Okay, if you'll take your seats, we'll proceed in a minute. It looks like we're ready for Greg.
Warren and Charlie, I have a follow-up on the railroad business. By nearly all measures, BNSF had a solid year in 2018. Full-year revenue growth of 11.5% was better than the 7.5% top-line growth that Union Pacific, which is BNSF's largest direct competitor, came up with. With Burlington Northern seeing both larger increases in average revenue per car unit and total volumes than its closest peer. Even so, Burlington Northern once again fell short of Union Pacific when it came to profitability, with its operating ratio declining 130 basis points to 66.9%, while Union Pacific's ratio fell only 120 basis points to 62.7%, further cementing the spread that exists between the two companies' margins at more than 400 basis points.
Can you explain what is driving the difference in profitability between Burlington Northern and Union Pacific, as theoretically we should not see that wide of a spread between two similar-sized companies that are basically competing for the same business with the same customers in the western half of the United States? While you noted that Burlington Northern is in a wait-and-see mode with regards to precision scheduled railroading, we've kind of heard the same line historically with regards to GEICO's approach to telematics. What worries me here is that the potential now exists for a much wider gap to emerge between profitability levels at Burlington Northern and Union Pacific, which has recently adopted a version of PSR, some of which Union Pacific could eventually use to get more price competitive.
Well, Warren knows the answer to that a lot better than I do. My guess is that they work a little harder than we do at building the rates. Warren, you answer that one.
Yeah. it's true that we receive the lowest ton mile revenue of any of the six big railroads in North America, there's some explanation for that, obviously, a significant explanation in the particular types of hauls we have and that sort of thing. We do have longer hauls generally. The answer, Union Pacific's profit margin, they talk about operating ratios, but that goes back to the Interstate Commerce Commission. It's really profit margin, pre-tax, pre-interest profit margin. The Union Pacific at one time probably 15 or maybe a little more years ago, they really went off the track, so to speak. they've done a very good job. They got a lot of underpriced coal contracts worked out, as did we.
they've also done a very good job on expenses, there's no fundamental reason why the BNSF franchise I always liked the western railroads better than the eastern. Not by a dramatic margin, but I think the West will do better in terms of ton miles over time than the eastern roads. we've got some great routes, some of which were underwater in March for a while. we pay a lot of attention to what's going on at the Union Pacific as we should. The future, it's not like we're losing business to anybody, but they have been operating more efficiently in effect than we have during the last few years. like I say, we take notice of it. They've cut a lot of people, right here at Omaha, we'll see what that does in terms of shipper satisfaction.
we are measuring ourselves very carefully against what they do, and if changes are needed, we'll do them. We've got a wonderful asset in that business. when I bought it, I said it's for 100 years. It's for a lot more than 100 years. It is a very, very fundamental business, we've got a wonderful franchise, we should have margins comparable to other railroads.
Charlie?
I don't know much about it.
You don't?
Station 9.
Hi, Warren and Charlie. My name is Rob Lee from Vancouver, Canada. Could you please share with us what do you value the most in life now? Thank you.
Well, you know.
Well, I'd like to have a little more of it.
It's the two things you can't buy, time and love, I valued those for a long time. I've been very lucky in life in being able to control my own time to an extreme degree. Charlie's always valued that too. That's why we really wanted to have money, was so we could do what we damn pleased, basically, in our life. It wasn't six houses or boats or anything, Well, Charlie's got a boat, but it doesn't do us that much good. Time is valuable and we are very lucky to be in jobs where physical ability doesn't make any difference. We've got the perfect job for a couple of guys with aging bodies, and we get to do what we love to do every day.
Literally, I could do anything that money could buy pretty much, and I'm having more fun doing what I do than doing anything else. Charlie is designing dormitories and he's got an interesting life, He brings a lot to it. He still reads more books in a week than I get done in a month, He remembers what he reads. We've got it very good, We don't have unlimited time, Whatever we do to free up the time to do what we like to do, and we both maximize that in our lives, we do.
Anybody's lucky if what he spends his time at, he really likes doing. That's a blessing.
Yeah. We've had so much good luck in life, it sort of blows your mind, starting with being born in the United States. Canada would be fine too, incidentally. I don't want to offend anybody. Okay. Carol?
This question is from Brian Neal, who writes from the Mayo Clinic Education site. "Berkshire owns approximately $200 billion in publicly traded stocks. I appreciate the disclosure of Berkshire's holdings, but I am disappointed by the lack of specific performance information. Since investing in publicly owned stocks is so much a part of Berkshire's business, why do you not tell us every year how our portfolio performed?
Well, I would say it could be calculated fairly easily, it's about 40% of Berkshire's value, 60% is the businesses. If you look at the top 10 stocks, I would guess you're down to where beyond those 10 stocks, you're talking about less than probably 10% of Berkshire's value. Again, we're not in the business of explaining why we own a stock. We're not looking for people to compete to buy it. We have a portfolio of companies where I would say that of that $200 billion or so, at least $150 billion of them are buying in their stock and increasing our interest every year. Why in the world should we want to tell a whole bunch of people to go out and buy those stocks so that the company on our behalf ends up paying more money for them?
People get very happy when their stocks go up. If we're going to own, whether it's Bank of America, whether it's Apple, whether it's any of the big holdings, we will do considerably better in the next 10 years if their stocks do terribly during certain periods and they buy lots of stock in it. It's just exactly like buying it ourselves, except they're using our money. It's so elementary. Why in the world would we want to go out and tell the world that these stocks should go up so that maybe they can sell or something when it costs us money, and we're not going to be able to move in and out of the stocks to our advantage? Our holdings are filed quarterly. Our domestic holdings, as it was pointed out earlier, filed quarterly.
We would rather not tell the world what we own anymore than we'd like to tell them what our strategy is at NetJets or what we're going to do at Lubrizol and what we're working on the way of better advances in additives or whatever it may be, or where we plan to build a new store for the Furniture Mart or something. That's proprietary information, and we have to disclose a certain amount, but we're certainly not going to be touting the stocks to the other people. In terms of calculating our performance, you can take the top 10 or 12 stocks and anybody can make the calculation. At the end of the year, The Wall Street Journal runs, all the papers run something where it says year-to-date performance or something of the sort. That's a simple calculation. Charlie?
I've got nothing to add to that.
Okay. Jonathan?
No one's ever asked a question about FlightSafety, perhaps this year is somewhat topical given the 737 MAX controversy. The New York Times spoke to engineers who said that Boeing explicitly designed the MAX in a manner that allowed airline customers to avoid paying for simulators to train their pilots. Do you expect the worldwide regulatory and commercial response to the MAX's problems to result in increased demand for FlightSafety simulators? Could you please more generally discuss FlightSafety's competitive position and growth prospects?
Well, Their specialty would be with corporate pilots. They train our NetJets pilots, for example. They have a major facility with simulators for that. I don't think what's happened with the 737 MAX will have any particular effect. We have I don't know how many of the Fortune 100 companies that we do business with, but it's a very significant percentage, and they train their pilots with FlightSafety because we've got the talent and the simulators like nobody else has for that business. Charlie, didn't you have that friend of yours that was trying to get Al Ueltschi to pass him when he shouldn't?
Well-
You remember that story of your friend that wanted to have FlightSafety?
Oh, yes.
Yeah, credit. Why don't you tell them? Al Ueltschi, who started FlightSafety with a few thousand dollars and a little visual simulator or whatever it may have been at LaGuardia, he really cared about saving lives. He made a lot of money in the process, but he was dedicated throughout his lifetime to truly train better pilots and reduce the chance of accidents dramatically. It was a mission with him. That spirit still continues, and as I say, we've got a I can't tell you the percentages, I don't know, but I know it's very high of certainly the corporate business. We have government business, we have some airline business, and all of that. I don't expect any great change in the flight training business. Tell them about your friend, Charlie.
Well, of course, people pass those tests with flying colors, and some of them just barely pass. One of my friends just barely passed, and they called me and told me. It's an art in the business.
Yeah. FlightSafety.
They care about everything.
They care.
They watch the details.
They care. Those simulators, they can cost over $10 million. They're dedicated, obviously, to a given model of plane. You might find it interesting, at NetJets, our pilots only fly one model. Most charters and all those, I'm sure they could fly other models and all of that, but we want them to be flying one model, and we give them a maximum amount of training annually. When I bought the company for Berkshire in, I think it was 1998 or thereabouts, the thought obviously bothered me that I would have a significant percentage of the people would be friends of mine that were using it, and you'd hate to have anything happen. I use it, my family uses it, our managers use it, and there's nobody that cares more about safety than at NetJets. It's a first-class operation in many ways.
They've never killed a passenger.
No.
They had one pilot who hit a glider at 16,000 feet. It was kind of a difficult landing.
It was more than a difficult landing.
They've never killed a pilot. It was a woman pilot, yeah.
She was flying the next day. The co-pilot was kind of taken out of operation, but this woman ended up almost with a control panel in her lap because this guy had turned off his battery, and hit one of our Hawker. She had one shot at the runway, and she brought it in. We've had some remarkable training and pilots there. You should ask for her if you're flying on NetJets. Station 10.
Mr. Buffett and Mr. Munger. Hi, my name is Daphne. I'm from New York, and I'm nine years old. I'm excited to be at the Berkshire meeting, and this is my third year.
Wow. You should be rich by now.
You have often said that investors are well-served by identifying businesses with a wide moat where the castle behind the moat is run by a king or queen who can be trusted to make good decisions. In the past, you have applied this advice by investing in businesses with world-class strong brands such as Coke, American Express, and See's, as well as media companies that has helped these brands protect and widen their moats, such as Cap Cities, ABC, and The Washington Post.
In the past, you have also generally avoided investing in technology companies, pointing out how quickly technology changes and how hard it is to build a circle of competence in it. Today, we seem to be in a world where some of the most dominant companies in the world are technology companies, and we have built powerful platforms such as Amazon, Google, Facebook, and Microsoft in America, and Alibaba and Tencent in China. These companies all have wide moats, strong brands, and are led by brilliant entrepreneurs.
That's good.
My question to you is this. If Berkshire is to honor its tradition of investing in wide moats and strong brands, and especially in companies that are also capital efficient, do you think that Berkshire needs to expand its investing lens to include more of these leading technology platforms? In other words, do you believe you need to adapt your model of wide moats and strong brands to embrace, not avoid, technology?
I think the answer is maybe. I think the answer is to put her on the board, it'll bring down the average age enormously. We won't get criticized as much. You're exactly right in that we do like moats, we used to be able to identify them in a newspaper that was the only newspaper in town or in TV stations where we felt the dominant positions, we felt the product was underpriced in terms of advertising it. We saw it in brands sometimes. It is true that in the tech world, if you can build a moat, it can be incredibly valuable. I've not felt the confidence that I was the best one to judge that in many cases.
It wasn't hard to figure out who was winning at any given time or what their business was about, there were a huge number of people that knew more about the game than I did. We don't want to try and win in a game we don't understand. We may hire people, such as Ted and Todd, that are better at understanding certain areas of investing than I am, or maybe even Charlie is. The principles haven't changed. You're right that some of the old ones have lost their moat, you're right that there are going to be companies in the future that have them that will be enormously valuable. We hope we can identify one every now and then. We'll still stay within where we think we know what we're doing, obviously, we'll make mistakes even within that area.
We won't go into something because somebody else tells us it's a good thing to do. We are not going to subcontract your money to somebody else's judgment. You can take your money and follow somebody else's judgment, we're not in the business of thinking that if we hire 10 people with specialties in this area or that it will lead to superior investment results. We do worry that we could blow a lot of money that way. We'll do our best to enlarge the circle of competence of the people at Berkshire so that we don't miss so many. We'll miss a lot in the future. We missed a lot in the past. The main thing to do is to find things where our batting average is going to be high.
If we miss the biggest ones, that really doesn't bother us as long as the things we do with money work out okay. Charlie?
I think we've still got an awful lot of companies with big moats, and some of our industrial brands are just incredibly strong in the niches we're in. Berkshire shareholders don't need to worry about we're just one big morass of unprofitability or anything like that. We have not covered ourselves with glory in the new fields.
We won't end up all in buggy whips, though, or anything like that. It's a very good question, and it's what we focus on all of the time, and I hope.
We're trying to improve.
We hope we see you back here for your fourth next year. Becky?
This question comes from Stuart Boyd, who's a chemical engineer from Australia. He says, "Currently, Berkshire would be incredibly difficult for an activist investor to target because number 1, Warren, your ownership stake is large. Number 2, shareholders appreciate the business is more valuable operating under the Berkshire umbrella rather than being sold off in pieces. Number 3, the sheer size or market capitalization of Berkshire is an entry barrier for most activist investors. Warren and Charlie, after your ownership has been completely distributed, will Berkshire be more vulnerable to activist investors? I'm guessing this isn't something that keeps you up at night, but thought it was worth asking.
No, it's going to happen quite a few decades after my death.
Yeah.
I don't think I'll be bothered much by it. Well, anything can happen. It's a low probability. It can't happen for a lot of years in terms of the way my stock gets distributed and in terms of the way other stock is held. In the end, Berkshire should prove itself over time. There are no perpetuities. It deserves to be continued in its present form. It has a lot of attributes that are maximized by being in one entity, which people don't fully understand. They think if you spin off something that would command a high P/E, that therefore value has been unlocked, which is totally nonsense. It's already built in. One day out, you might have an extra 3% or 5% in price, but over the years, we want to keep the wonderful businesses.
Eventually, I think the culture will remain one of a kind. I think that we will be able to do things other people can't do. I think that the advantages of having them in one spot will likely be significant over time. If that happens, no activist is going to take it over. If the model doesn't work for some reason over a long period of time, then something else should happen. Charlie?
Nothing more.
Okay. Jay.
This question is on GEICO. Progressive is gaining the most market share among the major auto insurers based on its presence in the direct and independent agency channels, as well as now bundling its auto and homeowners insurance coverage. How does GEICO plan on responding to competitive threats so that it can retain its place as the second largest auto insurer? I was hoping we could also hear on this topic from Ajit or GEICO's management. Thank you.
Okay. Progressive is a very well-run business. GEICO is a very well-run business. I think they will, for a long time, be the two companies that the rest of the auto insurance industry has trouble not losing share to. I've always thought for a long time, Progressive has been very well run. They have an appetite for growth. Sometimes they copy us a little, sometimes we copy them a little. I think that'll be true five years from now and 10 years from now. We sell substantial amounts of homeowners insurance. We have an agency arrangement with that. We were in the business of writing it ourselves until Hurricane Andrew, when a decision was made.
We didn't control it then. A decision was made that the homeowners, essentially you could lose as much in one year as you made in the previous 25 years. The float isn't as large. We became a company that placed our customers' desire for homeowners with several other large and solid organizations. The big thing is auto insurance. We grew in the first quarter about 340,000 policies net, which will look quite good compared to anybody but Progressive. That was quite a bit more than last year, but not as good as two years ago. The profit margin was in the nine-point area. I feel extremely good about GEICO. What has been built there by Tony and his people is perfect.
We don't own any Progressive. I think that Progressive is an excellent company. We will watch what they do. They will watch what we do. We will see five years from now or 10 years from now which one of us passes State Farm first. Charlie? Ajit, would you like
The underwriting profit is really a function of two major variables. One is the expense ratio. The other is the loss ratio, without getting too technical. GEICO has a significant advantage over Progressive when it comes to the expense ratio to the extent of about seven points or so. On the loss ratio side, Progressive does a much better job than GEICO does. They have, I think, about a 12-point advantage over GEICO. Net-net, Progressive is ahead by about five points. GEICO is very aware of this disadvantage on the loss ratio that they're suffering. They're very focused on trying to bridge that gap as quickly as they can. They have a few projects in place. Sometimes GEICO is ahead of Progressive. Right now, Progressive is ahead of GEICO.
I'm hopeful they'll catch up on the loss ratio side and maintain the expense ratio advantage as well.
Thank you.
GEICO has gained market share essentially, I'd have to look at the figures for sure, but virtually every year since Tony took over. I would bet significant money that GEICO increases its market share in the next five years. I think it will for sure this year. It is a terrific business. Progressive is a terrific business. As Ajit says, we've got the advantage in expenses and we will have an advantage in expenses. Then the question is, they have a very sophisticated way of pricing business. The question is whether we give some of that five points back or six points back in terms of loss ratio, and we are working very hard at that, but I'm sure they're working very hard too to improve their system. To some extent, it's a two-horse race and we've got a very good horse.
Warren, in the nature of things, every once in a while, somebody's a little better at something than we are.
You've noticed?
Yeah, I've noticed.
Yeah. I'd settle for second place in a lot of the business. Okay, station 11.
Mr. Buffett and Mr. Munger, thank you for taking my question. My name is Feroz Qayyum, and I'm from Mississauga in Canada, and now live in New York. My question is how to best emulate your success in building your circle of competence. Given the environment today in investing is a lot more competitive than when you started out, what would you do differently, if anything at all, when building your circle? Would you still build a very broad generalist framework? Would you build a much deeper but narrower focus, say, on industries, markets, or even a country? If so, which ones would interest you? Thank you.
Well, you're right. It is much more competitive now than when I started. When I started, I literally could take the Moody's Industrial Manual and the Moody's Banks and Financial Manual, and I could go through page by page, and at least run my eyes over every company and think about which ones I might think more about. I would just do a whole lot of reading. I'd try and learn as much as I could about as many businesses, and I would try to figure out which ones I really had some important knowledge and understanding that was probably different than overwhelmingly most of my competitors.
I would also try and figure out which ones I didn't understand, and I would focus on having as big a circle as I could have, and also focus on being as realistic as I could about where the perimeters of my circle of competence were. I knew when I met Lorimer Davidson in January of 1951, I could get insurance. What he said made so much sense to me in the three or four hours I spent with him on that Saturday. I dug into it and I could understand it. My mind worked well in that respect. I didn't think I could understand retailing. All I'd done was work for the same grocery store that Charlie had, and neither one of us learned that much about retailing, except it was harder work than we liked.
You've got to do the same thing, and you've got way more competition now. If you get to know even about a relatively small area more than other people do, and you don't feel a compulsion to act too often, you just wait till the odds are strongly in your favor, it's still a very interesting game. It's harder than it used to be. Charlie?
Well, I think the right strategy for the great mass of humanity is to specialize. Nobody wants to go to a doctor that's half proctologist and half dentist. The ordinary way to succeed is to narrowly specialize. Warren and I really didn't do that, and we didn't because we prefer the other type of activity. I don't think we can recommend it to other people.
Yeah, it was a little more treasure hunting in our day.
A little.
It was easy to spot the treasures.
We made it work, but it was kind of a lucky thing.
Yeah.
It's not the standard way to go.
The business, at least I best understood, actually was insurance. I had very little competition. I went to the insurance department in Harrisburg, Pennsylvania. I remember one time I drove there just to check on some Pennsylvania company, and this is when you couldn't get all this information on the internet. I went in and I asked about some company, and the guy said, "You're the first one that's ever asked about that company." I went over to the Standard & Poor's library on Houston Street, I guess they call it, and I would go up there and ask for all this obscure information, and there wasn't anybody sitting around there. They had a bunch of tables that you could sit and examine things through. There was less competition. If you know even one thing very well, it'll give you an edge at some point.
It's what Tom Watson Sr. said at IBM, "I'm no genius, but I'm smart in spots, and I stay around those spots." That's basically what Charlie and I try and do, I think that's probably what you can do. You'll find that those spots.
Yeah, we did it in several fields. That's hard.
Yeah. We got our head handed to us a few times, too.
Yeah. Okay, Andrew?
Thanks, Warren. Governance question from a shareholder. "Larry Fink of BlackRock has predicted that in the near future, all investors will be using ESG, environmental social governance metrics, to help determine the value of a company. I'm worried we don't score well on everything from climate to diversity to inclusion. How well do you think Berkshire measures up on those metrics, and are they valuable metrics?
I think in reality, we measure up well, but we don't participate in preparing reports for anybody that asks about it. We have this idea that even though all shareholders are equal, we prefer individual shareholders. We actually prefer people we know as co-owners, and we don't want to be preparing a lot of reports and asking 60 subsidiaries each to do something where they'll set up a team and then mail things to headquarters, and then we'll supply them to somebody who, if our stock goes up some, is probably going to sell it anyway. We want our managers to do the right things. We give them enormous latitude to do that, and I think that our batting average really is quite good. You saw in the movie, we talked about having 100% of the electricity we sell in Iowa come from essentially wind generation.
That doesn't mean that we get to do it 24 hours a day. We sell some and we buy it, but essentially we will be creating as much wind energy as all of our customers use in electricity. There's one other electric utility that's about our size, roughly our size, in Iowa, and they have practically no wind resources, and the wind blows where they exist, too. We will have that 100%. As a matter of fact, it's a moving target because we do so well, partly, we do so well on wind generation that a number of the high-tech companies want to locate in Iowa and get clean energy from us at very low prices, and therefore the moving target becomes our growth in customers in that area.
We're not going to spend the time of the people at Berkshire Hathaway Energy responding to questionnaires or trying to score better with somebody that is working on that. It's just we trust our managers, and I think the performance is at least decent, and we keep expenses and needless reporting down to a minimum at Berkshire. We do not yet mention this in the annual report. I can't imagine another company like it, but here we are with $500 billion of market capitalization. We do not have a consolidated P&L monthly. We don't need it. I can't imagine any other organization doing that, but we don't need it, and we're not going to tie up resources, people resources, doing things we don't need to do just because it's the sort of standard procedure in corporate America.
Corporate America, in general, they're very worried about whether somebody's going to upset their apple cart, and with activists and everything, so they want to be very sure that every shareholder is happy on issues like that. Fortunately, we don't have to worry about that, so we don't have to run up a lot of expenses doing things that don't actually let us run the business better. Charlie?
Well, I think in Berkshire, the environmental stuff is done one level down from us, and I think Greg Abel is just terrific at it, so I think we score very well. When it gets to so-called best corporate practices, I think the people who talk about them don't really know what the best practices are. They just know what they think are the best practices, and they determine that based on what will sell, not what will work. I like our way of doing things better than theirs, and I hope to God we never follow their best practices. Yeah.
I'd like to point out one thing on independent directors. I have been on 20 public company corporate boards, not counting any Berkshire or its subsidiaries. I've seen a lot of corporate boards operate. The independent directors, in many cases, are the least independent. If the income you receive as a corporate director, which typically may be around $250,000 a year now, if that's an important part of your income and you hope that some other corporation calls the CEO and says, "How's so-and-so as a director?" Your CEO says, "Oh, he's fine," and never raises any problems, and then you get on another board at $250,000, and that's an important part. How in the world is that independent? I really, just on observation, I can't recall particularly any independent director where their income from the board was important to them.
I can't recall them ever doing anything in board meetings or committee meetings that actually was counter to the interest. They put them on the comp committee. They're just not going to upset the apple cart. I'd probably behave the same way in the same position. If $250,000 a year is important to you, why in the hell would you behave in a way that's going to cause your CEO to say to the next CEO, "Say, this guy acts up a little bit too much. You really better get somebody else." It's the way it works, but they've got these ideas.
Yeah, I think it works a little worse than Warren's telling you.
Yeah, Charlie and I.
It's really awful.
It was awful.
Know that Warren and I are, we occupy the niche for pomposity very well ourselves. We don't need any more of it.
Charlie and I were on one board. Well, I was on one board, actually, a long time ago, where we owned a very significant percentage of the company, and the rest of the board was almost exclusively customers of the company, but not owners. They had absolutely token holdings. At one point, we were looking at something where a tax decision was being made in terms of distribution of some securities, and it was a lot of money was involved. One of the other directors said, "Well, let's just swallow the tax." Well, his swallowing amounted to about $15 or something. I said, "Let's parse this sentence out. Let's swallow the tax. That's let us swallow the tax. Who wants to swallow an equal amount to me?" You don't get invited to be on boards if you belch too often at the dinner table.
Well, at Blue Chip Stamps, we had a director who said, "I don't see why you guys have got to be so important just because you own all the shares.
Yeah. Charlie and I used to have to cool off after the Blue Chip Stamps meetings because we and Rick Guerin owned what percent probably collected-
Oh, yeah, 50%.
Yeah, 50%, they'd appointed all the It came-
They were all members of the Rotary Club.
It came out of a government settlement or something. It was not an ideal form of decision making, and they just had a different calculus in their mind that we didn't. I can understand it, but I'm not going to replicate it. Okay, Greg?
Warren and Charlie, U.S. electricity demand has flatlined during the past decade, but could potentially pick up over the next decade with three emerging sources of demand, electric vehicle charging, data centers, and cannabis cultivation, expected to account for more than 5% of total U.S. electricity demand. Utilities will have to work hard to benefit from this new demand, though, much of which is likely to accrue to states in the South Atlantic, Central West, and mountain regions, with the greatest benefit going to firms that invest in grid expansion, smart networks, reliability, and renewable energy.
While Berkshire Energy has been aggressive with its capital investments and already has some of the lowest electricity rates in the areas where it competes, it seems like the firm is winding down its annual spending at a time when more might actually be required, with annual spending expected to fall from around $6 billion on average annually to around $4 billion in 2021, with two-thirds of that spending being more maintenance driven than growth. Is there any one area where you feel Berkshire Energy might need to commit more capital over the next decade to ensure that it captures this future expected demand growth, much as it already has with wind power in western Iowa, which is now populated with a lot of data centers?
For territories where demand growth is expected to be the strongest, but where Berkshire does not have a presence, are there any avenues aside from acquisitions for the company to put capital to work?
I'm going to throw that over to Greg in just a second, but I will tell you that we have three owners of Berkshire Hathaway Energy. We are the 91% owner, and there are no three owners that are more interested in pouring money into sensible deals within the utility industry or are better situated in terms of the people we have to maximize any opportunities. We have never had a penny of dividends in whatever it is, close to 20 years of owning MidAmerican Energy. Other utility companies pay high dividends. They just don't have the capital appetite, essentially, that we do. It's just a question of finding sensible projects, and I would say that there's no group that is as smart about it, as motivated about it as our group. With that, I'll turn it over to Greg.
In short, we're about as good as you can get. You should worry about something else.
Yeah. Greg, could you stand up and talk about We really hope to spend a lot of money in energy.
Afternoon. Greg, you touched on it. A couple critical areas as we go forward is to look realistically in the 2021, 2022 time frame, because as you've touched on, we've got a great portfolio as we finish out 2019, 2020, and it's really been focused on building the renewable energy projects in Iowa, expanding the grid. Equally, we do have those opportunities in our other utilities. The footprint in Iowa, realistically, is getting pretty full. As we hit 100% renewables. Warren touched on it. Every time we get a new data center, that means we can build another 300 megawatts of renewables. We'll continue to do that. When you look at PacifiCorp, where we serve six states in the northwest, we've really just embarked on an expansion program there. The first part was to build significant transmission, so expand the grid, and then start to build renewables.
Just to give you some perspective of the regulation that exists in place, we started that project in 2008, and we're realistically building the first third of it. We do have the planning in place for the second phase and the third phase, and that's what you'll see come into place in 2021 and 2023. The reality is we'll continue to do that in NV Energy with really, again, the focus being on both grid expansion, so we can move the resources, and then supplementing it with renewables. It's exactly what you've touched on, and we haven't identified the specific projects yet, so we never put them in our capital forecast that we disclose to folks.
As they firm up and we know they will go forward, clearly you'll see some incremental capital, and that's capital we clearly earn on behalf of the Berkshire shareholders as we deploy it. Thank you.
Good. Good. We will put a lot of money into energy.
Yeah. We're really in marvelous shape in this department.
Incidentally, Walter Scott, he gets excited looking at all these projects, and goes out and visit them. He knows way more about the business, he's forgot more about it than I'll ever know. We've got a great partnership. We've got unlimited capital. We'll continue to have it, there's needs for huge capital in the industry. I think 10 years from now or 20 years from now, our record will be looked at and there'll be nothing like it in the energy business.
Well, Greg, is there anybody ahead of where we are in Iowa in terms of energy?
Charlie, there's realistically no one ahead of us in the U.S., let alone Iowa. When you look at the amount of energy we produce relative to what our customers consume, we really do lead the nation in Iowa.
Our rate's about half that of our main competitor.
About half.
In Iowa to boot.
Close.
Exactly. We're right in that range.
If this isn't good enough for you, we can't help you.
Incidentally, we sell electricity five miles from here. Greg, is that correct?
Yeah. Right across the river.
Yeah, right across the river. The wind blows the same and all that sort of thing. The public power district here, Nebraska, going back to George Norris, has always been a public power state. Capitalism doesn't exist in the electric utility field in Nebraska. They have had the advantage of selling tax-exempt bonds. We have to sell taxable bonds, which raises costs to some degree. They have a big surplus, which they don't have to pay any dividends on or anything else. Our rates are cheaper than theirs, basically. We're very proud of our utility operation. Carol?
Warren, you are a big advocate of index investing and of not trying to time the market. By your having Berkshire hold such a large amount of cash and T-bills, it seems to me you don't practice what you preach. I'm thinking that a good alternative would be for you to invest most of Berkshire's excess cash in a well-diversified index fund until you find an attractive acquisition or buy back stock. Had you done that over the past 15 years, all the time keeping the $20 billion cash cushion you want, I estimate that at the end of 2018, the company's $112 billion balance in cash equivalents, and short-term investments in T-bills would have instead been worth about $155 billion. The difference between the two figures is an opportunity cost equal to more than 12% of Berkshire's current book value.
What is your response to what I say? I forgot to say, the question is from Mike Lazar, who is with The Colony Group located in Boca Raton, Florida. What is your response?
It's a perfectly decent question. I wouldn't quarrel with the numbers. I would say that that is an alternative, for example, that my successor may wish to employ. Because on balance, I would rather own an index fund than carry Treasury bills. I would say that if we'd instituted that policy in 2007 or 2008, we might have been in a different position in terms of our ability to move late in 2008 or 2009. It has certain execution problems with hundreds of billions of dollars than it does if you were having a similar policy with a billion or 2 billion or something of the sort. It's a perfectly rational observation, and certainly looking back on 10 years of a bull market, it really jumps out at you.
I would argue that if you were working with smaller numbers, it would make a lot of sense, and if we're working with large numbers, it might well make sense in the future at Berkshire to operate that way. We committed $10 billion a week ago. There are conditions under which they're not remote, they're not likely in any given week or month or year, but there are conditions under which we could spend $100 billion very quickly. If we did, if those conditions existed, the capital very well deployed and much better than in an index fund. We're operating on the basis that we will get chances to deploy capital. They will come in clumps in all likelihood, and they will come when other people don't want to allocate capital. Charlie, what do you think about it?
I plead guilty to being a little more conservative with the cash than other people. I think that's all right. We could have put all the money into a lot of securities that would have done better than the S&P, with 20/20 hindsight. Remember, we had all that extra cash, all that period, if something had come along in the way of opportunities and so on. I don't think it's a sin to be a little strong on cash when you're as big a company as we are. We don't have to. I watched Harvard use the last ounce of their cash, including all their prepaid tuition from the parents, and plunge it into the market at exactly the wrong moment and make a lot of forward commitments to private equity, and they suffered two or three years of absolute agony. We don't want to be like Harvard.
Plus timber and a whole bunch of things.
What?
Plus timber and, I mean.
Yeah. We're not going to change now.
We do like having a lot of money to be able to operate very fast and very big, we know we won't get those opportunities frequently. Certainly, in the next 20 or 30 years, there will be two or three times when it will be raining gold and all you have to do is go outside. We don't know when they will happen, and we have a lot of money to commit. I would say that if you told me I had to either carry short-term Treasury bills or have index funds and just let that money be invested in America generally, I would take the index funds. We still have hopes.
The one thing you should very definitely understand about Berkshire is that we run the business in a way that we think is consistent with serving shareholders who have virtually all of their net worth in Berkshire. I happen to be in that position myself, I would do it that way under any circumstances. We have a lot of people who trust us, who really have disproportionate amounts of Berkshire compared to their net worth if you were to follow standard investment procedures. We want to make money for everybody, we want to make very sure that we don't lose permanently money for anybody that buys our stock somewhere around intrinsic business value to begin with.
We have an aversion to having 1 million-plus shareholders, maybe as many as 2 million, having a lot of them ever really lose money if they're willing to stay with us for a while. We know how people behave when the world generally is upset, they want to be with something. I think they want to be with something that they feel is like the Rock of Gibraltar, we have a real disposition toward that group. Jonathan.
Freddie Mac and Fannie Mae have new financing programs for manufactured home loans that I'm guessing could finally put purchasers of those homes who need mortgages on a somewhat more level playing field with those buying site-built homes. How positive an effect do you expect these new programs to have on manufactured home demand, and how might the programs affect Clayton's sizable profits from lending? Will Clayton sell more loans to Freddie and Fannie, and does that help profits even if spreads compress?
Well, it may not help profits, but it definitely is good if the Freddie and Fannie are authorized to do more lending against manufactured homes. Manufactured homes are a very reasonable way for people to get decent housing and have a home, and they are hard to finance to some degree. The local banks frequently do it, but the big lenders haven't wanted to do it. There is the possibility or the likelihood that Freddie and Fannie are going to expand. We already sell, I don't know whether it's $10 million a month of loans or something like that, to Freddie and Fannie. But it would be very good for America, in my view, if Freddie and Fannie did more in that area.
Obviously, we would sell some more homes, but we would lose financing, and we might come out behind, we might come out ahead, but I think it would be a good thing to do. Charlie?
Well, I think Freddie and Fannie will finance more and more homes, and I think they'll do more and more of it through Clayton. They'll do it because Clayton is very trustworthy and will do a very good job at making good housing at cheap prices for people. I think Clayton will get bigger and bigger and bigger as far ahead as you can see. The guy is young. He doesn't look like Warren and me. Not at all.
We've got a terrific managerial group at-
Yeah
Clayton, and we're expanding our site-built homes. We just closed on a builder a few days ago, and we now have nine different, I believe, site-built home operations, and we didn't have any a few years ago. We think extraordinarily well of Kevin Clayton and his group. Our directors met last year in Knoxville and viewed the Clayton operation for the second time. So we like the idea of Clayton expanding, and we like the idea of more people having very affordable housing. During the 2008 and '09 recession, our borrowers who had very low FICO scores on average, compared to typical home buyers, if they kept their jobs, they made the payments. They wanted that home, and a home was an enormously important item to them.
We had various programs that helped them as well, but our loan experience was far better than people anticipated under the stress that existed then. It was because a home really means something to people, and absent losing jobs or sickness, and like I say, we have some programs to help people. They make the payments, and they have very decent living, but they would get that even cheaper if Freddie and Fannie expanded their programs. Like I say, I hope they do. Okay, station two.
Hi, Warren. Hi, Charlie. My name is Carrie, and this is my daughter, Chloe. She's 11 weeks. It's her very first Berkshire meeting. We're from San Francisco, and we have a question on employment for you. As both a major employer and a producer of consumer goods, what do you make of the uncertain outlook for good full-time jobs with the rise of automation and temporary employment?
Well, if we'd asked that question 200 years ago, and somebody said with the outlook for development of farm machinery and tractors and combines and so on, meaning that 90% of the people on farms were going to lose their job, it would look terrible, wouldn't it? Our economy and our people, our system, has been remarkably ingenious in achieving whatever we have now, 160 million jobs, when throughout the period ever since 1776, we've been figuring out ways to get rid of jobs. That's what capitalism does, and it produces more and more goods per person. We never know exactly where they're going to come from. I don't know what you were, whatever occupation. Well, if you were in the passenger train business, that was going to change.
We find ways in this economy to employ more and more people, and we've got now more people employed than ever in the history of the country, even though company after company, and particularly in heavy industry and that sort of thing, has been trying to figure out naturally how to get more productive all the time, which means churning out the same number of goods with fewer people or churning out more goods with the same number. That is capitalism. I don't think you need to worry about American ingenuity running out. You look at people from all kinds of businesses, and they like to make money, but they really like to be inventive. They like to do things. This economy, it works. It will continue to work, and it will be very tough in certain industries, and there will be dislocations.
We won't be making as many horseshoes and that sort of thing when cars come along and all that. We do find ways now to employ whatever we're employing, 155, whatever it is, million people, and supporting a population of 330 million people when we started with four million people with 80% of the labor being employed on farms. This system works, and it will continue to work. I don't know what the next big thing will be. I do know there will be a next big thing. Charlie?
Well, we want to shift the scut work to the robots to the extent we can. That's what we've been doing, as Warren said, for 200 years. Nobody wants to go back to being a blacksmith or scooping along the street, picking up the horse manure or whatever and helping people used to do. We're glad to have that work eliminated. A lot of this worry about the future comes from leftists who worry terribly that the people at the bottom of the economic pyramid have had a little stretch when the people at the top got ahead faster. That happened by accident because we were in so much trouble that we had to flood the world with money and drive interest rates down to zero. Of course, that drove asset prices up and helped the rich. Nobody did that because they suddenly loved the rich.
It was just an accident, and it will soon pass. We want to have all this productivity improvement, and we shouldn't worry a little about the fact that one class or another is a little ahead at one stretch.
Charlie. Charlie and I, we worked in a grocery store, when people ordered a can of peas, we had ladders that we climbed up to reach the can of peas, then we placed it in a folding box, then we put it on a truck. If you looked at the amount of food actually transferred between the producer and the person who consumed it, and the number of people involved in the transaction, it was, I don't know whether it was one-third or one-quarter or one-fifth as efficient as the best way now to get food delivered to you.
The food was worse.
Yeah. My grandfather was distressed about the fact that this particular credit and delivery kind of store would be eliminated, it was eliminated, society progressed.
It's coming back.
Pardon?
It's coming back.
It's coming back, but more efficiently.
Yeah.
Yeah. Anyway, we've seen a little creative destruction, and frankly, we're glad that it freed us up to go into the investment business. It worked out better for us. Becky?
This question comes from Brian Gust of Grafton, Wisconsin. He's talking about regulators and politicians and says, "The Berkshire Hathaway investment portfolio holds several large financial institutions that are heavily regulated and are politically charged. Do you feel that in some cases, the regulators and/or politicians are running the big banks instead of the CEO and the board of directors?
Sure. Not too much.
No, insurance has been regulated. It happens to be regulated primarily on a state basis, but insurance has been regulated ever since we went into it. When I looked at GEICO, it was doing $7 million of business, and it will do $30-odd billion of business now. It's been regulated the whole time. Regulation can be a pain in the neck, generally, but on the other hand, we don't want a bunch of charlatans operating in the insurance business. Insurance actually lends itself to charlatans because you get handed money and you give the other guy a promise. I like the fact that there is regulation in the insurance business or the banking business. It doesn't mean it can't drive you crazy sometimes or anything of the sort, but those businesses should be regulated.
They're too important, any time you can take other people's money and they go home with a promise and you go home with the money, I don't mind a certain amount of regulation in those businesses. Charlie?
Yeah. If you're using the government's credit because you have deposit insurance, there's an implicit bargain you can't be too crazy with what you do with the money. That's perfectly reasonable, I absolutely believe that we should have a regulation system that involves supervision of risk-taking by banks. It got particularly bad in the investment banks at the peak of the real estate crisis, There's only one word for the behavior. It was disgusting, it was pretty much everybody. It's hard to think of anybody who stayed sane in that boom. They felt the other guys doing dumb things, "I've got to do it too, or I'll be left out." What a crazy way to behave. Sure, there's some intervention, but there probably has to be.
You want a Food and Drug Administration.
Yeah.
You'll be unhappy with how they do it if you're in the business and all that, I find any kind of regulation irritating, nevertheless, it's good for the system. Actually, a number of regulators, I would say that they've really been quite sensible about regulation. You don't feel that way when you're being told how to run your business. As Charlie says, you wouldn't want to be a bank that ran in an unregulated system where anybody could come in and do all kinds of things that would have consequences that drew you into the problems that they created themselves. We had the Wild West in banking long ago, and it produced a lot of problems in the 19th century. Jay?
For the past several years, in Berkshire's annual shareholder letter, there's been increasingly less detail provided on its operating businesses and financial performance. For example, the company is no longer providing details on the finance and financial product segment, or a balance sheet for the manufacturing service and retail segment, or a breakdown of float by unit in the insurance business. For a company as large and diversified as Berkshire, why are investors being provided less information than previously?
Well, I don't think we actually provide less information. We may present it in a somewhat different form from year to year. This year, for example, I started my letter, as usual in my mind, as saying, "Dear Doris and Bertie," my sisters, to tell them what I would tell anybody that had a very significant proportion of their net worth in Berkshire, who was intelligent, did not know all the lingo of our various businesses, that would read a lot of words because they did have a large investment, so if I explained anything and did a decent job, that they would understand what I was talking about. I tell them that in the language that I think will be understandable to a significant percentage of a million-plus people who have all kinds of different understanding of accounting and all that sort of thing.
I tell them information I would want to hear on the other side. If I was a competitor, and I wanted to know what one of our furniture store was earning or something of the sort, I might love it, but it doesn't really make any difference. If you're talking about a $500 billion organization, if you understand our insurance business, and in terms of giving you the picture, I think in three or four or five pages. Actually, we've got a whole bunch of stuff that's required by the SEC about loss reserve development. I think you can write a 300-page report that gives a whole lot less information than a 50-page report, and you lose people. I try to tell them, like I say, in my mind it's my sisters.
I try to tell them what I would tell them if we had a private business and they own a third of it each, and I own a third. Once a year, they like to get filled in, and they don't know what a combined ratio means because it's a dumb term that everybody uses, and it's important they call it a profit margin. They don't know what the operating ratio is in the railroad business, and it's an obsolete term. It'd be better to call that a profit margin. The lingo, we're not writing it for analysts. We're writing it for shareholders, and we're trying to tell them something so they can not only get the picture as to what we own now, but how we think about the operation, what we're trying to do over time.
We try to do the best job we can every year. I think if somebody is terribly interested in the details, they really are missing the whole picture because you could have known every detail of our textile business in 1965, and we could give you the information as how much we made from linings and how much we made from handkerchiefs, and you'd be in a different world. The important thing was how we looked at running money and what we would do about things over time, and you could have gotten very misled. If you'd read it in 1980 or 1985 and you looked for great detail on how See's Candies was doing and as they moved eastward. We'll tell you that overall that failed in terms of moving out of the territory.
Going into a whole lot of detail, that might be very interesting to an analyst, but really for a shareholder, they better make a decision as to who's running their money and how they're running it and what they've done over time and what they hope to do in the future and how to measure that. Again, we're writing it for the individual. Charlie?
I suppose I should be watching every tiny little business down to the last nickel, I don't, I don't want that much detail. I think our competitors would like it wouldn't do our shareholders any good. We'll probably just keep reporting the way we do.
You can see how flexible we are here. Station three.
Hello, Mr. Buffett and Mr. Munger. I'm Xinhan Xia from China International Capital Corporation Limited. Last week, China announced 12 new measures on further opening up the financial industry. All these measures will allow many more invested institutions to enter into Chinese financial market and to ensure the policies of foreign investment to be consistent with those of domestic investment. What do you think about these new measures? Do you believe the foreign financial institutions will have more pricing power over the Chinese stock markets in the future? Do you have any plans to set up a company in China? If so, what time? Thank you.
We've got one now. Dairy Queen is all over China and it's working fine. We didn't wait for new laws. We did it under the old laws. We're not that big net in China, right, Warren? We're not that big what? In China. No. We had something that could have happened that would have been quite sizable. With China, it's a big market, and we like big markets. We really can only deploy capital in a major way maybe in 15 or so countries, just because of the size. Generally, I think the climate is getting better. It really makes sense for the two countries to get along. Think of how stupid it would be if China and the United States didn't get along. Stupid on both sides, I might add. Yeah. We've done well in China. We haven't done enough, Andrew?
Warren, this is a question from a member of the House of Lords in Westminster-
who happens to be here today, who also is a shareholder of the company. This is Jitesh Gadhia, who says you've written, "We hope to invest significant sums across borders." What's your appetite to invest in the U.K. and Europe, and how will Brexit impact that? While we're at it, what's your advice for solving U.K.'s Brexit dilemma?
That's yours, Warren. Well, I will tell you this. I gave an interview to the "Financial Times," I don't do that very often, one of the considerations I have is that I would like to see Berkshire Hathaway better known in both the U.K. and Europe, the FT audience was an audience that I hoped would think of Berkshire more often in terms of when businesses are for sale. Our name is familiar, I think, pretty much around the world, in at least financial circles, there's no question, if anybody's going to sell a large business in the United States, they're going to think of Berkshire. They may decide for other reasons they'd rather do it differently, but they will think of Berkshire. I mean, obviously that is not as true around the world.
We've had some very good luck with the few people that have thought of Berkshire, such as ISCAR, actually Berkshire Hathaway Energy has one of its base holdings from way back was in the U.K. I was looking, in doing that interview, I was willing to spend three hours with the FT reporters in the hope that when they write the story, that somebody someplace thinks of Berkshire that wouldn't otherwise think of it. We'd love to put more money into the U.K. If I get a call tomorrow and somebody says, "I've got an X billion GBP company that I think might make sense for you to own and that I would like to actually have as part of Berkshire," I'll get on the plane and be over there. They'll have to tell me what their price ideas are and what it's earnings are.
I'm not interested in going over and talking about it and pricing it for them and then not making a deal. We like to make deals when we actually get into action. We're hoping for it. We're hoping for a deal in the U.K. and/or in Europe no matter how Brexit comes out. I'm not an Englishman, but I have a feeling it was a mistake to vote to leave, but it doesn't destroy my appetite in the least for making a very large acquisition in the U.K. Charlie? All my ancestors came from Northern Europe, so I'm very partial to the place. On the other hand, if you ask me how I would vote on Brexit if I lived in Britain, I don't even know. It just strikes me as a horrible problem, and I'm glad it's theirs and not mine.
If I called you tomorrow and said we had a deal in the U.K., I would go in in a minute. Yeah. Yeah. Those are my kind of people. I understand them. Yeah. Okay, Greg.
Warren, I just want to kind of maybe follow up on those past two questions because there is sort of a theme there. It seems to me that there's definitely more of a home country bias when we look at the acquisitions and investments that Berkshire has done historically. While there's definitely value in sticking with what you know and feel the most comfortable with, it seems like you've gone from a model that was originally focused on putting boots on the ground to find investment and acquisition opportunities to one where you're seemingly more content to have sellers or their representatives call you or drop by the office. Basically, more of a pull model than a push model.
There's nothing wrong with this, but I just wonder if the opportunity cost that comes with this type of model is that Berkshire misses out on a lot of overseas business where owners are unaware of your willingness to step up and buy them outright and allow them to run their companies under the Berkshire umbrella, and missing stocks investment opportunities because Berkshire is not necessarily familiar enough with the local market. At this point, do you think Berkshire would benefit from putting more boots on the ground in these overseas markets?
We actually, it must have been after we bought ISCAR, Eitan Wertheimer convinced me that we should get more exposure in Europe. He helped out in doing that. I went over, he arranged various meetings. We've had a lot of conduct. It isn't that they're not aware, and we do hear about some, but we do have the problem. They got to be sizable. If we do a billion-dollar acquisition and it makes $100 million or thereabout pre-tax, $80 million after tax. If we really know the business and we're sure we're not going to have a problem with the people running it, being motivated in the future and doing a similar job as to when they had their own money in and everything, it's nice to add $80 million to $25 billion, you can't afford to spend lots of time doing that.
We gain something by having Todd and Ted do some looking at things, screen them, and all that sort of thing. In the end, you want some family that's held their business in Europe or in the U.K. for 50 or 100 years that can make a deal and that wants to do it with Berkshire. If they're looking to get the most money, if they want to have an auction, we're not going to win, and we're not going to participate because we're not going to waste our time on it. If we form an acquisition crew, they'll acquire something. I've watched so many institutions and operations that if your job every day is to go to work and screen a bunch of things with the idea that you're the strategic department or acquisition department, you're going to want to do something.
I want to do something, but I don't want to do something unless Berkshire benefits by it and clearly benefits by it, and it generally is to the size.
Warren, our problem is not lack of boots on the ground. Our problem is the people on the ground are paying prices that we don't want to pay.
Yeah.
That's our problem.
We can-
That problem is not going to be cured by boots.
We can spend $100 billion in the next year. That is not a problem.
No.
Spending it intelligently is a huge problem.
Our competitors are buying with somebody else's money.
Yeah.
They get part of the upside and they ignore the downside.
They'll leverage it up.
It's hard to compete with people like that.
Yeah. They'll leverage it up. They'll make a lot of money if it fails, and they'll make even more money if it succeeds. That's not our equation.
No.
That isn't always that way, but it's certainly that way now.
It's not in the shareholders' interest that we get to be like everybody else.
Yeah. Okay. Station four.
Mr. Buffett and Mr. Munger, thank you so much for the wisdom you've shared with us over the years. This is Steven Wood from New York. Mr. Buffett, thank you very much for your feedback, your very generous feedback last August on the book that I'm writing. I just had one follow-up, if I may. In studying the most significant value creators of all time, it is very evident that the major compounding effect happened at the later stages of the careers, or in Vanderbilt's case, even beyond his own career. Your recent investments have suggested to me that you are designing Berkshire to being a steady compounding machine that should continue to create value for a very long time. Would you both please elaborate on this compounding machine and the machine's ability to continue to adapt to keep this value creation durable?
Is this legacy one of your sort of primary motivations when you wake up every day?
I would say it is the primary motivation, but it's been that for a very long time. No matter what was going right in my life, if things were going badly at Berkshire, I would not feel good. I don't need to be spending my time working on something that makes me feel bad about the results when we get through. It's something that's doable. The culture is stronger now than it was 10 years ago, and it was stronger then than 10 years previously. It moves slowly, but it goes in the right direction. When we get chances to deploy the capital, we've always tried to make any entity, whether it was the partnership originally or Berkshire now or Blue Chip Stamps when we owned it, or even Diversified Retailing, we wanted them all to be compounding, in effect, be compounding machines.
That's why people gave us capital. That's why we put our own capital in. If we failed at it, we really felt like we'd failed. It didn't make any difference how much money we made from fees or anything like that. We knew what our yardstick was. That will continue. I think Berkshire is better situated than it's ever been, except for the fact that size is a drag on performance. I probably wrote that 40 years. I wrote it actually when I closed the partnership to new money when we had $40 million in it. I just said that really the additional capital would drag down returns from a $40 million base. You can imagine how I feel with a $368 billion base of capital in Berkshire now. This culture is special. It can work.
It won't be the highest compounder by a long shot against many other businesses. I think it'll be one of the safest ways to make decent money over time. That will depend on the people that follow us. Charlie?
We came a long way from very small beginnings, the fact that it slows down a little when it becomes monstrous is not my idea of a huge tragedy. I think we will continue to do very well in the future. We had nothing like the energy operation 20 years ago, it's a powerhouse. We had nothing like Kevin's operation in home building 30 years ago, it will soon be the biggest. Even now it's better than anybody else in the country if you count both types of housing, isn't it? Houses? I think so. We have a lot going for us and I'm satisfied. I think it's going to continue reasonably.
It would ruin our life if we did it terribly. That's what we wake up thinking about in the morning. I wouldn't want to be in a business where I was going to let down other people, and I think you'd be crazy to do something like that, even if you weren't rich in 1988. We are motivated to have something that is regarded as something different than others. We're actually in a world where so much money is institutionalized. I like the idea of having something that's actually owned by individuals in very significant part, who basically trust us and don't worry about what the next quarter's earnings are going to be. I think it's different than much of capitalism, and I think it's something that Charlie and I feel good about. Additional, Charlie?
Yeah, absolutely.
Carol?
This question comes from Stefan Jibodh of Danville, California, and it raises a question I've certainly never heard before. "Mr. Buffett, in the past, you have recommended low-cost S&P, and again today, S&P 500 index funds as reliable long-term investment vehicles. These funds have certain inherent structural advantages, such as low costs and automatic reshuffling of their holding. Berkshire also has certain structural advantages, such as financial leverage from the float and diverse capital allocation opportunities. I think of Berkshire as being ahead in this game. For example, it seems to me that if Berkshire's overall operating business and investment performance were to exactly match the total return of the S&P index over a 10-year period, Berkshire's growth in intrinsic value would outperform the S&P 500. If you agree, could you estimate by how many percentage points?
Well, the answer is I won't estimate anything. If we just own stocks and we own the S&P, our performance would be significantly worse than the S&P because we would be incurring a corporate tax, which would now be 21% on capital gains, plus possibly some state income taxes. Effectively, our tax rate on dividends depends where they're held, but somewhere between 10.5 or 11 and 13%. Berkshire is at a corporate disadvantage simply by the way the tax law runs compared to owning an index fund, which has no tax at the corporate level, but just passes through to shareholders. I don't know whether we'll outperform the S&P 500 or not.
I know that we'll behave with our shareholders' money exactly as we would behave with our own money, we'll basically tie our fortunes in life to this business, and we will be very cognizant of doing anything that can destroy value in any significant way. If there were to be a very strong bull market from this point forward, we would probably underperform during that period. If the market five years from now or 10 years from now is at this level or below, it will probably over-perform. I don't quite understand the question in terms of what is it? The total return of the S&P over a 10-year period and Berkshire's growth and intrinsic value would outperform. I don't know whether that will happen or not. Charlie?
There'd be one big advantage for the shareholders that pay taxes, that is that the Berkshire shareholders, even if we just matched the S&P, we'd be way ahead after taxes. We all have a pretty decent role in life and a pretty good position. We shouldn't be too disappointed.
No. If we could have structured, going back to partnership days, we could have structured things so that actually over a period of time doing the same things we did would have come out somewhat more favorably for shareholders if we'd kept it to the original partnership group. The present form hasn't worked badly, although we have had periods when our corporate capital gains tax as opposed to the individual, I think it got up to 39% for a couple of years or one year, and certainly was 35% for a long time. Then on top of that, we had state income taxes in some cases, and they exceeded. Well, if you owned a pass-through fund, you did not have that level of possible double taxation. Now, if you hold your stock forever, you don't pay it.
If you actually sell your stock, you've had a double tax effect. We're not complaining in any way, shape, or form. This country has treated us incredibly well, we've added this huge tailwind, which I wrote about in the annual report, it wouldn't have happened in any other country. We've been very lucky that we've been operating in this country at this time. Charlie, anything?
No.
Jonathan?
In Nevada, several casinos have cut the cord with our NV Energy subsidiary and are seeking their electricity needs elsewhere, even though they had to pay huge exit fees. I have three questions about this phenomenon. 1, do you believe that these are rational choices, or were they made for non-economic reasons? 2, what can NV Energy do, if anything, to stem the tide of defections? 3, is this something that could happen in other states where you operate regulated utilities, or is the situation in Nevada somehow unique because of super-sized customers that have more leverage in the power market than smaller industrial customers in other states? I don't know whether that's a question for you or Greg, but I'd be happy to hear from either of you.
It's a question for Greg.
Thanks, Jonathan. Just for everybody, I think they heard the question from Jonathan, but we've owned the utility there for approximately five years. When we inherited the utility, we knew it had some fundamental issues around its customers. The relationships were really strained from day one because they'd had a history of continuing to increase rates, and they really weren't delivering renewable energy or meeting the customers' needs or expectations. We knew we had some challenges there. As we sit here today, we've had five customers leave our system. Those customers still use our distribution services. The only thing we do not provide them is the power. We have lost an opportunity to sell them power, and we've lost the associated margin on that. We are disappointed with that. We do recover substantial fees, as you noted.
How the commission looked at it was, "Well, you lose this customer, we'll give you effectively six years of profit on that, and by then you should have grown back into your normal load." Actually, it's a fair outcome. Our load is higher than it was relative to when those customers have left. We've grown through that, and it's consistent with their belief. The fundamental issue, and you've touched on it, why are they leaving? There are economic reasons for them leaving. The fundamental reason is in year seven, they no longer bear sort of the societal costs that are being imposed by the state. They don't have to bear the cost of renewable energy. They don't bear the cost of energy efficiency. They viewed it as sort of the time to exit out of that model.
We do have a variety of legislation that's going to levelize the playing field. We've had a number of customers that announced they were leaving now have entered into long-term agreements with NV Energy. I really do believe our team has the right model, which we're much more focused on delivering a great value proposition to our customers. It has to include price, but equally, we're building substantial renewable energy there now. Long term, our team will deliver a great proposition to them. NV Energy, it will prosper in the long term. We're going to be happy with it as a long-term investment. Thank you.
Greg, could you give the audience a rough approximation of what, say, in the 10 years or whatever it may be before we bought Nevada Power, what had happened with rates, what has happened with rates under us, and what has happened with coal generation under us?
Right. Yeah. That's great. Warren's really expanding on the focus we've brought to delivering something to the customer. If you'd looked at the prior 10 years, they pretty much had a rate strategy that every second year their rates would go up sort of by the cost of inflation. That pretty much materialized year after year. We came in immediately, just like we've done in Iowa. We've built all that renewable in Iowa, and we've never increased rates since the date we acquired it, 1999. Rates have been stable, and we don't ever see raising rates in Iowa till probably 2030 or 2031. Our team took a very similar approach in Nevada, which was to stabilize it. Rates are down probably 5%-7% since we've owned them, so we haven't had rate increases.
We've announced substantial rate increases again that'll take effect every two years. Just like we used to be able to have rate increases, we have a view of when we'll decrease their rates. The rates will go down again in two years.
20-
In two years. Then on top of that, there's been an approach to eliminate coal, as Warren touched on. Fundamentally when we acquired it, all their coal fleet was operating. We've retired a substantial portion of the coal fleet already, and by, I believe it's within a year, this 2023, we'll have eliminated 100% of their use of coal in that state, and it was a substantial portion of their portfolio in the past. Team's done a great job. Thank you.
Charlie, you have anything? No. Station 5.
Yes. Hi. My name is Aaron Lanni. I'm a portfolio manager at a company called Medici out of Montreal, Quebec. My question is actually for Todd and Ted, if possible. According to Warren, you lag slightly behind the S&P 500 since joining Berkshire. What recent changes, if any, have you implemented to increase your odds of beating the S&P in your respective stock portfolios over the next 10 years?
Yeah. I'm not sure whether Todd or Ted are here, I will tell you, then I'll make this the final report on it. On March 31st, actually one is modestly ahead, one is modestly behind, but they are extraordinary managers. It's been a tough period to beat the S&P, and like I say, one is now is ahead of the S&P over that period, one's modestly behind. They've also helped us in just all kinds of ways. What Todd has done in connection with the medical initiative we have with JP Morgan and Amazon, I don't know how many hours a week he's worked totally on that.
The things they've brought to me, what Ted did in terms of the Home Capital Group, where we have essentially, in a major way, well, we stabilized a financial institution that was under attack and experiencing runs in Canada, and he did the whole thing. I heard about that on a Monday, and on Wednesday, we put an offer before the company, and previously to that, they probably had dozens and dozens of people combing over them, and meanwhile they were struggling, and it was remarkable what he did, and I think it's appreciated in the Toronto area. We are enormously better off because the two are with us, and while we have that measurement, like I say, I'll just put it this way, they're doing better than I am anyway.
If you ask me to report on them all the time, I'll have to report on myself all the time, and that would be embarrassing compared to how they do. They're very, very smart. They've been smart with their own money over the years. They've been smart in running other people's money over the years, and they made us a lot of money, but they made it during a market where you'd have made a lot of money in the S&P as well. Charlie? No. Okay. Becky?
This question comes from Lidor Zloof, Yossi Zloof, and Dan Gorfinkel of Israel. They write to both Mr. Buffett and Mr. Munger, "Do you think that Amex's share of mind is enough to win the credit cards race? How do you see Amex's competitive position now compared to the past, and who is the most threatening competitor now compared to the past?
Yeah, everybody's a competitor, including now Apple, that has just instituted a card, I guess, in conjunction with Goldman Sachs. Everybody. There will always be, in my view, many competitors in the business. Banks can't afford to leave the field. It's a growing field. They build up receivables on it. I wouldn't think of the credit card business as a one-model business any more than I would think of the car business as essentially being one model. Ferrari is going to make a lot of money, but they're going to have just a portion of the market. Well, Amex is growing around the world with individuals. It's growing around the world with small businesses. You just saw the contract they made with Delta, which is probably the ideal partner that runs, what, for eight or nine, whatever it may be, nine or 10 years, actually.
The billings go up per capita. The coverage spreads. They're going to have loads of competition, and they always will. That's something JP Morgan took on the Platinum Card and was a competitor, and the Platinum Card had highest renewal rates that they've had, and they increased the price, I think from $450-$550 during a competitive battle. Retention improved and new business improved, and 68% or so of the new business was millennials. It is not an identical product with anything else. As a premium card, it has a clientele which is large. It may be X% of the market, it may be three-quarters of X%, or whatever it may be. It isn't for the person that likes to have five cards and look every day at which one provides the most rewards that day, or in what gas stations or something of the sort.
It's got a very large constituency that has a renewal rate, a usage rate that's the envy of everybody else in the industry. I like our American Express position very well. Charlie? Charlie? Anything out of American Express?
No. I think we own the world as long as the technology stays the same.
It's an interesting thing.
I have no opinion about technology.
This year, the technology is not the whole thing, fortunately. If you look at credit card usage, there are a lot of different things motivating different people to use different various types of payment systems, and there's a lot of them that are growing. There's some of them that are marginal, and American Express is an extraordinary operation. I think this year, our share of the earnings, well, by next year, our share of the earnings of American Express will be equal to the cost of our position. We'll be earning 100% on what that position cost us, and I think it will grow. I think the number of shares will go down, and our interest will go up without us laying out a dime. It's.
As you say, we own the world if it doesn't change.
Well, even if it changes some. The world has changed a lot. American Express was formed in 1850.
No, I'm talking about WeChat.
You can talk about all kinds of competitors.
Yeah
The American Express actually was an express company formed in 1850, like you say, by Wells and Fargo of all people. For a while, they carried these big trunks around of valuables, then the railroads came along, that wasn't going to work very well anymore, they went to traveler's checks. It's a very interesting thing. In 1950, when I was living at the 116th and Broadway, they were down at 65 Broadway, and they were the most important name in travel. They were synonymous with the integrity of their traveler's checks. The whole company, in a record year for travel, earned $3 million. $3 million, what a bond trader earns now in my lifetime. Their hand going in was the traveler's check, which has more or less disappeared.
The American Express, the power of that brand, intelligently used going into the credit card business, where they entered much later than the Diners Club, later than Carte Blanche, they came to dominate the luxury end of the credit card business. It's a fantastic story, and I'm glad we own 18% of it. Okay. Jay?
I'm actually going to ask something about Occidental Petroleum. I'm surprised it hasn't been asked yet. Berkshire is committed to providing $10 billion of financing in the form of an 8% preferred share and attached warrants for Occidental's proposed acquisition of Anadarko. This is the first time Berkshire has committed to such a large preferred share investment since the acquisition of Heinz in 2013. What did you find attractive about the Occidental deal in terms of its business, and should we expect other large financing transactions in the future as a way for Berkshire to deploy a portion of its excess cash?
I don't think the Occidental transaction will be the last one we do. There may be one in a month, there may be one three or four years from now. It won't be identical. I hope it's larger. The point is we're very likely to get the call because we can do something that really no institution can do it. They've got committees that have to pass on it, and they want to have so-called MAC clauses, material adverse changes. They want to do this and that. If somebody wants a lot of certain money for a deal, they've seen that I can get a call on Friday afternoon, and they can make a date with me on Saturday, and on Sunday it's done.
They absolutely know that they have $10 billion, and we're not going to tell them how to structure their transaction or do anything else. They've got it. There will be times in the future when something not identical but similar comes along, and we're the one to call, and I hope it's larger than $10 billion. It could be in the next five years, we will do a lot of money, additional money, and things similar to this, not identical, and it could be that nothing will happen. But if there are any $10 billion or $20 billion or maybe even $50 billion two-day transactions that are in the world, believe me, they'll think of Berkshire Hathaway for sure in terms of what number to call. Charlie?
Well, I like it.
I called Charlie as soon as we made it. I called Ron Olson first because I was worried that he might have a conflict, and in about 10 minutes, he had. I told him it had to be done by Monday night, and Cravath was being told the same thing by Occidental, and it was very light on Monday night, but all the papers were put in order and Munger, Tolles & Olson was in Los Angeles, and Cravath was in New York, and I was in Omaha, and I didn't do that much. Marc Hamburg did a lot of the work. He was at work on Sunday on other things when I went down to meet with the Occidental people. It was the product of people who understood us, understood how we operate, and both with an incentive to put all the manpower necessary on the job.
Like I say, I think their board of directors met at 10:00 on Monday night to approve it, but they could announce it Tuesday morning, and that's what they wanted to do, and with Berkshire, they could do it. Okay, station six.
Good afternoon. My name is Tony McCall, and I'm from Montgomery, Alabama, and my question is about your discipline risk evaluation approach and how you balance that with the fact that perseverance and determination and grit are often necessary for success.
Well, I certainly like determination and grit with the people we work for, but we don't have any formula that evaluates risk. We certainly make our own calculation of risk versus reward in every transaction we do. That's true whether it's marketable securities. That's true whether it's private investments. That's true whether it's making an investment in a business. Sometimes we're wrong, and we're going to be wrong sometimes in the future. You can't make a lot of decisions in this business without being wrong. But we don't think the procedure or the results would be changed favorably by having lots of committees and lots of spreadsheets and that sort of thing. If I had a group under me, they would try and figure out what I wanted the answer to be, and they would tell me what I wanted to hear.
I've watched that approach at 20 public companies. What the CEO wants to do, they may spend a lot of time getting there, but the investment banker gets there, and the internal committees get there, or the internal operations get there. The calculations are the same as the insurance business with Ajit. Ajit gets calls on insurance deals, and you have to think through that deal. The main thing is, are you reasonably sure that you know what you're doing? It gets past that hurdle, then we go on to figure out the math of gain versus loss and how much loss we can afford to take in anything. We're willing to take what sound like large losses if we think that the rewards are more likely and proportional. Charlie?
I got nothing.
Yeah. It's very disappointing. We have no formulas around Berkshire. We don't sit down and write a bunch, have people work till midnight calculating things and putting spreadsheets together. If the hurdle rate is 15% or something, having them all come out at 15.1 or 15.2 because that's what's going to happen. You're going to get the numbers you want to hear to an extreme degree. The proposals we receive from the investment world, I've got to tell you about one because it illustrates. Go on. We received a proposition the other day, and I'll disguise the numbers a little bit so nobody can pick it out. It was a private company, and we'll say it was earning $100 million a year.
The seller of the business and the investment banker suggested that we should look at the earnings as being $110 million a year because, as a private company, they had to pay their top people in cash, which was expensed. We could pay them in stock options and things like that, which weren't expensed or were explained as not really counting, and therefore, we could report $110 million if we gave away something we didn't want to give away. Essentially, by sort of lying about our accounting, we could add $10 million in earning, and they wanted us to pay them because they couldn't do it, and we could do it. At this point, they're losing me, of course, totally. It's just astounding the accounting games that are played. All the adjustments are why the place will be earning more than before.
We also had one that came in from a private equity firm, by a mistake, we got the email that was sent to the manager from the email from the private equity firms that owned it to the manager in terms of making projections for it. They told them to add 15% because they say Buffett will discount it by 15% or 20% anyway. Just add 15% to offset his conservatism. It's not an elegant business, as Charlie will tell you. Do you have any better stories, Charlie?
It's bad enough.
Okay, Andrew.
It's really very bad enough.
Thank you, Warren. I think this is.
Why do we want our leading citizens lying and cheating?
Andrew?
I believe this is my final question. Admittedly, it's a two-parter, but it's the same topic. Elon Musk says that Tesla will start to offer insurance for its cars and can price it better than a typical insurance company because of the data it collects from all the vehicles on the road. You've talked about the threat of autonomous vehicles on the insurance business. What about the threat to GEICO of automobile companies themselves getting into the insurance business? On a very similar topic, Tesla recently announced that they're shifting to an online-only sales model. Several traditional auto dealerships are also reducing their property holdings as car buyers increasingly use smartphones and the internet to shop for cars. What does this portend for Berkshire Hathaway Automotive?
Yeah. Actually, General Motors had a company for a long time called Motors Insurance Company. Various companies have tried it. I would say that the success of the auto companies getting in the insurance business are probably about as likely as the success of the insurance companies getting into the auto business. I worry much more about Progressive than all of the auto company possibilities that I could see in terms of getting insurance business. It's not an easy business at all. I would bet against any company in the auto business being any kind of an unusual success. The idea of using telematics in terms of studying people's drivers habits, that's spreading quite widely. It is important to have data on how people drive, how hard they brake, how much they swerve, all kinds of things.
I don't doubt the value of the data. I don't think that the auto companies will have any advantage to that. I don't think they'll make money in the insurance business. Using the internet to shop for cars is like using the internet for shopping for everything. It's another competitor. There's no question that people will look for better ways. The gross margin on new cars is about 6% or thereabout. There's not lots of room in the game. That will be a method. That will sell some cars. It's another competitor. I don't think it destroys the auto dealer who takes good care of their customers and is there to service the customer. It's not an overwhelming threat. It's obviously something that's going to be around. Will sell some cars. Charlie?
Again, nothing.
Okay. Greg?
Warren, a lot of Berkshire's success over the years has come from the fact that you and Charlie have had the luxury of being patient, waiting for the right opportunities to come along to put excess capital to work, even if it has led to a build-up of large amounts of cash on the balance sheet. This has historically worked out well for shareholders as you and Charlie have been able to take full advantage of the disruptions in equity and credit markets or special situations like we saw with the Oxy deal to negotiate deals on terms that ultimately benefit Berkshire shareholders. That said, there is an opportunity cost attached to your decision to hold onto so much cash, one that investors have been willing to bear, primarily by foregoing a return of excess capital as dividends and share repurchases, as well as seeing lower returns on cash holdings.
As we look forward, how certain can we be that this will still be the case once you're no longer running the show, especially if Berkshire's returns are expected to be lower over time? Is it not more likely that the next managers of Berkshire will have to manage the eventual migration of Berkshire from an acquisition and investment platform to a returning capital to shareholders vehicle?
That's certainly a possibility. It's a possibility under me. It's a possibility under the successor. It's a question of can you invest truly large sums reasonably well? You can't do it as well as you can do small sums. There's no question about that. We will have to see how that works out over many years because certain years, lots of opportunities, huge opportunities present themselves, and other years are totally dry holes. That's not a judgment you can make in a one-year period or a three-year period. It's certainly a judgment you can make over time, though. Personally, my estate will have basically nothing but Berkshire in it for some time as it gets dispersed to philanthropies.
I have a section in there which says to the trustees, in effect, who manage it, I have a section in there that says, "Ignore the"You're exempt, from my standpoint, from the law that trustees normally should diversify and do all of that sort of thing. I want the entire amount that they have to be kept in Berkshire as they distribute it over time to the philanthropies, and I don't worry at all about the fact. I would like to have a very large sum go to the philanthropies, and I don't worry at all about the fact that it essentially will all be in Berkshire. I'm willing to make that decision while I'm alive, which will continue for some years after I die.
I have a lot of confidence in the ability of the Berkshire culture to endure, and that we have the right people to make sure that that happens. I'm betting my entire net worth on that, and that doesn't give me pause at all. I rewrite my will every few years, and I write it the same way in respect to the Berkshire holdings. Charlie?
I don't own any indexes, and I have always been willing to own just two or three stocks. I have not minded that everybody who teaches finance in law school and business school teaches that what I'm doing is wrong. It isn't wrong. It's worked beautifully. I don't think you need a portfolio of 50 stocks if you know what you're doing. I hope my heirs will just sit.
My heirs hope that I'll change my will. Okay, station 7.
Hi, good afternoon, Mr. Buffett and Mr. Munger. My name is Bill He, and I'm from Vancouver, Canada. You two make up an iconic duo, and growing up, I found your investment strategies very admirable. My question is, how do you deal with conflicts when they arise between the two of you?
Are you applying personal conflicts in terms of doing something ourselves versus having Berkshire do it, or?
Oh, between the two of you
Charlie and I literally, and people find this hard to believe, but in 60 years, we've never had an argument. We have disagreed about things, and we'll probably keep occasionally disagreeing about this or that. If you define an argument as something where emotion starts entering into it or anger or anything of the sort, it just doesn't happen. I think that Charlie is smarter than I am, but I also think that there are certain things where I've spent more time on them than he has. Sometimes we both think we're right, and generally, I get my way because Charlie is willing to do it that way, and he's never second-guessed me when things have been wrong, and I wouldn't dream of second-guessing him if he were doing something that was wrong, so it turned out to be wrong. We'll never have a conflict, basically. Charlie?
Well, the issue isn't how we get along. The issue is how is it going to work when we're gone? The answer is fine. It's going to work fine.
We're lucky that I ran into him when I was, what, 28 years old, and I both worked in the same grocery store, and he grew up less than a block away from where I now live and everything, but I did not know who Charlie Munger was until I was 28. Clearly, we're in sync in how we see the world, and we're in sync on business decisions, basically. Charlie would do fewer things than I would, but that's because I'm spending my time on this while he's designing dormitories or something. We both keep busy in our own ways, and we have a lot of fun dividing the labor like we do. Having the right partners in life, particularly the right spouse, but particularly having the right partners in life is enormously important.
It's more fun with a partner, both in personal life and in business life, and you probably get more accomplished, too, but you just have a better time. Would not be any fun to do work in a little room and make a ton of money trading around securities but never working with another human being. I recommend finding. Well, Charlie gave some advice in the movie.
The best person who will have you or something like that.
Sort of a limited objective.
It's not hard to be happy if you're a collector and don't run out of money. Collecting is intrinsically fun. Just think, how many people who you know in your whole life who are collectors who didn't run out of money, who weren't happy collecting? We've been collecting all our lives.
Yeah.
It's a very interesting thing. There's always a new rock to be turned over, and it's interesting.
Yeah, certainly, we've collected friends that make our lives better and that we have a good time with. It's very important who you select as your heroes or your friends, and I've been lucky in this. It was only because of a doctor named Eddie Davis and his wife that Charlie and I even met. If you keep doing enough things, some will work out very lucky. The best ones are ones that involve lifelong involvement with other people. We've got some of our directors, a number of our directors that have had similar impacts on me. I recommend that you look for somebody better than you are and then try to be like they are.
It's funny, we've lost people along the way, and when I lost Warren's secretary, I thought, "My God, she was so wonderful, Gladys. We'll never get another one." Becky is better. Then we had Verne McKenzie, who was a wonderful Chief Financial Officer. He's gone, and the current incumbent is better. We've been very lucky, and maybe the shareholders will be lucky a few more times.
Okay, station eight.
Hi, Warren. Hi, Charlie. My name is Jacob. I'm a shareholder from China, and also a proud graduate of Columbia Business School. Thanks for having us here. My question is, our world is changing at a faster pace today versus 40 years ago, and even more so going forward. Under this context, for each of us individually, shall we expand our circle of competence continuously over time, or shall we stick with the existing circle, but risk having a shrinking investment universe? Thank you.
Well, obviously, under any conditions, you should expand your circle of competence.
If you can.
If you can. Yeah, I've expanded mine a little bit over time.
If you can't, you ought to be pretty cautious.
Yeah. You can't force it. If you told me that I had to become an expert on physics or-
Dance may be the lead in the ballet, Warren. That would be a sight.
Yeah, well. That's one I hadn't even-
Particularly now.
That's one you may be thinking about, that hadn't even occurred to me. It's ridiculous.
Yeah.
That doesn't mean you can't expand it at all. I did learn about some things as I've gone along in a few businesses. In some cases, I've learned that I'm incompetent, which is actually a plus, and you've discarded that one. The world is going to change. It's going to keep changing. It's changing every day, and that makes it interesting. As it changes, certainly within what you think is your present existing circle, you should be the master of figuring that one out, or it really isn't your circle of competence. If you get a chance to expand it somewhat as you go along, I've learned some about the energy business from Oliver and Greg as we worked together, but I'm not close to their level of competence on it. I do know more than I used to know.
You get a chance to expand it a bit. Usually, I would think normally your core competence is probably something that sort of fits the way the mind is worked. Some people have what I call a money mind, and they will work well in certain types of money situations. It isn't so much a question of IQ. The mind is a very strange thing, and people have specialties, whether in chess or bridge, I see it in different people that can do impossible, what seem to me, impossible things, and they're really kind of, as Charlie would say, stupid in other areas. Just keep working on it. Don't think you have to increase it, and therefore start bending the rules. Anything further, Charlie?
No.
Station 9. Just about. Yeah, we got time for a couple more.
My name is John Durso, and I'm from New York. Mr. Buffett, you've said that you could return 50% per annum if you were managing a $1 million portfolio. What type of strategy would you use? Would you invest in cigar butts, i.e. average businesses at very cheap prices, or would it be some type of arbitrage strategy? Thank you.
It might well be the arbitrage strategy, but in a very different, perhaps, way than customary arbitrage is thought of. One way or another, I can assure you, if Charlie was working with $1 million or I was working with $1 million, we would find a way to make that with essentially no risk, not using a lot of leverage or anything of the sort. You change the $1 million to $100 million, and that 50 goes down like a rock. There are little fringe inefficiencies that people don't spot, and you do get opportunities occasionally to do, but they don't really have any applicability to Berkshire. Charlie?
Well, I agree totally. It's just you used to say that large amounts of money, they develop their own anchors.
Yeah.
It gets harder and harder. I've just seen genius after genius with a great record, pretty soon they got $30 billion and have two floors of young men, away goes the good record. It's just the way it works.
Well, when Charlie-
It's harder as the money goes up
When Charlie was a lawyer, initially, you were developing a couple of real estate projects. If you really want to make $1 million or 50% on $1 million, and you're willing to work at it, that's doable, but it just has no applicability to managing huge sums. I wish it did, but it doesn't. Yeah, Li Lu using nothing but the float on his student loans had $1 million practically shortly after he graduated as a total scholarship student. He found just a few things to do.
Yeah.
Did them. Okay, station 10.
Hello, Warren, Charlie. I'm Luis Cobo from Panama. I'm a proud Berkshire Hathaway shareholder since 10 years ago. I've been looking at See's Candies, and I am a pretty good fan of them, and I see Charlie's as well through our meeting. Even with all our consumption, and the company has given us generous profits over the past decades, why do you think the company has not grown to the scale of Mars or Hershey's? What do you think we could do to make this company grow and become a bigger part of our company, being such an amazing product?
Well, we've probably had a dozen or so ideas over the years. We used to really focus on it because it was a much more sizable part of our business. In fact, it was practically our only business aside from insurance. Like I say, we've had 10 or 12 ideas. Some of them we've tried more than once. As we've had a new manager, they've tried them, and the truth is none of them really work. The business is extraordinarily good in a very small niche. Boxed chocolates are something that everybody likes to receive or maybe give as a gift, both sides of it. Relatively few of the people go out and buy to consume themselves. If I leave a box of chocolates open at the office, we've only got 25 people, but it's gone almost immediately.
If I take it as a gift to somebody, they're happy to get it. If you leave the box open at a dinner party, again, they're all gone. Those same people that so readily grab it when it's right there in front of them, do not walk out to a candy store very often and buy it just to eat themselves. It's very much a gift product. It does not grow worldwide. Very interesting thing. At least last time I checked, people in the West prefer milk chocolate, people in the East prefer dark chocolate. People in the West like big chunky pieces, people in the East will take miniatures. We've tried to move it geographically many times because it would be so wonderful when it works, it works wonderfully, but it doesn't travel that well.
If we open a store in the East, we get enormous traffic for a while. Everybody says, "We've been waiting for you to come." We end up with a store that does X GBP per year when we need one and a half X in the same square footage to make terrific returns. We've tried everything because the math is so good when it works. Overall, we have a business that doesn't grow. Chocolate consumption generally doesn't grow that much. Obvious
Yeah-
Yeah, go ahead, Charlie.
Yeah, well, we fail in turning our little candy company into Mars or Hershey's for the same reason that you fail to get the Nobel Prize in physics and achieve immortality. It's too tough for us.
We put $25 million into it, and it's given us over $2 billion of pre-tax income, well over $2 billion, and we've used it to buy other businesses. If we were the typical company and had bought that business and tried desperately to use all the retained earnings within the candy business, I think we'd have fallen on our face. I think it just illustrates that all these formulas you learn are that having a strategic plan to use all the capital or something. Some businesses work in a fairly limited area, others really play out over. Dr. Pepper has a, I don't know what the percentage is now, but it might be a 10% or 12% market share or something like that in Dallas, or maybe it's eight. You go to Detroit or Boston, and it's less than 1%.
I'm not sure about the numbers currently. You'd think in a mobile society with Dr. Pepper having been around since the time Coke was founded in 1886, it's amazing how certain things travel, certain things don't travel. The candy bars you mentioned, Hershey, I mean, Cadbury doesn't do that well here, and Hershey doesn't necessarily do that well in the U.K., and here we are. We all look alike, but somehow we eat different candy bars. It's very interesting to observe. The idea that you have some formula for businesses that provide that each one should pursue the course they're on because they made it in X, they should try to find other ways to make it in X. We're quite willing to find it in A, B, C, D, E, or F, which is like the money is fungible.
I think actually it's worked very much to our advantage to have that philosophy. Anything further, Charlie?
I once told a very great man at dinner after he'd written a very great book, I said, "You know, you're never going to write another great book like that." He was deeply offended. I've read his four subsequent books, and I'm totally right. To write one great book is a lot to do in one lifetime. The people aren't holding back on you when they don't do more. It's hard.
Yeah. You ought to make the most of the one first one you got.
Yes.
Yeah, you're lucky.
Yes.
We were very fortunate. I would have blown the chance to buy See's Candies. Charlie said don't be so cheap, basically, we still got it at a pretty good price. We learned a lot.
It's amazing how much we've learned over the years.
Yeah.
If we hadn't, the record would be so much worse.
Yeah.
At any given time, what we already knew was not going to be enough to take us to the next step. That's what makes it difficult. Think of all the people you know that have tried to take one extra step and have fallen off a cliff.
Well, on that happy note, we will conclude the meeting. Thank you. Thank you. Thank you. Thank you. Thank you, but save some of it for next year. We may need it then. Yeah, just give us a carry forward on the rest of it. Thank you. We'll come back at 3:45. We will conduct the business of the meeting. We have nothing on the proxy to vote on, but we will be back here in 15 minutes. If you enjoy a process, you can stick around and watch us reelect our board. Thank you. Thanks for coming. The meeting will now come to order. I'm Warren Buffett, Chairman of the board of directors of the company, and I welcome you to this 2019 annual meeting of shareholders. This morning, I introduced the Berkshire Hathaway directors that are present.
Also with us today are partners in the firm of Deloitte & Touche, our auditors. Jennifer Toland is assistant secretary of Berkshire Hathaway, and she will make a written record of the proceeding. Becky Amick has been appointed inspector of elections at this meeting, and she will certify to the count of votes cast in the election for directors and the motions to be voted upon at this meeting. The named proxy holders for this meeting are Walter Scott and Marc Hamburg. Does the assistant secretary have a report of the number of Berkshire shares outstanding, entitled to vote, and represented at the meeting? Jennifer?
Yes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 6th, 2019, the record date for this meeting, there were 724,765 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 1,371,697,551 shares of Class B Berkshire Hathaway common stock outstanding, with each vote entitled to 1/10,000 of one vote on motions considered at the meeting. Of that number, 503,181 Class A shares and 839,707,642 Class B shares are represented at this meeting by proxies returned through Thursday evening, May 2nd.
Thank you. That number represents a quorum, we will therefore directly proceed with the meeting. First order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott, who will place a motion before the meeting.
I move that the reading of the minutes of the last meeting of shareholders be dispensed with and the minutes be approved.
Do I hear a second?
I second the motion.
The motion has been moved and seconded. We will vote on the motion by voice vote. All those in favor say aye.
Aye.
Opposed? The motion's carried. The next item of business is to elect directors. If a shareholder is present and who did not send in a proxy or wishes to withdraw a proxy previously sent in, you may vote in person for the election of directors and other matters to be considered in this meeting. Please identify yourself to one of the meeting officials in the aisle so that you can receive a ballot. I recognize Mr. Walter Scott to place a motion before the meeting with respect to election of directors.
I move that Warren Buffett, Charles Munger, Greg Abel, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Ajit Jain, Thomas Murphy, Ronald Olson, Walter Scott, and Meryl Witmer be elected as directors.
Is there a second?
I second the motion.
It's been moved and seconded that Warren Buffett, Charlie Munger, Greg Abel, Howard Buffett, Steve Burke, Susan Decker, Bill Gates, David Gottesman, Charlotte Guyman, Ajit Jain, Tom Murphy, Ron Olson, Walter Scott, and Meryl Witmer be elected as directors. Are there any other nominations or any discussion? The nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark the ballot on the election of directors and deliver that ballot to one of the meeting officials in the aisles. Ms. Amick, when you're ready, you may give your report.
My report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast not less than 543,703 votes for each nominee. That number exceeds a majority of the number of the total votes of all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.
Thank you, Ms. Amick. Warren Buffett, Charlie Munger, Greg Abel, Howard Buffett, Steve Burke, Susan Decker, Bill Gates, David Gottesman, Charlotte Guyman, Ajit Jain, Tom Murphy, Ron Olson, Walter Scott, and Meryl Witmer have been elected as directors. We now have a motion from Walter Scott.
I move the meeting be adjourned.
Is there a second?
I second the motion.
Motion to adjourn has been made and seconded. We will vote by voice. Is there any discussion? If not, all in favor say aye.
Aye.
All opposed say no. This meeting is adjourned. Thank you all. I hope I see you next year.