Berkshire Hathaway Inc. (BRK.A)

ASM 1997 Part 1

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May 5, 1997

Good morning. I'm Warren Buffett, the Chairman of Berkshire Hathaway, as you probably have gathered by now. I had a real problem last night. I was losing my voice almost entirely. I don't want you to think I lost it cheering for myself this morning here, but I think I'll do all right. But we've always got Charlie here to he's always done the talking. I just move my lips. So I'd like to tell you a little bit about how we're going to conduct things and then we'll go through a script that was written by the speechwriter for Saddam Hussein. It has all the warmth and charm and participatory elements you'd expect. We'll get through the business of the meeting as promptly as we can, which is usually about 5 or 6 minutes. And then Charlie and I will answer questions, your questions, until noon when we'll have a break for about half an hour. There's food outside all the time. And then at 12:30, we'll reconvene and we'll go till 3:30 or thereabouts and I hope my voice laughs. We've got various non Coca Cola products here that designed to keep it going. We'll have a zone system where we have 12 microphones placed around and I believe it's 12 and we'll just go around in order. And if you'll go to the microphone nearest you, there will be someone there who will try to arrange the people, get to ask questions in the order in which they arrived and we'll make sure that everybody gets a chance to ask their questions before people go on to second questions. Particularly in the afternoon, we'll make a special effort to answer the questions from people that have come from outside North America. We really got quite an attendance today with all 50 states, at least in terms of tickets, all 50 states are represented. We had I had it here somewhere. Yeah. We had ticket requests at least and I met a number of people from South Africa, Australia, Brazil, England, France, Germany, Greece, Hong Kong, Ireland, Iceland, Israel, Saipan, New Zealand, Saudi Arabia, Singapore, Sweden, Switzerland. So when people have come from that sort of distance, we want to make sure that they obviously, we want to make sure that they particularly get their questions answered. Interestingly enough, we have an increased percentage from last year who come from Nebraska this year. And you have to be a little careful in interpreting that because some people say they're from Nebraska and really aren't because for status reasons they, you know, like So make them produce their driver's license if they tell you they came from Nebraska. I think that's most of the preliminary. So I'm going to get into this. We'll get the meeting over with here promptly with your cooperation and I will go through this little script that's been prepared for me and it says, The meeting will now come to order. I'm Warren Buffett, Chairman of the Board of Directors of the company. I welcome you to this 1997 Annual Meeting of Shareholders. I will first introduce the Berkshire Hathaway directors that are present in addition to myself. I've introduced you to Charlie already. And the other directors, I believe, are in the front row here. If they'd stand when I mention their names, you can withhold any applause until finished and then it's optional. Howard Buffett. Howard, you want to stand up? Susan Buffett, Walter Scott and Malcolm Chase III, Kim Chase. And that is our extensive directorate. Give them a lot of applause because they don't get much else for it. It's a rather low paying board. Also with us today are partners in the firm of Deloitte and Touche, our auditors. They are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire. Mr. Forrest Crother is Secretary of Berkshire. He will make a written record of the proceedings. Ms. Becky Amick has been appointed an Inspector of Elections at this meeting. She will certify to the count of votes cast in the election for directors. The named proxy holders for this meeting are Walter Scott, Jr. And Mark D. Hamburg. Proxy cards have been returned through last Friday representing 1,012,050 Class A Berkshire Shares and 645,940 Class B Berkshire Shares to be voted by the proxy holders as indicated on the cards. That number of shares represents quorum and we will therefore proceed directly proceed with the meeting. We will conduct the business of the meeting and then adjourn the formal meeting. After that, we will entertain questions that you might have. First order of business will be a reading of the minutes of the last meeting of shareholders and I recognize Mr. Walter Scott, Jr. Who will place the motion before the meeting. Move the reading of the minutes of the last meeting of shareholders to be dispensed with. Do I hear a second? We got a second. The motion has been moved and seconded. Are there any comments or questions? We will vote on this motion by voice vote. Those in favor, say aye. Aye. Opposed? Say I'm leaving. The motion is carried. Does the Secretary have a report of the number of Berkshire shares outstanding entitled to vote and represented at the meeting? Yes, I do. As indicated, the proxy statement that accompanies the notice of this meeting that was sent by First Class Mail to all shareholders of record on March 7, 1997 being the record date of this meeting. There were 1,205,078 shares of Class A Berkshire Hathaway common stock outstanding with each share entitled to 1 vote on motions considered at the meeting and 815,015 shares of Class B Berkshire Hathaway common stock outstanding with each share entitled to 1, 200 of them both on motion considered at the meeting. Of that number, 1,000,000 12,050 Class A Shares and 645,940 Class B Shares are represented at this meeting by proxies returned through last Friday. Thank you. To shareholders present who wishes to withdraw a proxy previously sent in and vote in person on the election of directors, he or she may do so. Also, if any shareholder that is present has not turned in a proxy and desires a ballot in order to vote in person, you may do so. If you wish to do this, please identify yourself to meeting officials in the aisles who will furnish a ballot to you. With those persons desiring ballots, please identify themselves so that we may distribute them. Okay. The one item of business of this meeting is to elect Directors. I now recognize Mr. Walter Scott Jr. To place a motion before the meeting with respect to election of Directors. I move that Warren E. Buffet, Susan D. Buffet, Howard G. Buffet, Malcolm G. Chase, the third Charles D. Munger and Walter Scott, Jr. Be elected as Directors. Sounds good to me. Is there a second? It has been moved and seconded that Warren Buffett, Susan T. Buffet, Howard G. Buffet, Malcolm G. Chase III, Charles T. Munger and Walter Scott, Jr. Be elected as Directors. Are there any other nominations? Is there any discussion? Mike on a group. The nominations are ready to be acted upon. If there are any shareholders voting at present, they should now mark their ballots on the Election of Directors and allow the ballots to be delivered to the Inspector of Elections. I think we had 1 or 2 to collect then. Would the proxy holders please also submit to the Inspector of Elections a ballot on the election of Directors voting the proxies in accordance with the instructions they have received. Ms. Amick, when you are ready, you may give your report. My report is ready. The ballot of the proxy voters in response to proxies that were received through last Friday cast not less than 1,000,000,15,690 7,200 votes for each nominee. That number far exceeds the majority of the number of the total votes related to all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes, including the additional votes to be cast by the proxy holders in response to proxies delivered at this meeting, as well as those cast in person at this meeting, if any, will be given to the Secretary to be placed with the minutes of this meeting. Thank you, Ms. Emmick. Warren E. Buffet, Susan T. Buffet, Howard G. Buffet, Malcolm G. Chase, 3rd, Charles Steemunger and Walter Scott, Jr. Have been elected as Directors. After adjournment of the business meeting, I will respond to questions that you may have that relate to the business of Berkshire but do not call for any action at this meeting. Does anyone have any further business to come before this meeting before we adjourn? If not, I recognize Mr. Walter Scott, Jr. To place a motion before the meeting. I move this meeting be adjourned. Second? Motion to adjourn has been made and seconded, we will vote by voice. Is there any discussion? If not, all in favor say aye. Opposed say no. The meeting is adjourned. A very good group. In that movie, they said something about $350,000 an hour and I see you're conserving your money here by moving this thing right along. Now we're going to answer questions and if you'll just go to the nearest microphone and let's see where we start here. I'm just orienting myself to a map here. And we have, Area 1 is right here. I might describe this ahead of time. We have 6 areas on the main floor and we have 6 areas throughout the balcony and they work their way back 1 through 6 and then 7 starts over here and then it works its way around to 12. We look forward to having questions, the tougher the better. And if you always would just identify yourself and where you're from and that you're a shareholder. Yes, sir. My name is Tom Conrad and I am from McLean, Virginia and I am a shareholder. And I asked a question last year, Mr. Buffet, to you. I was struck with what you said that it takes only 3 quality companies to be to invest in, to be set for a lifetime. And I asked you the question, should last year should I wait until the market goes down or should I get in now? And you advised to get in now and the 3 companies that I chose were Coca Cola, Gillette and Disney. And because of that advice, I was able to afford the ticket to come back to this year to ask you a second question. And my question is this. I'm thinking of You ought to quit, Wager, I had, but go ahead. I think of expanding to a 4th company. The 1st company that I'm thinking of is McDonald's. I just wanted to ask you if you feel that McDonald's has the same ability to dominate the way Coca Cola and Gillette has? And secondly, do you feel that if the answer is yes, that I should wait until the price comes down a bit or get in now? And that's my question. Would you like it to the 8th of a point or shall we round off? In the Annual Report, we talked about Coca Cola and Gillette in terms of their base business being what I call the inevitables. But that related to obviously to the soft drink business in the case of Coca Cola and the shaving products with Gillette. It doesn't extend necessarily everything they do but fortunately in both those companies, those are very important products. I would say that in the food business, you would never get the total certainty of dominance that you would get in products like Coca Cola and Gillette. People move around in the food business from where they eat from they may favor McDonald's, but they will go to different places at different times. And somebody starts shaving with a Gillette Sensor Plus is very unlikely to go elsewhere in my view. And so they do not you just you never would get in the food business, in my judgment, quite the inevitability that you would get in the soft drink business a Coca Cola. You'll never get it again in the soft drink business. I mean, it took 100, I guess, the 18/86, so it'd be about 111 years to get to the point where they are and the infrastructure is incredible. So I wouldn't put it quite in the same class in terms of inevitability. That doesn't mean it can be a better stock investment depending on the price, but you're not going to get the price from me. And knowing Charlie, I doubt if you'll get price from him, but we'll give him a chance. He's breathing, folks. He's breathing. We've got this down to a routine. I have nothing to add, Warren. Okay. I didn't have anything to say either. I just spoke longer. How about Area 2? Mr. Buffet, my name is Pete Banner and I'm from Boulder, Colorado and I'm a shareholder. Recently, Mr. Greenspan made his comments about exuberance and it wasn't long thereafter that you came out in the annual report and made your comments that you felt the market was fully valued or something of that nature. Did you have or have you had any communication with Mr. Greenspan regarding the valuation of the stock market? The answer to that is no. The last time I well, I can't remember precisely when the last time I saw Alan Greenspan was. It was a long time ago. We had one conversation today of the Solomon crisis and he was formerly on the Board of Cap Cities before he took his job with the Fed and Cap Cities ABC, so I knew him then. But it's very hard to understand what Alan says sometimes, so there's not much sense talking to him. He's very careful about what he says. But I should I'm glad you brought up the subject of the annual report because it what I was doing in the annual report is I had talked about Coke and Gillette as being the inevitable and what wonderful businesses they were. And I thought it appropriate, particularly the report goes to a lot of people, that they would not take that as an unqualified buy recommendation about the companies because they're absolutely wonderful companies run by outstanding managers but you can pay too much at least in the short run for businesses like that. So I thought it was only appropriate to point out that no matter how wonderful a business it is, that there always is a risk that you will pay a price where it will take a few years for the business to catch or for the business to catch up with the stock, that the stock can get ahead of the business. And I don't know where that point is with those companies or any other companies, but I did say that I thought that the risks were fairly high that the the inevitable. But it was designed to be sure that people did not take the risk of the as Inevitable. But it was designed to be sure that people did not take the remarks that I made about those companies and just take that as an unqualified buy recommendation regardless of price. We have no intention of selling those 2 stocks. We wouldn't sell them if they were selling at prices considerably higher than they are now. But I didn't want particularly relatively unsophisticated people to see those names there and then think this guy is touting these as a wonderful buy. Generally speaking, I think if you're sure enough about a business being wonderful, it's more important to be certain about the business being a wonderful business than it is to be certain that the price is not 10% too high or 5% too high or something of the sort. And that's a philosophy that I came slowly to. Originally, it was incredibly price conscious. We used to have prayer meetings before we would raise our bid an 8 around the office, but that was a mistake and in some cases, a huge mistake. I mean, we missed things because of that. And so what I said in the report was not a market prediction in any sense. We never try to predict the stock market. We do try to price securities. We try to price businesses is what we try to do and we find it hard to find wonderful, good, average, substandard businesses that are that look to us like they're cheap now. But you don't always get a chance to buy things cheap. Charlie? Well, I certainly agree with that. The one thing we can competently guarantee is that real inflation adjusted returns from investing in a standard collection of stocks will be lower in the long term future than they've been in the last 15 years or so. This has been an unprecedented period and there will be some regression towards the mean in average returns from investing in the stock market. American Business has done extraordinarily well in the last decade plus and that's a huge plus for securities because they just represent pieces of those businesses. Interest rates over the last 15 years have fallen. That's a big plus for stocks. Anytime interest rates go down, the value of every financial asset goes up in a rational calculation. Both of those factors have combined in recent years to produce conditions that enhance the true value of American business. But those are pretty widely recognized now. And after a while, Ben Graham always used to say you can get more trouble in investment with a good premise than with a bad premise because the bad premise will shout out to you immediately as being fallacious whereas with a good premise, it will work for a while. Businesses are worth more money if interest rates fall and stocks rise. But then eventually, the market action of the securities themselves creates its own rationale for a whole, for a large crop of buyers and people forget about the reasons and the mathematical limitations that were implied in what they and what got them excited in the 1st place. And after a while, rising prices themselves alone will keep people excited and cause more people to enter the game. And therefore, the good premise after a while is forgotten except for the fact that it produced these rising prices and the prices themselves take over. He wrote about that in the connection with the 1920s when Edgar Lawrence Smith in 1924 wrote a fine book on why stocks were better than bonds and that was sort of the bible of the bull market of the '20s and it made sense if you paid attention to a couple of the caveats which were in Edgar Lawrence Smith's little book which was related to price. But people tend to forget about the importance of the price they pay as the experience of a bull market just sort of dulls the census generally. Zone 3? Mr. Buffet, my name is Lola Wells and I come from Florida. I'm a very minimum stockholder and I'm curious why stockholders whose stock is held in street name aren't eligible to make recommendations for your donations? The distinction really isn't whether their stock is held in straight well, that's one distinction. The Class B shareholders, as was pointed out in the prospectus originally for the B shares, do not participate in the program. The A shares that are held by the beneficial owner do participate. We obtained a tax ruling, I don't know, 1981 or thereabouts that made sure that there would be no taxation as a constructive dividend of the amount that shareholders could designate. There always was that possibility that the IRS would take the position that by allowing shareholders to designate a contribution to a charity that we were giving them something which first would be taxed as a dividend and then they would later give away. So we have a tax ruling and that tax ruling applies to shares held by beneficial owners or by record holders themselves and we follow that ruling subsequently. I might say it would be sort of a nightmare too, frankly, if we got into street name holders. We're at the point now where we probably have 30,000 or 35,000 street name holders of the A and with a B, it's probably 60,000 or something number like that. And it would be quite a nightmare to do and anyone, unless they have margin debt against their stock, they can put it in their own name and we encourage people to do it. One reason we encourage people to do it is that they'll get their shareholder communications more promptly too. We find that it's quite erratic, that the distribution reports is quite erratic when handled through brokerage houses to street name holders. So we really do encourage you to have your stock registered in your own name. You'll get the communications promptly and if you get the A shares, you'll be able to participate in the contributions program. And don't minimize your holdings incidentally. Between the 2 of us, we control the company. So I'm glad to have you here. Charlie? There's no ideological bias against the small shareholder. It's just not technically feasible to do it as a matter of administration. I should point out that the entire shareholder designated contributions program, really all of the work in relation to this meeting, I mean, Exarban has been terrific. They've helped out enormously. But in terms of sending out 11,000 plus tickets to the meeting, the baseball tickets, the planning that goes into it and everything, it's all done by the people at Berkshire basically. They pitch in to do all kinds of work. So when you look at that 3,000 plus square foot office, we get help from internal audit who does not work in the office. But very few people just do all of their regular jobs and then they do this on top of it And they never thought they were getting into this. Thank you. We could have an apartment of 50 people assigned to something like this. But the same way with the we get thousands and thousands of requests for annual reports and they all come in and we've got just a few people and they handle it with courtesy and sharefulness and I really tip my hat to them. Now let's go to Zone 4, please. Good morning. I'm Marshall Patton from Bandera, Texas. And, first I'd like to thank you very much for not only giving us a good investment vehicle, but, giving us a good education along the way. And, thanks a lot for the 2 volume set of the, letters to stockholders over the years. It's required reading around our place. And, if you can contain your hostility, I'd like to thank Charlie Munger for the copy of his speech to the University of Southern California Business School Students back in 1994. It's also required reading. And I wanted to ask you, when are you going to write your book? Well, first of all, I'd like to comment on Charlie's talk. I think every investor in the world ought to read that talk before they invest. I think that's a classic and we have copies available for, we mailed it out a year or so ago to the shareholders at that time, but anybody would like a copy of that talk, I'd be glad to supply it. There doesn't seem to be any need for me to write a book. Everybody else is doing it. We've got Jana Lowe here who just wrote the most recent one. And at one time or another, I've said everything I know and a good bit more. So I've never felt compelled to do it. I really feel that the annual reports are sort of a book on the installment system. Plus, I think very few people write 2 books and I have this kind of unwarranted optimism, I guess, that the best is always yet to come and that a lot more interesting things are going to happen and I would hate to preclude commenting on those. So I think it's going to be a few years, but I may get around to it at some point. But I think maybe it'd be a bad sign if it happened because it might be that I really thought that what I was writing about was more important than what was going to happen next. Charlie, are you going to write a book? No. But your comment about why you are unable to write a book reminds me of the Middle Western fellow who left an unfinished manuscript. And he apologized for not finishing his book, which was entitled Famous Middle Western Sons of Bitches. And he said he was always meeting a new one and therefore he could never finish the book. As a courtesy, Charlie and I are leaving each other out of the book that we write. Charlie was Charlie grew up in Nebraska and he's authentic. He has the credentials to prove it. We worked in the same grocery store at different times many years ago. Area 5, please. Mr. Buffet, my name is JP from Singapore. I flew 24 hours to get here. Mr. Buffet, throughout your life, you have repeatedly under promised and over delivered. For many recent years, for example, you've targeted Berkshire Hathaway's long term book value growth at 15%, yet you have come through at about 24%. That is a big gap of 9% between your modesty and the outcome, perhaps the biggest dose of modesty in corporate history. May I ask why is there such a big gap between your modesty and the outcome? I don't think it was modesty. I think it was, for one thing, we've had a terrific market that has reappraised all businesses in the last 10 or 15 years. So when we really started worrying about future performance, the key factor was having larger amounts of capital. And there's no question that the larger the amount of capital you work with, the more difficult the job is. Now, we were fortunate that, that ascension in capital happened to coincide with things that just lifted all the votes substantially. And so we have had better luck than I would have guessed we would have had 10 years ago or 5 years ago, but it's been aided by a huge tailwind. And absent that tailwind, we would not have done as well. I think maybe we would have done relatively as well, but we would not have done as well in absolute terms. And we won't have that tailwind in the future. I can assure you of that, but we will have a larger amount of capital, which is the anchor that works on us. So if Charlie and I could make a deal to increase the intrinsic value of Berkshire at 15% a year over the next 10 years, we would sign up now. And I don't want you to even tempt us with lower numbers because those numbers get astounding. If we paid no dividend at all over a 10 year period, you can figure out where a 15% rate would take us. And we hope to get there but we think that is absolutely tops. And I think it's very likely for a period when the market starts underperforming businesses that the rate could be very substantially lower than that. Charlie, do you want to expand on that? Well, the questioner came from Singapore, which has perhaps the best economic record in the history of developing an economy. And therefore he referred to 15% per annum as modest. It's not modest. It's arrogant. Be careful, Charlie, or they'll have a voice vote that we should move to Singapore. I mean, this is the group that watched performance. Large quantities of money are not going to compound at super rates at super compound rate. Rate. Small sum is probably hard either, but large sums aren't. And if anybody manages large sums of money that promises or implies that they can achieve really outstanding returns, I'd stay away from them. The numbers just get too big. And you've seen some of that with certain money management organizations in recent years. And 15% on an intrinsic value, which is substantially greater than our book value, gets to be a very, very big number. And we need huge ideas. We don't need thousands of ideas. I mean, we might need them, but we could never come up with them. So what we look for is the very large idea, but we're not finding them now and we'll keep looking and every now and then, we will find something. But really, if you think we're going to have any chance of doing better than 15%. And believe me, that is no number that I'd want to sign my name to, but you really shouldn't, you're going to be disappointed in Berkshire. And we don't want to disappoint you, so that's the reason we try to be realistic about expectations. Zone 6? My name is Daryl Patrick from Dayton, Ohio. How many shareholders do you have that have owned Berkshire longer than you and Charlie? And have you ever gotten together with them? How many shareholders have had it longer than we have? Well, we started buying in 1962, and it was 7 and, I think the first ticket was 7 and 5.8 or thereabouts. But the, it was 2,000 shares. I've got the trading card on the wall and I paid a dime commission. I can't believe I was paying a dime commission in those days. We pay a nickel now on much higher priced stocks. It's a good thing I didn't have a fist fight with a broker about whether to pay or not. I might not have those 2,000 shares. We have, as a director, Kim Chase and his family's holdings in Berkshire go back to what? Kim, where are you down here? There we are. What year would you? The '20s, yes. The Chase family has been in Berkshire since the '20s. But I would say we bought about 70% of the Buffett Partnership, which was a partnership I ran in the '60s, bought about 70% of the company. That means there were 300,000 shares roughly that were not owned by us. Aside from the Chase family, I'm sure there are people that I'm sure we've got 50 or 100 shareholders maybe from that earlier date that are still around, and I'm glad they are. Charlie? Nothing to add. Morris Spence from Omaha, Nebraska. In light of recent stock market volatility, could you give us your definition of stock market risk and how does your definition differ from the standard definition? Finally, due to Charlie's recent counter revelation about Jets, are you going to rename the indefensible? Charlie would like to make an announcement on that second point. Prompted by Al Ouchi. We are changing the name of the company plane from the indefensible to the indispensable. It was Chateaubriand who incidentally was a writer and philosopher in addition to being the father of a piece of meat. Chateau Brion wrote one time, I believe I'm correct on my attribution here, that events make more traitors than ideas. And if you think about that in terms of Charlie's remark that the purchase of flight safety caused Charlie to have this counter revelation and it's an experience that is duplicated many times in life where people flip over very quickly to a new view based on their new circumstances. Now what was that first question again? I might add that I have a friend who's a United Airlines pilot and he has recently been promoted into the 747-400. Before he started carrying people like you around for hire. He had to train intensively for 5 weeks. 100% of his training was in a simulator. They're that good. So they better be that good. They cost us about $19,000,000 But they are fabulous. I mean, if you think about it, I think it's 85% of the problems that you can encounter in a plane if you attempted to teach people by actually being in a plane, they wouldn't be here anymore. So there's a, you want to develop the instincts and responses that can react to 85% of the problems. The only place to learn them is in a simulator and probably the other 15% the best places. Now let's go back to your first question and give it to me again. The first part was would you define give us your definition of stock market risk and how it differs from the standard definition? Carter:] Yeah. We don't think in terms of well, we think first in terms of business risk. The key to Graham's approach to investing is not thinking of stocks as stocks or part of a stock market. Stocks are part of a business. People in this room own a piece of a business. If the business does well, they're going to do all right as long as they don't pay way too much to join into that business. So we look at, we're thinking about business risk. Now business risk can arise in various ways. It can arise from the capital structure when somebody sticks a ton of debt into some business and so that if there's a hiccup in the business that the lenders foreclose, it can come about just by the nature that certain businesses are just very risky. Back in when there were more commercial aircraft manufacturers, Charlie and I would think of making a commercial airplane, a big airliner sort of as a bet your company risk because you would shove 100 and 100 of 1,000,000 of dollars out into the pot before you really had customers. And then if you had a problem with the plane, the company could go. There are certain businesses that inherently, because of long lead times, because of heavy capital investment, that basically have a lot of risk and commodity businesses have risk unless you're the low cost producer because the low cost producer can put you out of business. Our textile business was not the low cost producer and we had a fine management and everybody worked hard. We had cooperative unions, all kinds of things, But we weren't the low cost producer, so it was a risky business. The guy who could sell it cheaper than we could, made it risky for us. So there's a lot of ways businesses can be risky. We tend to go into businesses that inherently are low risk and are capitalized in a way that, that low risk of the business is transformed into a low risk for the enterprise. The risk beyond that is that even though you identify such businesses that you pay too much for them. That risk is usually a risk of time rather than loss of principal unless you get into a really extravagant situation. But then the risk becomes the risk of you yourself. I mean, whether you can retain your belief in the real fundamentals of the business and not get too concerned about the stock market. The stock market is there to serve you and not to instruct you and that's a key to owning a good business and getting rid of the risk that would otherwise exist in the market. You mentioned volatility. It doesn't make any difference to us whether the volatility of the stock market averages 0.5 percent a day or a quarter percent of a day or 5% a day. In fact, we'd make a lot more money if volatility was higher because it could create more mistakes in the market. So volatility is a huge plus to the real investor. Ben Graham used the example of Mr. Market, which is the, and we've used it. I've copied it in the report. I copy from all the good writers. And Ben said, Just imagine that when you buy a stock that you, in effect, you bought into a business where you have this obliging partner who comes around every day and offers you a price at which you'll either buy or sell and the price is identical. And no one ever gets that in a private business where daily you get a buy, sell, offer by a party. But in the stock market, you get it. That's a huge advantage. And it's a bigger advantage if this partner of yours is a heavy drinking manic depressive. I mean, The crazier he is, the more money you're going to make. So as an investor, you love volatility, not if you're on margin, but if you're an investor, you aren't on margin. And if you're an investor, you love the idea of wild swings because it means more things are going to get mispriced. Actually, volatility in recent years has dampened from what it used to be. It looks bigger because people think in terms of Dow points and so they see these big numbers about plus 50 or minus 50 or something. But volatility was much higher many years ago than it is now. And, you had the amplitude of the swings was really wild and that gave you more opportunity. Charlie? Well, it got to be the occasion in corporate finance departments of universities where they developed a notion of risk adjusted returns. And my best advice to all of you would be to totally ignore this development. Risk had a very good colloquial meaning, meaning a substantial chance that something would go horribly wrong. And the finance professors sort of got volatility mixed up with a lot of foolish mathematics. And, and, to me, it's less rational than what we do. And I don't think we're going to change. Yeah. Well, the Financial Department seats that that volatility equals risk. Now they want to they want to measure risk, and they don't know any other way. They don't know how to do it, basically. And so they they say that volatility measures risk. And they, I've often used the example that the Washington Post stock, when we first bought it, had gone in 1973, had gone down almost 50% from a valuation of the whole company of close to, say, $180,000,000 or $175,000,000 down to maybe $80,000,000 or $90,000,000 And because it happened very fast, the beta of the stock had actually increased. And a professor would have told you that the stock the company was more risky if you bought it for $80,000,000 than if you bought it for $170,000,000 which is something that I've thought about ever since they told me that 25 years ago, and I still haven't figured it out. Incidentally, I should make make an announcement on that because I think that I've made a certain amount of fun of finance departments over the years. A fellow named Mason Hawkins, who runs Southeastern Asset Management, just gave a $1,000,000 gift to the University of Florida, and the State of Florida is matching that with $750,000 So this $1,750,000 is going to be used to have several courses in what essentially is the Graham approach to investing, I think, starting very soon so that there will be at least and there are more than this, but there will be a finance department, in this case, specifically devoted to teaching the Graham approach. And I think they're even going to pick up on my suggestion that I stuck in the annual report about having a course on how to value a business and what your attitude toward the stock market should be. So thanks to Mason, who's done very well managing money, I should add. And there will be at least one university course that tackles what I think are the important questions in investing. Zone 8, please. Gentlemen, my name is Richard Surser from Tucson, Arizona. Let's give him a hand. This is the gentleman that led to the flight safety purchase. My question relates to owner earnings. What guidance can you give us as to the calculation of Item C, which is maintenance capital spending and working capital requirements? Richard, I was going to ask you a question. How about another company? Richard and his wife, Wilma, have attended, what, maybe 8 or so meetings and what he did is covered in the annual report. But if it had not been for Richard, we would not have merged with FlightSafety. And for that, we owe them a lot of thanks. Now the Item C, I don't remember Item C. I'm just talking about maintenance expenditures and working capital and so forth. The compulsory reinvestment. Oh, back on the, it goes back some years on that description. Yeah. In the case of the businesses that we're in, both wholly owned and major investee companies, we regard the reported earnings with the exception of the some major purchase accounting adjustment, which will usually be amortization of intangibles item. We regard the reported earnings, actually, the reported earnings plus or minus but usually plus, purchase accounting adjustments to be a pretty good representation of the real earnings of the business. Now you can make the argument that when Coca Cola is spending a ton of money each year in marketing and advertising that they're expensing, that really a portion of that's creating an asset just as if they were building a factory because it is creating more value for the company in the future in addition to doing something for them in the present. And I wouldn't argue with that. But, of course, that was true in the past, too. And if you'd capitalize those expenditures in those earlier years, you'd be amortizing the cost of them at the present time. I think with a relatively low inflation situation with the kind of businesses we own, I think that reported earnings plus amortization of any well, it's really amortization of intangibles. Other purchase accounting adjustments usually aren't that important. I would say that they give a good representation to us of owner earnings. Can you think of any exceptions in our businesses, particularly, Charlie? No. We have, after some unpleasant early experience, we have tried to avoid places where there was a lot of compulsory reinvestment just in order to stand still. And, but there are businesses out there that are still like that. It's just that we don't have any. Carter:] Yeah. I would say, and I would say that, in the case of GEICO, for example, the earnings the gain in intrinsic value will be substantially greater than represented by the annual earnings. Whether you want to call that extra amount of owner earnings or not is another question. But as we build float from that business, as long as it's represented by the same kind of policyholders that we've had in the past, there is an added element to the gain in intrinsic value that goes well beyond the reported earnings for the year. But whether you want to really think of that as earnings or whether you just want to think of that as an increment to intrinsic value, I sort of leave to you. But I would say that there's no question that in our insurance business where our float was $20,000,000 or so when we went into it in 1967 and where it is now that there have been earnings in effect through the buildup of the float that have been above and beyond the reported earnings that we've given to you. I think our look through earnings are, they're very rough. And we don't try to, we don't believe in carrying things out to 4 decimal places where we really don't know what the first digit is very well. So I never want you to think of them as too precise, but I think they give a good rough indication of the actual earnings that are taking place attributable to our situation every year. And I think the pace at which they move gives you a good idea as to the progress or the lack of progress that we've made. The only big adjustment I would make in those is that in the super cat insurance business, we're going to have a really bad year occasionally, And you probably should take something off all of the good years and you probably should not regard when the bad year comes, you should not regard that as something to be projected into the future. Charlie? No more. No more. Zone 9, please. Mr. Buffet, I'm Rick Fulton from Omaha, really. Recently, I was in Washington, D. C. With my wife on a business trip, and I wanted to tell Mrs. Graham, I know she's here, what a pleasure it is to get up in the morning to a good newspaper like the Washington Post. Also, I have a question about cap cities and now Disney. And is Mr. Murphy keeping busy now that ABC is owned by Disney? Also, every week you read in the paper the Nielsen ratings and does it matter that ABC now it seems that less people recently are watching? Does it matter to Disney's bottom line? Thank you. Yes. Well, first question about Mr. Murphy is that if we could hire Mr. Murphy, we would. I mean, there is no one in this world that is a better manager than Tom Murphy or a better human being as far as that's concerned. So I think he's keeping me pretty busy. He has been responsible for NYU Hospital. He wouldn't say that, but he's been the chairman of it for some years and that's an $800,000,000 a year or thereabouts organization. Charlie runs a hospital, so he knows how busy he can keep you. And he, but I would say this, that I would love to find a business that I could entice Murph to come back and run because they don't get any better than he is. And Charlie, you want to add anything on Murph? Well, I'd like to because you're absolutely right. And what was the other part of the question? Sir, does the recent decline in ABC's Nielsen ratings have anything to do with the bottom line? I was hoping for that. Yes. It makes a difference. Sure. The ratings translate in many cases into not depends on daypart, depends on a whole bunch of things, but overall, you make more money if your ratings are good in news, if they're good in early morning, if they're good in daytime, if they're good at late evening, whatever. I mean, ratings translate into money. They may not translate immediately, particularly if they have some big hit show. You may have sold it out too cheap. But over time, the prices you receive for your product relate to ratings. And over time, but over a longer period of time, the price that you pay for the product also relates to the ratings, but there's a difference in the time cycle so that it makes a difference to any network's bottom line what their ratings level is. And Disney is conscious of that and they are very able operators and I predict you'll see in a couple of years. But you can't do it immediately. The schedule fixes don't work on a week to week basis because people have habits and there's a time lag involved in any change. And you've seen, over the last 20 years, you've seen various networks on top or on the bottom from time to time. So it moves around a fair amount. Charlie? Yes. I think the TV network business is intrinsically a pretty tough business. And Disney did way better on ESPN than they might have forecasted and they probably did a worse on the network. These things happen. That was incidentally the situation when Cap Cities bought ABC in 1985. We made the deal and I'm thinking I closed it. I think I closed it 1st day or 2 of 'eighty six. I may be wrong on that. But the network diminished, the ratings diminished significantly and particularly in daytime. We'd always thought daytime was almost a certainty to produce big earnings and it had even prime time is what people pay the most attention to. But daytime slipped significantly after we bought it. It has no relationship to those movies I mean, that movie you saw earlier when I started appearing on it. I don't want anybody to make that connection, but it did happen to be at the same time. The kicker we got, again, was ESPN. ESPN was losing money when Cap Cities made the deal to buy ABC and we never really regarded it as that being that having that big a potential. And it has been huge. It's been it was enormously better for us than we ever anticipated. Leonard Goldblumsen, who ran ABC, told us it was going to be that good. But, of course, we were too smart to pay any attention to him. And I think Disney has been pleasantly surprised by how well ESPN has done, too. It's a powerhouse. Zone 10, please. My name is Bill Turan. I'm It would appear that there's going to be a capital gains tax cut. If it does materialize, would you consider a stock split? Secondly, is there an extra copy of your annual report available on the premises? C. Butler:] My guess is we'll get you an annual report. In fact, if someone could take it up to Zone 10, we'll be glad to get it to you. I don't think well, I'll put it this way. If they cut the capital gains tax to 0, we'll maybe I don't think I get Charlie's vote, though. Anyway, no, we will not be splitting Berkshire stock. Incidentally, we do not consider splitting the stock a pro shareholder move. If we did, we'd do it. I mean, we think that net, to take the entire experience, it's worked out well for shareholders and we think we have a more investor oriented or investment oriented audience in this room today than we would have had if we'd split many times. It is a way of enticing certain types of investors and perhaps discouraging others. And so it's worked well. But I will say this, too. We got pushed into, in effect, issuing the Class B shares last year. It wouldn't have been something we would have done except for the possible formation of the unit trust. And I would say that's worked out very well from our standpoint. So we're happy that it happened and we're happy that the Class B shareholders have joined us. And we now have something that's denominated at a much lower level. And there have been no bad effects whatsoever from having the Class B out there. So anybody who owns the H stock and wants to split, you can split 30 for 1 this afternoon. I mean, how many other companies give you that chance? Charlie? Charlie Carter:] I think what he's trying to tell you is that you've had your stock split. Zone 11, please. Yes, Mr. Buffet, I would like to thank you again for issuing the Class B shares. Well, I'm glad we did and I hope you own them. And I'm a Class B shareholder. I need your comment on some analysis that we did. If someone uses your investment philosophy of building a highly concentrated portfolio of 6 to 8 stocks and adopts your buy and holding principle so that the maths of compounding and no tax works for you. But however with one major modification, invest in high octane companies like Intel and Microsoft that are growing at 30% instead of typical 15% growth company in your portfolio. My question is, will this investment philosophy will translate into twice the shareholder return as you have historically provided to your shareholders? Well, it will certainly work out to twice the return if Intel and Microsoft do twice as well as Coke and Gillette. I mean, it's a question of being able to identify businesses that you understand and feel very certain about. And if you understand those businesses, and many people do, but Charlie and I don't, you have the opportunity to evaluate them. And if you decide they're fairly priced and they have marvelous prospects, you're going to do very well. But there's a whole group of companies, a very large group of companies Charlie and I just don't know how to value and that doesn't bother us. I mean, we don't know how to figure out what cocoa beans are going to do or the Russian ruble or I mean there's all kinds of financial instruments that we just don't feel we have the knowledge to evaluate. And really, it might be a little much much to expect that somebody wouldn't understand every business in the world. And we find some that are much harder for us to understand. And when I say understand, my idea of understanding a business is that you've got a pretty good idea where it's going to be in 10 years. And I just can't get that conviction with a lot of businesses whereas I can get it with relatively few. But I only need a few. As you pointed out, you only need a few, 6 or 8 or something like that. It would be better for you, certainly would have been better for you, if we had the insights about what we regard as a somewhat more complicated business as you described because there was and may still be a chance to make a whole lot more money if those growth rates that you described are maintained. But I don't think there are are I don't think you'll find better managers than Andy Grove at Intel and Bill Gates at Microsoft. And they certainly seem to have fantastic positions in the businesses they're in. But I don't know enough about those businesses to be as sure that those positions are fantastic as I am about being sure that Gillette and Coca Cola's businesses are fantastic. You may understand those businesses better than you understand Coke and Gillette because of your background or just the way your mind is wired. But I don't, and therefore, I have to stick with what I really think I can understand. And if there's more money to be made elsewhere, I think the people that make it are entitled to it. Charlie? Well, if you take a business like Intel, there are limitations under the laws of physics, which eventually stop your putting more transistors on a single chip and 30% per annum or something like that. You, I don't think those limitations are still a good distance away, but they're not any infinite distance away. That means that Intel has to leverage its current leadership into, new activities just as IBM leveraged the Hala Rith machine into the computer, predicting whether somebody is going to be able to do that, in advance is just, it's too tough for us. Bob Noyce. We could give appointment to you. Bob Noyce, one of the 2 founders of the 2 primary founders of Intel, grew up in Grinnell, Iowa. I think he's the son of a minister in Grinnell and went to Grinnell College and was Chairman of the Board of Trustees of Grinnell when I went on the Board of Grinnell back in the late '60s. And when he left Fairchild to form Intel, Gordon Moore, Grinnell bought 10% of the private placement that funded, was the initial funding for Intel. And Bob was a terrific guy, very easy to talk to just as Bill Gates is. I mean, these fellows explain the businesses to me and they're great teachers but I'm a lousy student. And they, I mean, they really do it. They're very good at explaining their businesses. Bob was a very down to earth Iowa boy who could he could tell you the risks and tell you the upside and enormously likable, 100% honest every way. So we did buy 10% of the original issue. The genius that ran the investment committee managed to sell those a few years later. I won't give you his name. And there is no prize for anybody that calculates the value of those shares. Incidentally, one of the things Bob was very keen on originally, in fact, he was probably the keenest on it, was he had some watch that that Intel was making and it was a fabulous watch according to Bob. It just had one problem. We sent a guy out from Grinnell who was going out the West Coast to where Intel was and Bob gave him one of these watches. And when he got back to Granada, he wrote up a report about this little investment we had and he said, These watches are marvelous. He said, Without touching anything, they managed to adapt to the time zones as they changed as we went along. In other words, they were running very, very fast as I turned it out. And they worked with that watch for about 5 or 6 years and they fell on their face. And as you know, they had a total transformation in the mid-80s when the product on which they relied also ran out of gas. So it's not and Andy Grove has written a terrific book, incidentally, Only the Paranoid Survive, which describes strategic inflection points. I recommend that every one of you read that book because it is a terrific book. But they had an Andy Grove there who made that transformation along with some other people. But that doesn't happen every time. Companies get left behind. We don't want to be in businesses where companies we feel companies can be left behind. And that means that an Intel could have and almost did go off the tracks. IBM owned a big piece of Intel, as you know, and they sold it in the mid-80s. So here are a bunch of people that should know a lot about that business, but they couldn't see the future either. I think it's very tough to make money that way, but I think some people can make a lot of money understanding those kind of business. I mean, there are people with the insights. Walter Scott, one of our directors, has done terrifically with a business that started just a gleam in the eye maybe 10 or 12 years ago here in Omaha and turned into a huge business. And Walter explained that to me on the way down to football games, but bad student again. So Walter connected and I'd share from the stands. But that doesn't bother me at all. I mean, what would bother me is if I think I understand a business and I don't. That would bother me. Charles Ferrante:] Well, having flunked when we were young and strong at understanding some complex businesses, We're not looking to master what we earlier failed at in our latter years. Zone 12. This may turn out like a revival meeting where we all confess our sins and come forward. Good morning, gentlemen. My name is Cary Blecker from Wellington, Florida. I know in 1987 when you purchased or invested in the Solomon Brothers convertible preferred stock, you had the 8 year win rather, the 8 year time frame to convert it into common or take the cash out. I know in 'ninety five, you took cash out, which was not a vote of confidence for Salomon Brothers. Any feelings on that in the future? Yes. We as the gentleman mentioned, we bought it 1987. And starting in 1995, we have every year for 5 years, we either have to take cash or convert to common 20% of the original issue of $700,000,000 And we don't have to make those decisions out of time. So we in 1995, we elected to take cash. In 1996, we elected to take stock. And, you know, we see no reason ever to, swing at the ball while it's still in the pitcher's glove. We just soon wait until it gets to the plate to make the decision. So the ball will get to the plate on October 31st 1997, I believe, for the next 20%. And we'll decide whether to swing at that point. But we don't need to make that decision today. I would say that the odds are overwhelming that we'll convert. But we'll wait until that time until to make the final decision. We have terrific confidence in the people that run Solom, and they helped us through some incredibly dark days in the past and showed the stuff of which they were made. And so we feel very good about that. We don't have the same degree of conviction about the profitability of the investment banking or brokerage business as a whole. It's not the sort of it it you don't develop that kind of conviction about that business versus a Coca Cola or something. They're different they have different economic characteristics. So we will see how the businesses the industry evolves. But we feel very good about the management, and the odds are extremely high that we will convert. But we will swing at the ball when it gets to the plate. Charlie? No more. Okay. Let's see. We did 12. We're back at 1 again. My name is my name is ted Vogelai from Corpus Christi, Texas. I would like to ask a question to you. Companies are purchased from time to time and the purchasing company will give shares instead of cash and their shareholder will receive new shares. Can an individual investor transfer non Berkshire to Berkshire with or without going through a broker? And if not, how does Berkshire do this with another company? And if possible, I would like to also receive a copy of the annual report. We'll get you a copy of the annual report. The only way I know of, and maybe Charlie knows some other way, the only way you can switch your shares in one company for into shares of another company is to have a tax free merger. And the Internal Revenue Code has specifications about that. You can have a transaction as we had with FlightSafety, where a portion is the shareholders can take cash and a portion can take stock, and it's still tax free for the for the people who elect stock. You can't have too many people take cash and have that happen. There are a lot of technical rules about what's tax free, but there's no way that you can own General Motors and transfer it into General Electric stock without a tax and a broker. Well, you don't have to have a broker. If your neighbor happens to own it, you can make a deal privately. But the easiest way usually is through a broker. But there's no way you can do it without tax, unless General Motors and General Electric decide to merge at some point. So the opportunities to switch from one security to another without tax are really limited to merger. And in terms of brokerage costs, it just happens to be that it's that the most economical way of finding the person in the world that wants to both buy the stock you want to sell and sell you the stock you want to buy is through an intermediary, a broker. And the cost of that actually can be relatively low. Charlie? Well, I think there's one way still permitted by the tax laws. You can still form a partnership if you own General Electric and I own General Motors and we each feel too concentrated, well, you could form a partnership and each put in your stock. And in essence, you would each thereafter be invested half and half with some diversification. I will predict that Wall Street will eventually get around to promoting such partnerships. Yes. Well, they did through swap funds in a sense 25 years ago. And then that was where you put in your highly your stock that had an enormous amount of unrealized appreciation in it and a whole bunch of other people did and then you owned a fund, which itself had a lot of unrealized appreciation in it. And you had a Plus a new layer of cost. Yes, plus a new layer of cost always. And you owned a piece of this larger fund and you owned a piece of everything else, everything that the other people want to get rid of and they owned a piece of what you wanted to get rid of and superimposed with some costs. But that that vehicle was sort of stopped in its tracks, I think, in the mid-70s by an amendment to the internal revenue code. But as Charlie said, you could replicate the effect of a swap fund by doing it with a partnership. It would be kind of awkward, but it can be done. Zone 2? Gentlemen, I'm Mark Rabenow from Australia. I am a shareholder. I had a question really related to our own businesses and how they're going and where you're looking to be in 10 years' time. Perhaps I could start with the insurance float, it's grown at 20%. Do you think that 20% growth rate will continue for the next 10 years? Do you our stable businesses which have been growing at say 5% or 7% will maintain that rate? And do you think flight safety from the SEC filings has been growing at about 5%, do you think that will continue at that rate? Well, we're glad to have you from Australia. I think we've got about 15 people here from Australia. So it got a good representation. I don't think the insurance flow could grow at 20% a year. That's been helped by some acquisitions and things. I mean, it's done way better obviously than we ever thought it would almost 30 years ago when we made the deal with Jack Ringwald. I would say though that I think GEICO is going to do even better than we expected when we bought it. And we thought it was going to do awfully well then. And Tony Nicely, we have an absolutely outstanding manager of that business, and he is focused on it. He knows it. I think he went to work there when he was 18, and he's been there 35 years or thereabouts. And they don't come any better. And he is absolutely zeroed in on the things that he should be zeroed in on. And the implementation gets better all the time. I mentioned in the annual report that the unit growth of GEICO's voluntary auto business, and we talk about voluntary because you get assigned risk type things that lose you money. But the real business is the voluntary auto business grew at 10% last year, which was the best growth rate in over 2 decades. 1st 4 months of this year, it's growing at about 16%. And 16% unit growth translates into about 20% a year premium growth. So GEICO, at present, would give you some encouragement for at least that segment of the insurance flow growing at a rate that's sort of comparable to the past. Insurance is going to be a very big business for us. And the float will grow, in my view, at a good rate, but I wouldn't want to predict that good a rate. Most of our other businesses, very good businesses, they don't have 20% a year growth possibilities in them. They throw off lots of cash, which we can use to buy other things, which may turn out to be a better strategy than even having a single high growth business. At flight safety, about 6 weeks ago or thereabouts, announced a major hookup in the joint venture with Boeing, as you may have noticed. And they're a terrific partner. And it'll be a great partnership. That's just for our the training for larger planes, primarily, I think, 100 seat not planes, although I think there may be a few Fockers in there that are slightly smaller planes. But it's basically the big commercial planes. And the combination of FlightSafety and Boeing worldwide in training over the coming decades, I will be a very powerful combination. So we've got some very good businesses. And I don't see that movie that's presented before I sit out here like you and watch it, but I like the ending of it. And the people we have out there, they've run businesses extremely well in the past. They get better results out of those businesses, frankly, than other people would or that other people in the industry generally do. So I think they have good futures. But they will throw off lots of cash in aggregate. And the tough job, we like to tell people it's a tough job anyway, is that Charlie and I have to figure out where to put that cash to maintain higher reasonable growth rate. Could you I'm not sure that's could you turn that on, please? I'm sorry to pin you down. That's okay. You can put me down. Would you guess that FlightSafety then is more likely to be in that 10% to 15% ballpark? Well, it's hard to tell on numbers. I mean, there's certainly there's going to be a growth in pilot training around the world. But flight safety already has a significant portion of the corporate market, for example. So it would be hard to grow a lot faster in the corporate market, although I can hear Al grinding his teeth when I say that because he plans to grow a lot faster than the market. But the corporate market, we've got a significant percentage. Commercial market, there could be a lot of potential in. It won't come tomorrow or the next day. But ideally, we would like to see people when they buy a 777 or 747 or something, buy a lifetime pilot training contract at that time. So I wouldn't want to stick a number on it, but I've got high hopes. And FlightSafety also announced recently a very major contract with the government through Raytheon. So it's a company that that's got its sights set a lot higher than where it is now. And insurance, 15%? Yes. I'll do that. You'll do that? You want 10ths of a percent or will you? Yes. We just don't know. I mean, we didn't know 25. We didn't 30 years ago, we didn't know we would be in the insurance business. I mean, Berkshire, we have no master plan. And Charlie and I did not sit down in 1960, early 'sixty 5 and say we're going to do this and that and all that. We're going to do we're going to try and do sensible things as we go along. The more money we have, the harder it is to find sensible things. But that's the criteria. Insurance is certainly a major area of opportunity for us. It's been a major opportunity. We have in certain fields, we have a terrific advantage for the three reasons I laid out in the annual report. But I mean, we have capital strength and a willingness to take on risk and a speed of action and a certainty of payment that, in aggregate, no one matches. Now how much demand there is for that depends on circumstances in the business and how much supply there is at lower prices that we think don't make sense is another question. But I think we'll do okay in insurance over time. Zone 3? Mr. Buffet, Mr. Munger, I'm Tim Medley from Jackson, Mississippi. We're glad to have you back, Tim. Tim, how many years have you come? This is my 11th. Good. It's been 11 great years. Thank you very much. At this meeting, 4 or 5 years ago, you commented that money managers in the aggregate have not done better than various market indices, and you attributed this in part to the frictional cost inherent in an actively managed portfolio. I wonder if today you would update your thoughts on this. And do you think that this underperformance compared to index funds will continue? And then a related question, if the 2 of you were giving advice to a classroom of equity mutual fund managers, are there 2 or 3 things in particular that you would want to suggest to them? Yes. Well, I would say this, money managers in the last few years since I've made that statement have not disappointed me. In aggregate, they have underperformed index funds. And it's the nature of the game. They simply cannot overperform in aggregate. There there are too many of them managing too big a portion of the pool. And for the same reason that the crowd could not come out here to exorbitant in the past years and make money in aggregate because there was a bite being taken out of every dollar that was invested in the parimutial machines, that people that invest their dollars elsewhere through money managers, in aggregate, cannot do as well as they could do by themselves, creating their own index fund or be easier to have just to buy into an index fund. It's they say in this world, you can't get something for nothing. But the truth is money managers in aggregate have gotten something for nothing. I mean, they've gotten a lot for nothing. And people investors have paid and the corollary is investors have paid something for nothing. And that doesn't mean that people are evil. It doesn't mean that they're charlatans or anything. It's just it's the nature. If you've got a $6,000,000,000,000 or $7,000,000,000,000 or whatever it may be, equity market and you have a very significant percentage of it managed by professionals and they charge you significant fees to invest with them and they have costs when they change around, they cannot do as well as unmanaged money in aggregate. And it's the only field in the world that I can think of. Charlie will think of some others. But where the amateur, as long as he recognizes he's an amateur, will do better than the professional does for the people whose money he's handling. And therefore, if I were in a teaching this class or speaking to that class, I would tell them that for their own psychological well-being, they should probably leave the room. Charlie? Well, I pretty well said what I had to say on this subject in that talk I gave at USC. And anybody that wants to read that, I can read it. I will say that one of the things I like about the Annual Meeting is I get to interface with a whole lot of people that have even lower annual investment management expenses than Berkshire Hathaway, the company, does. I mean, if you stop to think about it, we've got our cost almost to 0. And many of you have gotten it to 0. Yeah. We, Charlie and I would be glad to take any money management organization in the world that manages oh, just been had a note. It says, unfortunately, we don't have extra annual reports on site. Those shareholders desiring 1 should call us or write. And we're also on the Internet. You can run it off there. So I apologize for not having them on the here, but they're easy to get. Just dial 346-1400 and there's an annual report line and you'll have one sent to you. We would be willing to take any money management organization in the world managing $10,000,000,000 or more. And in the case of brokerage houses who have their brokers in aggregate handling $10,000,000,000 or more, And we would be willing to bet that their aggregate investment experience over the next 5 years or 10 years for the group that they advise will be less will be poorer than that achieved by a no load, very low cost index fund. And we'd put up a lot of money to make that wager with anybody that would care to step forward. Gambling may be illegal, but now you can do it through something called derivatives, you see. And we could we could create an instrument that would allow that even though it might be against the laws of the state of Nebraska. Charlie, would you join me on that? Or Well, I certainly agree with you. I always say that exactly 1 5th has to be in the bottom 20%. And there are certain fundamental forces at work here that, but it is a very peculiar profession where you have to be in a state of psychological denial to shave in the morning if you do the work. I don't think that's true for a handful. Investment managers. I think we know investment managers who add value. But it's a comparatively rare and small percentage. Yes. We have identified in the past, Stephen, I mean, on a prospective basis, not retrospective, managers who have added value. And there's a couple of them in this room. Well, and there's Lou Simpson of GEICO. Well, I mean, he's the one I had in mind. You know, it you can do it. You can't do it with unlimited amounts of money, and a good record tends to attract money. Even a mediocre record presented by a good salesperson tends to attract money. But they there are people working with smaller amounts of money that where the probabilities are that they will do better than excuse me. Where the probabilities are that they will do better than average, but they're very rare. Incidentally, I apologize on this voice. I had to leave garage early last night. And there were a number of you I was hoping to see. But I just it was gone entirely last night. And then I managed I'd like to tell you I did it by cherry Coke, but I managed to nurse it back to where it's working again in reasonable shape. Zone 4? Martha Copeland from San Francisco. The headwinds which face U. S. Air. Are you considering redeploying assets? Or how will your management plan to improve this company? Well, we're just an investor in U. S. They call it now U. S. Airways, but we're just an investor. We've owned a preferred stock for almost 8 years. The company had some very rough going. Charlie and I would not have thought its chances for survival were very good even some years back. But it's done quite well lately. Stephen Wolf has done a terrific job of running it. So as of the middle of April, all of our dividends are were caught up current. We've received, I don't know, dollars 260,000,000 or $70,000,000 in dividends in the last 8 years. But we have nothing to do with managing the company. As a matter of fact, there are some people that might have noted that when Charlie and I left as directors, that was when the fortunes of the company turned abruptly upward. But and we feel very good about what what Steven Wolf has done. I mean, he there's no tougher job than running an airline. That is not a job I would wish on anyone. And he's improved the operating performance dramatically and the financial performance has improved. And better yet, the preferred dividends have been paid. So, I we thank him for that, but we have nothing to do with it. By the terms of our preferred, in just a little over 2 years, we are due to be paid back our principal amount. It was really a loan in equity form with a possible kicker on the upside because of the conversion privilege on the preferred. We would have sold the conversion privilege for nothing a few years ago, but it actually is not so far away now. The stock's in the low 30s and our conversion is in the high 30s. So we actually have some chance of even having conversion value on that. It's been a very pleasant surprise. I made a mistake in getting into it, but Mr. Wolf is seems to be capable of of nullifying my mistake. Charlie? Yes. We'll give him this year. Zone 5, please. I'm Eric Butler from Menlo Park, California. A couple of questions, one serious one, not quite. Considering Berkshire Hathaway is well run at low cost and is diversified, Why should anyone do anything but put all their money into Berkshire Hathaway instead of maintaining a diversified portfolio? And in some of these, hat geographic kind of biographies, it is apparent that you have other investments yourself beyond Berkshire Hathaway. The second question I had is, is there any significance to the fact that the Omaha World Herald does not include Berkshire Hathaway and its stock tables on any day. Is this a sign that they do not honor profits? No. They, actually, they have a separate little table called Midlands. I think it's entitled Midlands Investment. But they pick out about 50 stocks that are of particular interest to people in this area. And they lift those from the regular table and put it in this separate table, which is usually on a second page, right following the main stock table. So they give us our just due on that. But you do have to you should look in a different table for that. Second question about putting all your money in. I've got 99% of my money in Berkshire. And but it was bought at a different price. And Charlie's was bought a little cheaper too, I think. So we like the idea of having it all in there, but we don't recommend that people do that because it's, you will get very low cost management. What we hope what we hope is that from this point forward that, that cost does not reflect its value. But the price at which you enter is very important. You do get a great group of businesses. You get a lot of great operating managers. You get very reasonable costs. But that is fairly widely recognized now compared to the past, and people pay more for it than they used to. I'm still very comfortable with it. And I think Charlie's comfortable with it, too. But everyone has to make up their own mind about price. Charlie? Yes. Eventually, if the success continues and we have more of the saggiography, the stock will get such a high price that it's no longer sensible at all to buy. We hope we dampen that process as we go along. And of course, there's always the very substantial chance that we'll just fail to meet expectations due to the vicissitudes of life. Falling on our face is what we call it. Yes. Zone 6. My name is Michael Hooper. I'm from Grand Island, Nebraska. I applaud Berkshire for starting the Class B shares. My question deals with tobacco stocks, which have been beaten down lately. Does Berkshire own any tobacco stocks? And are some of these stocks attractive now that prices are down on some of them? And in particular, a company called UST? Yes. We have owned we won't comment on what we own now, but we have owned tobacco stocks in the past. We've never owned a lot of them, although we may have made a mistake by not owning a lot of them. But we've owned tobacco stocks in the past, and I've had people write me about whether we should do it or not. We own a newspaper in Buffalo. It carries tobacco advertising. We don't well, actually, Charlie is the director of the sensational warehouse chain called Costco, which used to be called Price Costco. They sell cigarettes. So we are part of the distribution chain in with 100% owned subsidiary in the Buffalo News. And so we have felt that if we felt they were attractive as an investment, we would invest in tobacco stocks. We made a decision some years ago that we didn't want to be in the manufacture of chewing tobacco. We were offered the chance to buy a company that has done sensationally well subsequently. And we sat in a hotel in Memphis and in the lobby and talked about it and finally decided we didn't want to do it. Can I give you some That wasn't because we thought it wouldn't do well? We knew it was going to do well. We knew it was going to do well. But now why would we take the ads for those companies? Or why would we own a supermarket, for example, that sells them or a 711 or a convenience store that sells them or something of the sort and not want to manufacture them. I really can't give you the answer to that precisely. But I just know that one bothers me and the other doesn't bother me. And I'm sure other people would draw the line in a different way. So the fact that we have not been significant holders of tobacco stocks has not been because they've been on a boycotted list with us. It just means that overall, we were uncomfortable about enough about their prospects over time that we did not feel like making a big commitment in them. Charlie? Yes. I think each company, each individual has to draw its own ethical and moral lines. And personally, I like the messy complexity of having to do that. It makes life interesting. I hadn't heard that before. Well, we'll make him in charge of this decision. No, no. But I don't think we can justify our call particularly. We have to draw the line somewhere between what we're willing to do and what we're not. And we draw it by our own lights. We owned a lot of bonds at one time of RJR Nabisco, for example, meant some years back. And should we own the bonds and not own the stock? Should we own the should we be willing to own the stock but not be willing to own the business? Those are tough calls. Probably the biggest distributor of the biggest seller of cigarettes in the United States is probably Walmart at just because they're the biggest seller of everything. They're the biggest seller of Gillette products, and they're huge. And do I find that morally reprehensible? I don't. If I owned if we owned all of Walmart, we'd be selling cigarettes at Walmart. But other people might call it differently and I wouldn't disagree with them. Zone 7. Gentlemen, I'm John Tiresney, a shareholder from Omaha, Nebraska. People have already asked any sophisticated question that I might have, so I'm reduced to my simple ones. I first became a shareholder through flight safety. And at that time, I wasn't sure that I wanted to be bought out. However, I decided that any man who could agree with me on flight safety might be a good man to go along with. That's one way of doing it. Maybe you'd fit in well at headquarters. I have a couple well, I don't use Gillette products either as those of you who are close to me can see. My questions, my simple ones then are, a couple of years ago or within the recent times, you have said you would not necessarily buy Berkshire Hathaway. And I'd like to know whether you still feel the same way. Secondly, since I came to you through flight safety, I'm wondering if there's any other positions I should be looking at in that same light. And thirdly, there was a very distressing sign to me, sign that I saw when I drove in. And I don't know what the meaning of it is or if you do. And it said something about abortion. And I just don't have a clue. If you do it, now you can use yes or no answers to these to save your voice or suit yourself and elaborate. Yeah. I I we'll work backwards. I think the signs probably relate to the contributions to planned parenthood. I We follow a policy, as you know, at Berkshire of corporate contributions being designated by shareholders. We have some made by our operating companies to their local communities. And the local managers do what they think appropriate within their communities and with their own businesses. So Tony Nicely at GEICO, I have no idea what GEICO contributes to, but they make those decisions at GEICO. But in terms of the parent company, we let the shareholders designate the contributions. We have a number of shareholders who designate Planned Parenthood. We have other shareholders who designate organizations that are would be opposed to the ideas of Planned Parenthood. We make no judgment about those. And in terms of I designate the Buffett Foundation every year. And then the Buffett Foundation, in turn, gives money to other things, including Planned Parenthood. And so in the sense that those funds come in directly from Berkshire, they come in direct proportion to ownership the same way as everybody else gets a chance to do with their shares. And we've had people write us about it. And I there's no way in the world we would, in fact, there's some that would say that we should be boycotted because I do this. And we would not dream of questioning the people that we buy our almonds from or walnuts from or chocolate from as to what their beliefs were before we bought that or whether we would hire somebody that they'd have to agree with our beliefs. So it just it seems to me that perfectly appropriate for people to express their views on it. And they probably don't like clearly they don't like what I do on that. But it's where my reasoning and my own judgment leads me. But they're out there a few people are out there expressing their views on it. They're entitled to do that. And I don't have any problem with that. I think when they start saying, we don't want to hire you because you have a different view than we do or we don't want to buy your products, I think that's a little different position to take. I wouldn't do that. But again, it's their right to do that. Going back to whether we would buy the stock, I would say this a year ago. Well, it was about March 1 because that's when I wrote the annual report. In 1996. The stock was $36,000 And I said it was not undervalued at that point. And since we were more or less forced to have an offering by the unit trust, which I'm very glad, in retrospect we did, but it was not our idea, we felt that it was only appropriate in connection with that offering to point out that we had said it was not undervalued. And since Charlie and I like to buy undervalued securities, that we would not buy it ourselves at that price or recommend that others do. And in the ensuing year, the intrinsic value of Berkshire changed quite dramatically and the price didn't change. In other words, the stock, after years of overperforming the business somewhat, underperformed the business, which, of course, it's bound to do. And we're glad that they the business, which of course it's bound to do. And we're glad that they got back more in tandem. So we said this year that we regarded the stock as being much more appropriately valued than it was a year earlier, which is obvious. And I would say that the caution I made about securities generally would apply I would not accept Berkshire from that caution. But I would rather own or purchase Berkshire myself than I would most other securities, I can tell you that. Charlie? Charlie gives to Planned Parenthood too. So he has to they didn't put his name on the sides, but I'll take care of that. I am perfectly willing to have that limelight pass as well as the opportunity to say more on the subject. Did I miss one question up there? I think there were 3 of them. I addressed 2 of them. About any other area I should be looking at? That's the reason I skipped it. Yeah. I don't we don't we don't we don't, we don't direct people to any specific investments. And Mr. This is Nancy Jacobs from Omaha, a shareholder for about 4 years now. Before I leave today, I'm planning to purchase the world book on CD ROM for my 10 year old daughter. And I'd like a few words from either one of you or both of you about why I'm making the right choice. And second, does purchasing World Book over a competitor give her a somewhat improved chance of becoming a brilliant billionaire investor? Practically guarantees it, but go ahead. Okay. I'm buying now. Charlie, you want to, you love to talk about World Book. Well, I think World Book is clearly the class of the field. They have every word in the English language graded for reading comprehensibility. And the articles are cleverly written, so the difficulty of comprehension rises slightly as you go through it. And it's very user friendly to young people. And since it's something you want to encourage, making it user friendly is wonderful. I also find that with whatever intellect I have, it's more user friendly to me. And so I think it's a hell of a product, either for the young people or the old. And for a quick reference system, I don't think there is anything better. Personally, I like the reading version, being an old fashioned fellow. And I can hardly imagine a world where the wise people don't do a lot of But I doubt it. So But I doubt it. So I think you may have bought a wonderful product, but I would have the other one too. The product you see there was the joint development and was launched in January of this year in conjunction with IBM. IBM has been our partner in that product. I believe it's being bundled into the IV all the IBM PCs now being sold. So they've worked very well with us. Frankly, there's a book even that deals with this. Bill Gates did a very good job of developing a product that was bundled with 1,000,000 and 1,000,000 and 1,000,000 of PCs. It's called Encarta. It's actually Funk and Wagnalls. He hates it when that comes out, but they but they changed the name to Encarta, which was smart of him. And there are a few people in this room who are witness to a demonstration, 4 or 5 years ago in Bermuda where in connection with Encarta, it showed the moon and the earth. And the moon bumped into the earth in this. And I just I don't know why it sticks in my mind. I thought I ought to mention it today that the but his his is doing very well. So apparently, there are a number of people that don't care about the fact that moon and the earth collide. But in the world book, the moon and the earth never bump into each other. He's done extremely well with a card incidentally. I mean, it was a masterpiece of moving into an area and pushing hard. And I tip my hat to him, but now we're going to Yes, we copied him. Yes, we copied him, right? Okay, Nancy, be sure to buy the print version too, so Charlie will respect you. Zone 9. Good morning, gentlemen. My name is Patrick Byrne. I'm here today from Hanover, New Hampshire. I've searched for a couple of questions upon which I might get the 2 of you to disagree. First, what level of taxation and I direct these as much to mister Munger, therefore, as to you, mister Buffet. First, what level of taxation on capital gains is most conducive to the long term economic health of a society? And is that also the fair or just rate? In other words, is the just rate of taxation on capital gains precisely that rate that creates the most economic stuff? Or is there some other goal the state might pursue? And as a not so subtly related question, I work in a New Hampshire factory that makes industrial torches. As CEO, I might add, Patrick. Say again. As CEO of that that workings made it sound like you were down there on the floor. I just wanted people to Patrick writes me letters from chairman to chairman. So I think we got to get a bag of it. Continuing. Well, it's a small company. I do work as CEO, but it's not much of a hierarchy. We make torches use in heavy manufacturing and the fortunes of our factory echo those of industrial America. Do you agree with the conventional wisdom that maintains that the age of classical industrial America has passed and that we will that America cannot be competitive in the long term with low wage countries. So the first question is on taxation of capital gains. And then the second is on the future for industrial America. I have a sensational answer on the tip of my tongue, but I think I'll let Charlie go first. Refine her the best. Well, I think there's an easy answer to your capital gain issue. And one is what makes an economy work best in some abstract mathematical sense. And the other is the consideration that you allude to, which gets into issues of fairness. It's as Aristotle felt that systems worked better when they were generally perceived as fair. The civilization worked better if people saw the differences in rewards as having been fairly reasonably fair anyway. And I think that if you had a civilization where if you worked 90 hours a week driving a taxi cab with no money, no medical insurance and so forth, and somebody else does nothing but own Berkshire Hathaway shares and sit on the country club porch and peel off a few every year to pay the bills, that would be regarded as so unfair that even if it had some theoretical economic efficiency, it would be counterproductive for our particular civilization to have that kind of a tax code. So I'm all for having some taxation of capital gains. Once you reach that conclusion, you get into the question of what is the fair rate. I think the fair rate might well be a little lower than it is now, but not much lower. Sounds to me like he's a seller. No, Vircher. Patrick is a former heavyweight boxer and just got his PhD fairly recently from Stanford with a 700 page dissertation, which has in it some commentary that actually bears on this. And I and I and I thank Patrick actually for introducing me to a to a, kind of a system of construct mental construct that that to attack questions like this. Patrick gave me the example one time, and I think this may go back to John Rawls at at Harvard. But he said, just imagine that you were going to be born 24 hours from now, and you had been granted this extraordinary power. You were given the right to determine the rules, the economic rules of the society that you are going to enter. And those rules were going to prevail for your lifetime and your children's lifetime and your grandchildren's lifetime. Now you've you've got this ability in this 24 hour period to make this decision as to the structure. But there's a as in most of these genie type questions, there's one hooker. You don't know whether you're going to be born black or white. You don't know whether you're going to be born male or female. You don't know whether you're going to be born bright or retarded. You don't know whether you're going to be born infirm or able-bodied. You don't know whether you're going to be born in the United States or Afghanistan. In other words, you're going to participate in 24 hours in what I call the ovarian lottery. It's the most it's the most important event in which you'll ever participate. Yeah. It's going to determine way more than what school you go to, how hard you work, all kinds of things. You're going to get 1 ball drawn out of a barrel that probably contains 5,700,000,000 balls now, and that's you. Now what kind of a society are you going to construct with that in prospect? Well, I suspect you would focus on 2 issues that Patrick mentioned in his question. You would try to figure out a system that is going to produce an abundant amount of goods. And where that abundance is going to increase at a rapid rate during your lifetime and your children and your grandchildren so they can live better than you do in aggregate and the grandchildren can live better. So you'd want some system that turned out what people wanted and needed. And you'd want something that turned them out in increasing quantities, for as far as the eye could see. But you would also want a system that that, while it did that, treated the people that did not win the ovarian lottery in a way that you would want to be treated if you were in their position because a lot of people don't win the lottery. I mean, Charlie, when we were born, the odds were over 30 to 1 against being born in the United States. You know? Just winning that portion of the lottery, enormous plus. We wouldn't be worth a damn in Afghanistan. And, we'd be giving talks and nobody'd be listening. Terrible. That's the worst of all worlds. So we want it that way. We we want it partially in the era in which we were born by being born male. You know, that, when I was growing up, you know, women had it could be they could be teachers or secretaries or nurses, and that was about it. And, 50% of the talent in the country was excluded from a very large part from virtually all occupations. We won it by being white. No tribute to us. It just happened that way. And we won it in another way by being wired in a certain way, which we had nothing to do with. That happens to enable us to be good at valuing businesses. And is that the greatest talent in the world? No. It just happens to be something that pays off like crazy in the system. Now when you get through with that, you still want to have a system where the people that are born like Bill Gates or Andy Grove or something get to turn those talents to work in a way that really maximizes those talents. I mean, it would be a crime to have Bill or Andy or people like that or Tom Murphy working in some pedestrian occupation just because you got this great egalitarian instinct. But the trick, it seems to me, is to have some balance that causes the people who have the talents that can produce goods that people want in a market society to turn them out in great quantity and to keep wanting to do it all their lives. And at the same time, it takes the people that lost the lottery and make sure that just because they, you know, on that on that one moment in time, they've got the wrong ticket. Don't live a life that's dramatically worse than the people that were luckier. And when I get all through with that long speech, I probably come out with the idea that the capital gains taxes that exist today is probably about right. So that's I see very few people. And I've been around a lot of people with money and talent over time. They don't always go together, but I've been around both classes. And the I see very few of them that are turned off from using their talents by a 28% capital gains tax. It just doesn't happen. I mean, they do what they like to do. And part of the reason they're good at what they do is they like to do it. And I've just never seen it happen. And I've seen a lot of people that pay taxes that are higher than 28% that are contributing more to society by some judgment other than a pure market system. The other question about the the the low cost industrial, you know, how does the industrial society evolve? I you know, the world evolves in a way in a market society so people do what they're best at. And this country has done very well in recent years. Something like, you know, software that where Microsoft has been leading or or an Intel or something. I mean, we we have done very well. 10 years ago, the American public was sort of down on itself or 15 years ago in terms of what the economy could do. But here we are with our unemployment rate in Nebraska. It's under 3%. And, you know, you look at the countries of Europe that were supposedly gonna beat us into the ground or you look at Japan. And I think I think the American economy encourages adaptation. I mean, Singapore may be better, but but in terms of major large economies, I think the American economy does awfully well in encouraging adaptation to what people want, delivering it to them, and in ever increasing amounts. And, you know, I view that as all to the good. So I don't I don't regard any industry as sacred. I regard innovation and freeing up the able people to able in terms of production of goods in a market economy to spend 12 hours a day, although I'm I I don't see Andy or Bill letting up at all in terms of where Intel and Microsoft are now. I don't see Roberto Boisweta, Coca Cola or Michael Eisner or Disney or any of those people. They don't work 40 hour weeks. They work they work they work 70 or 80 hour weeks. And I think that system works very well in this country, and I don't worry particularly about the specific products that are turned out. Troy? I would not like the conclusion that both Warren and I have reached that issues of fairness are properly to be considered in the tax laws. To cause anyone here to believe that I have a great respect for Harvard University's philosopher, John Rawls. He is perhaps the world's best known living philosopher. And personally, I think he's had a pernicious influence on human thought. He doesn't know enough science. He doesn't know enough economics. He doesn't know enough about how systems work to be really good at figuring out what's fair in systems. And he studied too much philosophy and too little of everything else. So if anybody thinks we love John Rawls, you can count me out. No. I wasn't endorsing his conclusions. I was endorsing his his his thought his original construct. Charlie, how about how about the industries part of the question that Patrick asked? Well, if Patrick isn't the smartest person in the room, there can't be many his class. You are getting questions from a very able man, and he's deliberately made them very difficult. And that whole issue is too complex for me to usefully discuss here. There are also certain limitations on ability that's under the equation. So we'll go to zone 10. Good day, gentlemen. My name is Bill Rodenberg from Dayton, Ohio. I'm a shareholder, And my daughter, Sarah, who is 13, is also a shareholder. She chose not to join me in the limelight. I think the hot dogs had a higher appeal to her. And I would like to say that, it's very reassuring to know that Uncle Warren and Uncle Charlie are taking care of her college fund, And it's easy to sleep at night. I have 2 questions, one related to a question my wife asked me, which I was unable to fake a good answer to, and the second one related to my daughter's one share of Berkshire My wife asked me, in the annual report, you stated that if anyone out there has a good company like FlightSafety, please let you know, and you'd be glad to look it over and give an answer within 5 minutes or less. And her question is, how can he do that? Where does he get the information to make that decision? And how does he know that that information is valid? My second question has to do with my daughter. She's 13. In 5 years, she'll be off to college, perhaps UNL, perhaps not. In any case, she's going to face a significant capital gains when she sells that 1 share stock. I hope so. You mentioned earlier, and I believe this is correct, you said that you could trade 1 share of A for 30 shares of B this afternoon. And I thought, wait a minute, I thought there was a limited window on that. We happened to be out of the country at the time that exchange took effect and we missed it? No, the exchange exists forever. You can Forever. You can always exchange a share of A for 30 shares of B. You cannot do it in reverse. You cannot shift 30 shares of B into 1 share of A. But there was no window or timetable on that. The A stock is forever exchangeable for 30 shares of B. I don't recommend that she does it because it's always an option. And in the meantime, she gets the shareholder designated contribution and there's always a chance that the A will sell slight at a price slightly above 30 shares to B. It doesn't do it very often and it won't be very much if it does. But there's so there's no we didn't want to create an incentive for people to exchange A for B, but we they will always have the right to do so. The 5 minute test is, you know, Charlie and I have we're familiar with virtually every company of a size that would interest us in the country. I mean, if you've been around for 40 or more years looking at businesses, it's just like if you were looking at studying baseball players every day, you get to know all the players after a while. And that's the way it works. Then we have a bunch of filters we've developed in our minds over time. We don't say they're perfect filters. We don't say that those filters don't occasionally leave things out that should get through. But they're very they're efficient. And and they work just as well as if we spent months and hired experts and did all kinds of things. So we really can tell you in 5 minutes whether we're interested in something. And and, we had never owned shares in flight safety, but we've been familiar with the company for at least 20 years. Wouldn't you say, Charlie? Sure. I had a partner who bought a lot of it. 20 years ago. Yeah. Yeah. But that's true of almost any business. And we know we've got a fix on what we don't understand, and then we don't care to know anymore about them, particularly, although we'll pick up a little as we go along maybe. But and then the ones that are we're capable of understanding, we've probably gotten about as far as we'll get already. So we we do we do know in 5 minutes. Now when we do something with flight safety Before the purchase and even for somewhat a little after the purchase, I'd never been I'd never set foot on a on a piece. They have 40 or so training centers around the world. I never set foot on one of them. I never been to their headquarters. We never looked at a lease. We never look at title of the properties. I mean, we don't do all of those things. And I will say this: To date, that's never cost us a penny. What costs us money is when we miss assess the fundamental economic characteristics, of the business. But that is something we would not learn by what people generally consider due diligence. We could have lawyers look over all kinds of things, but that isn't what makes a deal a good deal or a bad deal. And we don't kid ourselves by having lots of studies made and lots of reports made. They're going to support whatever they think the guy that pays them wants anyway. So it doesn't mean they don't mean anything. They're nonsense. But we do care about being right about the economic characteristics of the business, and that's one thing we think we've got certain filters that tell us in certain cases that we know enough to assess. And then we make some mistakes. Charlie? I've got nothing to add to that except that people underrate the importance of a few simple big ideas. And I think that to the extent Berkshire Hathaway is a didactic enterprise teaching the right systems of thought, I think that the chief lessons are that a few big ideas really work. I think these filters of ours have worked pretty well and because they're so simple. Yeah. I think I think most of the people in this room, if they just focused on what made a good business or didn't make a good business and thought about it a little while, they could develop a set of fillers that would let them in 5 minutes, figure out pretty well what made sense or didn't make sense. I mean, there may be some reason after 5 minutes we don't get together on a deal of some sort. But another thing you can usually tell, at least you can tell it in the extreme cases, you can tell whether you've got the kind of manager very quickly that you want to have. I mean, if you've got somebody who's been batting 400 all their life and fortunately, age doesn't change that picture in terms of business performance and they love what they do, it's going to work. If the seller cares a lot about the money, they're probably not going to make a very good deal. I mean, what they're if their real interest is going in the is what they're going to do with the money, they may fall out of love or have less interest in their business subsequently. We love working with people who are just playing nuts about their businesses and it works very well and you can you can usually spot that. Now having said that, we'll have a few people figuring out how to fake that attitude, you know, when they try and sell us some piece of junk here. But, Charlie says we can get conned by some guy with a green eye shade and a low rent office and all that, but we won't get taken in by the guy with the suede shoes. Zone 11. Mister Buffet and mister Munger, thank you for having me here today. My name is Dorsey Brown from Baltimore, Maryland. I have two quick questions for you. Could you please comment on any observations that either of you may have concerning executive compensation and opulent issuance, a topic that seems to be getting a lot more media attention and are we going to getting a little bit of excesses in that area? And my second question to you, mister Buffet, could you just give us some idea of what a normal day, how you would like to spend a reasonable normal day and working on the investment side of the equation or analysis or reading or just to give us some flavor of that? Thank you. Okay. I'll answer the second question first. Very easy. I just I read a lot, and I talk on the telephone a fair amount. We have no meetings. We have no committees. We have no slide presentations. We have nothing. I mean, it and so we so I read a lot. I read annual reports. Business publications. I could do it in way less time, but I enjoy doing it so I make it last. I mean, you know, like some other activities in life. The so it's it's there's really it's the most boring job to anybody watching it, but I'm in love with it, you know. And so I I like doing that and I don't like talking about it a lot. I just like to kind of keep up with what's going on. Like I say, by this point in life, I could filter out so much of that. I just don't need to do that much of it. But I kind of enjoy just seeing what's going on, vicariously through doing a lot of reading. And I spend some time on the phone and I I'm on the computer a lot playing bridge and and I get to do what I like all the time at, we'll let Charlie describe what he does, which is even more bizarre. And then we'll talk about compensation and options. Well, there's a little more foolishness in my life than warrants and including being chairman of a large hospital. I'm not suggesting that hospitals are foolish. I'm just suggesting that it takes a certain quirk of mine to be willing to be the chairman of a hospital. And so my wife is even more it's less rational than Warren's. Warren lives one of the most rational lives I've ever seen. And it's almost unbelievable. He's got me wondering why I'm here today. Well, we'll talk about comp then a little. Yeah. The comps, there are 3 or 4 aspects to that. And on the subject of options, I would say that that most options are constructed poorly from the standpoint of the owner, but they're constructed very well from the standpoint of the person who receives them, which is not entirely unexplainable because the the it's a very strange form of negotiation when the the net the beneficiary is the one that also really does all the design and hires the experts to come in and tell them what is good for the company when the expert knows that the guy who signs the check be quite interested also in hearing what's good for him. There's nothing wrong with options per se at all. Frankly, in terms of Berkshire, it would have been perfectly appropriate if a properly designed option had been given to me or to Charlie. I mean, we have responsibility for the whole enterprise. And we believe that any kind of perform incentive for performance should be related to the area in which you have responsibility. We feel that if you want a typist to type a 100 words a minute, that you ought to pay for typing a 100 words a minute, not what the earnings per share were last year. We feel if a salesman gets paid for how many of the product is sold, they should get paid for that and not for some production quotas met. So we believe in tying incentive comp to performance for which you have responsibility. And there are certain areas of a business that don't lend themselves to that staff performance and so on. But that would lead to the corollary that the people that are responsible for the entire results of the business, it's perfectly appropriate to compensate them by options that in in some way, reflect the performance of that entire business. Now, the trouble is that stock prices reflect other things than the performance of the business. For one thing, over a period of time, they reflect simply the reinvestment of earnings. You know, I have pointed out in the past that if you gave me an option on your savings account to manage your savings account and you reinvested all the interest, I would take away a significant payment at the end of 10 years simply because you left the interest in. With a company that pays no dividend like Berkshire, if you're going to leave all your capital in every year, for me to get a fixed price option for 10 years would mean that I was getting a royalty on money that you left with me and I made the choice to have you leave it with me. So that does not strike me as equitable. So I think any option should have a step up in price that reflects the fact that money is reinvested by the shareholders annually. That, if somebody wants to pay out 100% of the earnings every year, then I say that you can have a fixed priced option. If you give me the money every year and you do more with the money that's left with you and the original sum, that's fine. But if if money is left, with someone for 10 years, there's going to be some increase in value even if they spend every day golfing. And to give a piece of that away simply over to have a royalty on the passage of time for them is a mistake. I think options ought to be granted basically at the fair value of the business at the time they're granted. Sometimes, that's the market price. Sometimes, it isn't the market price. But certainly, the management of a company would not give an option on their business to some third party at a market price they felt was way too low. So I find it a little, a little disingenuous when management say that they're when they get a takeover bid, they say that the companies really were twice that much, but they're perfectly willing to issue options to themselves, at this price, which they say is totally inadequate, when the owners get the option elsewhere. But options properly structured for people with responsibility for the business, I think, makes can make sense. And I think that if something happened to me and to Charlie, in terms of the manager of the business subsequently, if it was structured properly, I would not say anything wrong with an with an option arrangement. We carry this philosophy down to our subsidiaries where they generally have incentive arrangements that relate to the operation of their business. But they don't have incentive arrangements that relate to Berkshire overall because, if Chuck Huggins does a wonderful job at See's Candy, as he has done, and I fall on my face in terms of allocating capital, Berkshire stock will go no place despite, what Chuck does. And to penalize him or to tie his rewards to something over which he has no control, I think, is kind of silly. So we tie it instead to the operations of the candy business. In terms of overall level of compensation, the real sin is having a mediocre manager. I mean, they that is what costs owners, very significant amounts of money over time. And if a mediocre manager is paid a relatively small sum, it's still a great mistake. And if they're paid huge sums, it's a travesty. And that happens sometimes. It's almost impossible to pay the outstanding manager, a sum that's disproportionate to the value of that outstanding manager when you get a large enterprise. Coca Cola had a market value of $4,000,000,000 when Roberto Goizueta took over. It had stagnated during the previous decade under an earlier management despite having the same product and those great Mean Joe Greene commercials you saw. That was Mean Joe Green was in the '70s. The Teach the World the SING commercial was in the '70s. All these great commercials, but the company didn't do much. Roberto, if we'd bought the entire Coca Cola Company I wish we had in 1981 or 2, whenever he came in for $4,000,000,000 and we now had a business worth $150,000,000,000 Roberta would have earned more money with us than he's earned under the present arrangement. I mean, having the right person in place is just enormously important. How much they should take is another question. That's more a philosophical Tom Murphy, best manager, you know, in the world, he just didn't feel like taking a lot of money out of it, you know. And and and, you know, I tip my hat to him, but I don't think that necessarily makes it wrong for somebody else to take take more money for for doing the job. But I think it ought to be related to doing the job. When I ran a partnership in the 19 sixties, I took a quarter of the profit over 6% a year. And and, I didn't get paid any salary, but but I could make a lot of money doing that. And that thought occurred to me as I ran the place from day to day, and I think it probably helped a little. So I don't think it's a terrible thing to have somebody get paid for making money, for the shareholders. But they ought to get paid for really making it, not simply because the shareholders reinvest money with them. They ought to make it based on the fair value of what they they they had when they took over. And and, they ought to make it really for just excellent performance. Charlie? Well, we have remarked in previous Berkshire Hathaway meetings that we regard present mandated corporate accounting with respect to stock options as weak, corrupt, and contemptible. And it is. Otherwise, we're undecided. If something is so wonderful as a standard technique of compensation, Why does it have to be masked under weak, corrupt, and contemptible accounting? I think it is no credit to our civilization that we've drifted into this particular modality. And you can get, if you overuse stock options, where the whole thing is sort of a chain letter. In Silicon Valley, there's one company that practically paid everybody in options. And as long as the chain letter galloped, it worked as far as the income account because nothing went through expense. And then once everybody is issuing stock options, everybody else feels that he has to do it and the practice spreads. So I am not totally wild about the extreme prevalence of the stock option modality in an American corporate life. Personally, I would vastly prefer different modalities which would probably involve stock instead of stock options. I'm all for sharing with the kind of people who are doing the important work pretty well down in the organization at a place like Costco or Coca Cola or any other such company. But I don't much like the present scheme that civilization has drifted into. With respect to the subject of do we have some wretched excesses in American corporate compensation, My answer would be yes. I don't think the excess is necessarily the guy who got the most money. In many cases, I agree with Warren, the money has been deserved. But such is the envy effect that the practice spreads to everybody else and then the taxi driver and everybody starts thinking the system is irrational, unfair, crazy. And I think that's what causes some people as they rise in American corporations to at a certain point of power gaining and wealth gaining, they start exercising extreme restraint as a sort of moral duty. And that's what Warren was saying about Tom Murphy. And I would argue that the Tom Murphy attitude is the right attitude. And it goes way, way back in the history of civilization. The word liturgy comes from a Greek word which is just the same. I mean, if you were an important citizen of Athens, it was a lot like being an important person in Jewish culture. I mean, you had duties to give back and to act as a certain example. And the civilization had social pressures that enforced those duties. And I would argue that the Berkshire Hathaway compensation system, Considering what the people at the top already have, it would be better if we saw a little more of it. I think Warren and I do all right. Few years ago, I think an added problem is the sort of in terms of the accounting, the sort of hypocrisy that it pushes people into and then which becomes accepted and and and sort of a norm, particularly when leaders do it. You had a situation a few years back when there's no question that any manager would say that stock options are a form of compensation. They would say that compensation is a form of expense, and they would say that expense belongs in the in the income account. But they didn't want to have stock options counted because they felt that it might it might restrict their use. So when the federal the FASB, Financial Accounting Standards Board, came up with a proposal to actually have reality reflected, en mass. Corporate chieftains descended on Washington to pressure legislators to have Congress start enacting accounting standards, which, as I mentioned one time in Indiana in the 1890s, there was a legislator that introduced a bill to have the value of pi changed to an even 3 because he thought 3.14159 was too tough for the schoolchildren and it would ease computational problems. Well, that that sort of behavior by corporate chieftains when they are in there arguing that the black is white in order to feather their own nests and maybe create little higher stock prices. I think that it means that they forfeit, to some degree, their right to be taken seriously when they claim they're operating for the good of the republic and march on Washington in other regards. And I I just think that when the organization recognizes its hypocrisy and so on, I I think there's a degradation that that the consent is set in through a through an organization that, whose leaders are are also leaders in hypocrisy. Like I say, we have no strong feelings on this subject. Charlie, do you have any one? It's rather interesting, though. There's an earlier example. Commodore Vanderbilt took no salary from his railroads. After all, he controlled the railroads, they paid all the dividends that he needed and he got the fun of running the whole railroad. And he thought it was beneath Commodore Vanderbilt to take a salary. We've never quite reached the Vanderbilt standard but We don't have any dividends, Charlie. Well, maybe that's the reason. Well, with that, we'll take a break for we've got we've got food out in the other room, including See's candy for those who haven't tried it. We've almost finished this box up here, and we'll reconvene at 12:30. Thanks.

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