 miles driven. It got down to just just slightly over 1, from 15 to 1. You had almost as many, you had roughly as many people killed in auto accidents in the mid-1930s, about 3,032, 33,000 a year as we had last year or the year before when people drove almost 15 times as many miles. Cars have gotten far, far, far, far safer. And it's a good thing because if we'd had the same rate of deaths from auto accidents as we had in the '30s relative to miles driven, we would have had over 500,000 people die last year from auto accidents instead of a figure closer to 40,000. But last year, for the first time, there was more driving and I think there was more distracted driving. So you really had this uptick in frequency and more important in severity. GEICO has adjusted its rates. As I mentioned, my own prediction would be that the underwriting margins at GEICO will be better this year than last year, although you never know when catastrophes are coming along. March April have had a lot of cat activity. I made a bet a long time ago on a mental one on the GEICO model versus the progressive model. And as I say, they were significantly ahead of us in volume a few years back and we passed them and we passed Allstate. And as I put in the annual report, I hope on my 100th birthday that the GEICO people announced to me that they passed State Farm. But I have to do my share on that too by getting to 100. So we'll see what happens on that particular one. Charlie? Well, I don't think it's a tragedy that some competitor got a little better ratio for 1 period. The GEICO's quadrupled its market share since we bought all of it. Quintupled. Quintupled. All right. I don't think we should worry about the fact that somebody else had a good quarter. Yeah. I think it's far more sure that GEICO will pass State Farm someday than that I'll make it to a 100, I'll put it that way. Okay. We'll go to the shareholder from station 2. Greetings to all of you from the Midwest of Europe. I'm Norman Rentrop from Bonn, Germany, a shareholder since 1992. My question is about the future of salesmanship in our companies. Warren, you have always demonstrated a heart for direct selling. When we met you in the midst of a tornado warning in the barber shop, you immediately offered to write insurance for us. That's true. Now They were all huddled down there in the barbershop, and there wasn't going to be any tornado. So I told them if they give me a dollar, I can go upstairs. And if anything happened to my PAM, I forget $1,000,000 or something of the sort. Now we see with the rise of Amazon dotcom and others a shift from push marketing to pull marketing from millions of catalogs having been sent out in the past to now consumers searching on what they are looking for. What is your take on how this shift from push to pull marketing will affect our companies? Well, Norman, the development you refer to is huge, I mean really huge. And it isn't just Amazon, but Amazon is a huge part of it. And what they've accomplished in a fairly short period of time and continue to accomplish is remarkable. The number of satisfied customers they've developed and we don't make any decision involving even the manufacturing of goods, the retailing, whatever it is, without thinking long and hard about what the world will look like in 5 or 10 or 20 years with that powerful trend, really hugely powerful trend that you just described. So we're not we don't look at that as something where we're going to try and beat them at their own game. They're better than we are at that. And so Charlie and I are not going to out Bezos Bezos by a long shot. But we are going to think about that. It does not worry us, obviously, with a precision cast. It doesn't worry us in terms of the overwhelming majority of our businesses. But it is a huge economic trend that 20 years ago was not on anybody's radar screen and lately has been on everybody's radar screen. And many of them, have not including us in a few areas have not figured the way to either participate in it or to counter it. GEICO is a good example of a company that in an industry that had to adjust to change, and some people made the change better than others. We were slow on the Internet. The phone had worked so well for us, and this traditional advertising, and the phone had worked so well that there's always a resistance to think about new possibilities. When we saw what was happening on the internet, we jumped in with both feet and with mobile and whatever. But there are capital the nature of capitalism is somebody is always trying to figure if you've got some a good business, they're always trying to figure out how to how do women take it away from you and improve on it. And the effect, I would say, just of Amazon, but others that are playing the same game. The effect on industry, the full effect is far from having been seen. I mean it is a big, big force, and it will it already has disrupted plenty of people and it will disrupt more. I think Berkshire is quite well situated. For one thing, we one big advantage we have is we didn't ever see ourselves as starting out at 1 industry. I mean, we didn't go into we went into department stores, but we didn't think of ourselves as department store guys or we didn't think of ourselves as steel guys or tire guys or anything of that sort. So we've thought of ourselves as having capital to allocate. If you start with a given industry focus and you spend your whole time working on a way to make a better tire or whatever it may be, I think it's hard to have the flexibility of mind that you have if you just think you have a large, hopefully large and growing pile of capital and trying to figure out what is the next best, next move that you can make with that capital. And I think we do have a real advantage that way. But I think the fellow that I think Amazon's got a real advantage too. And this intense focus on having 100 of 1,000,000 of generally very happy customers getting very quick delivery is something that they want to get promptly and they want to shop the way they shop. And if I owned a bunch of shopping malls or something like that, I would be thinking plenty hard about what they might look like 10 or 20 years from now. Charlie? Well, I would say that we failed so thoroughly in retailing when we were young that we pretty well avoided the worst troubles when we were old. I think net Berkshire has been helped by the internet. The help at GEICO has been enormous and it's contributed greatly to the huge increase in market share. And our biggest retailers are so strong that they'll be among the last people to have troubles from Amazon. I didn't get that dollar from you, Norman, actually that after I gave you that wonderful advice. Andrew? Warren, great to see you today. Got a lot of questions on this particular topic and this question is a particularly pointed one. Warren, for the last several years at this meeting, you've been asked about the negative health effects of Coca Cola products and you've done a masterful job dodging the question by telling us how much Coke you drink personally. Statistically, you may be the exception. According to a peer reviewed study by Tufts University, soda and sugary drinks may lead to 184,000 deaths among adults every year. The study found that sugar sweetened beverages contributed to 133,000 deaths from diabetes, 45,000 deaths from cardiovascular disease, 6,450 deaths from cancer. Another shareholder wrote in about Coke, noted that you declined to invest in the cigarette business on ethical grounds despite one saying, It was a perfect business because it costs a penny to make, sell it for a dollar, it's addictive and there's fantastic brand loyalty. Again, removing your own beverage consumption from the equation, please explain directly why we Berkshire Hathaway shareholders should be proud to own Coke? Yeah. I think people confuse the amount of calories consumed. I mean, I happen to elect to consume about 700 calories a day from Coca Cola. So I'm about 1 quarter Coca Cola, roughly. I'm not sure which quarter, and I'm not sure if we want to pursue the question. They but I think if you decide that sugar generally is something that the human race shouldn't have, think the average person consumes something like 150 pounds of dry white sugar here, £125. I mean, you know, what's in Coca Cola largely, that more the calories come from is sugar. I elect to get my 26 or 27 100 calories a day from things that make me feel good when I eat them. And that's been my sole test. It wasn't a test that my mother necessarily thought was great or my grandfather, but there are over 1.9000000000 8 ounce servings of some Coca Cola drink. Now they have an enormous range of products, you know. I mean, a few that are called Coke, Diet Coke, Coke 0 and that sort of thing, but they have literally thousands of products. Dollars 1,900,000,000 that's was that a 693,500,000,000 8 ounce servings a year, except it's a leap year. That's almost 100 and 8 ounce servings per capita for 7,000,000,000 people in the world every year. And that's been going on since 18/86. And I would find quite spurious the fact that somebody says if you're eating 3,500 or so calories a day and you're consuming 27 or 800 and some of the 3,500 is Coca Cola to lay it any particular obesity related illnesses on the Coca Cola you drink. You have the choice of of of consuming more than you use. I mean, and I make a choice to eat or to get 700 calories from this. I like fudge a lot, peanut brittle. And I am a very, very, very happy guy. And I don't know. I think I and I'm serious about this. I think if you were happy every day, you know, it may be hard to measure, but I think you're going to live longer as well. So there may be a compensating factor. And I really wish I'd had a twin and that twin had eaten broccoli his entire life, and we both consumed the same number of calories. I'm I I know I would have been happier. And I I think the odds are fairly good. I would have lived longer if I I do I think Coca Cola is a marvelous product. I mean, if you consume 3,500 or 4,000 calories a day and live a normal life in terms of your metabolism, you know, something's going to go wrong with your body at some point. But if you keep I think if you balance out the calories so that you don't become obese, I have not seen evidence that convinces me that I'll make it. It'll be more likely I reach 100 if I suddenly switch to water and broccoli. Incidentally, a friend of mine, R. J. Miller, a remarkable man born about a 100 miles from Air West, 8th child near Shelby, Nebraska. He said Shelby's population was 596 and it never changed because every time some girl had a baby, a guy had to leave town. It was a very stable. But RJ went on to be president of Ford Motor Company from this farm near Shelby, and he had his 100th birthday on March 4th this year. So I went out to see RJ for his birthday on March 4th. And RJ told me that there were 10,000 men in the United States that have lived to be 100 or greater. And there were 45,000 women that were 100 or greater. So I came back and I checked that on the internet. I went to those census figures. And sure enough, that is the ratio. There's 10,000 men over 100 roughly and 45,000 women. So if you really want to improve your longevity prospects, I mean, the guy in my position, you have a sex change. I mean, you're 4.5x more likely to get to be 100. That sounds like one of those studies that people put out. Just a matter of fact, folks, I think I'll have Charlie go first, though, on that one. Charlie, do you have any comments? Well, I like I like the peanut brittle better than the coke. But I drink a lot of diet coke. And I think the people who ask questions like that one always make one ghastly error that's really inexcusable. They measure the detriment without considering the advantage. Well, that's really stupid. That's like saying we should give up air travel through airlines because 100 people die a year in air crashes or something. That would be crazy. The benefit is worth the risk. And if every person has to have about 8 or 10 glasses of water every day to stay alive and it's pretty cheap and sensible and improves life to add a little extra flavor to your water and a little stimulation and a little calories if you want to eat that way. There are huge benefits to humanity in that and it's worth having some disadvantage. We ought to have almost a law and yet it's very open. I'm sounding like Donald Trump, where these people shouldn't be allowed to cite the defects without citing the offsetting advantage. It's immature and stupid. Okay, Greg Warren. Warren, with both coal fired and natural gas plants continuing to generate around 2 thirds of the nation's electricity and renewables accounting for less than 10%, there remains plenty of room for growth. At this point, Berkshire Energy, which has invested heavily in the segment, is one of the nation's largest producers of both wind and solar power, and yet still only generates around 1 third of its overall capacity from renewables. As you noted earlier, MidAmerican recently committed another $3,600,000,000 to wind production, which should lift the amount of electricity it generates from wind to 85 by 2020. You've also had the company overall pledging to have around $30,000,000,000 in renewables longer term. The recent renewal of both the wind and solar energy tax credits has made this kind of investment more economically viable and should clear the path for future investments. Eliminating coal fired plants looks to be the main priority, but natural gas fired plants are also fossil fuel driven and are exposed to the vagaries of energy prices. Is the end game here for Berkshire Energy to get 100% of its generation capacity converted over renewables? And what are the risks and the rewards associated with that effort? After all, the company operates in a highly regulated industry where rates are driven by an effort to keep customer costs low while still providing adequate returns for the utilities. Yes. Well, I think implicit in what you say is that we do any decision we make, including the one that we just showed on this during the movie, to any decision about new generation, changes in generation, has to go through a what's usually called the Public Utility Commission. They may have different names in a few states. But the utility industry is overwhelmingly regulated at the state level and we cannot make changes that are not approved by the Public Utility Commission. We've had more problems, for example, in bringing in renewables in our Western Utility Pacific Corp because it's, in effect, regulated by 6 states. I believe in 6 states. And they don't necessarily agree on how the costs and benefits should be divided if we, put in a bunch of renewables and we have to follow their instructions. Iowa has just been marvelous about encouraging, I mean, at every level, I mean, the consumer groups, the governor, you name it, they have seen the benefits. And in Iowa, it's literally true that we have one major competitor called the Alliant. And they have not either been able to I don't know the reasons, but they have not pursued renewables the way we have. So our rates are considerably lower than theirs. And if you look at their budget projections, although they're substantially higher rates than we have now, they may well need a rate increase within a year or so. And with our latest expansion, we have said that we will not need a rate increase till 2029 at the earliest, that's 13 years off. So there have been great benefits if you have a regulation that works with you on that. But it is a determination that is made at the state level. Now the federal government has encouraged in a major way the development of renewables by this production tax credit, which currently amounts to about $0.023 per kilowatt hour. We would not have the renewable generation that we have if it hadn't been for the fact that, that the building of those projects is subsidized by the federal government because the benefits of reducing solar emissions are our carbon emissions are worldwide. And therefore it's deemed proper that citizenry as a whole should participate in subsidizing the cost of reducing those emissions. And that is encouraged. In fact, it's allowed things like have happened in Iowa as well. But the degree to which the renewables replace primarily coal, although there's plenty of emissions connected with natural gas, if you trace it all the way through, will depend on governmental policy. And I think so far, I think it's been quite sensible and encouraging having the costs borne by society as a whole in terms of reduced tax revenues and having the benefits, which are less CO2 into the atmosphere. They also broadly they're not just limited to the people of Iowa when we build that. That's a benefit that accrues to the world. So I think you'll see continued change. It will vary by jurisdiction. And we would hope we've got the capital, We've got loss of taxes, federal taxes paid in our consolidated returns. So we're in a particularly advantageous position to take advantage of massive investments that companies with limited tax appetites couldn't handle. So I think you'll see us be a very big player. But governmental policy is going to be the major driver. Charlie? Yes, I think we're doing way more than our share of shifting to renewable energy and we're charging way lower energy prices to our utility customers than other people. If the whole rest of the world were behaving the way we are, it would be a much better world. I will say this about the subject though and that is that I think that the people who worry about climate change is the major trouble of earth don't have my view. I think that we I like all this shifting to renewables, but I have a different reason. I want to conserve the hydrocarbons because eventually, I think we're going to use every drop of humanity for chemical feedstocks. And so I'm in their camp, but I got a different reason. One thing you'll find might find kind of interesting, Nebraska has not done much with wind power and maybe 3 miles from 2 miles from where we're sitting right across the river, people are buying their electricity cheaper in Council Bluffs right across the river than they are in Omaha. And yet Omaha Nebraska is entirely a public power state. So there's no stockholders who have to have any earnings. The bonds are issued on a tax exempt basis, and yet electricity is considerably cheaper right across the river. And, you know, the wind blowing doesn't just start at the Missouri River. I mean, it comes comes across Nebraska, and that wind could be captured. And so far, it really it really hasn't. And the real irony is that because our electricity is so much cheaper in Iowa, you have these you have these massive server farms of people like Google. It's become a tech haven for these operations that just gobble up electricity. And Iowa has gotten plant after plant after plant and job after job after job and increased property tax I mean, gotten more property tax revenues. And that's being done. The Google server is probably 7 or 8 miles from here. And it's located in Iowa because we have cheap wind generated electricity and it's creating jobs. It's fascinating, Nebraska has prided itself on public power. It was originated back, I believe, in the '30s when George Norris was a very powerful senator here. And it's been a source of pride, but lately it's been a source of cost too. Okay. Shareholders Section 3. Good morning, Mr. Buffet and Mr. Munger. My name is Adam Bergman. I'm with Sterling Capital in Virginia Beach. In your 2008 shareholder letter, you said derivatives are dangerous. They have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks. So my question for you is, how do you analyze and value companies like Bank of America, Merrill Lynch, and other commercial banks that Berkshire has investments in relative to their significant derivative exposures? Thanks. Yeah. Derivatives do complicate the problem very dramatically. Now they they are moving away to being collateralized, which helps. But there's no question that if you ask me to describe the derivative position of the B of A, for example, I would know that they have done a conscientious job and work hard at properly evaluating. But the great danger in derivatives is if there's a discontinuity. There's not discontinuities, you probably don't have much of a problem, assuming they get mark to market and collateralized and so on. But if the system stops for a while, the system stopped after nineeleven for 3 or 4 days. It stopped at the time of World War I. They closed the New York Stock Exchange for many months. They debated closing the Stock Exchange very seriously the day after October 19, 1987. And it was were a lot of people that wanted to close it. And on that Tuesday morning, it looked like it was about to stop, but it continued. But if you had a major cyber nuclear chemical biological attack on the country, which will certainly happen at some point. If you have a major discontinuity, then you'll have a lot of problems, a lot of problems. But you will also when things reopen, you will find there can be enormous gaps in things that you thought were fully protected by collateral and that sort of thing or netting arrangements and that type of thing. So I regard very large derivative position derivative positions as dangerous. We inherited a modestized position at January and in a benign market, we lost about $400,000,000 just in trying to unwind it with no pressure on us whatsoever. So I do think it continues to be a danger to the system. By the way, the accountants blessed that big derivative position as being worth a lot of money. They were only off, what, many 100 of 1,000,000. Yeah. Well, Charlie found one position when he was on the Audit Committee at Salomon. I think it was mismarked by $20,000,000 I actually, by happens since, happened. I do know of one incredibly mismarked position. It doesn't affect any of our operations. But it almost staggers the mind to know the way that position is marked. And you can only come to the conclusion that some trader somehow got influenced whoever did market or marked it himself, heaven forbid, and probably just influenced someone or they didn't know enough. Some of these things get so complicated. They are very hard to evaluate. That's the kind that have the most profit in them usually. So they were quite enthusiastic about those when we were at Solomon. They can be extraordinarily hard to market. And like I say, I know one that's so much marked, it would blow your mind. And, you know, the auditors, I don't think are necessarily capable of holding that behavior in check. It's very interesting because now there's really 4 big auditing firms. And obviously, they're auditing companies where there's a derivative position and they're auditing company A that's on one side of the transaction and they're auditing company B that's on the other side of the transaction. In some cases, it's the same auditor. And I will guarantee you that there's plenty of times when the marks on what they're attesting to are significantly different, which would be an interesting exercise to pursue in terms of checking those numbers out. Derivatives are still dangerous in large quantities and we have we would not do them on a collateralized basis because if there was a discontinuity, I don't know exactly where we would end up and I'm never going to get us in a position where we could be have money demanded of us and not be able to fulfill it with ease and with me sleeping well. So we won't engage in it. We've got some in runoff that so far we've made money and had the use of money for a decade or more. And it's been very attractive for us, but that does not entice me at all into doing any derivative transactions that would involve collateral and collateral is not required. It's still a potential time bomb in the system. Anything for discontinuities and basically that means closing up, stopping, trading markets from functioning. Anything where discontinuities can exist can be real poison in markets. Kuwait some years ago went to a very delayed system on settlement of stock purchases so that you didn't have to settle up for 6 months or thereabouts. And it caused all kinds of problems because you've got an IOU from somebody for 6 months. And if you've got zillions of those, a lot of trouble can ensue. So I agree with your general caution. I'm not in the least troubled by our Bank of America Investment, nor our Wells Fargo. We added to Wells Fargo. And our Bank of America position right now is a preferred stock, but we're very likely to exercise the warrants on that. On the other hand, there are a great number of banks in the world. If you take the 50 largest banks in the world, we wouldn't even think about probably 45 of them. Wouldn't you say that, Charlie? Well, we're in the awkward position where I think we'll probably make about $20,000,000,000 out of derivatives. And just those few contracts that you and Ajit did years ago. All that said, we're different from the banks. We would really prefer it if those derivatives had been illegal for us to buy. It would have been better for our country. Carol? This question relates to something that Warren briefly said earlier today. The question comes from Lynn Palmer, who is just finishing her freshman year in a Houston, Texas high school. My question, she says, concerns the flow generated by Berkshire's insurance companies. In Mr. Buffet's 2015 annual letter, he said that the large amount of float that Berkshire possesses allows the company to significantly increase its investment income. But what happens when interest rates decline? If the U. S. Were to implement negative interest rates in the same way that the eurozone and Japan have done, how would Berkshire be affected? Well, some of our float actually exists in Europe and where we have the problem of negative interest rates on very high grade short term and medium even medium term bonds. And obviously, anything that reduces the value of having money is going to affect Berkshire because we're always going to have a lot of money. We because we have so much capital and so many sources of earning power, we have the ability quite properly to use our float in, to a certain degree in ways that most insurance companies can't think about. So we can find things to do, but sometimes we get, you know, we we've got 50 odd 1000000000 of short term, government securities now, and we're going to get another $8,300,000,000 in all likelihood early in June when our Kraft Heinz preferred us call. So we'll be back over $60,000,000,000 again very soon. And so we've got $60,000,000,000 out that's out at, say, a quarter of 1%. Well, the difference between a quarter of 1% and minus a quarter of 1% is not that great. I mean, it's almost as painful to have $60,000,000 out at a quarter of a percent as to have it out at a negative rate. Flow does not worth as much to insurance companies now as it was 10 years ago or 15 years ago. And that's true at Berkshire. I think it's worth considerably more to us than it is to the typical insurance company because I think we have a broader range of options as to what to do with it. But there's no question about it that having a lot of money around now, this is not just a problem for insurance companies. It's a problem for retirees. It's a problem for anybody that's stuck with fixed dollar investments and finds that their income now is a pittance or in Europe, perhaps a negative rate. And that was not something in their calculation at all 15 years ago. We love the idea, however, of increasing our float. I mean, that money has been very useful to us over time. It's useful to us today, even under present conditions. And it's likely to be very useful to us in the future. It's shown as a liability, but it's actually a huge asset. Charlie? I've got nothing to add. Yeah. He's now at full string. Jonathan. Testing. The railroad industry seems right now to be suffering from exposure to some of the weakest parts of the economy with volume declines of varying magnitudes in coal, oil, sand and metals. Even intermodal, usually a steady source of growth has been relatively weak of late. How much of the weakness is cyclical? How much is secular? In the last 15 months, the other Western Railroads market capitalization is down by 35% as projections of future growth have come down. Is your estimate of BNSF's intrinsic value down by a material amount during the same period? Or is your view of the value of BNSF's irreplaceable network unaffected by these short term wiggles? Well, I would certainly the decline in coal, which is a very important commodity, is about 20% of revenues. That's secular. Now there's other factors that may cause the line of decline to jiggle around. We had very mild winter and we went into the winter with utilities carrying unusual amounts of coal. And ironically, part of the reason was that for that was that our service the year before had been bad and they'd gotten low on coal, so then they compensated by by bringing in more than they needed just to catch up. And because the weather was mild, electricity use was poor in the wintertime. And so they continue at this point to have considerably more coal on hand than they would like. So they are not only they're trying to under order what they will be using, and that has a little effect. But the decline in coal for sure is secular. And at 20% of revenues that's a significant factor. But and it's true that the market generally got very enthused about railroad stocks a year or 2 ago. So they sold up a lot. And now that people have seen that car loadings are down and earnings are down in some places, that equity valuations have come down. We don't we love the fact we own BNSF. We think we bought it at an attractive price. We'd love to be able to buy a second thing exactly like it at that price. We'd do it in a second. We'd even pay a little bit more probably. But we don't mark up and down, our wholly owned businesses based on stock market valuations. Obviously, stock market valuations are some factor in our thinking, but we are not marking our wholly owned businesses to market because we're going to hold them forever. And we regard the BNSF as a very good business to hold forever. But it will lose coal volume and it may lose in other areas, but it will gain in other areas. It's a terrific and valuable asset and it will earn a lot of money this year, but it won't earn as much money as it earned last year. Charlie? I've got nothing to add. Okay. Station 4. Hi, Warren. Hi, Warren and Charlie. Great to see you. This is Cora and Dan Chen from Talgar Investments of Los Angeles. This annual meeting reminds me of the magical world of Hogwarts. Of Harry Potter. This arena is our Hogwarts. Warren, you are our hitmaster and professor Dumbledore. I haven't read Harry Potter, but I'll take it as a compliment. Charlie is our headmaster's seat, direct, and full of integrity. The magic of long term concentrated value investing is real, yet similar to Harry Potter, the rest of the world doesn't believe we exist. Your letter to me has changed my life. And your Secret Millions Club has changed my children's life. They go to class chatting about investing. My question is for my children watching at home today, and the children in the audience. How should they look at stocks when every day in the media, they see companies that never made a time in their life go IPO. They're dilutive, and they see a lot of very short term spin. The cycle is getting shorter and shorter. How should they view stocks and what's your message for them? Finally, Cora and I would love to thank you in person and shake your hand personally today. I'll repeat what I said last year. Thank you for setting the seeds for my generation to sit under the shade, and for my children's generation to sit under the shade with the Secret Millionaire's Club. I truly walk amongst giants. Thank you. Would you mind repeating the whole thing? The Secret Millionaires Club, we want to give great credit to Andy Hayward on that. I think it has helped. I know it's helped thousands and thousands of children. And Andy, it was Andy's idea. And it grows in strength. And having young children learn good lessons in terms of handling money and making friendships and just generally behaving as better citizens is a great objective. And Andy makes it easy for him to do. So on his behalf, I accept your comments. You don't have to really worry about, you know, what's going on in IPOs or people making money. People win lotteries every day, but there's no reason to have that effect at all. You shouldn't be jealous about it. I mean, it's great. You know, if they want to do mathematically unsound things and one of them occasionally gets lucky and they put the 1 person on television and the million that contributed to the winnings with the big slice taken out for the state. You know, don't get on there. It's nothing to worry about. Just all you have to do is figure out what makes sense, and you don't and you look at buying when you when you buy a stock, you get yourself in the mental frame of mind that you're buying a business. And if you don't look at a quote on it for 5 years, that's fine. You don't get a quote on your farm every day or every week or every month. You don't get it on your apartment house. If you own 1, if you own a McDonald's franchise, you don't get a quote every day. You know, you want to look at your stocks as businesses and think about their performance as businesses. Think about what you pay for them as you would think about buying a business and let the rest of the world go its own way. You don't want to get into a stupid game just because it's available. And I'm going to say a little bit more about that close to the break. But with that, I'll turn it over to Charlie. Yeah. Well, I think that your children are right to look for people they can trust in dealing with stocks and bonds. Unfortunately, more than half the time, they will fail in a conventional answer. So they really have to, they have a hard problem. If you just listen to your elders, they'll lie to you and make and spread a lot of following. But they really have an easy problem in the sense that American business as a whole is going to do fine over time. So the only way that they can I'm not the average client of a stock broker. Well, we'll get to that later. The stock broker will do fine. The Yes, that's true. Yeah. But they don't have to do that. And we can talk well, I'd rather address that just a little later. But just you don't want to worry. You don't want to be a lot of problems, as Charlie would say, are caused by envy. You don't want to get envious of somebody who's won the lottery or bought an IPO that went up. You have to figure out what makes sense and follow your own course. Becky? This question comes from a shareholder named Alisa Kang Lee in Singapore. And this has to do with NV Energy's issue with solar energy in Nevada. Can the Chairman help his environmentally conscious shareholders understand why NV Energy has lobbied for new rules in Nevada that make it prohibitive for households to use solar energy. Is there a good reason that we haven't yet heard about? And can the Chairman or Vice Chairman share their views on whether there's a need to implement an environmental, social and governance policy on Berkshire Investments going forward? I understand that Berkshire Hathaway typically lets the underlying operating companies and CEOs manage their own policies autonomously. But should Berkshire's Board influence better environmental protection policies going forward? Well, the public utility and the pricing policy is everything of in Nevada as well as other places, but they're determined by a public utility commission. So there are, I believe, 3 commissioners that decide what's proper. The situation in Nevada is that, in terms of rooftop power was that of for the last few years, if you had a solar project on your roof, you could sell back excess power you generated to the grid at a price that was far, far, far above what we as a utility could buy it for elsewhere. So you could sell it back, we'll say, at roughly $0.10 a kilowatt hour and about 17,000 maybe a few more now, about 17,000 people had rooftop installations. Now they got there were federal credits involved, but those usually got sold to other people, in terms of tax credits. So they were being subsidized by the federal government. And that encouraged solar generation as it's encouraged us to do solar generation and wind generation as well. But the people who had these 17,000 rooftop installations were selling back to the grid at $0.10 roughly a kilowatt hour Energy we could purchase or produce either but purchase elsewhere too for $0.035 or thereabouts. So 99% of our consumers were being asked to subsidize the 1% that had solar units by paying them a significantly triple the market price, basically, of what we could otherwise buy electricity to sell to the 99%. So then it's just a question of whether you wish to have the 99% subsidized the 1%. And the Public Utility Commission in Nevada, they had originally let this small amount of rooftop solar generation be allowed as an experiment with this roughly $0.10 rebate. And they decided that they did not believe that the 99% should be subsidizing the 1%. There's no question that for solar to be competitive, just like wind, it needs subsidization. Costs are not yet at a level, where it becomes competitive, with natural gas, for example. And who pays the subsidy gets to be a real question. If you want to encourage people to use renewables. And in general, the federal government has done it through tax subsidies, which mean taxpayers generally throughout the country subsidize it. And the Public Utility Commission in Nevada decided after seeing this experiment, they decided that it was not right for a 1000000, well over a 1000000 customers to be buying electricity at a price that subsidized these 17,000 people and therefore increase the prices of electricity for the 1,000,000. And that question of who subsidizes renewables and how much, you know, is going to be a political question, for a long time to come. And, I personally think that if society is the one that's benefiting from the lack of reduction of greenhouse gases, that society should pick up the tab. And I don't think that somebody sitting in a house in some place in Nevada, we'll call it Las Vegas, but it could be other cities because we serve most of Nevada, should be picking up the subsidy for their neighbor. And the Public Utility Commission agrees with that. I think we have Greg Abel here who, NB Energy as a subsidiary of MidAmerican, of Berkshire Hathaway Energy. Greg, was there anything you want to add? Can we get a spotlight down here? Maybe done. It's on? I think it's on now. So as usual, Warren, you summarized it extremely well. When we think about it, it's exactly as you described. I would just add a few things. 1, as you've touched on earlier, we absolutely support renewables. So we start with the fundamental concept that we are for solar. But as you highlighted, we want to purchase renewable energy at the market rate, not at a heavily subsidized rate that 1% of the customers will benefit from and harm the other 99%. And it goes back to being as fundamental as this. If you take, as you touched on, a working family in Nevada who can't afford the rooftop unit and you ask them, do you want to subsidize your neighbor, that 1%, the answer is clearly no. At the same time, we're absolutely committed to Nevada utilizing renewable resources and absolutely proud of what our team's doing. By 2019, we'll have eliminated or retired 76% of our coal units and be replacing it with solar energy. So we're on a great path there. Thank you. And we're just going to encourage our team and and with the work of the the commission and obviously led by the state, we'll head down a great path. Thank you. Yeah. If the projectionists would put up slide 7, it will give you a view of what the situation is. And this counts all of our Berkshire Hathaway Energy operations. And you can see in the 20 year period, we'll have a 57% reduction. You wouldn't want a 100% reduction tomorrow. Believe me, the lights would be off all over the country, but it's moving at a fast pace. But you do you want to be sure that you treat fairly the the people involved in this because somebody pays the cost of of electric generation. And I do think that if you're doing something that's to benefit the planet, and it's important that it be done, but that you have the cost be assessed for that, not on a specific person who's having trouble perhaps meeting ends meet in their job. And obviously, if you got over 1,000,000 customers in Nevada, a lot of them are struggling. A lot of them are doing fine, too. But they are not the ones, in my view, to subsidize the person who could afford to put the solar unit in. Okay. Cliff? Over the past year, we've learned, perhaps I've learned that Berkshire's results are more influenced by oil markets than I previously appreciated. Revenues at the railway company and some of Berkshire's manufacturing businesses were negatively impacted and arguably low gas prices hurt GEICO's loss ratio. Yet during this year, Berkshire invested in Phillips 66, Kinder Morgan and even PCP has revenues associated with the oil and gas industries. I know Berkshire wouldn't make a bet on a commodity like oil, but is Berkshire making a statement about the long term outlook for oil? I'm making a statement about what? Oil. Price of oil? Yes. No. We haven't the faintest idea what the long term price of oil was. And there's always a better system available. You can buy oil, as you know, for delivery a year from now or 2 years from now or 3 years from now. We actually did that once, Charlie, didn't we, at some years back? We cashed it in too soon, too. Yeah. We made money, but we could have made a lot more money. But the, we don't think we can predict commodity prices. We don't hedge cocoa or sugar. We do some forward buying of chocolate coatings or something of that sort. But basically, we are not 2 fellows who think we can predict the price of soybeans or corn or oil or anything else. So anything you have seen in our investment transactions, some of the securities you mentioned there were bought by Todd or Ted, and one was bought by me. But neither they nor I bought those or if we sell them, sell them based on commodity price predictions. We don't know how to do it. And we're thinking about other things when we make those decisions. Charlie? I'm even more ignorant than you are. Now it'd be hard to be. Okay. I think that's the first time I've heard him say that. That's a nice ring to it. Okay. Station 5. Hi, Warren. Hi, Charlie. Hi. I'm Ken Martin. I'm an MBA student from the Tuck School at Dartmouth. My question is about college tuition and the problem of rising student debt balances. In the past, prominent philanthropists have founded institutions that are now prominent research universities in our country. Why is this not a bigger part of today's philanthropic debate, the founding of new colleges? Would not new supply in higher education be at least part of the solution to this problem? Charlie, you want to tackle that one? You're more of an expert than I am. Yeah. I think that if you expect a lot of efficiency, financial efficiency in American higher education, You're howling at the wind. Well, I think he's also talking about just more philanthropy delivered there. Am I right? Want to give him the light back on there? Yeah, that's right. What's the question again? The question about maybe whether more philanthropy ought to be devoted to that relatively because of the cost. But well, I do a lot more than Warren does in this field and I'm frequently disappointed. But the monopoly has kind of and bureaucracy have kind of pernicious effects everywhere and the universities aren't exempted from it. But of course, they are the glory of civilization and if people want to give more to it, I'm all for it. You know, you've got the option of very good state schools. And we spend a lot of money on education in this country. You know, if you just take you take kindergarten through 12, it's interesting. People talk about entitlements in this country. It's terrible. We have all these entitlements for social security and everything. We have entitlements for the young. We spend $600,000,000,000 a year educating 50,000,000 kids in the public schools between kindergarten and 12th grade. And just think of what that is, is an entitlement. Nobody ever seems to bring that up. But it's a huge, and I I believe in it, obviously. But, you know, the people in their working ages, generally speaking, I think, have an in a rich society, have an obligation to both the young and the old. And based on the amount we spend, If we have problems with our school system, it's not because we're cheap. There are other problems that contribute to it. In terms of in terms of the money we put out, we're right up there. But I was the trustee of a college that saw the endowment go from $8,000,000 to over a1000000000, and I didn't see the tuition come down and I didn't see the number of students go up. Nothing went up except the professor salaries. Yeah. From 8,000,000 to a1000000000. I mean, and very, very decent people running the place. But when you read the figures on endowment of the big schools, you know, and some of them have really gone up in the big numbers, The main objective of the people running the endowment is have the endowment grow larger. And that will be ever thus. That is the way humans operate. Do you have any more comments on that, Charlie? You've seen a lot. I have made only enemies I can afford at the moment. Okay. That's never slowed them down in the past. Andrew. Thank you, Warren. This from a shareholder asked to remain anonymous. If Donald Trump becomes the President of the United States and recognizing your public criticism of him and your public support for Hillary Clinton, what specific risks, regulatory policy or otherwise, do you foresee for Berkshire Hathaway's portfolio of businesses? That won't be the main problem. Well, government, you know, is a very big factor in our business and in all businesses. I mean, there's the very broad policies that affect practically everybody, and sometimes there can be some pretty specific policies. But I will predict that if either Donald Trump or Hillary Clinton becomes president and one of them is likely to be, very likely to be, I think Berkshire will continue to do fine. Charlie? I'm afraid to get into this area. We've operated under all I mean, we've operated under price controls. I mean, we've had 52% federal taxes applied to our earnings for many years. Even I mean, they were higher at other times. But you know, we've had regulations come along. And in the end, business in this country has done extraordinarily well for a couple of 100 years and it has adapted to the society, and the society has adapted the business. This is a remarkably attractive place in which to conduct a business. Imagine in a world of practically 0 interest rates, American business earning terrific returns on tangible equity. I mean, those are the assets that were actually employed in the business. The numbers are staggering. And people who have had their money in savings accounts or something are going to get destroyed. But owners of business, if you look at returns on tangible equity, just check them out sometime. And they have not suffered even as people who own fixed interest, fixed income instruments have suffered enormously. And farm prices are down now. Farmer income has fallen off a lot in the last couple of years. But business has managed to take care of itself and for a good reason because it contributes to and has been the engine of our market economy that's delivered output that is staggering by the imagination of anyone that might have existed 100 years ago. In my lifetime, the GDP per capita in real terms of the United States has gone up 6 for 1. Can you imagine in a society where in one person's lifetime, overall, people have 6 times the real output that they had at the beginning. It's the system works very well in terms of aggregate output. In terms of distribution of that output, sometimes it can fall very short, in my view. But it'll keep working. You don't have to worry about that, dear. 20 years from now, there'll be far more output per capita in the United States, in real terms than there is now. In 50 years, it will be far more And the quality will get better. And no presidential candidate or president is going to end that. They can shape it in ways that are good or bad, but they can't end it. Now Charlie, give something pessimistic here to balance me. No, I want to say something optimistic. And I think that the GDP figures greatly understate the real advantage that our system has given our citizens. It underweighs a lot of huge achievements because they don't translate right into money in a certain way that the economists can easily handle. But the real achievements are over the last century, say, are way higher than are indicated by the GDP figures. And the GDP figures are good. I don't think the future is necessarily going to be as quite as good as the past, but it doesn't have to be. There's no one you'll run into, at least in my experience, that says with my same talents, I wish I'd lived 50 years ago instead and born 50 years earlier. But a significant majority of the American public thinks that it's a bad time to be born today compared to when they were born. They think your shoulder went up. They're wrong. I mean, it's, the pace, the pace of innovation. Just think how different you're living compared to 20 years ago in terms of what you do with your time. Now, a a lot of people may condemn it or something of the sort, but you're making free choices that were not available to you 20 years ago and you're making them in a different direction than I'm still saying with a landline, but you people are way ahead of me. Okay, Greg. Warren, late last year, we saw Canadian Pacific make a hostile bid for Norfolk Southern, a combination that would have linked Canada's 2nd largest carrier with 1 of the 2 largest railroads in the Eastern U. S. This move led to a largely negative reaction from not only Norfolk Southern, but from federal and state lawmakers, shippers and other railroad operators, even though a formal evaluation process hadn't even begun with U. S. Service the between BNSF and Canadian National, the attitude was that any additional mergers amongst railroads would have to be accretive to competition. What do you think they meant by this? And if one believes that the hookup of 1 of the 2 major Western railroads with 1 of the 2 Eastern railroads would not alter the current landscape where most shippers have just 2 choices amongst the large railroads operating in the region and could actually generate efficiencies and cost savings that could be passed along to customers. How does a combination of someone like BNSF with Norfolk Southern or CSX not satisfy their goal? I think now there's and Matt Rose, is he here? He can probably answer that some of that better than I can certainly. He can answer all of it better than I can. Yes, there's Matt. Yes. Yes. So the statement is excellent right. Back in 1999, we had a failed merger with Canadian National. New rules were put in place by our regulator, a little group called the STB. And what they said was that the public litmus test for the next merger would have to be different. And at that point in time, we didn't really think that a large merger was possible. And so, when Canadian Pacific announced their merger of the Norfolk Southern, when we think about our 4 constituencies and those 4 are our customers, the labor groups, the communities in which we serve and shareholders, which our shareholder of course is BRK, we didn't see any interest in the final round of these mergers occurring outside of the shareholder community. And so our position was simply to say, if the rest of the shipping community believes that we ought to see this final round, that's fine. We'll participate, but we don't see it occurring right now. We do believe that when that final round occurs, there will be great efficiencies made for shippers and communities. But right now, we don't see the dynamics in place. So what are those dynamics? It'll be as the country continues to grow in population from where we are today, 315,000,000 people to say 320, 330, 350, 350. Transportation becomes more scarce and the railroads will need to do more and that's really when we think the next round will occur. Okay. Station 6. Hi. My name is Michael Mazia. I'm from Brooklyn, New York, and I'll be starting at Warren Business School in the fall. In an interview with Bloomberg Markets recently, Jamie Dimon defended the role banks play in financial markets, saying banks aren't markets. The market is amoral. You're a trade to the market. A bank is a relationship. But banks, namely investment banks, have struggled as regulators have favored market based solutions and many of those relationships investment banks have worked so hard for have proven to be less lucrative, especially compared to the growing fixed costs of supporting them. As it relates to our marketable securities portfolio, how do you feel about the investment banking component, particularly as Wells moves into that space? Would you feel differently if the cost basis was higher? And Warren, Charlie, thank you so much for doing this every year. Thank you. Charlie, I didn't totally get that, but does he feel the investment? Banking firms are being disadvantaged? Well, he's basically, how do we feel about Jamie says that you can't make as much money as you choose to out of relationships and it's getting tougher and so forth. Well, the public policy since 2000 and eight-nine has been to very much toughen up, capital requirements in a variety of ways for banks. But it is specifically, been designed to make large banks, very large banks, less profitable relative to smaller banks. And you do that by increasing capital requirements. You can change the math of banking and the attractiveness of banking totally by capital requirements. Obviously, if you said every bank had to be 100% equity, it would be a terrible business. You can't couldn't possibly earn any money that was significant on capital. And if you let people operate with 1% capital ratios, they can make a lot of money and they will cause the system all kinds of trouble. So since since 2009, the rules have been told against the larger banks by primarily through capital requirements. And that just means returns on equity go down. But returns on equity were awfully high prior to that. So it hasn't turned it into a bad business. It's turned it into a less attractive business than earlier. And that some of the investment banks operate as bank holding companies still, and they've been affected by those capital requirements too. I'm not sure getting 100% to your question, so I invite you to give me a follow-up if you'd like on that. In the marketable securities portfolio, do you feel good about the going forward prospects of the investment the investment banking companies, especially as Wells Fargo moves into that business? Well, Wells Fargo has an investment banking aspect to it that primarily came in through Wachovia, and it's not insignificant. But our ownership of Wells Fargo, which is very large it's our largest single marketable security. I'm not counting Kraft Heinz, which is about the same size because that in that situation, we're in a control position. It's the largest non control situation that we have at Wells Fargo. And that's my intent. I like it extremely well compared to other securities, not because it has the most upside, but I feel that weighted for upside and downside that it's It's not the investment banking that charms you in Wells Fargo. It's the general banking that Yeah. No, we're not a it isn't that big a deal and that's not what attracts us. We think Wells Fargo is a very well run bank, but we didn't make any decision to buy a single share based on the fact they were going to be more in the investment banking business because of the Wachovia acquisition. They've got a lot of sources of income. They've got a huge base of very cheap money, but unfortunately they've got it out at very cheap rates on the other side now. But spreads will probably work in their advantage eventually. And we think it's a very well run bank. Investment Banking business, Charlie and I are probably a little affected by the experience we had in running 1 for a short period of time. It's not been something we invested in significantly. We obviously made a major investment in Goldman Sachs, and we continue to hold shares that came out of the warrants that we received when we made the investment in 2,008. But I think I can't recall us making an investment banking purchase a marketable security involving an investment bank for a long time. Can you, Charlie? No. I think generally we fear the genre more than we love it. Carol? In the conclusion of the book, Dear Chairman, which you recommend in this year's annual letter, a new book you recommend, the author argues that, The life's work of great investors is inevitably reabsorbed into the industrial complex with little acknowledgment of their accomplishments. He then argues that Berkshire Hathaway will eventually be targeted by activist investors if it trades at too sharp a discount to intrinsic value. Do you agree with this assessment? And have you considered installing corporate defenses that might prevent future generations of activists from trying to break up Berkshire Hathaway? Yeah, I used to worry more about that than I do now. Partly, size is one factor. I think the more important factor would be that Berkshire will always be in a position to repurchase very significant amount of stock. And as long as it's willing to buy that stock at some price and it should be close to intrinsic value. There should not be a large margin in terms of anybody that might come along, I think there'd be a lot of money to be made by breaking up. There would be money lost by breaking it up in terms of we'd lose. There'd be certain advantages lost. Mid American Energy could not have done what it has done in renewables without Berkshire being the parent. I mean, if it had been split off, it would have been worth the parts would have been worth less than the whole. And there are other I could give you significant instances of that in other cases. So I don't think there will be a spread that will be enticing to anyone. And beyond that, I think the numbers involved would be staggering. And I think, we have a shareholder base that recognizes the advantages of both the Berkshire businesses and its culture. And so I think it's very, very unlikely. But there have been periods in business history where stocks sold at or practically all stocks sold at dramatic discounts from what you might call intrinsic value. And it's interesting that very little activity occurred there. In the 1974 period, 1973 74, there were really good companies, one of which was Cap Cities, for example, that Tom Murphy ran. It was something at a huge discount to what it was worth. But people did not come along. And so to some extent, when the discounts are huge, money is hard to get. It's not a huge worry with me. Actually, in my own case, because of the way my stock will get distributed to philanthropies after I die, the there'll be a it's very likely that that my estate, for some years would be by far the largest shareholder of Berkshire in terms of votes, even with this distribution policy that occurs. So I it's not something I worry about now. I used to worry about it some, but it's not a factor now. Charlie? Well, I think we have almost no worries at all on this subject and that most other people have a lot of thoroughly justifiable worry and I think that helps us. So I look forward on this subject with optimism. You want to explain how it helps us, Charlie? Well, if you're being attacked by people you regard as evil and destructive and so on, and you want a strong ally, how many people would you pick in preference to Berkshire? My name is Warren Buffet and I approve of that a message. Jonathan. Leasing has quietly become an important contributor to Berkshire's earnings with its several leasing units logging about $1,000,000,000 in combined annual pre tax income. Could you talk about Berkshire's competitive advantages in its various leasing businesses including containers, cranes, furniture, tank cars and railcars. Are there other leasing businesses you would be interested in entering for instance airplanes or commercial auto fleets? Plain leasing companies in particular seem to sell for reasonable prices and are often available. Yes. Well, we've got a very good truck leasing business in Extra and we've got a good, primarily tank car leasing business, Union Tank Car and Pro Car. And we expanded it by $1,000,000,000 when we bought the GE fleet recently. Leasing generally isn't something that we'll we have to bring something to the party. At Extra, that's much more than just handing people a trailer and taking a check every month. There's important service advantages brought to that. But pure leasing, leasing of new cars, which is a huge business, The math is not that attractive for us. The banks have an advantage over us because their cost of funds are so low. Now it's not quite as low as it looks, but I think Wells Fargo, I think the last figure was down around 10 basis points. And when somebody has I don't know, maybe $1,000,000,000,000 or so, and they're paying 10 basis points for it, I don't feel very competitive at Berkshire in that situation. So pure money type leasing is not an attractive business for us when we've got other people with a lower cost of funds. I mean, they've got the edge. And we have got railcar leasing involves a lot more than just a financial transaction. I mean, we repair we've got huge activity in the repair field. And those cards require servicing and the same way in our trailer business. But you will not see us get an aircraft leasing doesn't interest me in the least. We've looked at that a lot of times, had various aircraft leasing companies offered to us. And that's a scary business. And some people have done well in it by in recent years by using short term money to finance longer term assets, which have big residual risks. And that just isn't for us. Charlie? I think you've said it pretty well. We're well located now, but I don't think we've got huge opportunities. Okay, Station 7. Good morning, Warren and Charlie. I am Vande Bersaye from the Philippines. Warren, my wife and I sent original paintings to your office 2 days ago, and we hope you like them. Thank you. Today, Berkshire's size ensures that it faces competition from numerous businesses. If you had a silver bullet, which competitor would you take out and why? And sorry, you can't say Donald Trump. Which competitor and which businesses? I mean, you're asking about which Which competitor would you kill if you could? I don't think we have to answer this one. Charlie's a lawyer. But I've thought about the question. We have lots of tough competitors. And we're in many areas we're a pretty tough competitor ourselves. And the real what we want our managers to be doing, you know, is thinking every day about how to achieve a stronger competitive position. We call it widening the moat. But we want to turn out better products. We want to keep our costs down to a minimum. We want to be thinking about what our customers are likely to be wanting from us a month, a year, 10 years from now. And generally, if you take care of your customer, the customer takes care of you. But there are cases where there is some force coming along that really is, you may not have the answer for. And you know, you get out of that business. We had that department store in Baltimore in 1966. And if we kept it, would have gone out of business. So recognizing reality is also important. I mean, you do not want to try and fix something that's unfixable. And we're not targeting competitors for destruction. We're just trying to do the best we can everywhere. Spoken like an antitrust lawyer. Okay. We really hope to be the ones that the other guys want to use the silver bullet on it. Becky? This question comes from Ram and Raji Tarakad from Sugar Land, Texas. He writes, my wife and I have the vast majority of our net worth invested in Berkshire and in shares of the Sequoia Fund. Mr. Buffet, you have endorsed the Sequoia Fund on more than a few occasions. Recently, the Sequoia Fund has been in the news because of its large position in Valiant Pharmaceuticals. Mister Munger has termed Valiant's business model highly immoral. Mr. Buffet, do you agree with Mr. Munger's assessment? Have your views about Sequoia Fund changed? Also, as you know, Sequoia is an admirer and large holder of Berkshire stock. Yeah. In a sense, I'm the father of Sequoia Fund in that when I was closing up my partnership at the end of 1969, I was giving back a lot of money to partners and these people that trusted me. And they wanted to know what they should do with their money. And we helped out those who wanted to put it in municipal bonds for a few months. Bill, Scott and I stayed around and helped those people come up with those, but most of them were equity oriented type investors. And we said there were 2 people that we admired enormously in the investment business, not simply because they were terrific investors, but they were terrific people. And they would be the kind of people that you'd make trustee of your will. So those 2, one of whom is in the room, Sandy Gottesman, our Director, and one was Sandy and one was Bill Ruhain. They were friends themselves. So Sandy took on a number of our clients, a number of our partners, and they became clients and very happy clients of his. And I'll bet some of them are still clients or their children or grandchildren are to this day. Others, went with Bill. So a lot of them went with both of them, actually. In fact, I wouldn't be surprised, but the majority who had a lot of money gave some to Sandy and gave some to Bill. But, Bill, we had a lot of people whose total funds were really not of a size that made them, economic individual clients. And so Bill, who would not have otherwise set up a fund, Bill said, I'll set up a fund. And it actually had an office in Omaha. John Harding, who used to work for me, became the employee here. And a number of our ex partners, my ex partners, joined Sequoia Fund as a way to find an outstanding investment manager, like I say, both for ability and for integrity, and could deploy small sums with him. And Bill ran Sequoia until I think roughly 2,005 when he died and did a fantastic job. And even now, if you take the record from inception to now with the troubles I've had recently, I don't know of a mutual fund in the United States that has a better record. There probably is 1, maybe, or 2, but it's far better than the S and P. And you won't find many records that go for 30 or 40 years that are better than the S and P. So Bill did a great job for people. And Bill died in 2,005 and the record continued to be good until a year or so ago. And at that time, they the management company, the manager, I should say, took an unusually large position and valiant. And despite the objection of some people on the Board, not only maintained that position, but actually increased it after a fair amount of doubt had been expressed by the Board about the viability of doing that. The record, like I say, to date still from when started is significantly better than average. My understanding is that the manager who made the decision on Valeant is no longer running the operation than other people at Roinchennet for doing so. And I have every reason to believe that they're I know that they're very smart, decent people who are good, probably way better than average analysts in terms of Wall Street. So I think it was a very unfortunate period when the manager got overly entranced with a business model, which if you I watched the Senate hearings a couple of days ago when Senator Collins and Senator McCaslin interrogated 3 people from Valiant. And it was not a pretty picture. In my view, the business model of Valeant was enormously flawed. It had been touted to us. We had several people who urged us strongly to buy Valeant, wanders to meet Pearson and all that sort of thing. But it illustrated a principle that Pete Keywood, I think, said many, many years ago. He said, if you're looking for a manager, find somebody that's intelligent, energetic and has integrity. And he said, if they don't have the last, be sure they don't have the first two. If you've got somebody who lacks integrity, you want to be dumb and lazy. And if you get an intelligent, energetic guy or woman who is pursuing a course of action, which you put on the front page, would make you very unhappy. You can get in a lot of trouble. It may take a while. But Charlie and I have seen and we're not remotely perfect at this, I don't mean that, but we've seen patterns. You get pattern recognition gets very important in evaluating humans and businesses. And the pattern recognition isn't 100% and none of the patterns exactly repeat themselves. But there are certain things in business and securities markets that we have seen over and over and that frequently come to a bad end, but frequently look extremely good in the short run. One which I talked about last year, I'm not referring to value in this regard, is the chain letter scheme, the disguised chain letter. You're going to see chain letters the rest of your life. Not that nobody calls them chain letters because that has a connotation that will scare you off. But they're disguised chain letters. And many of the schemes on Wall Street that are designed to fool people have that particular aspect to it. And there are patterns at Valiant that I think certainly if you go and watch those Senate hearings, I think you'll decide that there are patterns there that really should have been picked up on. And it's been very painful to the people of Sequoia. And I personally think that the people that are running Sequoia now are able people. And I'll get into in a second the difficulty of managing money. But first, I'll give Charlie chance to comment on this. Well, I totally agree with you that Sequoia has reconstituted. It's a reputable investment fund and the manager has reconstituted it as a reputable investment advisor. And I've got quite a few friends and clients that use Roincareff and I've advised them to stay with the place that's reconstituted. And I believe you've done the same thing, haven't you? Right. So we trust, we think the whole thing is fixed. A valiant, of course, was a sewer and those who created it deserve all the appropriate that they got. In a few minutes, we'll break, but I think it almost ties in with this last question. If we could put slide 3 up. I promised some years ago, I made a wager and I promised to report before the lunch of the wager was coming out. And I've been doing that regularly, but it probably seems appropriate, since it's developed this far, to point out a rather obvious lesson, which was what I hoped to drive home to some degree by offering to make the wager originally. Incidentally, when I offered to make the wager, namely that somebody could pick out 5 hedge funds and I would take the unmanaged S and P index used by Vanguard Fund. And I would bet that over a 10 year period that the unmanaged index would beat these 5 funds that were all being managed. Presumably, they could pick any 5 funds that were managed by people who were charging incredible sums to people because of their supposed expertise. And fortunately, there's an organization called or at least you go to you go to the Internet, if you put in longbets.org, it's a terribly interesting website. You have a lot of fun with it because people take the opposite side of various propositions that have a long tail to them and and make bets as to the outcome, and then they both give their each side gives their reasons. And you can go to that website and you can find bets about whether what population will be doing 15 years from now or all kinds of things. And our bet became quite famous on there. They and a fellow I like, who I didn't know before this, Ted Sidis, bet that he could pick out 5 hedge funds. These were funds of funds. In other words, there was one hedge fund at the top and then that manager picked out who he thought were the best managers underneath and then bought into these other funds in turn. So that the 5 funds of funds represent maybe 100 or 200 hedge funds underneath. Now bear in mind that the hedge fund, the fellow making the bet, was picking out funds where the manager on top was getting paid perhaps a half a percent a year, plus a cut of the profits for merely picking out who he thought were the best managers underneath, who in turn were getting paid maybe 1.5% or 2% plus a cut of the funds on profits. But certainly, the guy at the top was incentivized to try and pick out great funds. And at the next level, those people were presumably incentivized too. So the result is after 8 years and several 100 hedge fund managers being involved is that now the totally unmanaged fund by Vanguard with very, very, very minimal costs is now 40 some points ahead of the group of hedge funds. Now that may sound like a terrible result for the hedge funds, but it's not a terrible result for the hedge fund managers. These managers, a, you've got this top level manager that's charging probably a half a percent. I don't know that for sure. And down below, you've got managers that are probably charging 1.5% to 2%. So if you have a couple percentage points sliced off every year, that is a lot of money. We have 2 managers at Berkshire that each manage $9,000,000,000 for us. They both ran hedge funds before. If they had a 2.20 arrangement with Berkshire, which is not uncommon in the hedge fund world, they would be getting $180,000,000 each, you know, merely for breathing annually. That, I mean, that it's a compensation scheme that is unbelievable, to me, and that's one reason I made this bet. But what I'd like you to do is for a moment imagine that in this room we have the entire you people own all of America, All the stocks in America are owned by this group. You are the Berkshire 18,000 or whatever it is that have somehow managed to accumulate all the wealth in the country. And let's assume we just divide it down the middle. And on this side, we put half the people, half of all the investment capital in the world, and that capital is what a certain presidential candidate might call low energy. In fact, they have no energy at all. They buy half of everything that exists in the investment world, 50%, every one on the side. And so now half of it is owned by these no energy people. They don't look at stock prices. They don't turn on business channels. They don't read the Wall Street Journal. They don't do anything. They're just they are a slovenly group that just sits for year after year after year owning half of the half of the country, half of America's business. Now what's their result going to be? Their result is going to be exactly average as how American business does because they own half of all of it. They have no expenses, no nothing. Now what's going to happen with the other half? The other half are what we call the hyperactives. And the hyperactives, their gross result is also going to be a half, right? They can't the whole the whole, has to be the sum of the parts here. And this group, by definition, can't can't change from its half of the ultimate investment results. This half is going to have the same gross results. They're going to have the same results as the low energy, no energy period people. And they're also going to have terrific expenses because they're all going to be moving around, hiring hedge funds, hiring consultants, paying lots of commissions and everything. And that half as a group has to do worse than this half. The people who don't do anything have to do better than the people that are trying to do better. And it's that simple. And I hoped, through making this bet to actually create a little example of that. But that offer was open to anybody. And I would make incidentally the same offer now, except being around at 10 years to collect gets a little more problematic as we go through life. But it seems so elementary. But I will guarantee you that no endowment fund, no public pension fund, no extremely rich person wants to sit in that part of the auditorium. They just can't believe that because they have 1,000,000,000 of dollars to invest, that they can't go out and hire somebody who will do better than average. I hear from them all the time. So this group over here, supposedly sophisticated people, generally richer people, hire consultants, and no consultant in the world is going to tell you just buy an S and P index fund and sit for the next 50 years. You don't get to be a consultant that way, and you certainly don't get an annual fee that way. So the consultant's got every motivation in the world to tell you this year, I think we should concentrate more on international stocks. This year, this manager is particularly good on the short side. And so they come in and they talk for hours and you pay them a large fee. And they always suggest something other than just sitting on your rear end and participating in the American business without costs. And then those consultants, after they get their fees, they in turn recommend to you other people who charge fees, which as you can see over a period of time, cumulatively eat up capital like crazy. So I would suggest that what I felt sure, I didn't feel sure because nothing, can't tell for sure about any 10 year period, but I certainly felt very probable or I wouldn't have stuck my neck out. It just demonstrates so dramatically. I've talked to huge pension funds and I've taken them through the math. And when I leave, they go out and hire a bunch of consultants and pay them a lot of money. And it's just unbelievable. And the consultants always change the recommendations a little bit from year to year. They can't change them 100% because then it didn't look like they knew what they were doing the year before. So they tweak them from year to year and they come in and they have lots of charts and PowerPoint presentations and they recommend people who in turn are going to charge them a lot of money. And they say, well, you can only get the best talent by paying 2.20 or something of the sort. And the flow of money from the hyperactive to what I call the helpers is dramatic while this group over here sits here and absolutely gets the record of American industry. So I hope you'll realize that for most for the population as a whole, American Business has done wonderfully and the net result of hiring professional management is a huge minus. And at the bookstore, we have a little book called Where Are the Customers Yachts? Written by Fred Schwett. I read it when I was about 10 years old. It hadn't been updated, but new additions have been put out a few times, but the basic lessons are there. That lesson is told in that book from 1940. It's so obvious. And yet all the commercial push is behind telling you that you bound to think about doing something today that's different than you did yesterday. You don't have to do that. You just have to sit back and let American industry do its job for you. Charlie, do you have anything to add to my sermon? We are talking to a bunch of people who have solved their problem by buying Berkshire Hathaway. That worked even better. And there have been a few of these managers, the managers who've actually succeeded. There are a few in the universities who are really good, but it's a tiny group of people. It's like looking for a needle in a haystack. And when I was given the job of naming 2 in 1969, I knew I knew 2. I knew a couple of others. Charlie wasn't interested in managing more money than my friend, Walter Schloss, would not scale up well, although he had a fabulous record over 45 years or thereabouts. But you know, that was all I could come up with at that time. And fortunately, you know, I did have a couple. And the people who went with Sequoia Fund have been well served if they stayed for the whole period. But the people there's been far, far, far more money made by Wall by people in Wall Street through salesmanship abilities than through investment abilities. There are a few people out there that are going to have an outstanding investment record, but there are very few of them. And the people you pay to have identify them don't know how to identify them. And they do know how to sell you. And that's my message. We'll come back at 1 o'clock. Thanks.

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