1998 Berkshire Hathaway Annual Meeting (Full Version)

[Applause] morning [Applause]

good morning i'm warren buffett chairman of berkshire and this is my partner this hyperactivity fellow over here is charlie munger and

we'll do this as we've done in the past following the saddam hussein the school of management we're going to go through the business meeting in a in a hurry and then we're going to do questions and we'll do those

until 3 30 with a break at noon one will take off uh for 30 minutes or so while you can grab lunch and those of you there's

we're operating in an overflow room as well so those of you who are in the overflow room now can join the main for after noon break because we'll have

plenty of room then we'll we'll go until 3 30.

we'll try to get all the questions we can we've got 11 zones uh 10 of them in this room and we'll just make our way around them i've got a little map here which i'll

get oriented on here in a second and uh let's see and i think we'll get through the business meeting now the incidentally i don't see that movie

before it's shown but that was one of our directors singing in the at that final session there

we keep costs down at berkshire okay 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 1998 annual meeting

of shareholders i will first introduce the berkshire hathaway directors that are present in addition to myself so we have uh

and i can't see very well with the lights here but if if you'll stand as i as i name you susan t buffett the vocalist howard g buffett the non-vocalist

malcolm g chase charlie you've met and ron olson and walter scott and walter scott also with us today are partners in the firm of deloitte and tushar auditors

they are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of berkshire mr forrest cutter secretary berkshire he will make a written record of the proceedings

this becky hammock has been appointed inspector of elections at this meeting she will certify to the count of votes cast in the election for directors the name proxy holders for this meeting are walter scott jr and mark d hamburg

proxy cards have been returned through last friday representing 1 million 39 276 class a berkshire shares and one million eighty thousand five hundred and nine class thousand two hundred and seventy six class a

berkshire shares and one million eighty thousand five hundred and nine classes the number of shares represents a quorum meeting we will conduct the business the meeting and then adjourn the formal meeting after that we will entertain questions

that you might have first order of business will be a reading of the minutes of the last meeting of shareholders i recognize mr walter scott jr who will place a motion before the meeting i moved the minutes of the reading the minutes the last

stockholders meeting be dispensed with do i hear a second a lot of seconds the motion has been moved in second are there any comments or questions we will vote on this motion motion by

voice vote all those in favor say aye opposed motions carried does the secretary have a report of the number of berkshire shares outstanding entitled to vote and represented at the meeting yes i do

as indicated in the proxy statement that accompanied the notice of this meeting that was sent by first class mail to all shareholders of record on march 6 1998 the record date for this meeting there

were 1 million 199 680 shares of class a berkshire hathaway common stock outstanding with each share entitled to one vote on motions considered at this meeting and one

million two hundred and forty five thousand eighty one shares of class b berkshire hathaway common stock outstanding with each share entitled to one two hundredth of one vote emotions

considered at the meeting of that number one million thirty nine thousand two hundred and seventy six class a shares and one million thousand five hundred and nine class b shares are represented

at this meeting by proxies returned through last friday thank you forrest for sure shareholders president who wishes to withdraw a proxy previously sent in and vote in person on the election of directors he or she may do so

also if any share vote in person on the election of directors he or she may do so also if any shareholder that is president has not turned in a proxy please identify yourself to meeting officials in the aisles who will furnish a ballot to you

those persons identifying desiring ballots please identify themselves so that we may distribute them the one item of business of this meeting is to elect directors i now recognize mr walter scott jr to place a motion before

the meeting with respect to election of directors i move the warren e buffett susan t buffett howard g buffett malcolm g changs charles t munger ronald l olson and

walter scott jr be elected as directors there a second ben woman second the warranty buffett susan t buffett howard g buffett malcolm g chase charles t munger ronald l olson and walter scott jr be elected as

directors are there any other nominations is there any discussion nominations are ready to be acted upon if there are any shareholders voting in person they should now mark their ballots on

the election of directors and allow the ballots to be delivered to the inspection specter of elections with the proxy holders please also submit to the inspector of elections a ballot on the election of directors

voting the proxies in accordance with the instructions they have received as amick when you are ready you may give your report my report is ready the ballots of the

proxy holder in response to proxies that were received through last friday cast not less than 1 million thirty nine thousand two hundred ninety eight votes for each nominee

that number far exceeds a majority of the number of the total votes related to all class a and class b shares outstanding the certification required by delaware

law of the precise count of the votes including the additional votes to be cast by the proxy holders in response to proxies delivered at this meeting

as well as those cast in person at this meeting if any will be given to the secretary to be placed with the minutes of this meeting thank you miss amick warnie buffett susan d buffett howard g buffett malcolm

g chase charles d monger ronald olsen and walter scott jr have been elected as directors after adjournment of the business meeting i will respond to questions that you may have that relate to the businesses of berkshire

but do not call for any action at this meeting does anyone have any further business to come before this meeting before we adjourn if not i recognize mr walter scott jr to

place a motion before the meeting i move this meeting be adjourned second motion to adjourn has been made in second we will vote by voice is there

any discussion if not all in favor say all the aye say i'm leaving this meeting is adjourned

[Applause] charlie and i may not get paid much but we work fast on an hourly basis

now we're going to do this by zones and uh i think you can see uh who is manning each uh yeah i see we've got a number out there already and

please ask just one question the only thing that i can think of that we won't discuss is what we're buying or selling or maybe buying or selling but we'll be glad to talk about anything

that's on your mind so let's go right to zone one and start in thanks for the beautiful beautiful weekend in omaha i'm mike asayle

from new york city with a question for warren and charlie about what makes a company's price earnings ratio move up relative to other companies in its

industry how can we as investors find company and even industries that will grow their relative price earnings ratios as well

as their earnings and thank you for the wonderful weekend and for sharing your brilliance with the shareholders thank you thank you the um you know it's very simple that

price earnings ratio relative price earnings ratios move up uh because uh people expect either the industry or the company's uh prospects uh to be better relative to

all other securities than they have been in their preceding view and uh that can turn out to be justified or otherwise absolute price earnings ratios uh

move up uh in respect to the earning power of the prospective earning power of that is viewed by the investing public of future

returns on equity and also in response to changes in interest rates and in the recent well really the ever since 1982 but but extension recent years

you've had decreasing interest rates pushing up stocks uh in in aggregate and you've had an increase in corporate profits return on equity of american businesses

improved dramatically uh recently and that also and and people are starting to believe it so that has pushed up absolute price earnings ratios and then within that universe of all stocks

when people get more enthusiastic about a specific business or a specific industry they will push up the relative pe ratio for that stock or industry charlie

yes i think he also has how do you forecast these improvements in price earnings ratios that's your that's your part of the question around here i would say that if our

predictions have been a little better than other people's it's because we tried to make fewer of them we also try not to do anything difficult which ties in with that we we

we really do feel that it's you get paid just as well you know this is not like olympic diving in olympic diving you know they have a degree of difficulty factor and if you can do some very difficult dive

the payoff is greater if you do it well then if you do some very simple dive that's not true in investments you get paid just as well for the the most simple dive as long as you execute it all right and there's no

reason to try those three and a halves when you get as long as you execute it all right and there's no reason to try those three and a half's when you get paid just so we we we

looked for one foot bars to to to step over rather than seven foot or eight foot bars to try and set some olympic record by jumping over and it's very nice because you get pages as

well for the one foot bars okay zone two good morning my name is joe lacy i'm from austin texas in this era when the financial

departments of the institutions of higher learning are referring to you as an anomaly and they preach the efficient markets hypothesis saying that

you can't outperform the market where does one go to find a mentor like you found in ben graham someone you can ask questions to regarding value investing

my understanding is that the university of florida has instituted a couple of courses that uh actually mason hawkins gave them a significant amount of money uh

to finance and i believe they're they're teaching something other than efficient markets there there's there's a very good course at columbia i know

that uh it gets a lot of visiting uh years to come teachers to come in i i go in there and teach occasionally and and but a number of practitioners i think

the efficient market uh theory is less holy writ now than it was 15 or 20 years ago in in uh in universities but it's

well than it was 15 or 20 years ago in in uh in universities but it's 20 years ago i'd recommend you know looking into those two schools that you know it's really quite useful

uh if you had a merchant shipping business if all of your competitors believe the world is flat you know that it is a huge edge because they will not take any uh

they will not take on any any any cargo to uh to go to places that are beyond where they think they will fall off and so we should be encouraging the teaching of efficient market

theories and universities and it amazes it it amazes me but what it you know it i it amazes it it amazes me but what it you know it i'm almost economical about

ideas that they make the ones they learn in graduate school last a lifetime and what happens is that you spend years getting your phd in finance and you you learn theories with a lot of

mathematics and that the average layman can't can't do and and you become sort of a high priest and you get an enormous

amount of yourself an ego and even professional security invested in those ideas and it gets very hard to back off after after a given point and i

think that to some extent has contaminated the uh the teaching of investing uh uh in the universities charlie well i would argue that the

contamination was massive but it's waning it yeah it is waning it's waning it the good idea is eventually triumph yeah and i'm the word anomaly i've always

found interesting on that because it uh you know after a while i mean columbus was an anomaly what it means is something that the

academicians could not explain and and and rather than re-examine their theories they simply just discarded any evidence

of that sort as anomalous and i think when you find information that contradicts previously cherished beliefs that you've got a special obligation to look at it and look at it quickly

uh i think charlie told me that one of the things darwin did uh was that whenever he found out anything that contradicted some previous belief he knew that he had to write it down almost immediately because he felt

that the human mind was conditioned so conditioned to reject contradictory evidence that unless he got it down in black and white very quickly his his mind would would simply push it out of existence

charlie and knows more about darwin than i do maybe he can explain that well i don't know about darwin but i did find it amusing one of these extreme efficient market theorists

explained warren for many many years as an anomaly of luck and he got to six sigmas six standard deviations of luck and then people

started laughing at him because six six six sigmas of luck is a lot so he changed his theory not because six six six sigmas of luck is a lot

so he changed his theory now see i'd rather have the six segments of luck actually the one thing he couldn't bear to leave was his six sigmas

let's try zone three my name is warren hayes i'm from chicago illinois i understand from various publications like outstanding investor digest

that many of the best value investors are buying high quality multinational japanese companies that are trading below net net working capital value

do you agree that these values exist in japan and would you consider it do you agree that these values exist in japan and would you consider the purchase of some of them i will give a

tout on it i read the outstanding investors digest oid and it's a it's a very good publication and i and i have read some of those some of the commentary about about japanese

securities we've looked at securities in all major markets and we certainly looked at them in in japan particularly in recent years when the nikkei is so underperformed

uh the s p here uh we're quite a bit less enthused about those stocks as being any kind of obvious bargains than the people that

that you read about in oid the returns on equity in most areas of japanese business returns on equity are very uh very low and

it's extremely difficult to get rich by owning by being the owner of a business that earns a low return on equity you know we we always look at what a business does

in terms of what it earns on capital we want to be in good businesses what we really want to be is in businesses that are going to be good businesses and better businesses 10 years from now and we want to buy them at a reasonable

price but many years ago we gave up what uh labeled the cigar but approach to investing which is where you try and find a a really uh uh kind of pathetic company

but it's all so cheap that you think there's one good free puff left in it and and uh we used to pick up a lot of soggy cigar butts you know i mean i had a portfolio full of them uh

and there were soggy cigar butts you know i mean i had a portfolio full of them uh and there were free puffs in there and and b we don't find many cigar butts around that we would be attracted to

the um but they those are the companies that have low returns on equity and if you have a business that's earning five or six percent on equity and you hold it for a long time

uh you are not going to do well in investing even if you buy it cheap to start with time is the enemy of the of the poor business and it's the it's the friend of the great business i mean if you have a

business that's earning 20 or 25 on equity and it does that for a long time time is your friend but time is your enemy if you uh if you have your money in a low return business and

uh you may be lucky enough to pick the exact moment when it gets taken over by someone else but uh uh we like to think when we buy a stock we're going to own it for a very long

time and therefore we have to stay away from businesses that have low returns on equity charlie yeah it's not that much fun to uh buy a business where you really hope this sucker liquidates before it goes

broke [Applause] we've been in a few of those too right yeah charlie and i we we uh or at least i have i've owned stock in an anthers ampersand that don't know what

anthracite is street railway companies windmill manufacturers what other gems do we have tax dollars yeah it's actually going to have turtles yeah

don't even think yeah berkshire was a mistake believe it or not i mean it we went into berkshire because it was cheap statistically just as a as a a general investment back in the early 60s

and it was a company that in the previous 10 years had earned less than nothing i mean it had a significant net loss over the previous 10 years it was selling well below working

capital so it was a cigar button and uh it was i mean we could have done the things we've done subsequently from a neutral base rather than a negative base and and

actually it would have worked out better but it's been a lot of fun uh number four uh hello my name is martin weigan from bethesda maryland again i want to thank

you for your letters and principles they're a great help for small business people running their business my question is last year you said you had filters in

your mind to help you quickly analyze businesses how do your filters take into account the very fast changes of technology and the way that businesses

communicate with their customers take orders things like that but we do have filters and some of those sometimes those filters are very irritating to people who check in with us about businesses because we really

can say in 10 seconds or so note a 90 percent plus of all the things that come in simply because we have these filters we have some filters in regard to people

too uh but the the question of technology is very simple that doesn't make it through our filter i mean so if something comes in where there's a technological component

uh that's of significance or where we think the future technology could hurt the business as it presently exists we look at you know we we look at that as something to worry about uh

we will uh it won't make it through the filter we we want things that we can understand which filters out a lot of things and and we wanted to be good businesses and

we want the people to be the people we're very comfortable with that means ability and integrity um and we can we can do that very fast we've we've heard a lot of stories in

our lives and and and it's amazing how they uh you can become quite efficient uh in probably getting 95 of the ideas through

in a very short period of time that should get through charlie yeah we have to have an idea that is a a good idea and b a good idea that

we can understand it's just that simple and so those filters are are filters against uh consequences from from our own lack of

talent fillers haven't changed much over the years either okay area five hi i'm alan maxwell i live in the wonderful tropical island of omaha

that's right up there with a sarban that's nebraska spelled backwards everybody in this room has got to be wondering the same question who in your opinion both of you is the

next warren buffett charlie who's the next charlie munger let's try that first that's a more difficult question there's not much demand [Applause]

i don't think there's only one way to succeed in life and and our successors in duke time may be different in in many ways and they may do better

incidentally we have a number of people in the company some of whom are in this room today and the ones you saw on that screen who are leagues ahead of

charlie and me in in in various kinds of abilities i mean a lot of different talents we've got fellow in this room tonight today who's the best bridge player probably in the world and

charlie and i could work night and day and if he spent 10 minutes a week working on it he'd play better bridge than we would and and all kinds of intellectual endeavors that for some reason or another one person's

a little bit better wired for than someone else and uh we have people running our businesses that if charlie and i were put in charge of those businesses we we couldn't do remotely as

as well as they do so there's there's a lot of different talents the the two that we're responsible for is keep able people

who are already rich motivated to keep keep working at things where they don't need to do it for financial don't need to do it for financial reasons i mean it's it's that simple and and and that's that's that's a problem any

of you could think about uh and and you'd probably be quite good at it if you gave it a little thought because you'd figure out what would cause you to work if you were already rich and didn't need the job why would you

jump out of bed and be excited about going to work that day and then we try to apply that to the people who work with us secondly we have to allocate capital and these days we have to allocate a lot

more capital than we had to allocate uh a decade ago that job is very tough at present sometimes it's very easy and it will be easy at times in the future and will be difficult at times in the

future but there are other people that can allocate capital and and uh we have we have them we have them in the company charlie i mean no okay uh number six

good morning uh my name is chad corey i'm from gaithersburg maryland i just want to thank you for sharing your wisdom

and my question is what criteria do you use to sell stock i kind of understand how you buy it but i'm not sure how you

sell yeah well the best thing to do is buy a stock that you don't ever want to sell i mean that and that's what we're trying to do uh and that's true when we buy an entire business i mean we bought all of geico we bought all of c's candy or the

buffalo news we're not buying those to resell i mean what we're trying to do is buy a business that we will be happy with if we own it the rest of our lives and we expect to with those it's the same

principle applies to marketable securities you get extra options with marketable securities you can you you can add to holdings obviously easier we can never own more than 100 of a business but if we own two percent of a

business and we like it at a given price we can add and have four or five percent so that's that's a that's an advantage sometimes if we if we need money to move to another sector like we did last year

we will trim from some holdings but that doesn't mean we're negative on those businesses at all i mean we think they're wonderful businesses or we wouldn't own them and we would sell

uh a if we needed money for other things the geico stock that i bought in 1951 i sold uh in 1952 it was you know went on to be

worth 100 or more times before the 1976 problems 100 or more times what i paid but i didn't have the money to do something else so you sell if you need money for something else you may sell

if you believe that valuations between different kinds of markets are are somewhat out of whack and uh you know we we have done a little trimming last year uh uh

in that map but that could well be a mistake i mean the real thing to do with a great business is just hang on for dear life charlie yes but this the sales that do happen

the ideal way is when you found something you like immensely better isn't that obvious that's the that's the ideal way to sell and incidentally the ideal purchase is

to find is is to have something that you already like be selling at a price where you feel like buying more of it i mean that we probably should have done more of that in the past in some situation but that's the beauty of a marketable

securities you really do if you're in a wonderful business you do get a chance periodically maybe to double up in it or something that sort uh if if the market the stock market

would sell a lot cheaper than it is now we would probably be buying more of the businesses uh that we're all we that we already own they would certainly be the first ones that we would think about they're

they're the businesses we like the best charlie nothing more okay zone seven good morning miss

mr buffett mr monger my name is ron wright from iowa city iowa new companies have always been an interest to me

is it reasonable to assume an omaha based company uh with only five billion dollars in the bank might succeed in telecommunications

well i think i think uh that a new company with five billion in the bank is probably better off than most new companies but like jennifer gates uh there's a new

newborn uh the uh i i think you're probably referring to a company that was uh that was created out of one of our local operations that's run by walter

scott one of our directors from the keyword company level three uh i can tell you it's got very able management and i and i'll take your word for it it's also got five but

you'll have to make your own judgment on this stock i know charlie won't comment on that one zone eight zone eight yes uh good morning

this is mo spence from omaha nebraska in the past you've often said that the insurance operation is the most important business in berkshire's portfolio is that true and what are

numbers two and three i'd also like to ask if is it true that charlie chose the colors for the cover of this year's annual report did charlie chose him he

had nothing to do with them i chose them they were a their tribute to the nebraska football team and tom osborne who you saw tom incidentally has a very low key

style and bobby bowden a few few years ago was in lincoln and he said that on their first date that that nancy had to slap tom three times and somebody said was he that fresh and

she said no i was just checking to be sure he was alive tom had a fairly conservative offense for a time in the past although it hasn't been so conservative the last few years but somebody said at

that time the most reckless thing he did was to eat some cottage cheese a day after the expiration on the carton but then but i uh

no i chose the colors now what was the question what was the question charlie you know a memorable question but give it to us again are we back there in zone eight

oh the numbers yeah sure the question was about about the insurance business which we have said will be by far the most important business at berkshire we see that many many years ago

and it's proven to be the case it obviously got a big leg up when we purchased all of geico insurance as far as the eye can see

will be by far the most significant business at uh berkshire and the question about two and three uh in terms of earnings

flight safety is uh is the second largest source of of earnings uh but uh we don't really think of them that way i mean we do know our main business as

insurance but we really have a lot of fun out of all of our businesses i mean i have a great time out of borsheims yesterday or at a dairy queen so uh

at a dairy queen so uh it will be accident to some extent the second or third or fourth largest that'll be determined by opportunity we've bid on

certain businesses that are negotiated on them that that could have been very large businesses if they become part of berkshire and that'll happen again in the future so we

have no predetermined course of action whatsoever at berkshire we have no strategic planning department we don't

have any strategic plan we we react to what we think are opportunities and if it's a business we can understand and if it's particularly if it's big

you know we would love to make it number number two charlie i also want to say proudly that we have no mission statement it's hard to think of anything that we

do have as a matter of fact and we have never had a uh they've never i mean i'm sure you all know this we've never had a consultant and we we we uh we tried to keep things

pretty simple we still have 12 people at headquarters we have about 40 000 people that now work for berkshire and and we hope to grow a lot but we don't hope to grow at headquarters uh

number nine yes my name is patty buffett and i'm from albuquerque new mexico i like your name thanks in your opinion what effect will the

year 2000 compliant issue have on the u.s stock market and the global economy

u.s stock market and the global economy well i i get different reports on on 2000 but the main report i hear i think you know we uh

you wouldn't want to rely on me on this but but you could rely on our managers and i think we're in good shape it's costing us some money but not huge amounts of money to to be prepared for 2000

uh with companies and which i'm a director at which i'm a director i you know i hear some reasonably good size numbers those numbers are in their annual reports and described as to the cost of compliance but what

i'm told by people uh that know a lot more than i do is that they think probably that the the weakest link maybe and got think that

that in terms of where they stand versus the commercial sector in terms of reaching where they uh in terms of reaching where they need to be

by 2000 that there's some areas of both national and state and local governments and foreign government where uh they're really behind the curve now i i that is not an independent

judgment judgment of mine but somebody said you want to be very careful about making a phone call at five seconds before midnight at the millennium because you make a charge for a hundred years you know [Laughter]

so it'll it'll be interesting i don't think it's i don't think it's going to affect berkshire in any material way and i certainly have a feeling that the the world will get past it very easily but

it is turning it it is expensive for some companies and it's going to be very expensive for governments charlie yeah i find it interesting that it is

such a problem you know it was predictable that the year 2000 would come yeah we decided that back in 1985 actually we didn't welcome it understand that's

not berkshire's style though it is it is fascinating isn't it when you think about it that uh a whole bunch of people with 160 iqs that uh could build up such a problem

but here we are and that's why we stick with simple things number ten my name is kristen schramm i'm from

springfield illinois and i'm a proud shareholder of berkshire hathaway we're glad to have you here i've heard a little about your thoughts

on trying to control campaign spending could you tell us more about your thoughts and efforts on this topic thank you i think it was campaign spending okay

i'm saying spending yeah i i have uh joined something to jerry colbert this is personal this has nothing to do with berkshire but i that jerry colberg

uh spearheaded and uh it's taken a position under probably 30 or so mostly business people

taking a position against soft money and also taking a position on on very fast disclosure campaign finance money because i personally

think that the arms race in terms of campaign spending by by businesses uh you know has just begun i mean it doubled in the last election but

uh political influence uh and i i don't mean that by buying a vote but i mean just in terms of having a a a big ear in washington or in other state capitals

political influence has been an underpriced product in the past i mean the government is enormously important in this country to most companies it was amazing how cheap

uh cheaply it could be uh attention could be purchased but those the price is going up and there will be an escalation and and i don't think it's easy

if you're the manager of a business and you own one tenth of one percent of it and you're in a business is heavily affected by government i don't think it's very easy to tell your board of directors that you're going to take a hands-off

approach so i think legislation um is needed in that arena and there are over 100 campaign finance reform bills that have been introduced everybody wants to have their

name on a bill they just don't want to have it passed and uh it's you know john mccain's been working hard on it and uh it's it's something i think we have

to come to grips with because it's going to be a battle of the wallets of uh for influence and uh like i say it if i were running some other company

and my competitors were spending money uh to get the attention of uh of would-be legislators or actual legislators it'd be very difficult to take some high and mighty position that

i wasn't going to do it myself and my board and my shareholders might ask me why i was taking that position we are lucky basically to be in a business that's relatively unaffected by legislation

although we will we're going to pay a lot of tax this year i said two years ago that it would only take two thousand entities in the whole united states

uh businesses individuals any kind of entity to pay the same amount of taxes as berkshire and that would take care of the entire budget you'd need no social security taxes you need no nothing i think we're going to be able to say

that again this year i think that that if you multiply our our tax by 2000 you will more than account for including social security and everything else so

you might say why aren't you in washington lobbying for a capital gains rate or a capital gains rate at corporations it's the same as individuals or something but we

basically haven't played that game we feel very fortunate i i'll say this i would rather in this country be a huge taxpayer myself than be

somebody who needed the other end of it the government the dispensary if anybody here is paying taxes and they want to you know if you'd like to shift positions with

somebody in a veterans hospital or or that you know that as a couple of children by age 19 is getting a check from the government you know i i don't want to i don't want to shift positions i'm happy to be paying the taxes

zone 11 please i think 11 is probably the remote yeah so we're going to hear this from from the overflow room are we there yes um good morning mr

buffett mr munger my name is patrick brown from charlotte north carolina and i've watched returns and equity for the banking sector in the u.s go up a good bid over the last few years and the

returns on tangible equity for some of the major banks that have led the consolidation have gone up a good bit more uh leads me to wonder whether these returns are sustainable over either the

near term or the the longer term five ten years out well that's a that's the 64 question because the returns on equity and

particularly tangible equity as the gentleman mentioned and and particularly tangible equity in the banking sector even those returns have hit numbers that that

uh unprecedented and then the question is if they're unprecedented are they unsustainable uh we charlie and i would probably think the

that we would certainly prefer uh we would not we would not base our actions on the premise that they are sustainable uh uh

20 plus returns on tangible equity or on on book equity and much higher returns on on tangible equity in the banking field you have a number of enterprises that on

tangible equity here are getting up close to the 30 percent range now can a system where the gdp in real terms is growing

maybe three percent where in nominal terms it grows four to five percent can businesses consistently earn 20 on equity they certainly can't if they retain most of their earnings because

you would have corporate profits rising as a percentage of gdp to the point uh that would get ludicrous so under those conditions you'd either have to have

huge payouts either by repurchases of shares or by dividends or uh or by takeovers actually that would keep the level of capital

reasonably consistent among industry or because you couldn't sustain let's just say every company retained all of its earnings and they earned 20 on equity you could not have corporate profits growing at 20 as a part of the

economy year after year um this has been a better world than we foresaw in terms of returns and so we've been wrong before and we're not

making a prediction now but we we would not want to buy things on the basis that this these returns would be sustained we we told you last year if these returns are sustained and interest rates stayed at these levels or fell

lower that's stock prices are in aggregate or justified and we still believe that but those are two big ifs and the particularly big if in my view is the one about about returns on

on equity and on tangible assets it goes against certainly goes against classic economic theory to believe that they can be sustained charlie how do you feel about it

well i think a lot of the increase in return on equity has been caused by the increasing popularity of jack welch's idea that you can't be a leader in a line of

business get out of it and uh if you get fewer people in the business while returns on equity can go up then it's gotten way more popular to buy in shares even at

uh very high prices per share and if you keep the equity low enough by buying shares back while you can make return on equity whatever you want we've had to some extent a

a slow revolution in in corporate attitudes and uh but warren is right you can't you can't have massive accumulations of

of of earnings that are retained and uh and keep earning these rates of return on them an interesting question is to think about it if you had 500 jack welch's and they were running the fort cloned and

they were running all of the fortune 500 companies would returns on equity for american business be higher or lower than they are presently i mean if you have i mean if you have

500 sensational competitors uh they can all be rational but that doesn't and they will be and they'll be smart and they'll keep trying to do all the right things but there's a self-neutralizing effect

it's like having 500 expert chess players or 500 expert bridge players that you still have a lot of losers if they get together and play in a tournament so it's not at all clear that if

all american management were dramatically better leaving out the competition against foreign enterprises that returns on equity would be a lot better they might very well drive things down that's what

to some extent can easily happen in securities markets it's way better to be in securities markets if if you have a hundred iq and everybody else operating

has an 80 than if you have 140 and all the rest of them also have 140 so it's the secret of life is weak competition somebody said how do you beat bobby

fischer you know and you said you play him any game except chess well that's how you beat jack welch you play him any game except business oh he's a very good golfer i want to point out he would

he shot a 69 one a few months ago and i saw him at a very tough course jack manages to play 70 or 80 rounds of golf a year and and come in sub-par occasionally while

still doing what he does at gee he's a great manager but 500 jack welch's i'm not at all sure would make stocks more valuable in this country

zone one i'm ben noel and i'm from minneapolis and first i just wanted to thank you for providing your past annual letters to

the shareholders and mr munger for providing your speech to the graduate students at the usc a couple years ago um

drawn a lot of insights from that not only investing but also in my day job as a as a business manager and i'm wondering if you could help me with my summer reading list

and provide some additional suggestions for reading in the fields of investing and management

other than the standards of graham fisher so forth charlie yeah i have uh recently read a new book twice

which i very seldom do and that book is guns germs and steel by jared diamond and

it's a marvelous book and the way the guy's mind works would be useful in business he's got a mind that is always asking why why why why

and he's very good at coming up with answers i would say it's the best work of its kind i have ever read i read a little easier book recently i i i'm not even sure of the title i i don't pay much attention to

titles when i get into the books but it it's something to the effect of the quotable einstein i mean it's it's it's all it's a lot of his commentary over the years and it's great reading the fermat theorem was with the book but

that wasn't the exact title either it's a story of the of the uh discovery of the answer on that that that's a very interesting book one of our shareholders from sweden gave me a copy of that when i was in new york and i've enjoyed it

zone two mark rabinoff shareholder from melbourne australia uh gentlemen we have large holdings in freddie mac and fannie mae and as you

both know they were quite well they were hurt quite a lot when interest rates went up in the past are wondering if you think they'll be hurt again when

interest rates go up in the future well that the question about freddie mac and freddie freddie mac and fannie mae and on interest rates they they are not as interest rate sensitive as people formerly

uh thought they were but it would be the pattern you know i have a feeling that if interest rates got extremely low so that there was a huge turnover the portfolio

and then rates went up dramatically that even though they have uh various ways of protecting themselves against interest rate scenarios that

that that might get very tough uh uh they there i think there would be some kind of squeeze there they may have good answers as to why that wouldn't happen incidentally because they certainly worry about every kind of interest rate

scenario that's their job uh but i uh i think in a sense very low interest rates uh are more of a long term because if

you get a portfolio chock full of say four percent mortgages or something of the sort and then you had a huge move upward uh uh that could that would be quite painful for some period of time no

matter what you've done in the way of hedging charlie i've got nothing to add that's what happened to the savings and loans in effect you see 25 years ago or whenever it was

and freddie and fanny have other functions and there and they've got a lot of advantages but they they have a savings and loan type operation they just they just do it on a

very big scale and they get their money from uh in a very different manner than from millions of depositors but the basic economics have some similarity zone three

jane bell des moines since i became a berkshire hathaway shareholder i've been coming to these meetings this is my second

i've been coming these meetings ever since i've been a shareholder mr buffett i'm a partner and owner in a consulting business and we tell our clients and potential clients

that we design solutions for what keeps them awake at night mr buffett from your perspective as an investor

what keeps you awake at night well that's a good question and i that's one i always ask the managements of our subsidiaries as well as any any new investment i want to know

what their nightmare is uh andy grove in his book uh only the paranoid survive talks about the silver bullet for a competitor so in terms of if you only had one silver bullet which competitor

would you fire it at and it's not a bad question and uh your question's a little broader if you only had one worry that you could get rid of what would it be i would say that i would

char and i think i speak for sure i let him do it but we really don't worry uh you know we we will do the best we can and

when we have capital allocated sometimes it's very easy to do sometimes it's it's almost impossible to do but we're not going to worry about it because it

you know it the world changes and if we had something we were worried about in the business we would correct it we're we're i'm not worried about anything i'm not really worried about about uh

you know we can lose a billion dollars on a california earthquake uh but i'm not worried about it although i have a sister who's in the audience that lives in california i've told her to call me quickly if the dogs start running in

circles or anything like that but there's you know if you're worried about something to do is get it corrected and get back to sleep and and i can't think of anything i'm worried

about at berkshire that doesn't mean that i have any good ideas as to what we should be doing with a lot of a whole lot of money that we have around but you know i can't do anything about

that except keep looking for things that i might understand and do something with the money and if they aren't there they aren't there and we'll we'll see what happens tomorrow and next week and next month the next year charlie what are you worried about well

in the 30-some years i've been watching you i would say what it takes to make you not sleep at night is an illness in the family short of that

warren likes the game i like the game and even in the periods that look tough to other people it's a lot of fun it's a lot of fun it's a lot of fun

in fact it probably is the most it it's sort of it is the most i mean we define tough times differently than other people would but but our idea of tough times is like now and our idea of uh

we don't feel as tough times when the market's going down a lot or anything so we're having a good time uh then i mean it we don't want to sound like undertakers during a plague or anything but but

it they're really uh you know it makes no difference to us whether whether our some the price of berkshire is going up or down we're trying to figure out ways

to make the the company worth more money years down the road and if we figure that out the stock will take care of itself so and usually when the stock is going down

uh it means other things are going down and that it's it's a better chance for us to deploy capital and that's our business so we you will not see us worrying then

maybe we should you know what may worry no zone four my name is pill yoon from la california mr

warren buffet mr trudeau i'm one of the persons who highly admire you

both i have i have two questions question one your view on world

financial business environment in the next decade question two u.s position

u.s position for economic competition in the next decade thank you well you you've asked two big questions but but you're going to get very small

answers i'm afraid i and that's no disrespect but we we we just we don't have that we we don't think about those things very much we we just we just are looking for decent businesses and and incidentally our

views in the past wouldn't have been any good on those subjects and we try to we try to think about two things we try to think about things that are important and things that are knowable

now there are things that are important that are not knowable in our view those two questions that you raise fall in that there are things that are knowable but not important we don't want to cut our minds up with those so we're we say

what is important and what is knowable and what among the things that fall within those two categories can we translate into some kind of an action that is

useful for berkshire and and we really they're all kinds of important subjects that charlie and i we don't know anything about and and therefore we don't think about them so we have our view about what the

world will look like over the next 10 years in in business or competitive situations we're just no good we do think we know something about what coca-cola is going to look like in 10 years or what gillette's going to look like in 10 years or what disney's going to look

like in 10 years or what some of our operating subsidiaries are going to look like in 10 years we care a lot about that we think a lot about that we want to be right about that we're right about that

the other things get to be uh you know they're they're just they're they're less important and and if we started focusing on those

we would miss a lot of big things i've used this example before but coca-cola went public and i think it was 1919 and the first year

one share cost 40 the first year it went down a little over 50 at the end of the year was down to 19 there were some problems with bottler contracts there's problems with sugar various kinds of problems

if you'd had perfect foresight you would have seen the world's greatest depression staring you in the face when when the social order even got questioned you would have seen

world war ii you would have seen atomic bombs and and hydrogen bombs you would have seen all kinds of things and you could always find a reason to postpone

uh why you should buy that share of coca-cola but the important thing wasn't to see that the important thing was to see they were going to be selling a billion eight-ounce servings of beverages a day this year or some large number and that

the person who could make people happy a billion times a day around the globe ought to make a few bucks off doing it and so that forty dollars which went down to nineteen dollars i think with

dividends reinvested has to be well over five million dollars now and if you develop the view on these other subjects that in any way forestalled you acting on this more

important specific narrow view about the future of the company uh you would have missed the missed a great ride so that's that's the kind of thing we focus on charlie yeah we're not

predicting the currents that will come just how some things will swim in the currents whatever they are zone five please good morning mark gerstein from value

line mr buffett uh considering the large amount of demands on your time how do you go about reviewing the entire spectrum choices in the equity markets

give me that last part again i got the demands on my time and how do you and mr munger manage to review the whole spectrum of choices in the equity markets a bad pitch coming up the uh

but i don't mind it at all because the truth is that we get i don't know what we even pay for value line charlie and i both get it but uh in our respective offices but we get incredible value out of it because it's

it gives us the quickest way to to see uh a huge number of the key factors to tell

us whether we're basically interested in the company also gives us a very way of good way of of sort of periodically keeping up to date value line has 1700 or so stocks they cover and they do it

every 13 weeks so it's a good way to make sure that you haven't overlooked something if you just quickly review that but it the snapshot it presents is

an enormously efficient way of for us to garner information about about various businesses we don't care about the ratings i mean that doesn't make any difference to us we don't we're not looking for opinions we're looking

for facts but i i have yet to see a better way including uh fooling around on the internet or anything that that that gives me the information as quickly i can absorb the information on about a

company most of the key information you can you can get in probably doesn't take more than 30 seconds uh in glancing uh through value line and i don't have any other system that's as

good charlie well i think the value line charts are a human triumph i i it's it's hard for me to imagine a job being

done any better than is done in in those charts an immense amount of information is put in very usable form

and uh if i were running a business school we would be teaching from value line charts and when charlie says the charts and he does not mean just the chart of the price behavior it means all that

information that really is listed under the charts that oh yeah that gives the detailed financial information uh you can run your eye across that the chart is the chart of the price action

doesn't mean a thing to us although it may catch our eye just in terms of businesses that have done very well over time but that we price action has nothing to do with any

decision we make price itself has is is all important but but whether a stock has gone up or down or what the volume is or any of that sort of thing that is as far as we're concerned you know

those are chicken tracks and we pay no attention uh to them but that information that's right below the chart in those 10 lines or so 15 lines

if you have some understanding of business that's a it's a it's a perfect snapshot to to tell you uh very quickly what kind of a business

you're looking at zone six please uh david winters from mountain lakes new jersey um with the consolidation in the insurance industry how do you think that will affect berkshire's insurance

businesses and the long-term development of the float and if i may not to encourage your dogma to run over your karma but how do you think your policy of

partnership and fair dealing has enhanced or detracted from your investment returns thank you well the consolidation taking place in insurance has been taking place for some

time there have been some big mergers over the years it should there are developments in insurance we mentioned the the super cat bonds which are not bonds at all

but that has an effect uh but i would say that the that there's no merger that has taken place

that i regard as being detrimental either to our geico business uh or to

uh our reinsurance business uh that has not been a factor and i think if if there were some more mergers it would not be a factor i i

i see no way that that any entities being put together would would change the competitive situation in respect to geico geico

operating just as it does independently is as competitive as can be and it would not benefit by being part of any other organization and uh our reinsurance business is much more

opportunistic and uh it's not consolidation there it's it's it's just lack of fear generally by competitors who

can price particularly cat business at a rate that could be totally inadequate as i use an illustration of the report but nevertheless it could appear to be profitable for a long time and uh

there's probably more of that going on now and there'll probably be a lot more going on uh in that arena we have some sensational insurance businesses though i have to tell you that

uh you you i don't think you really have to worry too much about how we do uh insurance in the future we had we had a number of geico people that here today i hope you got a chance

to meet him geico uh and you saw laura davidson i really was hoping he could be here but davey is 95 years old i went to visit him a few months ago it just isn't easy for him to get around

but he uh he built a sensational company and it stumbled once jack byrne got it back on track and and and tony nicely got it going down

the track at about 100 miles an hour it's getting faster all the time so we've we've got a great business there charlie nothing bad

zone seven yes um bill ackman from new york uh uh is there a price at which it's inappropriate for a company to use its

capital buyback it stock right give me that example of coca-cola at uh 40p is that a smart place for coke to deploy capital

well it it sounds like a very high price when you name it in terms of a pe to buy back the stock at that sort of number but i would say this uh coca-cola has been around a hundred

and what 12 years now and uh there are very few times in that 112 years if any when it would not have been smart for coca-cola be repurchasing its shares

coca-cola is probable in my view among businesses that i can understand it's the best large business in the

world i mean it is a fantastic business and uh we love it when coke repurchases shares and our interest goes up we owned

6.3 of coca-cola in 1988 when we bought in we actually increased that a little bit a few years later but if they had not repurchased shares

we probably would own about 6.7 or point eight percent of coke now as it is we own a little over eight percent uh through repurchases uh they're going to be about a billion

eight ounce servings of coke sold around the world our coca-cola products sold around the world today uh eight percent of that is 80 million and

6.8 percent of 68 million so they're 12 million extra servings for the account of berkshire hathaway being sold around the world and they're making a little over a penny a serving so

you know that that gets me kind of excited and i i think it all i can tell you is i approve of

of coke repurchasing shares i'd rather have them repurchasing shares at 15 times earnings but but when i look at other ways to use capital

i still think it's a very it's a very good use of capital and maybe the day will come when they can buy it at 20 times earnings and if they can i hope they go out and borrow a lot of money to buy a ton of it

at those prices and i think we will be better off 20 years from now if coke follows a consistent repurchase approach i do not think that is true for

many companies i mean i think that repurchases have become in vogue and done for a lot of silly reasons and uh so i i i don't think everybody's

repurchase of shares is well reasoned at all you know we see companies that issue options by the ton and then they

repurchase shares much higher you know i started reading about investments when i was six and i think the first thing that i read was you know buy low sell high but these companies through their options you know they they

sell low and then they buy high and they've got a different formula than i was taught uh so there are a number that we don't approve of when when we have when we own stock in a wonderful business

uh we we we like the idea of repurchases even at prices that uh that may give you uh nosebleeds uh it generally turns out to be a pretty good

policy charlie well i think the answer is that in any company the stock could get to a price so high it would be foolish for the corporation to repurchase its shares

sure and you can even get into gross abuse before the crash the insult utilities were madly buying their own shares

as a way of promoting the stock higher it was like a giant ponzi scheme at the end so there's all kinds of excess that's possible but the really great companies

that buy a high price earnings where that's that can be wise our interest in geico went from 33 to 50

without us laying out a dime because geico was repurchasing its shares and uh we benefited substantially but we benefited a lot more obviously when prices were were

lower i mean we would we would our interest in the washington post companies gone from nine and a fraction percent to 17 in a fraction percent over the years without us buying a single share

but the post or coke or any number of companies don't get the bargain in repurchasing now that they used to we still think it's probably the best

best use of money in many cases zone eight my name is hutch vernon i'm from baltimore maryland my question has to do with float he said in the annual and

you've said in the past that float has had a greater value to berkshire than an equal amount of equity i wondered if you could uh clarify that

statement is that because the float has been generated at such a low cost relative to an imputed cost for equity or is there something else behind that statement no

it's it's because the float which is now we'll say seven billion comes to us at a negative cost uh we would not make that statement if our float was costing us a couple percent a year even though float would

then be desirable highly desirable but our float is even better than that or it has been and and so it comes to us uh with a

a cost of less than zero it comes to us with a profit attached so if we were to replace if we were to get out of the insurance business and give up the 7 billion afloat and replace it with 7 billion of equity

we would have less going for us next year than under the present situation even though our net worth would appear to be 7 billion higher and i have said and

uh that if we were to make the decision if if we were offered the opportunity to go out of the insurance business

and that 7 billion liability would as part of that decision would evaporate from our balance sheet so that our equity would go up seven billion with no tax implications

we would turn down that proposition so obviously we think that seven billion which is shown as a liability one is part of it viewed as part of an insurance business

uh is not a is not a liability uh at all in terms of real economic value and of course the the key is not what the float

is today and not what the cost is today the key is what is what is the float going to be 10 or 15 years from now and what is the cost going to be 10 or 15 years ago and you know we will work

very hard at both increasing the amount of float and keeping the cost down uh somewhere close to our present level uh that makes it a very attractive

business when that can be done geico's a big part of the of doing that but we've got other things the other insurance operations that'll be important in that too and we may have others besides that in the future

charlie yeah if the float keeps growing that is a wonderful thing indeed we really have a marvelous insurance

business in addition to having this remarkable earning power it's way less likely to get really clobbered than most insurance businesses

so it's i think it's safer on the downside and has a better upside and it may sound strange but we don't regard losing a billion dollars in the california quake is getting really clobbered i mean

that's part of the game there are many companies that have greater exposures than that that really aren't getting paid for it and you don't see it specifically but

any company that has a ton of homeowners business in florida or long island or along the coast of texas may have exposures many times our billion

and really exposures many times our billion and really not be getting paid appropriately or specific zone nine hi my name is mary semler from seattle washington

japan is a major holder of u.s

treasuries given the troubled japanese economy do you perceive japan cashing in the u.s

investments to bail themselves out why or why not i thought i didn't get all that i didn't get that i was busy chewing here but

japan is a major holder of u.s

treasuries given the troubled japanese economy do you perceive japan cashing in the u.s

investments to bail themselves out why or why not the problems with the japanese economy and does that mean that are you thinking particularly about them dumping treasuries or something

that's exactly what she's yeah well you know it's very interesting uh the whole all the questions about what uh so-called foreigners do with investments um

let's just assume that the japanese or any other country decides to sell some us government holdings that they have

if they sell if they sell them to u.s

corporations or citizens or anything what do they receive in exchange they receive u.s dollars what do they do with

receive u.s dollars what do they do with the u.s dollars you know i mean they

the u.s dollars you know i mean they they can't get out of the system if they sell them to the french you know the french give them something in return now the french own

the government securities but really as long as we the united states run a deficit uh a big deficit a trade deficit

we are tr we are accepting goods and giving something in exchange to foreigners i mean when they when they send us whatever that it may be and and on balance they send us more of

that than we send over there we give them something in exchange we give them we may give them an iou we may give them a government bond but we may give them an investment they make in the

united states but they they have to be net investors in this country as long as we're net consumers of their goods it's a tautology so i don't even know quite

how a foreign government dumps its government bonds without getting some other type of asset in exchange that that may have an effect on a different market

the one question you always want to ask in economics is and and not a bad idea elsewhere too but is and then what because there there's always a second

side to a transaction and just ask yourself if you are a japanese bank and you you sell a billion dollars worth of government bonds u.s government bonds

what do you receive in exchange and what do you do with it and if you follow that through i don't think you'll be worried about about foreign governments selling

selling uh us bonds that it is not a threat charlie if i uh own japan

i would want a large holding of u.s

treasuries on an island nation without much in the way of national resources i think their policy is quite intelligent for japan and

i'd be very surprised if they dumped all their treasures if they're in that exporter too so what choice do they have and think about it they if they send over more goods to us than we send to them which has been the

case they have to get something in exchange now for a while they were taking movie studios in exchange you know they were taking new york real estate in exchange i mean they've got a choice of

assets but they don't have a choice as to whether if they can send us more than they get from us whether they get some investment asset in return i mean it it's amazing to me how little discussion there is about the fact that there's two

sides to an equation but but it it makes for better headlines when i guess when when read the other way zone 10.

this is john bond from detroit michigan nebraska's senator kerry has provo proposed private investment accounts for up to two percentage points of the current payroll tax his words were and i

quote people want more than just a transfer payment they want wealth do you approve this proposal and if you do would you recommend passive investing

i.e index or if you recommend active

i.e index or if you recommend active investing would you and charlie want to give it a shot well i've talked with bob carey about that and and bob does like the idea of giving

everybody some piece of the american economy and an interest in it he's thought as you know he's proposed really sort of small grants

to the three and a half million or so children born every year and then some uh build up of that account uh senator moynihan has come up with something

recently in conjunction with kerry i personally would not like to see uh any major amount of social security and

and one hand is talking about two percent and i actually i suggested the idea that maybe two percent out of the 12 and a fraction percent at the option uh

of the beneficiary social security participant could be devoted to some other system but then they would only get

five sixths of the basic social security benefit i don't think you could drop it below that because you wouldn't want to people turning 65 or maybe more advanced age in the future 70

and not having the safety net of of social security so i wouldn't want to drop it below about five six of the present benefits uh i don't i i think it's a perfectly reasonable

topic to discuss whether you want to take that two percent then and let people build up an account perhaps tax free perhaps a ira type account so they would have both wealth and the safety net but

i wouldn't want to drop the safety net very very far and i think that i would not want to turn an army of sales people loose on the american public with with a mandatory two percent

uh going in some direction i don't think that would be particularly healthy charlie i'm much less enthusiastic than you are in other words your negative or

conservative attitude is way more affirmative than mine i think the idea of getting the government and the promoting the value of equities

in japan we have a taste of that now the japanese government has been using the postal savings system to buy equities massively year after year after year uh

i don't think we need to get the government into the equity market we go to zone 11 please i'm dale max from university park

illinois and i've got a question for each of you a short question for charlie and a little maybe a little longer for warren uh my question for charlie is

in a business school sense what is the cost of capital for berkshire hathaway and my question for warren is that i've been on the internet

and i look at yahoo and they give you recommendations for companies and when i search for berkshire hathaway it shows that nobody is recommending

berkshire hathaway despite the fact that there are maybe a thousand people that are wearing signs here i love berkshire hathaway and of course i've got mine on too but

what seems to be the problem in lack of recommendations well we're not recommending yahoo incidentally either but [Applause]

but i'll i'll let uh puzzle people for thousands of years and then the way that is taught in most business schools now i find incoherent and

so i'm the one that asks that question and gets the incoherent answers i don't have a good answer to a question i consider kind of

a stupid question what is the cost of capital that berkshire hathaway when we keep drowning in this total that berkshire

hathaway when we keep drowning in this torrent of cash which they get to that and but you don't need a mathematical answer the first question is is when you have capital

is it better to keep it or return it to shareholders it's better to return it to shareholders when you cannot create more than a dollar of value with that capital that's test number one and and

if you pass that threshold that you think you can achieve more than a dollar a value for every dollar retained then you simply look around for the thing that you're the you feel the surest about

and that promises the greatest return waited for that certainty so our cost of capital is in effect is measured by by the ability to create more than a

dollar value for every dollar retained if we're keeping dollar bills that are worth more in your hands than in our hands then we've exceeded the cost of capital as far as i'm concerned

and once we think we can do that then the question is is how do we do it to the best of our ability and and frankly all the stuff i see in in business schools and i've not found any way to improve on

that formula now the trouble that you may have is that many managements would be reluctant to distribute money to shareholders uh even if they would rationalize that

they would do better than they'd then actually do but that's that may be a danger on it but that won't be solved by them hiring a bunch of people to come up with some cost to capital it also justifies them keeping the money

because that's what they'll do otherwise the question about recommending the stock we've we've very seldom had stock recommendations over the years as i think back to 1965 i

i i can't think of a lot of brokerage reports that have recommended berkshire that i i i'm not looking for any you know reports at all we are not looking to have berkshire sell at the highest

possible price and we're not looking for to try and attract people to berkshire who were buying stocks because somebody else recommends them to them we we prefer people who

who figure out for themselves why they want they themselves want to buy berkshire because they're much more likely to stick around if they enter the restaurant because they decide it's the restaurant they want to eat at then if somebody has

touted them on it and and that's that's our approach so we we do nothing to encourage but i think even if we did we probably wouldn't generate a lot of recommendations it's it's not a great

stock to get rich on if you're a broker yeah i think the reason i think the one of the main reasons why it's so little recommended in the institutional

market is that it's perceived as hard to buy in quantity we we prefer we've got some good institutions as holders including one that's run by a very good friend of ours but frankly it's more fun for us

to have a bunch of individual shareholders i mean you see it it translates if there's money made it translates into changes in people's lives and not some change in somebody's performance figure for one quarter and we think that

individuals are much more likely to join us with the idea of staying with us for as long as we stay around and and you know that's the way we look at the business very few institutions look at

investments that way and and frankly we think they're often less rational holders than we get with individuals number one good morning

good morning gentlemen i'm hugh stevenson a shareholder from atlanta my question involves the company's

super cat reinsurance business you've addressed some of this but i would like for you to expound on it please you've indicated that you think this is the most important business of the company

and my question is what do you think the long term impact of catastrophe bonds and is what you think the long term

impact of catastrophe bonds and catastrophe derivatives will be on the float and the growth and float of the company affect

the way you price your business but i'm wondering how you think it can affect the volume of the business and i remember several years ago mr buffett you talk about you

can never be smarter than your dumbest competitor right and these are some potentially dumb competitors you've got it the

i just want to put an asterisk on one thing we say insurance will be our most important business we've not said the super cat business will be our most important super cat has been a significant part of

our business and may well over the years remain a significant part but it is far less significant uh than geico and i'll mention a word or two about that but

the supercat business you can price wrong as i illustrated in my report you can be pricing it at half what it should be priced at i used an illustration in in

in the report of how you could misprice it a policy that you should be getting say a million and a half for namely a 50 million dollar policy on

writing on on something that had one chance in 36 of happening so you should get almost a million halfway i said if you price it at a million a year you know you would think you were making money after 10 years 70 odd percent of the time the interesting thing about

that is if you price it for a dollar a year you would have thought you made money 70 odd percent of the time because it it when you when you were selling insurance against very infrequent events

you can totally misprice them but not know about it for a long time super cat bonds open up that field wide open i mean you've always had the problem of of dumb competitors but you

have a much more chance of having dumb competitors when you have a whole bunch of people who in in the case of hedge funds who bought some of these where the manager gets 20 of the profits in the

in the year when there are profits and there there is no hurricane and and when there is there happens to be a hurricane or an earthquake he doesn't take the loss his limited partners do so it's it's very likely to be a

competitive factor that that brings our volume down a lot it won't change our prices uh you know the thing about the the thing to remember is the earthquake does not know the premium that you receive i mean

the earthquake happens regardless so it doesn't say you know you don't have somebody out there on the san andreas faults that says well he only charged a one percent premium so we're only going to do this once every

100 years and it doesn't work that way um so we we we will probably do a whole lot less volume in the next few years in the super cat business we have these two policies that

run for a couple of more years but in terms of new business we will we will do a whole lot less geico is the by far the most important part of our insurance business though geico

geico in the 12 months ended april 30th had a 16.9 percent increase in policies and force year end i told you it was 16.0 a year ago i told you it was 10

year before that i think it was six in a fraction so its growth is is accelerating and

it should be in a whole lot more homes around the country than it is now you know by a big factor and it will be in my view uh so that that will be the big part of our insurance business but we may be in

insurance business in some other ways too as as time goes along it's it's a business that if you exercise discipline you should find some ways to make money

but it won't always be the same way charlie i've got nothing to add okay zone two

hello i'm steve davis from san francisco i'd like your advice on how to understand annual reports what you look for what's important what's not important

and what you've learned over the years from reading thousands of reports thank you we've read a lot of reports i will tell you that and we uh

well we start by looking at the reports of companies that we think we can understand so we hope to find we hope to be reading reports and i and i do read hundreds of them every year we hope to be reading reports of

businesses that are understandable to us and then we see from that report whether the management is telling us about the things that we would want to know about if we owned 100 of the company

and when we find a management that does tell us about those things and that is candid in the same way that a manager of a subsidiary would be candid with us and talks in language that we can

understand it it definitely improves our feeling about about investing in such a business and the and it it definitely improves our feeling

about about investing in such a business and the and the reverse uh turns us off to some extent so if we read a bunch of public relations gobbledygook

it has some effect toward a business we want to understand the business better when we get through with the annual report than when we picked it up and that is not difficult for a management to do if they want to do it

if they don't want to do it you know we think that is a factor in whether we want to be their partners over a 10 10 year period or so but we've learned a lot from annual reports for

example i would say that the coca-cola annual report over the last good many years been an enormously informative document i mean i can't i i can't think of any way if i had had

a conversation with roberto voisueda or now doug ivester and they were telling me about the business they would not be telling me more than than than i get from reading that annual report we

bought that stock based on on an annual report we did not buy it based on any conversation of any kind with the top management of coca-cola before we bought our interest we simply bought it on based on reading

the annual report plus our knowledge of how the business worked charlie yeah i do think the if you've got a standardized bunch of

popular jargon that looks like it came out of the same consulting firm i i do think it's a big turn off that's not to say that some of the consulting

mantras aren't right but i think there's a lot for sort of a candid simple coherent prose a lot to be said for them

almost every business has problems and we just assumed the manager would tell us about them we would we would like that in the businesses we run in fact one of the things we give very little advice to our

managers but one thing we always do say is to tell us the bad news immediately and and i don't see why that isn't uh good advice for the the manager of a

public company uh uh over time you know i'm i'm positive it's the best part you know i'm positive it's the best policy but but uh

a lot of companies they're dying just to pump out what they think is good news all the time and they they have this attitude that you know that you've got a bunch of animals out there to be fed and that

they're going to feed them what they want to eat all the time and over time the animals learn so it's we try and stay away from businesses like that what you seldom see

in an annual report is a sentence like this this is a very serious problem and we haven't quite figured out yet how to how to handle it

but believe me that is an accurate statement much of the time all right zone three i'm larry and i live

i'm gonna jerks i live in the area and i would like to know what your prediction is for coca-cola's long-term growth

versus pepsi cola's recent efforts to increase their pep positiveness with coke yeah [Applause]

long term i would expect coke to continue to gain versus pepsi [Applause]

what has he been doing while i was gone what'd you say charlie i knew i knew i was taking a chance what was the question i said that long term i expected coke to

continue to gain versus pepsi oh well those kind of insights is why we keep him on the job year after year in a in a moment of particular

confidence we one time told me the same thing about rc that was that that was probably zone three you were answering so we'll go to we'll go to four what have you got there you got peanut brittle

[Music] zone four please houston texas uh my first question is on the quality of earnings and your evaluation of quality of earnings in the

us right now and the second is what multiples should be put on asset gains such as uh sale of bottling assets or reversal of merger reserves thanks

taking the second question for example the coca-cola weather the bottling transactions are incidental to a long-term strategy which

uh in my view has been enormously successful to date and which has more successes ahead of it but in the process of of rearranging and consolidating the

bottling system and expanding to to relatively undeveloped markets uh there there have been and there will

be a lot of bottling transactions and some produce large gains some produce small gains i ignore those in my evaluation of of coke the two important

elements in coke are our unit case sales and and shares outstanding and if the shares outstanding go down and

the uni case sales advance at a good clip you're going to make money over time in in in coca-cola um there have been transactions

where people have purchased uh rights to various uh drinks uh coca-cola's purchased some of those around the world and when you

see what is paid for a million or 100 million unit cases of of uh a business and then you think to yourself that maybe coke will add

a billion and a half cases a year that's that's a real gain in value it's a dramatic gain in value and and that is what counts in terms of the coca-cola company what if you think the

coca-cola company is going to sell some multiples of its present volume 15 or 20 years from now and you think there'll be a lot fewer shares outstanding you've gone about as far as you need to

go but i would pay no attention to to asset gains i would just take those out of out of the picture now as the quality of earnings charlie and i feel that

in in several respects but in one important respects the quality of earnings has gone down not because the policy has changed but because it's just become more significant and that's in the case of stock options

uh we have there are certain companies that we've evaluated for possible purchase where in in our calculation of earnings

the earnings are maybe 10 less per year per share than reported and that isn't necessarily the end of the world but it is a difference in

valuation that is significant and is not reported uh under standard accounting so we think the quality of earnings as reported by a company with significant stock option grants every year

we think is dramatically poor uh than one for one that where that doesn't exist and there are a lot of companies that fall in that in that category coca-cola's earnings are very easy to

figure out just figure out what they're you know what they're earning per case from operations and you'll see over the years the earnings per case go up and the cases go up and the shares go down

and it doesn't get much more complicated than that charlie you've said it wonderfully i just wish we had more like that yeah geico the key i mean the same way is

policies in force and underwriting experience for policy and and that is exactly the way as noted in the annual report we pay we pay people there we pay them

from the bottom to the very top based on what happens with those two variables and we don't talk about earnings per share at geico and we don't talk about investment income we don't get off the track because there are two

things that are going to determine what kind of business that geico is over a long period of time and and policies that at

geico are unit cases at coca-cola zone five hello mr buffett mr munger my name is james claus from new york city and uh i

just wanted to ask you a question um both you and mr munger have repeatedly said that you don't believe that business valuation is being taught correctly at our universities and as a phd student at columbia

business school that troubles me understandably because in a couple of years i'll be joining the ranks of those teaching business valuation my question isn't

what sources such as graham or fisher or mr munger's talks you would point people that are teaching business valuation to but do you have

any counsel about the techniques of teaching business valuation well i i was lucky i had a sensational teacher in ben graham and we had a course there there's at least

one fellow out in the uh audience here that attended with me and and just ben made it terribly interesting what we did was we walked into that class and we valued companies and he had various little

games he would play with us sometimes he would have us evaluate company a and company b with a whole bunch of figures and then we would find out that a and b were the same company at different points in its history for example and then

there were a lot of little uh games he uh he uh played to get us to think about what were the key variables and you know how could we go off the track i remember

one time ben met with uh with charlie and me and about nine or so other people down in san diego and and 1968 or so when he gave

gave all of us a little true false test and we all thought we were pretty smart we all flunked but that was his way of teaching us that teaching us that a

smart man playing his own game and and working at fooling you could do a pretty good job at it but i would you know if i were teaching a course on investments

there would be simply one valuation study after another with with the students trying to identify the key variables in that particular

business and uh evaluating how predictable they were first because that is the first step if something is not very predictable forget it you know you don't have to be right about every

company you have to make a few good decisions in your lifetime but then when you find the important thing is to know when you find one where you really do know the key variables which ones are important and you and you

do think you've got a fix on them where we've been where we've done well charlie and i made a dozen or so very big decisions relative to net worth

but not as big as they should have been and we've known we were right based on those going in i mean they did they just weren't that complicated and we knew we were focusing on the right variables and

that they were dominant and we knew that even though we couldn't take it out to five decimal places or anything like that we we knew that in a general way we were right about them and

that's what we look for the fat pitch and that's what i would be teaching trying to teach students to do and i would not try to teach them to think they could do the impossible charlie

yes if you're planning to teach business valuation and what you hope to do is uh teach the way people teach real estate

appraising so you can take any company and your students after studying your course will be able to give you an appraisal of of that company

which will indicate really its future prospects compared to its uh market price i think you're attempting the impossible yeah probably on the final exam i would

i would take an internet company and i would say the final exam the question is how much is this worth and anybody that gave me an answer i would flunk right

make grading papers easy too okay zone six good morning lawrence balter carlsbad california question for the two of you

there was an article i think about last year in the new york times that regarded westco as a berkshire class sea share type company and i'd like to know your comments on

that and the second question is if i were to write you a check for the operating businesses that berkshire owns how much would it have to be big uh charlie is the resident expert on west

coast so i'm going to let him address that subject he gets very eloquent on this yeah we always say that per unit of book value wesco is worth way less than berkshire

and indeed the market is saying the same thing it is not a clone of berkshire it's a historical accident we want to do well obviously for west

coast we own 80 of it and we've got strong feelings about the people who are partners there particularly the peters family who uh in effect invited us in 20 odd years ago and trusted us to

manage a big part of their money in effect by by letting us buy control so we've got we've got strong fiduciary feelings about it it suffers

in comparison with berkshire because for one thing anybody that wants a tax-free merger is going to want to come to berkshire you know that's just the way it is unfortunately and

we are looking for big ideas primarily and the big ideas are going to fit into berkshire we would love to get ideas that fit into westco and we had a very good one a couple of years ago thanks to

roy dinsdale pointing me in the right direction and and we added kansas banker surety to westco and it's a gem and it's run by don told who's done a terrific job

but that's the exception unfortunately because if the flight safety comes along it's not going to fit fit westco uh so we will do our best for westco

but the nature of things is is that most of the opportunities that make a lot of sense are going to come to berkshire charlie

nothing more okay zone seven my name is bob swanson from phoenix and i'm wondering what are the advantages of

investing in berkshire hathaway as opposed to investing in the stocks that berkshire owns well a lot of people do one or the other

and some people do both but no you have to really make up your own mind on that we're not going to go to great lengths to tell you about everything that berkshire is doing as we go along and

there could be some changes and there will be things that can happen in berkshire that i think you would have trouble duplicating elsewhere but on the other hand you know if you put all your money in coca-cola

some years back you might have done better than if you put in berkshire so we we really make no recommendation to what people do with their money we do not seek to become investment advisors through in effect

uh our portfolio actions at at berkshire charlie basically we hate it when people following us follow us around buying the we by

nothing personal no by the way the questioner before this last one asked what is the market value under the hammer of all berkshire's operating

subsidiaries and the answer is you have to figure that out yourself mr nice guy uh so well but we give you the information

incidentally where your judgment on that should be about as good as ours there's nothing mysterious about valuing the buffalo news or sees candy

or flight safety or dairy queen so you really have the same information we have in that i mean if there's if there's material information

that we aren't giving you about any important but berkshire subsidiary we'd like to give it to you because we think you are entitled to have the information enables you to value the various pieces because of the aggregate

size of berkshire now in terms of market capitalization and some of the positions we own uh the smaller subsidiaries really cannot have that much effect we love them just as much i i enjoy

all of the businesses we're in and i enjoy the people that run them so we don't make a there's not we don't differentiate uh in our attitude within the company but in terms of the actual

impact on the valuation of berkshire uh there are a number that really just they just don't make that much difference in terms of figuring out whether berkshire's worth

x or x minus a thousand or plus a thousand because a thousand now is over a billion dollars in in terms of valuation a billion is still a lot of money uh

area eight please hello mr buffett mr munger my name is robert mccormick i'm from holdage nebraska and i would like to know

how much you attribute the gains enjoyed by the stock market these past years to the baby boomer generation

investing for their retirement now i would say that personally i would not think that has much to do with it i think the the two big factors

are well there's three big factors one is the improved return on equity which was a fundamental factor that pushed stock prices up two is the decline in interest rates that pushed

stock prices up and then finally stock prices advancing themselves brings in buying it doesn't go on forever but it it it creates its own momentum to some

extent if you have these underlying factors that are that started to push it along so i would say two of the three factors are fundamental and the third is a market type factor that

bull markets do feed on themselves uh and i think that you've seen some evidence of that but i don't think that any specific you know the 401k factor or whatever it may be was

was it by itself but i do think money is pouring into mutual funds for example because people have had a very favorable experience with those funds and and that does that does bring

that bring investors along people want to be on the train charlie and i think incidentally many of them have very unrealistic expectations yeah the the

general investment experience in the last what uh 18 years in common stocks has been awesomely high i think by any past standards now it's not a great war right

well you've had since 1982 you've had roughly 10-fold in the dow and probably somewhere in the s p and with a huge amount of money and with

more participants all the time and there are people coming into the market every day because they feel that they've missed the boat or they're coming in heavier than they came in before simply because they've had a

pleasant experience and past experience doesn't does not mean much in terms of what you should expect from your investments we you will do well in your investments because you

own or bought things at the right price and the businesses behave well from that point forward well you won't have 18 more years at 17 or 18 per annum

that i think we can virtually guarantee are you nine hello i'm tubby stamen from palm beach florida i know you enjoyed bridge very much i know you play my late husband's

convention tell me how often are you able to devote to this wonderful game how many times a week do you play other than the

internet didn't get all of that how much bridge are you playing oh yes well this week we should put this in the annual report because it may be a material factor i probably

uh i'm probably uh at least 10 hours a week um maybe a little more i don't get any better by doing it either it's rather discouraging but but it is a lot of fun

and it's and it's it has to have come out of reading time uh i don't think it's hurt berkshire yet but that may be because we're in a slow period generally it if if the market goes down a lot i

promise to cut back on my bridge charlie yeah well i probably pay three or four hours a week but i don't play on any internet

he plays a lot of golf though i confess charlie oh yes yeah we both spent about the same amount of time goofing off i mean if you want to know

okay area 10.

yes my name is carrie blecker also from west palm beach florida with all due respect to mr eisner if he's in the audience uh there's been some criticism

levied recently at uh the disney company uh mainly from an accounting professor at one of the state universities in new york in reference to disney's purchase of capital cities and the way they

accounted for that purchase basically what this professor is saying is that disney somehow created a a slush fund and is charging the uh expenses to the

merger to this slush fund rather than earnings if you're familiar with this uh criticism i'm wondering what you think of it if you're not

are you familiar with the way disney accounted for the purchase of capital thank cities and actually a brillo who wrote that is a fellow who in general i admire a

broke and actually a brillo who wrote that is a fellow who in general i admire abe wrote me a letter actually where he teaches and i wrote him back and i i told him i wouldn't be able to do it because

it's not in proximity to where i'll be uh but and i told him and he he asked me about this anything and i told him i disagreed with him uncertain i admire

i admire what abe does in the attempt to have accounting reflect economic reality but he and i don't see it exactly the same on some points although we would agree on other points

i think i don't think disney is is a very complicated enterprise to evaluate i mean it uh uh

there are when cap cities bought abc there were purchase accounting adjustments and and uh they tend to wash through for some to

some extent i mean if you have programs that you're stuck on uh you may write those down from what the previous carrying cost was maybe the previous management should have written them down too at that point but

uh i don't think that i i think with disney what you see now is what is what you get charlie yeah

i've got no great quarrel with the accounting at disney i think uh yeah roloff is a wonderful guy he's got a good sense of humor and he's

he generally fights the right demons but i don't think you can criticize disney's accounting we we certainly disagree with abe uh who like i say is it i agree with charlie

he's a good guy but he we disagree with him on amortization of intangibles entirely so we would say that if disney is charging whatever it

may be uh probably 400 million a year for amortization of intangibles which is not tax deductible we would include that as a component of earnings so there might be some pluses

and minuses that you'd make in adjustments but i would i would say by the time you had back amortization of intangibles that we would probably think the economic earnings of disney might well be

more than the reported earnings in the next few years i think that the intangible amortization question which the fasb is looking at now i think it should be changed i mean i

think it absolutely distorts economic reality and i think that it influences whether people go to purchaser accounting or pooling and they do all kinds of acrobatics to try and get pulling

accounting and you know it shouldn't make that kind of difference in reported numbers based on whether a transaction which has exactly the same

economics is done through a purchaser pooling but i have seen managements some i know quite well arranged to do things on a pooling basis that they think where they if they were

private they would do it on a purchase basis and i think that's nuts and i think if accounting is pushing people to doing things that are nuts that it's time for a cut to look at accounting to look at itself i would i

would say that that net the economic earnings of disney in our view are are somewhat higher than reported earnings

zone 11 please good morning mr munger and mr buffett my name is prakash puram from minneapolis there seem to be great values in the

technology sector that meet most of your criteria philosophy and investing with the exception of the simplicity criterion um names like ibm microsoft hp intel

would you ever consider investing in companies in this sector in the future well the answer is no and it's probably pretty unfortunate because i've i've been an admirer of andy grove and and and

bill gates and you know i wish i translated an admirer of andy grove and and bill gates and you know i wish i translated that admiration and i don't know what that world will

look like in in 10 years and i don't want to play in a game where i think the other guys have got an advantage over me and the other guys have got an advantage over me and and

i could spend all my time thinking about tech i wouldn't be the 100th or the thousandth or the 10 000 smartest guy in the country in looking at those businesses so that is a seven or eight foot bar

that i can't clear there are people that can clear it but i can't clear it and no matter how i train i can't clear it so the fact that there will be a lot of money made by somebody doesn't bother me really and i

mean there may be a lot of money made by somebody in cocoa beans but i don't know anything about them and uh there's a whole lot of areas i don't know anything about so you know more power to them and

i think it would be a very valid criticism if charlie and i if you if it were possible that charlie and i and by spending a year working on it could become well enough informed so

that our judgment would be better than other people's but that wouldn't happen and and it would be a waste of time it's much better for us to swing at the easy pitches charlie

whatever you think you know about technology i think i know less that's probably not true incidentally charlie has a little more of a he understands some things in the in the physical world a lot

better than i do but anyway we'll go to zone one good morning i'm murray katz from markham ontario um first off against my dentist's advice i'd like to thank you for the free coke and ice cream last

night um earlier this morning mr buffett you mentioned that you liked when wonderful companies like coke

purchased their shares back similarly i own shares in a wonderful company that's berkshire um should i be hoping that you buy your own

shares back well it's interesting we we should have perhaps we should have bought some shares back but usually at the time we could have bought something

else uh that also did very well for us i mean maybe we were buying coke we could have been buying our own shares back to some extent there hasn't been that much trading in it but i think it's a valid criticism

to say that we have missed the boat uh at various times in in in not repurchasing shares um we'll see what we do in the future if it

looks like the best thing to do with money it's what we should be doing and in the past i've probably been uh not optimistic enough in respect to berkshire compared to

other things we were doing with money now the money we spent buying the geicos and all that has turned out to be a good use of money too but we've never wanted to leverage up that's just not our game so uh we've never

wanted to borrow a lot of money to repurchase shares we might advise other people to do it but we would it's not our style ourselves we've got all our money in in the in in the company we've got all of our

friends and our relatives money virtually so we have never felt that we wanted to leverage up this company like it was just one of a portfolio of 100 stocks but it's

it's a valid criticism to say that we have we have not repurchased shares when we should have and it's also a valid criticism to say that we've issued some shares we shouldn't have issued charlie

well i would agree with both comments area two fellow inves fellow investors of berkshire and hedway

warren buffett and charlie munger i'm from originally china now i have a company in michigan

i want to ask questions based on facts i want to sell coke

geico and a little book called [Music] the wizard of omaha

the investment philosophy of warren buffett in china through all the villages the cities little towns i want to make

that a reality cheers cheers come here [Applause] zone three

i'm not asked the question all right just warming up okay i will they always tell me to get off the stage while you're in good shape but i'll say it i could i could quit but you missed your

chance i'm the owner of berkshire and i spent six percent

of my net worth to be engaged to berkshire wise decision i did better than

guess who bill gates i noticed bill gates and you were traveling on a slow boat in china

i want to go home on the fast stream you want to cut me off if you want to cut out fine to the investors i quit if you want me to do it

i have to i come a long ways okay i know i'm a problem for you but i'm here for a reason because i made some money

i'm go on a train a smile train yesterday or the day before at the baseball i asked mr warren buffett

have you heard of the smile train he said no i'm back here to respond this is a smile train okay we thank you but i think that's that's your question

we better go to uh zone four on that thing [Applause] good morning or afternoon actually

my name is matt schwab i'm from new york pound ridge new york i actually had a question about the silver purchase last year when you announced it you said that you believe that supply and demand

fundamentals would only be established at a higher price re-established at a higher price i was just wondering if you could go into more detail about what some of those fundamentals are i mean we've read

a lot about like battery technology and some other things yeah we have no inside information about great new uses for silver or anything of the sort but the

situation and you can you can get these figures and they're not precise but i think they're in general uh they're generally accurate you can

you can see from looking at the numbers that aggregate demand primarily from photography from industrial uses and

from ornamental jewelry type uses uh it's close call it 800 million plus ounces a year and there are

500 million or so ounces being produced of silver annually although there will be more coming on in the next couple of years

there's more coming on right now however most of that silver is produced as a byproduct in the mining of gold or copper and lead sink so that

since it's a byproduct it's not responsive to very responsive to price changes because obviously if you've got a copper mining you get a little silver out of it you're much more interested in the price of

copper than silver so you have 500 million ounces or so of mine production and you have 150 million ounces or so of reclaimed silver a large part of

which relates to to the uses in photography so there's been a gap in recent years of perhaps 150 million ounces but none of

these figures are precise which has been filled by an inventory a bullion above ground which may have been a billion two or more ounces a few years back but which

has been depleted and no one knows the exact figures on this but there's no question that the bullion inventory has been depleted significantly which means that the present price for silver

does not produce an equilibrium between supply as measured by newly mined silver plus reclaim silver and and usage

and that eventually something will happen to change that picture now it could be reduced usage it could be increased supply or it could be a change in price

and that imbalance is sufficiently large even though there is some new production coming on and there's the threat of digital imaging that will reduce silver usage perhaps in the future in

photography but we think that that gap has is wide enough so that it will continue to deplete inventories

bullion inventories to the point where a new price is needed to establish equilibrium and because of the byproduct nature which makes the supply inelastic and because the nature of demand which

is relatively inelastic that we don't think that that price change would necessarily be b minor it's interesting because silver has been artificially influenced

for a long time you saw that movie about uh you know it was william jennings brian who was editor of the omaha world herald and a congressman from from nebraska and his brother was governor of nebraska

uh who was the big silver man and they used to talk 16 to one uh the 16 to one ratio i think goes back to isaac newton when he was master of the mint charlie will know all about that

because he's our newtonian expert here and but that that ratio had kind of mystical significance for a while didn't really mean anything and in 1934

the government passed a an act called the silver purchase act of surprisingly 1934 which set an artificially high price for silver at that time

when production and usage was much less and the government the us government ended up accumulating two billion ounces of silver now this was at a time when demand was a couple hundred million ounces a year so you're talking 10 years supply

so there was an artificially high price for a while by the 19 early 1960s that became an artificially low price of 1.29 and at that time i could see the

inventories of the of the us government being depleted somewhat akin to what inventories are being depleted now and despite the fact that lyndon johnson and

the administration said they would not demonetize silver they did demonetize it and silver went up substantially that was the last purchase we had of silver but i've kept track of the figures ever since the hunt brothers caused

a great amount of silver to be converted into boolean form including a lot of silver coins so they again increased the supply in a very big way by their action and pushing the price

way up to the point where people started melting it down so you had this dislocations in silver over a 60-plus year period which has caused the price to be

affected by these huge inventory accumulations and and and reductions and we think right now that we thought last summer when we started buying it that

at the price we bought it that that was not an equilibrium price and sooner or later and we didn't think it was imminent because we don't wait till things are imminent uh you know we were going to buy a lot of

silver we didn't want to buy so much as to really disrupt the market however we had no intention of of replaying any any hunt scenario so we wanted to be sure we didn't buy that

much silver but we liked it charlie well i think this whole episode will have about as much impact on berkshire hathaway's future as warren's bridge playing

we've got a line of activity where once every 30 or 40 years you can do something employing two percent of assets this is not a big deal for

berkshire the fact that it keeps warren amused and yeah it is not doing counterproductive things it makes me feel better about makes me feel better about all those pictures

that people take over the weekend they all use a little bit of silver at least it shows at least it shows something that teaches an interesting lesson

think of the discipline it takes to think about something for three or four decades waiting for a chance to employ two percent of your assets

i'm afraid that's the way we are it means there'll be some dull stretches right yeah it's less than a billion dollars in silver it's 15 billion dollars in coke you know it's uh

it's a non event it's 5 billion in american express i mean the uh it it is close to a non-event but if you see it there at least it shows the human personality

at work very peculiar personality i might have reinforced by a partner yes okay let's go to area five

my fa my family is a class b shareholder thank you for issuing those shares i have one observation and one question

your class b share is creating a new phenomena in this country these baby shares are not only attracting my baby boomer generation

but also ex-generation and echo generation your grandchildren my question is this next generation

would like to hear from you your investment discipline your lifestyle and your philosophy of contributing the wealth

back to the society in a language they can understand and communicate back to their friends when they get back to school on tuesday thank you

thank you i uh well i appreciate that and and i would say the only uh the only speeches i give i get

i get a lot of requests probably perhaps because i don't do them uh but i get a lot of requests including from a lot of our managers in terms of trade conventions all kinds of things i don't i the only groups i talk to are students and

i try to i try to talk to college and university students all i've talked to high school students too uh whenever it fits in terms of travel

schedules and and i just think that uh you're going to spend your time uh with groups talking that rather than entertain people that it it probably is better to talk to the group who talked about it and

charlie and i are never reluctant to talk so we do it charlie's charlie has given a couple of talks uh one i sent you a few years ago from usc but there's been another one

recently that that i think everybody would profit by by reading so it was reprinted in the outstanding investor digest but

if you write charlie i'm sure i'll send you a copy uh area six please uh hi my name is uh david osterbaugh i'm from kalamazoo michigan

uh this is a hypothetical question about berkshire it's going to take a little imagination i think the scenario as follows that the u.s

justice department makes a ruling that berkshire must split into two parts immediately you and mr monger must decide which part

to keep you can either choose your marketable securities cope gillette disney etc or you can choose your insurance and

private businesses which one do you choose and why well that's an easy question for me i would choose the operating businesses anytime because it's more fun and i have a good time out of the

investments too but what i like i like being involved with with real people in terms of the businesses where they

they're a cohesive unit that can grow over time and you know i wish we owned all of disney or coca-cola or gillette but we aren't going to so if i had to if i had to give

up one or the other i'd give up the marketable securities but it's not going to happen so we're going to be happy in both arenas and i look forward to being in both arenas for the rest of my life charlie

well uh i'll be in a hell of a fix if i i'm not in the same arena we'd both be at a hell of a victim area seven

yes hello to mr monger and mr buffett my name is jerry gonzalez from plantation my question is what are your recommendations of berkshire hathaway

if charlie munger were in charge or your third man in charge of your third man which i think you said it's the ceo of geico what are your recommendations

if charlie munger would have been in charge fully 100 or your third man the ceo of geico well in due course this this

corporation will have a change in management i'm afraid we have no way of fixing that and but we do not apart from making sure

we've got good options and having some system in place uh we are not obsessing about a future management yet

no we the director plans to live almost indefinitely absolutely the uh although i must say at my last birthday somebody asked me uh how old i was i said well why don't you

just count the candles on the cake and he said he was driven back by the heat so but uh we're not we're not going to leave willingly uh

and we do the directors know who and and they have a letter uh that says who who they think who we

think should be the ones to succeed us at both the operating aspect and the investment allocation aspect and that those letters

can change over time as we keep hanging around but i don't worry about the fact that 99 plus of my estate will be in berkshire hathaway stock or that a

foundation will eventually receive that stock so it doesn't bother me at least i can't think of a place i'd rather have it and that includes my appraisal of the managers that we have who can

step in and do what charlie and i do and who knows one of them may even understand technology i think this place would have

very respectful or respectable prospects if the top 25 managers all drop dead at once well that that's

not an experiment we intend to pursue although i i see no reason to think it wouldn't continue to do quite well right it's been lovingly put together

to have a certain margin of safety we actually if we have a choice it's number three through 23 though that we're 25 that we're interested okay area eight please

uh this is raul from uh walnut creek california uh thanks mr buffet thanks mr munger

thanks for your great company wish i had known about it 10 years ago you are not only the greatest but the most honest

i want to commit 99 of what i have to berkshire hathaway and i will

the question i want to ask is how do you calculate the intrinsic value of the company and based on intrinsic value

to me berkshire hathaway looks a great bargain at these prices especially based on look through earnings

is that room and one last question i want to ask just for fun what do you think about telecom ipos

like quest u.s luck

u.s luck they seem to pop up 50 at opening does it make any sense to invest in these thank you very much

i didn't follow that at all uh intrinsic value we give you the facts and you make your own conclusions

uh i like the fact that you think we're honest but you know if you people keep bidding up the price of our stock honesty will only do so much for you in

the future yeah we've never been tested i mean we're very lucky we've never had you know we've never had anything that we needed really that that we haven't had and uh

you know who knows what the situation be if your family was starving or something and so our intention is to continue in a position where we'll never be tested too i might add the intrinsic value question i mean by

definition intrinsic value is is the present value of the stream of cash that's going to be generated by any financial asset between now and doomsday

and that's easy to say and impossible to figure but it's the kind of thing that we're looking at when we look at a coca-cola where we think it's much easier to evaluate the stream of cash that comes in the future than it is in a company

uh such as intel marvelous as it may be we just it's it's easier for us it may not andy grow may be better at figuring out intel than coke and in berkshire

uh it is complicated by the fact that we have no business that naturally employs all of the capital that flows to us so it is dependent to some extent

uh on the opportunities available and the ingenuity used uh in in in when that cash pours in as it does

some businesses have a natural use for the cash uh actually intel has a good national use for the cash over time as they've expanded in their business and many businesses do but we do not have

a natural use we have some businesses that use significant amounts of cash a flight safety will will buy a lot of build a lot of simulators this year and they cost real money but in relation to the resources

available we have to come up with new uses new ways to use cash and that makes for a more difficult valuation job than if you've got

well the classic case used to be a water or electric utility where the cash could be deployed and the return was more or less guaranteed within a narrow range and

it was very easy to make calculations then as to the expectable returns in the future but that's not the case at berkshire uh we've got very good businesses and uh both directly and

partially owned and those businesses are gonna do well for a long long time but we do have new cash coming in all the time and sometimes we have good ideas for that cash and sometimes we don't and that

does make your job more difficult in terms of computing intrinsic value we'll have yeah we're going to break after the next question that they at that time we break whenever charlie and i run out of candy

up here actually the uh we're going to uh let everybody that you can you can you can get something to eat if you want to stick around and we will be here till 3

30 when we reconvene at 12 30.

um and uh those of you who've been with us this morning and had enough we thank you for for being here this weekend we've had a terrific time with you so

i'm very appreciative of that let's have a question from zone nine and then we'll go to lunch good morning my name is frank jorvich i'm a shareholder from london ontario and

canada my question is for mr munger and it concerns his models and the question specifically is related to market valuation i know i'm not going to get a prediction

that's not your bag what i'm curious about is there any specific touchstone models that you reflect upon and trying to gain perspective

these markets whether the historic valuations are quite high and why do you draw on those models my second question is for mr buffett

and it relates to taxation if you were able to trade your portion of your portfolio at least in a tax-exempt fashion like 401k plans or in canada the rsp

plans would you possibly trade more actively charlie you want to answer yours first yeah well the monger system for dealing

with reality is to have multiple models in the head and then run reality against multiple models i think it's a perfect disaster to look at

to look at reality through just one model or two it's it's there's an old proverb that says to the man with only a hammer every problem looks pretty much like a nail

and and that is not not our system so i i can't sit here and run through all the models in my head even though there aren't that many

but but multiple models is the the question about taxation uh it would not if if we were

running uh berkshire absent a capital gains tax i don't think it would make much difference in in what we do i don't think it would make that certainly wouldn't make a

difference in making in causing us to trade actively that we own the businesses we want to own we don't we don't own them because taxes have restrained us from selling

them and as i mentioned earlier uh i'm i'm fairly sure we'll pay at least a billion dollars in income tax this year we might not but that it looks that way to me that we'll

pay a billion dollars and i could do things that that at least deferred and i certainly could do things by doing nothing that avoided paying that billion

in tax a good bit of the billion call it 800 million of the billion but that doesn't that is not a big factor with me it's never it's it's never been a big deal with me i i i paid my first income tax when i

was 13 so i guess i got brainwashed at the time and it doesn't it doesn't bother me a lot uh to be paying taxes i think i'm net personally i'm

i'm under taxed in relation to what the society has delivered to me and uh you know i don't send along any voluntary payments to the irs i should understand but i really do i mean it uh

i i don't there's nobody i want to trade places with and because their tax situation is better than mine and so it would not increase the activity i've been asked to take one more question from zone 10. i'm not sure why

but maybe because they see that i still have candy up here so zone 10 please and then we'll break uh mr mr buffett and mr munger my name is sanjeev merchandi shareholder from

boston first of all thank you to both of you for everything um i have two questions for you mr buffett um you obviously have filters that you apply on selecting people as you do on stocks can

you tell us a little bit about what those filters are fillers on people yes in selecting you have an ability to motivate people who have a lot of money to keep working what do you look for to

figure out who those people are that's a that is that is a key key question because when we buy businesses we don't have managers to put in them i mean we're not buying them that way we don't have a lot of mbas

around the office uh that we're thank god yeah [Applause] that i you know i have not promised that they're going to have all kinds of opportunities and so as a practical

matter we need management with the businesses that we buy and three times out of four thereabouts the manager is the owner

and is receiving tens of millions maybe hundreds of millions of dollars so they're not they don't have to work and we have to decide

in that time when we meet them whether they love the business or love money and we're not making a moral judgment charlie may but i i'm not making a moral judgment about whether it's better to

love the business or love money but it's very important for me to know what which of the two is the primary motivator with them and uh

we have had extremely good luck in identifying people who love their business and so all all we have to do is avoid anything that

that on our part that diminishes that love of the business or makes other conditions so intolerable that they overcome that level of the

business and we have all we have a number of people working for us that no financial need to work at all and they probably outwork you know 95 or more of the people in the

world and they do it because they just they love smacking the ball and we almost we virtually had no mistakes in that

respect and we have identified a number of people charlie and i have in terms of proposals to us where we felt that they did really they liked the money better than the business they were

kind of tired of the business you know and and they might promise us that they would continue on and they would do it in good faith but something would happen six months later a year later and they'd say to themselves why am i doing this

you know for berkshire hathaway when i got when i could be doing whatever else they want to do i can't tell you exactly how we what filter it is that we

that we put them through mentally but i i can tell you that that if you've been around a while you can i think you can have a pretty

high batting average in in in coming to those conclusions as you can about other aspects of human behavior i'm not saying you can take 100 people and take a look at them and

analyze their personalities or anything of the sort but i think when you see the extreme cases the ones that are going to cause you nothing but trouble or the ones that are going to bring you nothing but but joy i

think you can identify those pretty well charlie well yeah i think it's pretty simple you've got integrity intelligence and experience

and dedication and that's what human enterprises need to run well and we've been very lucky in in getting this marvelous group of

associates to work with all these years it would be hard to do better i think than we've than we've done in that respect look around this place i mean

and pretty you young people look around this place look at how much gratification can come into these lives which have been mostly spent in deferring gratification

it's a it's a very funny group of people you shareholders on that note of self congratulations let's go have lunch and we'll be back in

half an hour let's settle down please and we'll we're going to go to uh we skipped one last time so we're going to go first to zone four hello um

uh my name is nelson errata i'm from southern california and um i have a question it's not really related to intrinsic value or any of that stock

stuff but uh more on um house houses i'm still quite young i don't have a house yet and i'm thinking about buying a house someday soon

and in order to do that i'm going to have to put a down payment which means i might have to share or sell my shares and i was wondering if you can provide some insight on

when is the best time to buy a house and how much down payment you should be putting down in relation to interest rates and also in relation to available cash

and the stock market well charlie's going to give you an answer to that in a second i'll just relate one story which was when uh i got married we had we did have about

ten thousand dollars starting off and i told susie i said now you know there's two choices it's up to you you can we can either buy a house which will use up all my capital

and clean me out and it'll be like a carpenter who's had his tools taken away from him or uh or you can let me work on this and someday who knows maybe i'll even buy a

little bit larger house that would otherwise be the case so so she was very uh understanding on that point and uh we waited

until 1956 that we got got married in 1952 and uh i i i decided to buy a house when it was about

when the down payment was about 10 or so my net worth because i i really felt i want to use the capital for other purposes but that was a way different environment

in terms of what was available to buy in effect if you if you have the house you want to buy i you know i definitely believe in just going out and probably getting the job done but i

uh in effect you're probably making something in the area of the seven or eight percent investment implicitly when you do it so uh you know you'll have to figure out your own equation from that charlie

probably has better advice on that he's he's a big homeowner in both senses of the word the uh i think the time to buy a house is when you need one

and and when do you need one well i have very old-fashioned ideas on that too uh the single people i don't care if they ever get a house

when do you need one of your marriage charlie i'll follow up here for you need them when your wife wants one but yeah yeah i think you've got that exactly right

yep sure gregory crawford needs to go to the security office please for emergency message gregory crawford to the security

officer office for emergency message thank you okay i hope it isn't a margin call okay we'll go to zone one please

i'm ralph pfeffer from phoenix arizona the question i'm going to ask does not pertain to berkshire hathaway but i would appreciate it if you

gentlemen if you can explain the justification and rationalization for the exorbitant salaries bonuses

perks director's fees and other benefits that most public corporations are paying well

[Applause] i would say this in my own view the most exorbitant are not the necessarily the biggest numbers that what really bothers me is when companies

pay a lot of money for mediocrity and that happens all too often but we have no quarrel in our subsidiaries

for example for paying a lot of money for outstanding performance i mean we get it back 10 or 20 or 50 for one and similarly in public companies

we think that there have been managers and our managers who have taken companies uh to many many many billions of market

value more than would have happened uh with virtually anyone else and they sometimes take a lot of money for that

sometimes as in the case of tom murphy at cap city's uh you know he it just didn't make a difference to him i mean he performed in a way that that would justify would have justified

huge sums but it wasn't it he would tell you that he had all the money he needed so and and he just didn't care to uh to take what the market might bear

but i am bothered i am bothered by irrational pay systems and i'm particularly bothered when when uh average managers

take uh really large sums i'm bothered when they design or have designed for them systems that are very costly to the company maybe partly to make themselves look

good because they want huge options themselves so they feel like they give options widely throughout the company so they design a system that is illogical company company-wide because they want one that's illogical

for them personally but large sums per se don't bother me i'm not saying you know whether any individual might want to take them or not but i

don't i do not mind paying a lot of money for performance it's it's done in athletics it's done in entertainment but in business the people who are the 200 hitters and the people who

uh would not attract a crowd as an entertainer i've worked it out so that i mean the system has evolved in such a way that many of them take huge sums and i think that's

uh obscene but i can tell you there isn't much you can do about it the the system feeds on itself and companies do look at other companies

proxy statements every ceo does and they say well if if joe smith is works worth x i have to be worth more and they tell the directors that certainly you wouldn't be hiring anybody that was below average so

how can you pay me below average and the consultants come in and ratchet up uh the rewards and uh it's not anything that's going to go away it's like we were talking about

campaign finance reform earlier the people who were the who have their hands on the switch are the beneficiaries of the system where the

who have their hands on the switch are the beneficiaries of the system bidding enormously and perhaps disproportionately from that system charlie

well yeah i'd like to report that the original vanderbilt behaved even better than the people at berkshire hathaway he didn't take any salary at all he thought it was beneath him as a significant

shareholder to take a salary that ideal i'm afraid died with him and charlie charlie and i our directors are paid 900 a year but i tell them on an

hourly basis they're making a fortune because we don't work that hard but what charlie and i did not think through when we established that 900 a year is that they set our salaries too so

we have not followed the standard procedure which is to load it on the directors and the directors shall load it on you i do think it will have pernicious effects

for the country voted on you i do think it will have pernicious effects for the country's escalating because i think you're getting at the very top corporate salaries in america are too

high and that is not a good thing for a civilization when the leaders are regarded as as not dealing fairly with the institutions

that they had you know if [Applause] all i can say is the prostitution would

be a step up for them [Applause] put him down as undecided zone two please i'm dan blum from seattle washington

wyatt cambridge massachusetts i want to ask whether the issuance of class b stock has achieved the

objective which you announced for it when it was created well i would say this that the considering the alternatives we faced

which was the uh eminence of unit trusts that would have been promoted with heavy front-end commissions with

substantial annual fees with bad tax consequences and with probably a representation a misrepresentation of the historical record in such a way that people who really didn't know much about securities

would have been enticed in with that as an alternative i i think the the bee stock was the best thing we could have done and and i feel good about how it's worked

out i think that you know we didn't we didn't we didn't set out to issue it we don't like talking anybody into buying our stock but uh

i don't think in any way that uh the group we have here is diminished in the least by having a mix of b and a shareholders as opposed to a only the b

the b has worked out uh as well as possible i i hope that it you know we haven't enticed anybody in with unreasonable expectations that's the biggest thing

that charlie and i worry about and it's hard not to have that happen with the historical record i know it would have happened in a big way with the unit trust so uh you know it's like

it's like uh making the mistake originally of starting with berkshire i think we enjoy things as they come along and and and we've gotten a good group with the b shareholders and and we're happy with

the present situation charlie yeah we wanted to step hard on what we regarded as a disreputable financial scheme and that we did and

and then and i think the way we sold the b was such as to not as as to attract the kind of people who really did look at it on a long long-term basis we we did everything we could to discourage people who thought they're going to make a lot of money in

a hurry so we i think we attracted a whole new group of shareholders who were quite similar in perspective to the shareholder group that we already had and that was our

hope zone three please my name is my name is alan rank from pittsburgh i first wanted to thank susan jacques for returning the

cocktail yesterday and i hope she was rewarded with good sales at borsheims question is regarding the fact that you don't report details of anything under

750 million dollars and with the change of the values of a small cap in relation to large cap would that be something that berkshire

or individuals might try to look as opportunity with the small cap premium shrinking as it has we don't worry about whether a stock is

small cap or large cap except to the extent that by now we've gotten to a point where anything below a certain level just is not of interest to us because it can't be material to our results so

um we don't we never think of opportunities as existing because of something as small cap or sectors or all that you know what generally gets merchandised

uh so our cutoff point is is set more or less at the point where we think it's material if that's that's not as defined

by the sec we could have a higher uh limit but we uh we think when you get down below two percent of assets are thereabouts that

the reporting of positions would not affect anybody's calculation of intrinsic value or give them insights about

about the way we run the business but it would be more for the people who are looking for things to piggyback on and so we we we will move the cutoff point up as we go along

because of our size we will never be in companies that have capitalizations that you know of a half a billion or a billion dollars because we just can't put enough money in occasionally we'll

we'll be in one just by accident but but we're looking at we're looking at things that we can put 500 million dollars in ourselves at least at 500 million a 5 position is a

10 billion dollar market cap and that limitation has hurt will hurt is hurting

our performance to some degree you would if berkshire were exactly 1 100th of its present size in all respects owning the operating businesses it did but all one one hundred the size our prospects would be better than they

are uh with the kind of money we have presently charlie i've got nothing to add okay zone four please okay my name is tom conrad i'm

from mclean virginia i just wanted to first thank you mr buffett and mr monger for each year answering our questions i found myself at 5am standing outside the door here and i don't do that for anyone

and it's a real pleasure to hear your answers i have two questions one is with travelers the company travelers and the merger with

citibank do you have confidence in the management of sandy weil my second question is you said it in a few meetings ago that

diversification is a protection against ignorance and it only takes three great companies to be set for an investment lifetime and i invested in those three companies

coca-cola gillette and disney and i went ahead and invested in a fourth company without asking you i invested in pfizer and i just wonder what you think about the pharmaceutical

industry if you feel there's some great companies in that industry thank you very much yeah well a we think sandy weil is a very very good manager zandi is i mean

the record is clear he it is not easy to manage uh in wall street and sandy has done an excellent job there as well as in in

other allied or somewhat allied fields so his his record is is proven uh and he is going to last ever since

buying commercial credit from control data he's built a terrific company and he's built a terrific company in businesses that themselves aren't necessarily so terrific so it's required

real management skill pharmaceuticals we missed uh we would not have known how to pick out any single business but we a single

company within the industry but we certainly should have recognized did recognize didn't do anything about it

that the industry as a whole represented a a group that would achieve good returns on equity and where some sort of a group purchase might have made sense we did we did buy

one a while back but we didn't it was peanuts and uh it would have been that it was within our circle of confidence to identify the industry

as likely to enjoy very high profits over time it would not have been within our circle of confidence to try and pick a single company charlie yeah we stupidly blew that one

we'll blow more too zone five yes sir good afternoon my name is matt lovejoy from lexington kentucky

and gladly i'm not a consultant i have a question sir mr buffett about your operating management style in my opinion the main

mainstream media minimizes the significance of your non-public operating investments when you consider capital allocation in

these companies do you have the managers submit annual business plans and if so do you formally meet with those managers

to see how well you can track progress against those plans yeah that's a good question and the answer is that we [Music]

we may meet with some of them annually we may meet with others semi-annually but we have no formal system whatsoever and we will never have a formal system we don't demand any meetings of any of

our managers uh we have no operating plan submitted to headquarters some of the companies use operating plans themselves some of

them don't they are all run by people who are have terrific records and they have different batting styles and we're not about to tinker with somebody

that's batting with 375 just because somebody else holds the bat a little differently or uses a different weight bat or something of the sort so we we believe in letting them do

currently and in the future what has been successful for them in the past and different people have very different styles i've got my own style you know but we we have managers that like to talk things over

we have other managers that like to go their own way and uh we have managers that have a a by the book approach which works well we have other managers that

wouldn't dream of that we have managers most managers probably have monthly statements of financials we have other managers that don't and it that really isn't a isn't a problem

we want to have as good managers and there is there's more than one way to get to at least business heaven and and we have a number that have found different ways uh to get there

so we have never imposed we have certain requirements because we're a public company and sec requirements and internal revenue service coordination but we have never imposed anything

uh from the top uh on any of the operating managements uh we have mbas running companies we have people that never saw a business school and

uh talent talent is the is the scarce commodity and when you find talent and they've got their own way of doing things um

we let it we're delighted to have him do it more than letting it have to do we want them to do it their way and we don't want to change them charlie yeah the truth of the matter is that we have decentralized

power in the operating businesses to a point just short of total abdication and we don't think our system is right for everybody

it it has suited us and the kind of people that have joined us but uh we don't have criticism for other people like emerson electric or

something who have operating plans and compare performance quarterly against plan and all that sort of thing it's just not our style yeah we centralize money and

everything else we decentralize pretty much but and i don't know whether you met him here but for example al yoshi is here he started flight safety in 1951 and he's i don't know what he'll spend on

simulators this year but it could easily be a hundred million dollars or thereabouts and he just if i spent hours with him i couldn't add one 100th of one percent uh his knowledge of how to allocate that

money i mean it would be ridiculous it'd be a waste of his time and it would be an act of arrogance on my part and i have no worries about

how allah allocates the money and and that's an unusually capital intensive business compared to most of our businesses there's some that i get into the details

more because i've just worked with a person that's running things a long time and we kind of enjoy it ajit and i talk virtually every night about the reinsurance business you know i am not

improving the quality of his his decisions at all but it's an interesting game and i like hearing about it he doesn't mind talking about it so we talk him over uh but that's that's just a matter of

personal chemistry uh and as we add managers we will we will adapt to them we adapt our accounting systems to a degree to them now we we do have certain requirements that

result from the sec and irs but uh we don't our managers know their businesses and uh they know how to run them and if they don't this hasn't been the case but if they

didn't we would you know we'd do something about the manager we wouldn't try and and build a bunch of systems zone six please good afternoon gentlemen my name is

george donner from fort wayne indiana my question has to do with estimating the intrinsic value of a company in particular the capital intensive companies like you

were mentioning i'm thinking of things like mcdonald's and walgreens but there are lots of others where you have a

very healthy and growing operating cash flow but it's largely or completely offset by heavy expenditures on

putting up new stores or restaurants or building a new plant and so my question is what do you do for your estimate of

future free cash flow and with treasuries around the long treasuries around seven six percent at what rate do you discount those cash

flows well we discounted the long rate just just to have a standard of measurement across all businesses but we would take the company that is spending the money as it comes in and

and they don't get credit for for gross cash flow they get credit for whatever net cash is get left every year but of course if they're spending the

money wisely even though you have to discount it for more years uh the growth in in in in cash development should offset that or they weren't investing it wisely the best

business is one that gives you more and more money every year without putting up anything to get it or very little and we've got some businesses like that

the second best business is a business that also gives you more and more money it it takes more money but the rate at which you invest reinvest the money to get that growth is is a very satisfactory

rate the worst business of all is the one that grows a lot and where you're forced and forced in effect forced to grow to stay in the game at all and where you're reinvesting

the capital at a very low rate of return and sometimes people are in those businesses without knowing about it but in in terms of discounting in terms of

of calculating intrinsic value you look at the cash that is expected to be generated and you discount back in our case we use the long-term

treasury rate that doesn't mean that you pay the amount that that present value calculation leads to but it means that you use that as a common yardstick that that treasury rate and

that means if somebody is reinvesting all their cash flow the next five years they better have some very big figures coming in down the road because at some day a financial asset has to give you back cash

to justify you laying out cash for now for it now investing is is the art essentially of laying out cash now to get a whole lot more cash later on and and something at some point better

deliver cash ben graham and his class used we used to talk about what he called the frozen corporation and the frozen corporation was a company whose charter prohibited it

from ever paying anything to its owners or ever being liquidated or ever being sold and sort of like a hollywood producer yeah and the question was what what was such an

enterprise worth well that's sort of a theoretical question but it forced you to think about the realities of of what business is all about and business is all about putting out money today to get

back more money later on charlie i do think there is an interesting problem that you raise because i think

there is a class of businesses where the eventual cash back part of the equation tends to be an illusion i think there are businesses where you just keep pouring it in and pouring it

in and then all of a sudden it doesn't work and no cash comes back and what makes our life interesting is trying to avoid those and getting

the alternative kind that drowns you in cash one the one figure we regard as utter nonsense is the so-called ebitda i mean the idea of looking at

a figure before the cash requirements of merely staying in the same place and there usually are any business with significant fixed assets you almost

always has with a a concomitant uh requirement that major cash be be reinvested in order simply to stay in the same place competitively and and in

terms of unit sales to look at some figure that is before uh that that is stated before those cash requirements is absolute folly and it's

been misused by lots of people who sell lots of merchandise in recent years it's not to the credit of the investment banking fraternity but it has learned to speak in terms of ebitda

i mean the idea of abusing a measure you you know is nonsense and then piling additional reasoning on that

false assumption it's not creditable intellectual performance and then once everybody is talking in terms of nonsense why it gets to be standard

zone 7 please hi my name is brandon vecchio and i'm in the academy of finance at northwest high school here in omaha could you explain the criteria you look

at when selecting your stocks well we look at and i'm glad you came i i hope there's a large group i got a note i think from your teacher on that the uh

[Applause] we look at it the criteria for selecting a stock is really the criteria for looking at a business uh we are looking for a business we can understand

that means they sell a product that we think we understand and we understand the nature of their competition what could go wrong with it over time and then when we find that business we try to figure out

whether the economics of it means the earning power over the next five or 10 or 15 years is likely to be good and getting better or poor and getting worse but we try to evaluate

that future stream and then we try to decide whether we're getting in with some people that we feel comfortable being in with and then we try to decide what's an appropriate price for what we've seen up

to that point and uh as i've said last year what we do is simple but not necessarily easy uh

the what the checklist that is going through our mind is not not very complicated uh knowing what you don't know is important and sometimes that's not easy

and knowing the future is definitely uh it's impossible in many cases in our view and and it's difficult in others and sometimes it's relatively easy and we're looking for the ones that are relatively easy

and then we uh and then when you get all through you have to find it at a price that that's interesting to you and that's very difficult for us now although there have been periods in the past where it's been a total cinch

uh and that's what goes through our mind if you were thinking of buying a service station or a dry-cleaning establishment or a convenience store in omaha

to invest your life savings in and run as a business you think about the same sort of things you think about the competitive position and what it would look like five or ten years from now and how you were going to run it who was going to run it for you and how much you

had to pay and that's exactly what we think of as when we look at a stock because the stock is nothing other than a piece of a business charlie yeah if

if finance were when finance is properly taught it should be taught from cases where the investment decision is easy

and the one i always cite is the early history of national cash register company and that was created by a fanatic who who

bought all the patents and had the best sales force and the best production plants and he was a force in the best production plants and

he was a very intel was a godsend to to retailing when it when cash registers were invented so that was the pharmaceutical so of a former age

if you read the an early annual report prepared by patterson who was ceo of national cash register an idiot could see that this was a talented fanatic very

favorably located and that therefore the investment decision was was easy if i were teaching finance i would collect a hundred cases like that and

that's the way i would teach the students we have that annual report what was that 1904 or something charlie but it's it's a really a classic report because patterson not only tells you why

his cash register is worth about 20 times but he's selling to for the people but he also tells you that you're an idiot if you want but he also tells you that you're an idiot if you want to go in competition with him but it's a classic

dude it is just a bit bored and not realize that this guy can't lose there you ate please good afternoon my name is robert rowland from london england

i've been in omaha all weekend with my wife on the first leg of my honeymoon and i've noticed your qualifier of nostalgic assets can i ask whether nostalgia is one of

your filters are there any are there any assets like that left in the us to buy and if not can i suggest you come to the uk where all we do is sell them

[Laughter] well i don't want to interrupt your honeymoon well but if you'd send me a list of those companies over there log on nostalgia that might be that might be to our liking because

charlie and i tend to uh operate from sort of a norman rockwell frame of mind and it is true that the the kind of companies we like sort of do

have a homing or a norman rockwell saturday evening post type character to them there they uh they have character and they're the kind of companies i think

frequently that the people when they join them expect to spend the rest of their lives there rather than and uh look at it as something to stick on their resume and

there are businesses like that if you look at the businesses that we've bought in the last three or four years there's a there is real character the the businesses and to the people that build them and that's why the

people that build them stay on and feel very strongly about running them correctly even have no financial consequence to themselves whatsoever so even

have no financial consequence to themselves whatsoever so after your honeymoon drop me a line zone nine pleasant good afternoon joshua andrews from omaha

northwest high school academy of finance good and on behalf of academy of finance we want to thank you for the tickets there's 33 of us in attendance terrific

[Applause] we had the opportunity to play a national game the investment challenge

and on the on the list of stocks there were burke a and burke b can you explain what the difference of the two stocks are yeah the difference between the berkshire a and b

is simply that an a can be converted to a b at any time in the ratio of 1a

into 30 b's the b cannot be converted into the a so it's a one-way street on into 30 b's the b cannot be converted into the a so it's a one-way

street on of the b is exist so anything that anytime the a ever gets any money of any kind uh from dividends or liquidation or a

merger or something of a sort for every 30 dollars that you get on the a you're going to get one dollar on the b the two differences are that there is less voting for power proportionately in

the b and the b does not participate in a designated contributions program that's that berkshire runs uh simply because uh

that that would be very very hard to administer and when we issued the b we pointed out those two differences the b should never sell for more than one thirtieth

of the price of the a when it sells just a tiny bit above that then arbitrage settles in as people buy the a and convert it to b and and cell to b

uh occasionally the b may be at a at a slight discount uh to the a because it's not convertible the other way but i think as a practical matter you can

treat the a and b as very equivalent investment choices there's a and b as very equivalent investment choices

there's area 10 please um my name is sheena show from the academy of finance what recommendations would you give us

as teenagers to pre to prepare for our future and become as successful as you well if you're interested in business

uh i definitely think you ought to learn all the accounting you can all by the time you're in your early 20s accounting is the language of business

now that doesn't mean it's a perfect language so you have to know the limitations of that language uh as well as well all aspects of it so i would advise you to

learn accounting and i would advise you to be [Music] in terms of part-time employment or anything else work at a number of businesses there's nothing like seeing how business operates to

to build your judgment in the future about about businesses uh the you know when you understand what kind of things are very competitive and what

kind of things are less competitive and why that works that way all of that adds to your knowledge so i would do a lot of reading if you're interested in investments i would a i would take the accounting courses i do a

lot of reading about investments and i would get as much business experience i would talk business with people that are in business to find out what they think

makes their operation tick or where they have problems and why i just think you just kind of sop it up every place that you can and if it turns you on you'll do well in it

i mean i think that if it uh you know there's certain activities grab different people but if business is of interest to you my guess is you'll do well and if you do

if you understand business you understand investments that investments are simply business decisions that uh in terms of capital uh investments are simply

business decisions that uh in terms of capital yeah there's also the little matter of underspending remastered that really works if you keep at them

yeah i mean charlie and i both charlie started having children at a rapid rate so he and he was a lawyer with there was not big money and then but

i was any money you save before you get out and start having a family is probably where any dollar is probably worth ten dollars later on simply because you can

save it it's the time to save is young and you'll never have a better time to save than really pre-pre-formation of a family uh

uh because the expenditures come along then uh whether you like them or not so i you know work for yourself first and and put the money aside i was lucky that way i didn't have to pay for my own college

probably wouldn't have gone to college if i'd had to pay for it but uh but i you know i was able to save everything i made in my teens and and uh those dollars

uh got magnified quite a bit whereas the money i when i started first selling securities i mean that that the money i made then was was taken up by family needs to quite make

sense so start saving early a lot of us have it anyway so it's a great habit to have zone one please

i'm i'm tony allison from new york city following up on the questionnaire from london in light of the current dearth of investment opportunities

do you see yourselves investing in non-us companies which are well managed understandable and growing

well if we find such companies as you describe at a price that's half attractive we're perfectly willing to buy them so the answer to that is yes but we would be looking

to an extent worldwide uh irrespective of market conditions in the united states now market valuations in this country are

tend to be fairly well matched in in most of the major company countries so we don't there's been a bull market all over the world uh in a huge way

in the bigger markets and and so unfortunately i mean it would have been nice for us if the u.s market had tripled and other markets had stayed the same and then we would be very likely to be finding things

abroad we're not finding them abroad but we certainly are they're certainly looking for the kind of thing you're you're talking about we are not reluctant to invest

abroad and uh our two two of our well all three of our largest holdings uh american express gillette and coke

and we're talking about 25 billion dollars of market value there that we have all three of those have major businesses abroad and in the case of coke and gillette it's it's a

majority of their earnings uh from abroad so we're interested and there's better growth opportunities in many areas abroad than here

finding bargains as we look around the world charlie nothing more okay are you two my name is henry allen

mcmarinak new york uh question i have is a little delicate relates to my family and heirs rather than myself

because i'm a couple of decades older than you gentlemen you've been very candid about the succession and the estate planning

but how will the recipients of huge grants charitable grants get the liquidity they need without

to use the money without unduly uh driving the stock down well i don't think that supply and demand in terms of

specific uh you know let's just say that three percent of berkshire were to be added to the supply annually i don't think that makes much difference what

really makes the difference is it is the prospects of the business i i uh if my charitable foundation were operative today

it would have to sell you'll have to it would have to give away five percent of the value of the foundation every year and if berkshire paid no dividend that means it would have to sell five percent of the

holdings per year i don't think that the price of berkshire would be materially different if there were a seller of that would be in this case two percent of berkshire's capitalization

i don't think it would be materially different if it is it probably should be different i mean it uh there should be a reasonable amount of trading that that

can take place annually without affecting the price of the stock materially or the price of the stock is being propped for on sort of unnatural reasons so i wouldn't i wouldn't really worry about that we had

we had one shareholder uh die about a year year and a half ago that had three quarters of one percent of the company for example it was sold in

i don't know six weeks or thereabouts and they raised at that time 250 million dollars or thereabouts from the sale i'm i am not worried about that i'm worried about

i mean i don't worry but uh but the the the key factor is what are the prospects of the businesses if the businesses are worth money there are all kinds of companies in their stock exchange who are perfectly decent

businesses where 30 or 40 percent of the stock turns over a year and and berkshire's price should not be way different if 10 trades a year as opposed to the present three percent

charlie i agree with that i don't think there'd be any problem at all at the present time with the bubbt foundation we're selling uh

five percent of its holdings every year could be 500 shares a week or something like that but there isn't demand for 500 shares a week if they on a company with our capitalization then the price probably

is artificially wrong at that time i just had lunch with susie and she doesn't look to me like she's in any imminent danger of mortality yeah it will it will come into play when

the when the the survivor of the two of us dies and and and when the when the estate gets cleaned up and everything else so i

i think certainly hope and i think it's quite a ways away you people have more important things to worry about [Applause]

zone 3 please my name is jim howard i'm from syracuse indiana my question is does the book methodology by mary buffett present

fairly in all material respects the calculations you used in evaluating the business for purchase or did the lady just write a book

well it was written by two authors but i would say that uh uh no i would i would say that in a general way it it gets at the investment

philosophy but uh but i wouldn't say that uh it's not it's not the book i would have written precisely but i but i have no quarrel with it either

i i actually think by reading berkshire's reports uh you should be able to get more i would think you get more of our philosophy than in any other manner i think larry cunningham

the uh fellow who held the symposium at the cardozo school at yeshiva did the best job actually of sort of reconstructing

the various things that that that have been written at berkshire into uh sort of the best organized presentation of our philosophy so he's selling it right here it's a very

practical yeah he had an abortion in the mall outside borsheim yesterday and larry did a very good job and and i had nothing to do with it but uh uh i think that that i really think he's

done a first-class job of sort of of uh organizing by topic i mean all these things that i've sort of written annually and charlie's written over time

so uh that would be that would probably be my if i were picking one thing to read uh that would probably be the one

okay zone four please my name is leora garner i'm from los angeles california and i want to begin by thanking you for having bob hammond

it was a strip of genius i could shop at four shimes and my husband was entertained while i did so well bob is not only the best bridge player around buddy but he is an

entertaining guy too he's great yeah he is great i agree with you uh my question um you owned disney once before and sold it

you also owned advertising companies in the 70s i believe right and you sold them could we have some insight into your thinking

as to why you sold them i'm not sure i want to give you any insight into that thing well we'll start off with the fact that when i was 11

i bought some city service preferred at 38 and it went to 200 but i sold at 40.

so grabbing my two dollars a share of profit so i had everything we've ever sold uh has gone up subsequently but some have

gone up more painfully subsequently than others and and certainly the disney sale in the 60s was a huge mistake i should have been buying i'd

forget about about holding and that's happened many times i mean we we think that anything we sell should go up subsequently because we are own good businesses

and we may sell them because we need money for something else but we still think they're good businesses and we think good businesses are going to be worth more over time so every everything virtually that i can think of

has gone on to sell it at a lot more for a lot more money and i would expect that would continue to be the case that is nice that is not that's not a source of distress but i must say that

that uh selling the disney was a mistake and actually the ad agencies have done very well uh since we sold them too now maybe some of that money went into coca-cola or something else so i i don't i don't

worry about that i would worry frankly if i sold a bunch of things right at the top because that would indicate that in effect

i was practicing the bigger fool type approach to investing and i don't think that can be practiced successfully over time i think the most successful investors if they sell it all

will be selling things that end up going a lot higher because it means that they've been buying into good businesses as they've gone along charlie well i'm glad that the questioner

brought this touch of humility because it is really useful to be reminded of your errors i mean and i think we're pretty good at that i mean we kind of mentally rub our own noses in our own mistakes

and uh that is a very good mental habit warren can tell you the exact number of cents per share of it that he sold out and compare it with the

current price it actually hurts him it actually doesn't hurt the truth is i that you know because it you know you just keep on doing things and it uh but but it is instructive

to look at to do post-mortems on on everything and as long as you don't get carried away with it but every acquisition decision that kind of thing you know there should be post-mortems done most companies don't like to do

post-mortems on their capital expenditures i i've been a director of a lot of companies over the years and and they've not usually not spent a lot of time on on the postmortems they spent a lot of

time on on telling how wonderful the acquisitions are going to be or the capital expenditures but they don't like to look so hard necessarily at the results think of how refreshing the board of directors

meeting would be if they sat down and now we'll spend three hours examining all our stupid blunders and how much we've blown and then after that the compensation committee will be no that

is not going to happen right okay area five please my name is keller harpel keller from portland oregon

two questions one of a personal nature obviously there are many many people here today and i wonder if one of the true

patriarchs of the investment business is here today any phil his friends and admirers would wish him well phil uh

phil up until a week ago was going to be here today phil was 101 wrote a wrote a book on investments in 1924 and i've known him phil for

about 46 or seven years and phil has made all the meetings for a number of years would be here today and he he uh he broke a hip

about five or six days ago and but he sent a message that uh he will definitely be here next year and he will be too and a message that

he will definitely be here next year and he will be too second question has to do with ben graham and

he changed his valuation standards as the decades progressed when he couldn't buy stocks below net net he changed his standards because the

environment changed now the world today seems to be a much different place than in 1989

when the ussr collapsed even they are stumbling toward the free enterprise system the russian mafia is a perverse

illustration of that now there is only one superpower in the world the usa and we must be extremely grateful for the

men who put us on the track to the free enterprise system now the free enterprise system is out of the bottle it's not going to get back in

it seems to be expanding and accelerating around the world but the resulting expansion of world trade

may that lead to a re-evaluation of historical measures for measuring investments well my answer to that would be that i

doubt it but i the end i also don't know but i don't think i don't think that the end of the cold war is something that i would

factor into my evaluation of businesses there are all kinds of events that happen and their impact in terms of being quantified

very difficult to figure overtime very difficult to isolate any single variable in a complex economic equation so uh in terms of how the world is going to

work 10 years from now or the returns are going to be on on equity and business you know i i don't i don't know what will be all the variables that impact on

that and and and and obviously right now people are very bullish about the fact that uh that uh those returns or something like those

returns will will continue but i don't i would not rely uh in making such a projection on the fact that

that cold war is ended or or really any any political or economic development around the world i don't know how to predict uh future earnings

of american business and when i look at all of the great historic events of the past nothing there gives me much in the way of a clue as to which ones

would signal major changes in profitability of american business charlie well i think you raised one very interesting question

if the rest of the world becomes very much more prosperous as it will if it adopts the free enterprise system uh which investments are likely to do best

i would argue that the cokes and gillettes and so on are likely to be helped by a great increase in prosperity and in what is now the third world

and i'm not so sure that's true of a lot of other businesses we like we like the international businesses we have and as i say that our three top holdings all have a major international aspect to

them and really in aggregate a dominant international aspect to them and and there's no question in my mind that a coke will grow faster outside of the united states than in the united states

and the same is true of gillette maybe the same is true of american express so that's built into what we our evaluation of those businesses uh uh

but i felt that way before 1989 too i mean it so it's very hard to evaluate how how the ball is going to bounce generally but it

around the world but it is a plus to have products such as gillette has or or kocav that have demonstrated the fact that

they travel extraordinarily well around the world the people crave those products and that they're going to and no one's going to find a way to do it better than those two companies in

their respective fields so and they sell an inexpensive product so all of that's going for us but in terms of how stocks generally sell or the profitability of american

business generally is uh in the future i don't it doesn't help me generally sell or the profitability of american business generally is uh in the future i don't it doesn't help anymore hi

my name is bartley cohen i just want to thank you for a great weekend and my question is um after you bought dairy queen i heard they put coca-cola into all the stores but yesterday when i went to the

nebraska furniture mart they said they don't take american express and my question is my question is do you encourage um the subsidiaries and the companies that you have stock to use each other each

other's products or do you leave it up to the management of the subsidiary well that's a good question and it does tell you something about the berkshire method of operation we we tell each subsidiary to run their

business in the way that they think is is best for their operation and uh warships takes american express seas takes american express the furniture

mark doesn't for example uh but that is that'll be true uh in other areas too uh uh

if harvey gala but american express who absolutely done a sensational job for us if he wants to talk with or have his representatives talk with anybody at any of our operations you know we're

all for that happening but we will never tell a subsidiary manager uh which vendor to uh

to patronize or or anything of that sort once we start making decisions for our managers in that respect then we become well for the operation and they are no longer responsible for the operation they are responsible for their

operations and that means they get to call the decisions and they should do what is best best for their subsidiary and it's up to any other company that wants to do business

with them to prove why that's that is best for them and that that's that's the berkshire approach to things and i think on balance our managers like it that way so they're not getting second guessed and somebody can't go

over their head i get letters all the time from people who are trying to jump over the heads of our managers and they want us to say this advertising agency should be used or that and that sort of thing

it doesn't work at berkshire they they deal with the managers of the the businesses and they're not going to they're not going to get around them charlie [Applause]

i love your answer it gives warren lots of time to read annual reports at headquarters area seven uh hello my name is steve erico i'm from new york

uh what do you think is likely to happen with respect to the tobacco settlement and what do you think should happen and secondly mcdonald's and dairy queen are similar

businesses was a relationship between your acquisition of dairy queen and the disposal of mcdonald's thank you yeah there's there's no connection in the second case there they have certain

similarities but there's certainly a lot of differences to uh uh you know a burger king of mcdonald's would be much more similar or wendy and mcdonald's but dairy queen is a

is much more of a niche than uh away from that the tobacco settlement's interesting just in terms of watching the dynamics of it because uh

one of the things in labor negotiations is always a problem is that when you as a manager you have a labor negotiation at the end of the negotiation

you as management are committed and basically the union isn't because the union is going to have a vote on it and that's just the way it is i mean you can't get away from that but it is

it is not fun to be in a negotiating position where you're bound and the other side is not bound and although that wasn't totally contractually necessarily the situation in the tobacco

area it it it smelled like trouble to me for the tobacco companies whether you feel they should have had that trouble or not but it smelled like trouble to me when they they were bound and you had

uh a another side that was not bound in any way and where there were lots of political considerations and whether a lot of time

was going to expire i mean that just that did not smell to me like a deal that would stick and i don't know any of the tobacco executives that were involved in that but i i don't know how much they

agonized over getting in a position where where they were bound and the other party wasn't but i can tell you from uh labor negotiations that that that's not a pleasant place to be and it's not

a great strategic place to be uh uh charlie what do you think on that i don't feel i've got any great expert deep expertise uh

in this situation well neither did i but i'm okay so hey please hello i'm jamie mcmahon from birmingham alabama and uh i was hoping

that uh mr buff and mr munger y'all would expand a little bit on your ideas of an inheritance and be positive

and negative influences that that can have on your heirs and what you might be able to do as a business person and an investor

and as a parent to uh sort of mitigate those negative influences yeah well i i quoted i think kay grandma was quoting her father at the time but

that uh some years back as saying if you're quite rich probably the idea of leaving your children enough so they can do anything but not enough so they can do nothing

is not a bad formula i i think if you're talking about people that aren't quite rich i think you know i socially i wouldn't have a

system that involved inheritances but but recognizing the situation that exists i think probably at lower levels that

that leaving to the children in this society is perfectly okay but uh i i believe enough in a meritocracy that i if i were if i were devising the system with a consumption tax and

everything i would probably make inheritance a form of consumption that would be very heavily taxed because i i don't believe that because you happen to be the come out of the right womb essentially that

you are entitled to live an entirely different life than somebody who wasn't quite as lucky in terms of womb selection uh but in my own case

you know i i follow the enough so they can do anything but but not enough so they can do uh nothing i think that society showered all these i was very lucky i was wired the right

way at the right time in history to to do very well in this kind of a market economy where as bill gates has told me if i was born some thousands of years ago i've been

some animals lunch you know i don't run very fast and and there are different different assets that are that are useful at different times uh and

you know i'm i'm not wired to play championship bridge or championship chess or i'm not wired to be a basketball star or anything it just so happens i'm an area where it pays off like crazy to be good at capital

allocation and that doesn't make me a more worthwhile human being than anybody else or anything it just it just means i was lucky and i should that luck

it just means i was lucky and i should that luck uh enable many generations of people that

i would have some reservations about that so that's my own feeling on inheritance but charlie has a bigger family and and he can give you a better answer

well i feel in a capitalist system that there should be an inheritance tax and but once that's been imposed and paid what

each person wants to do in his own testamentary arrangements is up to that person i see very few people

that i regard as ruined by money many of the people that i see ruined who have money would have been ruined without money and and

i think the percentage of the people that are going to be living the life of the french aristocracy before the revolution is always going to be very small and living

the life of the french aristocracy before the revolution is always going to be very small and there are plenty of grasping people to

take the money away from a whole class of incompetence ruling the word world as their money cascades ever higher so i like a fair amount of charity

and uh i'm certainly some testamentary charity is okay but i i feel it's an individual choice that people have to make

you get a choice there number nine my name is sammy wong from urban california i have two questions question number one

the uh do you think the usa market is overvalued today question number two uh would you buy personal hashway stock

today by proshar hedgeworth stock today considering the fact that if they have a nice run-up yes presumably i have a kid 20 years old and

he has 150 thousand dollars to invest in persian history and you won't need the money until five years later gradually

would you recommend to buy a share or be sure all the combination thank you if you decide to buy berkshire i don't think it really makes much difference whether you buy a or b

but we don't make any recommendations about whether people buy or or sell berkshire we never have and

that's a game we don't want to get into um in terms of overvalue the question where the market's overvalued generally it's it's simply as we said last year here in the annual report it's not the general

market is not overvalued if two conditions are met which is in our view which is that interest rates remain at or near present levels or go lower and or and

that corporate profitability in the u.s stay

at the uh present close to the present levels which are virtually unprecedented now those are a couple of big gifts as we pointed out a lot of the stories that came out after

the annual report would emphasize one aspect or another but it's simply and they say do what does he mean by that well it means exactly what i say if two if the two conditions are i think it's not overvalued and if the

if if either of the conditions is breached in an important way i think it will turn out to be overvalued and i don't know the answer which is why i put it with the in the form that i did

it's very tough at any given time to to look forward and and know what level of valuation is is justified you do know when certain dangerous

things appear and certainly if you're predicating your answer that stocks are okay at these prices you have if you come to that conclusion you have to

also come to the conclusion that in our view that corporate earnings at present levels are likely to be uh maintained and and that's a conclusion

you would have to come to i don't think it's obvious that that's the case area 10 please good afternoon my name is jamie harmon and i'm from boston um

you say that companies should only spend a dollar on capital expenditures if it will create more than one dollar of market value i'm wondering how do you determine this is it based on a

historical returns on capital b a qualitative judgment of the company's competitive position historical returns on capital b a qualitative judgment of the company's competitive positions a

quantitative projection of the returns on capital or d something else we can say today every dollar we've retained has been worthwhile because i've on

balance those dollars uh have produced more than a dollar of market value and and it's actually with a great many companies you could you could say that

now because uh things have turned out so well but um it would be a case to check on it is a over every if after

three or four years you've found that the dollars we've retained haven't created more than value then then the presumption becomes very strong at that point that we should start

paying out money but almost any management that wants to retain money is going to rationalize it by saying we're going to do wonderful things with the money we retain and and

we think there should be checks on that which is why in the report and the ground rules i suggest making checks uh on the validity of those projections charlie and i

if you asked us today whether the single dollar we retained from the earnings today we've got a use for today that will produce about more than a dollar value the answer is no we do think that

based on history that the prospects are that better than 50 percent well over 50 percent in the next few years we

would have an opportunity to do that but there's no certainty to it charlie nothing more okay area one please charlie

nothing more okay area one place good afternoon my name is gary byalis i'm from southern california i want to thank you again for producing my uh can you tell me if the

rule of thumb is still applicable regarding the statement in the owner's manual that the percent increase in the book value of attracts pretty well the percent increase in intrinsic value or

is the fact that you now have more owned businesses especially ones like geico and flight safety mean that the spread between those two is possibly narrowed well this you know the true have tracked

pretty well uh over over the years i mean compared to the record of most businesses uh that are publicly owned uh i would say that over the 33 or so

year span our market prices tracked intrinsic value more closely than 80 or 90 percent of the companies that

we view probably 90 percent but that doesn't mean it does it all the time and there are times when the market uh but that doesn't mean it does it all the time and there are times when

the market had the change in intrinsic value and there are times when obviously then that it will lag behind so it's far from perfect uh but it's better than most

ideally we would like it to track it perfectly if we had we ran this as a private company and we met once a year and set a price on the stock to have it traded once a year

and charlie and i were responsible for setting that price we would try to set a price that was as close to intrinsic value as we could and that would be to the extent that we could do it it would be a perfect tracking the market

isn't like that and the market responds to a lot of other other things so it it's not perfect it's not getting more perfect in our view but uh we still think that bird

companies charlie companies charlie nothing to add i'm elizabeth cruz from new york city i

have a question about gillette another significant gillette investor kkr recently sold over a billion dollars in gillette shares shares that they had acquired through gillette's acquisition

of duracell knowing that kkr has also been a successful investor do you see this as a negative signal about gillette's future prospects

particularly on the eve of the launch of the mach 3 razor and what do you think their plans are for the remainder of their shares well i think they they may have even publicly stated i'm pretty

sure they have the duracell shares which from which the gillette shares came uh were held by a specific investment fund that was formed in a i don't know what

year but a given year and which was is scheduled to disband at a certain point so those shares whether they were of duracell or whether they're of gillette

were scheduled for disposition at some point within a given term and i think that kkr made the decision and they've made it with other stocks too

is to have maybe three or so offerings between now and that terminal date for their partnership and why they pick any one of uh any given date you know it's up to them and their advisors

uh it means nothing to us i mean with the uh if they didn't have that kind of a fun and they decided to sell it wouldn't make any difference to them and i presume if we made a decision to sell it wouldn't make any difference

in their case so we you know we form our ideas of valuation independent of anybody else's thinking on it but in the case of kkr

specifically they have a termination date on a partnership that owned those shares and and have to dispose of them one way or another between now and the termination date and probably decided

that with the quantity of stock they had that they were going to have several sales the mach 3 is terrific it's quantity of stock they had that they were going to have several sales

uh the mach 3 is terrific incidentally i didn't use park 3.

area 3 please i'm gertrude goodman from palm springs california mr buffett and mr munger

there are many stocks that rise and eventually split my question is do you foresee in the near future

a split for berkshire hathaway class a well that's an easy one no the answer is no we uh we have no plans to split the a uh

in effect we let people who want to split the a uh split themselves into a b at a so anybody that owns the a can have a 30 for one split any morning they wake up

and want to have such a split and charlie do you have any additional comment no i think you said no perfectly

[Applause] we don't we don't take that attitude because we're cavalier about how shareholders feel we really think that in your in the long-range interests of

berkshire that the policy we followed on not splitting has has benefited the company and shareholders we uh nothing dramatic about it but i think

that that we have a better class of shareholders in aggregate in this room than we would have if we were selling it three dollars a share or thirty dollars a share or maybe even

three hundred dollars a share area four please good afternoon mr buffett and mr monger my name is jack sutton from new york city

i have two questions the japanese stock market has been likened to the u.s market in 1974

with japanese stocks selling at very low price to book values as compared to u.s

stocks would it not make sense to invest in a basket of japanese stocks or an index fund of japanese stocks

question number two berkshire hathaway tends to invest in companies with high margins

and high return on common equity berkshire's investment in the airline business seems to have digressed widely from those principles

could you elaborate on why berkshire invested in the airline industry and would berkshire consider new investments in the industry

in the future now going to the first question the reason that and i don't know the exact figures the japanese stocks would sell at a lower

price book ratio than u.s stocks is simply because japanese companies are earning far less on book than american companies and earnings are

what determine value not book value book value is is not a factor we consider uh future earnings are a factor we consider and and as we

mentioned earlier this morning uh earnings have been poor for a great many japanese companies now if you think that

that the return on equity of japanese business is going to increase dramatically uh then you're going to make a lot of money i mean and you're correct you're going to make a lot of money in japanese stocks but

the returns on equity the return on equity for japanese businesses has been quite low and that makes a low price to book ratio very

very appropriate because earnings are measured against book and the company's earning five percent on book value i don't want to buy out of book value uh if i if i think it's going to keep

earning five percent on book value so uh a low price book ratio means nothing to us uh it does not intrigue us in fact if anything

we are less likely to look at something that sells at a lower relationship to book than something that sells at a high relationship to book because the chances are we're looking at a poor business in the first case and a good business in the second case

um the uh what was the other question on charlie buying it airlines all right yeah i always repress everything on airlines i don't want to

we never we've never bought an airline uh common stock that i can remember so what we did was we lent money to u.s air

for a 10-year period and we had a conversion privilege there it looked like it it was a terrible mistake i made the mistake but it we got bailed out but we

we've never made the determination when we bought our stock u.s air was selling at fifty dollars a share they're about to the common and we didn't have an interest in buying usa at 50 or 40 or 30 or 20.

uh and we got a chance to as things went along all the way down to four and we never bought it uh and we never bought american or united or delta or any other airline it is not a business

that intrigues us we did think it was intriguing to to lend money to them with a conversion privilege and it's worked out now as it because we got lucky and because steve

wolf came along and and and really rescued the company from right at the brink of bankruptcy uh but we're unlikely to be in airlines although

again we wouldn't mind lending money uh to a lot of businesses that we wouldn't buy common equity in i mean that that that could happen again in various industries including the airline

industry uh charlie do you have anything to say on either the airlines or the japanese market well the airline experience was very unpleasant for us

the net worth just melted it was like a billion and a half and it just went 100 million 100 million 100 million and

finally the cash is running down it is a very unpleasant experience and we try and learn from those experiences but we're very slow learners

japanese oh the japanese market i suppose anything i suppose anything could happen after all we bought silver

but uh we have never made a big sector play on a country i think we've almost never made a big sector play

we would have to come to the conclusion the japanese business instead of earning whatever it's earning on equity now is going to earn appreciably more on equity i've got no basis for i wouldn't argue anybody else feels that way

i wouldn't argue with them but i have no basis for coming to that conclusion and unless you come to that conclusion you're not going to make good returns i mean unless that unless that happens you're not going to make good returns

from japanese stocks you cannot you can't earn a lot of money from businesses that are earning five percent on or 60 on equity and i look at the reports but i don't see

i don't see um the earning power now now maybe it'll all change i mean there's there's talk of well there's already been a small temporary tax cut but corporate tax rates are quite high as you know in

japan and they used to be 52 here in the united states now they're 35 so you could have things happen that increased corporate profits but i don't have any special insight into that

that that uh anyone that reads the press generally would not have there are also readings in corporate culture that have

to be made owning stock in a corporation where you know that if shareholders or somebody else has to suffer the choice is likely to be that

somebody else will be chosen that is a different kind of a company to invest in than one that thinks that the principal purpose of life is to keep some steam boiler

company going in a particular community or something no matter how much the shareholders suffer i think it's hard to judge corporate culture in the foreign countries as well as we can judge it in

our own area five yvonne edmonds from cedar mountain north carolina i have a specific question but not a trivial one

uh your um you you regularly compare berkshire hathaway's performance to the s p 500 which is very helpful

and uh and very interesting but i haven't seen um a correlation coefficient between the s p 500

daily from day to day performance close say and the and berkshire hathaways closed now it so happens for me and i'm sure some other people in the audience that

um i don't always have access to newspapers or the internet for that matter newspapers that publish

berkshire hathaway performance on a daily basis or even a weekly basis for that matter or a monthly basis it would be very helpful to know the extent

of a correlation coefficient between those two variables if you have that would you let us know what it is and if you don't would you

please consider calculating it in the future well it could be calculated but i don't think it would have much meaning i mean it would be an historical correlation coefficient which you know i would

i would be very reluctant to have people place any weight and i try to indicate even the limitations of the yearly comparison of the relative

performance because what was doable by us in the past is not doable today i i mentioned in my annual report the best decade i ever had on comparative performance by far was the

50s now i don't think it was because i was a lot smarter than i'm unwilling to accept that but uh you know i i had some edge of

um well there's probably um 40 plus points per year uh but i was working with it that has no relevance to today whatsoever it would

be misleading uh uh to publish it or make calculations based on it so i i think i think that you would find i don't know what you'd find on a

specific correlation between berkshire and the s p you'd find a lot of correlation well you might not find so much you'd find it an intrinsic value between that and coke and a few stocks like that but i don't i don't really think that's

that's uh particularly useful information uh going forward we have no objection anybody wants to make the calculation but it wouldn't be something that would be of any utility

to us and if we don't think it should be utility to us we don't want to put it out for shareholders as being a possible utility we do think that the s p annual calculation has some meaning because it's an alternative for

people uh to invest they don't need us to buy the s p so unless over time we have some advantage over that uh

you know what what are we contributing what value is added by by our management so we think that that's people should hold us accountable even though we wouldn't we would prefer not to be because that it is a tough

comparison for us as a tax paying entity against the non uh pre-tax calculation on the s p but we don't pay any attention to beta

or any of that sort of thing it just doesn't mean anything to us we're only interested in price and value and that's that's what we're focusing on all the time and any kind of market movements or anything don't mean

anything i don't know what berkshire is selling for today and it really makes no difference you know it just doesn't make any difference what does count is where it is 10 years from now and

i can't tell you what it was selling for on may 4th 1983 or may 4th 1986. so i

don't care what it says on may 4th 1998.

i do care you know where it is in general 10 years from now and that's where all the focus is charlie yeah we're publishing data

in the forum where we would like it if we were the passive shareholder and so you're getting the data and you're

getting it on a time schedule based on what we would want if we were in your position and we don't think and we don't think the correlation confessions would help us

we don't think anything that relates either to volume price action relative strength any of that sort of thing and bear in mind when i was in my teens

i used to eat that stuff up i mean i was making calculations based on it all the time and kept charts on it wrote even wrote an article or two on it but it just it just has no place in the

operation uh now one of the pleasant things about dealing with warren all these years is he's never talked about a correlation coefficient if the correlation isn't so extreme you can see it with the negative i he

doesn't compute it okay we're going to go to zone six and i'm gonna have a dilly bar and charlie got one here too these are terrific mike my question has to do with what you

mentioned earlier about how companies have to reinvest a certain amount of cash in their business every year just to stay in place and if one could say that the best

businesses are the ones that not only throw off lots of cash but can reinvest it in more capacity but i suppose the paradox is that the

better companies opportunities for making expansionary capital expenditures the worse they appear to be as consumers

of cash rather than generators of cash what specific techniques have you used to figure out the maintenance capital expenditures that you need to do in order to figure out how much of cash how

much cash a company is throwing off what techniques have you used on gillette or other companies that you've studied well if you if you look at a company such as gillette or coke

you won't find great differences between their depreciation forget about amortization for the moment but depreciation and and sort of the required capital expenditures if if we got into a hyper-inflationary period or i mean you

can find you can set up cases where that wouldn't be true but by and large the depreciation charge is not inappropriate in most companies to use

as as a a proxy for required capital expenditures which is why we think that reported earnings plus amortization of intangibles usually gives a pretty good indication

of of of earning power and uh i don't i i've never given a thought to whether gillette needs to spend 100 million dollars more 100 million dollars less

than depreciation in order to maintain its competitive position but i would guess it's the range is even considerably less than that versus its uh its recorded depreciation

uh the businesses you have to worry about i mean an airline business is a good case in airlines you know you just have to keep spending money like crazy and you have to spend money like crazy if it's attractive to

spend money and you have to spend it the same way if it's unattractive you just it's part of the game even in our textile business to stay competitive we would have needed to spend

substantial money without any necessary any any clear prospects of making any money when we got through spending it and those are real traps those kind of businesses and

they may work out one way or another uh but but they're dangerous and in a seize candy we would love to be able to spend 10 million 100 million 500 million

dollars and get anything like the returns we've gotten in the past but there aren't good ways to do it unfortunately we'll keep looking but it's not a business where capital produces the profits

uh flight safety capital produces the profits you need more simulators as you go along and more pilots are to be trained and so capital is required to produce profits but

it's just not the case it sees and at coca-cola particularly when new markets come along you know the china's of the world or or east germany

or something of the sort the coca-cola company itself would frequently make the investments needed to build up the bottling infrastructure to rapidly capitalize on those markets the

old soviet union so those are those are expenditures you don't even make the calculation on them you just know you've got to do it you've got a wonderful business and you want to have it spread worldwide and you want to

capitalize on it to its fullest and you can you can make a return on investment calculation but as far as i'm concerned it's a waste of time because you're going to do it anyway and and you know you want to dominate those markets over

time and eventually you'll probably fold those investments into other bottling systems as the market gets developed but you don't want to wait for conventional bottlers to do it you want

to be there one of the ironies incidentally it might get a kick out of some of the older members of the audience that when the berlin wall went down and coke was there that day with uh

with coca-cola for for east germany that coke came from the bottling plant at dunkirk so there was a certain poetic irony there

charlie do you have anything in there i've heard warren say since very early in his life that the difference between a good business and a bad business is usually the

good business just throws up one easy decision after another whereas the bad this business gives you a horrible choice

where the decision is hard to make is this really going to work is it worth the money the if you want to

system for determining which is a good business and which is a bad business just see which one is throwing the management bloopers time after time after time

easy decisions it is not very hard for us to decide to open a new seas store in a new shopping center in california that's

obviously going to succeed it's a blooper on the other hand there are plenty of businesses where the decisions that come across your desk are just awful

and those businesses by and large don't work very well i've been on the board of coke now for 10 years and we've had project after project come up and there's always an roi but it doesn't really make much difference to me

because in the end almost any decision you make that solidifies and extends the dominance of coke around the world

in an industry that's growing by a significant percentage and which has great inherent underlying profitability the decisions are going to be right and you've got people there that will execute them well you're saying you get

blooper effort yeah and then charlie and i sat on u.s air

and the decisions would come along and it would be a question of you know do you buy the eastern shuttle or whatever it may be and and you're running out of money and yet to play the game and to keep the traffic

flows such as with connecting passengers and everything you just have to continually make these decisions whether you spend a hundred million dollars more on some airport and and they're agony because again you don't have any real choice

but you also don't have any real conviction that it's going to translate those choices are going to or lack of choices are going to translate themselves into real money later on so one game is just forcing you to push

more money into the table with no idea what kind of a hand you hold and the other one you get a chance to push more money in knowing that you've got a winning hand all the way charlie

why'd we buy us there [Laughter] could have bought more coke area seven my name is

my name is bakul patel i am from upstate new york my question is is berkshire prepared for 1929 style of depression or like a

prolonged bear market that exists in japan 1929 style of depression or like a prolonged bear market that exists in japan well

funny we don't expect what you're talking about but we are probably about as well prepared as any company can be for adversity because um we uh

berkshire has been built to last uh net we would benefit over a 20-year period by having some periods of terrible markets uh periodically in that 20-year period

that doesn't mean we're wishing for them and it doesn't mean they're going to happen but we make our money by allocating capital well and and the lower the general stock market would be the better we can

allocate capital so we're we're well prepared but we're not necessarily expecting charlie yeah we are not going to ever

sell everything and go to cash and wait for the crash so we can go back in on the other hand we are structured so that

i think net a lot of turmoil in the next 20 years will help us not hurt us i don't mean it'll be pleasant to go through the down cycle but

it's part of the game area eight my name is pete banner from boulder colorado uh first of all uh mr buffett mr munger

thank you for your genuine generosity today berkshire closed yesterday the a share

was about uh for friday 69 000. and the

b share was about 2300 do you feel that price is uh grossly overpriced or grossly underpriced or

reasonably priced well i'll let charlie answer that one i'm not going to say now we we we're just never going to we're never going to give out advice on berkshire stock that

there's no you know that is up to people who who want to buy and sell it and anything we would say could easily get

magnified and people would be acting on it months later and who knows all the problems that it could produce so it would be quite eccentric if we were to every day put out an announcement now's the time

to buy now's the time to sell our own stock eccentric we are but that eccentric we aren't area nine

i'm irene finster your long time partner from tulsa hi irene yeah irene has a soda fun you ought to go visit her first i want to thank you for giving

your shareholders the opportunity to select their own charities and second i'm very concerned about your

health due to your diet of red meat [Applause] irene these are our products that i'm eating red red meat candy

ice cream and um and that's just what i do that's what i do in public and i want to know what your doctor says

my doctor says i i must be heavily relying on my genes now i will tell you i i mean charlie and i are both very helpful if you were in the life

insurance business uh you would be happy to write us at standard rates i can assure you uh you know they asked george burns when he was 95. what

does your doctor say about smoking these big black cigars and he said my doctor's dead charlie and i played bridge with george when he was about 97 i'd say at the

hillcrest country club and there was a big sign behind him and said no smoking by anyone under 95.

[Laughter] and actually at his 95th birthday party he had about five very good-looking young girls that were there to greet him with it with a big cake and everything and he looked them over one

after another and he said oh girls he said i'm 95 one of you is gonna have to come back tomorrow [Music] we're very big on george burns in recent years

area 10.

my name is uh hubert voss i'm from santa barbara california earlier this morning you made a comment that if the market fell

you would be spending less time on the internet because you'd be very busy and this has reinforced an impression i have had that the cash flows of berkshire

hathaway are enormous but that possibly in the last 12 months you've been investing less than you had previously and if so if this is correct what does

that say about waiting for attractive values how long are you willing to to weigh and what does that say to the investment public in their own habits well you're correct

that we have not found anything to speak up in uh inequities in in a good many months and uh the question of how long we we wait

we wait indefinitely we we are not going to buy anything just to buy something we will only buy something if we think we're getting uh something attractive uh and that and incidentally if if things

were five percent cheaper that were ten percent cheaper that wouldn't change anything uh materially so um we have no idea when that period ends we have no idea whether at least so

um we have no idea when that period ends we have no idea whether free tonic would he stay where they're at they are but they they're even then they aren't in the least mouth-watering so

we won't feel we've missed anything particularly uh if returns stay where they are because if if it turns out that these levels are okay uh they still will not produce great returns from here in our view that

doesn't mean you couldn't have a tremendous market in the short term or something of the sort markets can do anything i mean you look at the history of markets and you just see everything under the sun um

but we will not you know we have no we have no time time frame if the money piles up the money piles up and uh when we see something that makes sense

we're willing to act very fast very big but we're not willing to act on anything that doesn't uh that doesn't check out in our view there's no you don't get paid for activity you only get paid for being

right charlie yeah uh an occasional dull stretch for new buying this is no great tragedy in an investment lifetime

and other things may be possible in such an era too i mean it isn't like we have a quiver with only one arrow we sat through periods before i mean the most dramatic

one being the early 70s late 60s and early 70s for a long time it seemed doesn't seem so long when you look back on it seems long when you're going through it but it it's like having a tooth pull or

something but it's you know what can you do about it the uh the businesses aren't going to perform better in the future just because you got antsy and decided you had to buy something

we'll we will wait till we find something we like we'll love it when we can swing in a big way though that's that's our style

area one larry pickowski milburn new jersey berkshire seems never to have made any real pure real estate

investments with the not counting facilities the operating companies might own with the exception of west coast involvement in the residential project

in california i was wondering if you've ever looked at a real estate transaction and tried to apply the same filters meaning

competitive advantages returns on capital that you do in operating companies and if not is it a circle of competence issue or is there something

you find disinteresting about real estate yeah okay charlie i want to take this let me take this one because here's a area where we have a perfect record that

extends over many decades we have been demonstrably foolish and almost every operation had to do with real estate we've ever touched

every time we had a surplus plant and didn't want us hit the bid and let some developer kind of take on unfair advantage of us we would have been better off

later if we'd hit the bid and invested the money in fields where we had the expertise that housing track that i developed because i didn't want to let the zoning authorities rob

me the way they wanted to i wish i had let them we have a certified record of failure in this in this field and we the funny thing is we understand

real estate and we're good at it right but and actually as a correct aside we do understand real estate and charlie got to start real estate yeah but we understand other things

better and so the chances that we're going to be big in real estate are low yeah we we we've seen lots of things and we've uh

the prices that you know just don't intrigue us in in terms of what we uh what we get for our money i i tried to buy a town when i was uh

what 21 years old the us government had a town in ohio for sale and would have worked out very well as i i've always there's nothing about the

the arena that that turns us off but the we don't see we don't see great returns uh available and

and like charlie says the few things particularly having an old plant or something that is not we have not been great at working our way out of those fortunately they haven't been very important in relation

to the net worth of berkshire area too good afternoon my name is fred castano from detroit michigan my question

concerns nike is a company experiencing some short-term problems but is a great company with an excellent track record phil knight is similar to bill gates in

the respect that he's a marketing genius and is a very hard worker making sneakers is a very simple business with high margins how do you view nike and what do you think of the company

well i think phil knight is a terrific operator i think and and he's a he's a he's a competitor he's got a lot of money in nike but as in terms of what we think of the stock

you know we we keep all of those views to ourselves pretty much area three [Laughter]

hello my name is ed clinton i'm from chicago illinois i'm wondering about the tobacco litigation there's also have been some comments

about fatty food do you think there's going to be a new trend of fatty food litigation coming out of the tobacco problems well i sign a waiver before i

do any of that myself the uh no i i i would doubt i would i i do not see those two as being remotely uh remotely similar but uh

charlie do you have any different views on it well i think the traditional tort system is particularly ill-suited for solving what

might be called the tobacco health problem so i regard that whole thing instead of a mad hatter's tea party and we set out from afar

area four yes i'm fred bunch from near tightwad missouri in light of the what was the name of that company that town

tightwad missouri tight wide missouri huh there's a bank there did they name it after me or charlie well neither one

you'd both fit in in light of today's healthy growth and stability of the american economy at the present time and over the last five years or so

how much credit if any do you give the clinton administration and why well i give credit to uh i give credit going back to volcker uh significant

credit to boker uh i give credit to reagan going back to volcker uh significant credit to bulker uh i give credit to reagan who uh

certainly to greenspan and and and to reuben and this tax bill was very important they're carried by one vote and uh i think he he may listen to ruben uh

so i i think there's i think there's a lot to give credit for and i think you can spread it around a fair amount charlie may be less charitable here let's see no i've got no great quarrel of the way

the country economy is performed i think it's way better than any of us would have predicted area five my name is travis keith i'm from dallas

texas and my question regards what phillip fisher referred to as scuttlebutt when you've identified a business that you consider to warrant further

investigation more intense investigation how much time do you spend commonly both in terms of total hours and in terms of the span in weeks or

months that you perform that investigation over well the answer to that question is that now i spend practically none because i've done it in the past and and

one advantage of allocating capital is that an awful lot of what you do is is cumulative in nature so that you do get continuing benefits out of things that you've done earlier by now it's

cumulative in nature so that you do get continuing benefits out of things that you've done earlier by now to the businesses that that might qualify but when i started out and for a long time

i used to do a lot of what phil fisher described i i followed this scuttlebutt method and and i don't think you can do too much of it now the general premise of why you're interested

in something should be 80 of it or thereabouts i mean you you don't want to be chasing down every idea that way so you should have a strong presumption you should be like a basketball coach

who runs into a seven footer on the street i mean you're interested to start with now you got to find out if you can keep him in school if he's coordinated and all that sort of thing that's the scuttlebutt aspect of it

but i i believe that as you're acquiring knowledge about industries in general companies specifically that there really isn't anything

like first doing some reading about them and then getting out and talking to competitors and customers and suppliers and ex-employees and current employees

and whatever it may be and you will you will learn a lot uh but it should it should be the last 20 or 10 percent i mean

you don't want to get too impressed by that because you really want to start with a business where you think the economics are good where they look like seven footers and then you want to go out with a scuttlebutt approach to

to possibly reject your original hypothesis or maybe in in and if you confirm it maybe do it even more strongly i did that with american

express back in the 60s and essentially the scuttlebutt approach so reinforced my feeling about it that i kept buying more and more and more as i went along and

uh if you if you talk to a bunch of people in an industry and you ask them what competitor they fear the most and why they fear them and all of that sort of thing you know who who would they use the silver bullet of andy groves on and so on

you're going to learn a lot about it you'll probably know more about the industry than most of the people in it when you get through because you'll bring an independent perspective to it and you'll be listening to everything everyone says rather than coming in with

these preconceived notions and just just sort of listening to your own troops after a while and i advise it i don't really do it much anymore i do it a little bit and i i talked in the annual report about how when we made the

decision on keeping the american express when we exchanged our perch for common stock in 1994 i was using the scuttlebutt approach when i talked to frank olson i couldn't have talked to a

better guy than frankel said frank olson running hertz corporation lots of experience at united airlines and consumer marketing guy by nature

i mean he understands business and and when i ask him how strong the american express card business and and when i ask him how strong

the american express card i mean he could give me an answer in fiverr that i could accomplish in hours and hours and hours or weeks of of roaming around and doing other things so you can learn

from people and frank was a user of it i mean frank was paying x percent to american express uh for his hurts cars and and frank doesn't like to pay out money so

why was he paying that and if he was paying more than he was paying on master charger visa why was he paying more and what could he do about it i mean you just keep asking questions and

i guess davey explained that in that in that video we had ahead of time i'm very grateful to him for doing that because that was a real effort for him but but that was that was really what i was doing back in

1951 when i visited him down in washington because i was trying to figure out why people would insure with geico rather than with the companies that they were already insuring with and how permanent that advantage was and you

know how what other what other things could you do with that advantage and you know there were just a lot of questions i wanted to ask him and he was terrific and and giving me the answers it you know changed my life in a major

way so i've got nobody to thank but but baby on that but that's the scuttlebutt method and i do advise it charlie nothing to add area six

all right my name is richard lontock from toronto canada i have a question for both of you uh mr buffon berkshire's hathaway's earnings in 1997

is less than that of 1996.

what do you intend to do in 1998 to improve that earning and uh mr munger i've been watching you and mr buffett eating the seas candies

and drinking the coca-cola the whole day join in do you intend to do any commercials in the future like what dave thomas does with wendy's [Laughter]

which of us do you think we should do them now you're talking we aren't old enough to be really good in a commercial what we would what we would like to do is have

somebody up here happily eating sea's candy and answering these questions who's about 110 years old that would really be

helpful we uh in terms of the earnings the the final bottom line gap reported earnings mean absolutely nothing at berkshire to us what now the look for earnings

which we publish do have some meaning but even those have to be interpreted in terms of whether there was a super cat occurrence or whether geico had an unusually good year and we try to mention those factors but we do hope that the look through

earnings do build us at a reasonable clip uh over time uh but our final earnings include capital gains and we can report

those in any number that we wanted to and we paid no attention whatsoever to to uh realize capital gains at berkshire the irs does but uh

and that's why we may send them a billion or more dollars this year but they mean nothing in terms of measuring our progress uh they look through earnings

say something about it that table the first couple of pages that shows are changing in book value versus the s p says something about it not perfect uh the real test is to gain an intrinsic

value for sure over time and that there's no hard number for that but so far charlie and i judge it satisfactory but we also judge it as non-repeatable

charlie anymore no area seven please good afternoon mr buffett and mr munger my name is keiko mahalik

and i'm an mba student at wharton but please don't hold that against me we won't i never made it that far i was an undergraduate student could you please explain

how you differentiate between types of businesses in your cash flow valuation process given that you use the same discount rate across companies

for example in valuing coke and geico how do you account for the difference in the riskiness of their cash flows we we don't worry about risk in the

traditional uh the way you're taught actually at wharton uh we but i i i it's it's a good question i i

believe me uh but what we're if we could see the future of every business perfectly it wouldn't make any difference whether the money came

from running street cars or from selling software because all the cash that came out which is all we're measuring between now and judgment day would spend the same to us it really

the industry that it's earned in means nothing except to the extent that it may tell you something about the ability to develop the cash but it doesn't tell it has no meaning on the quality of the cash

uh once it becomes distributable we look at riskiness essentially as being sort of a no a go no-go valve in terms of looking

at the future businesses in other words if we if we think we simply don't know what's going to happen in the future that doesn't mean it's necessarily risky it just means we don't know it measures risky for us it might not be

risky for someone else who understands the business in that case we just give up we don't try to predict those things and we we don't say well we don't know what's going to happen so

therefore we'll discount it at nine percent instead of seven percent some number that we don't even know that is not our way to approach it we feel that once it passed a threshold test of being something about which we

feel quite certain that the same discount factor tends to apply to uh to everything and we try to do only things about which we're

quite certain when we buy into uh the businesses so uh we think all the capital asset pricing model type reasoning with different rates of uh

of risk adjusted return and all that we tend to think it is what we don't tend to we think it is nonsense and but we do think it's also nonsense to get into situations

or to try and evaluate situations where we don't uh have any conviction to speak of as to what the future is going to look like and we don't think you can compensate for that by having a higher discount

rate i'm saying it's riskier so that i don't really know what's going to happen i'll have a higher discount rate that that just is not our way of approaching things charlie yeah this

great emphasis on volatility in corporate finance we just regard as as nonsense it just

if we have a statistical probability of putting out a million and having it turn into let's put it this way as long as the odds are in our favor

and we're not risking the whole company on one throw or anything close to it we don't mind volatility in results what we want is the favorable odds we figure the volatility over time will

take care of itself on get berkshire if we have a business about which we're extremely confident as to the business result we would prefer that it have high volatility than low

volatility we will make more money out of a business where we know where the end game is going to be if it bounces around a lot

i mean for example if people reacted to the monthly earnings of seas which might lose money eight months out of the year and and makes a fortune you know in in november december if people

reacted to that and therefore made its stock as an independent company very volatile that would be terrific for us because we would know it was all nonsense and we would we would buy in july and

and sell in january well obviously things don't behave that way but when we see a business about which we're very certain but the world thinks that it that its fortunes are going up and down

and therefore it behaves volatile with great volatility you know we love it uh that's that's way better than having uh a a lower beta so we think that

that we we actually would prefer uh what other people would call risk when they when we bought the washington post i've used that as you know went down 50 in a matter of a few months best

thing that could have happened i mean that doesn't get any better than that the uh business was fundamentally very non-volatile in nature i mean tv

stations and and a strong dominant newspaper that's a non-volatile business but it was a volatile stock and uh you know that is a great combination

from our standpoint there he ate good afternoon and thank you for staying around to answer our questions i have two first of all would you give us

what logic when and this went into your decision to both buy and sell mcdonald's and my second question goes to a term that you've used you've talked about the

caliber of the shareholders of berkshire hathaway how do you define the caliber and what difference does it really make well it makes a lot of difference and we

our idea of a high caliber group is one that is just like us [Laughter] and that's not entirely facetious in that we we basically want shareholders

who look at the business the same way we do because we're going to be around running something and what could be worse than having a group out there had a whole different set of expectations than we did and that evaluated us in a

different way or all of this sort of thing i mean if you are going to you're you're going to have a given number of shares outstanding let's say we have an equivalent of a million 200 and some

thousand a shares somebody's going to own every single share now would you rather have them owned by people who understand your business who understand your objectives who measure you the same way you do who have similar

time horizons or would you rather have the reverse it makes a real difference over time to be in with people that are compatible with you so it's a

significant plus to us the operation of the business and it leads to a more consistent relationship between price and intrinsic value when

you have a group like that because they understand themselves and they end the business they're not likely to do silly things in either direction so you get a much more consistent relationship than if we had a whole bunch of people

who were thinking that the most important thing in evaluating this business was next quarter's earnings question about mcdonald's simply is you know it's a it's an outstanding business and and

we don't talk about it when we buy it we don't talk about it if we sell it charlie yeah the question of what difference does it make to the management

who the shareholders are well if you are into what i call trustee capitalism where the shareholders aren't just

a faceless bunch of nothings but you feel as a kind of a hair shirt an obligation to do as well as you can by the shareholders well

wouldn't you rather feel an obligation to people you liked instead of people you didn't like yeah let's say you were running a business and you had a choice of three

owners you'd have 100 of it owned by whatever your favorite philanthropy is you could have 100 of it owned by the us government and you could have 100 percent owned by you know the worst person you

can think of in you know in your hometown i mean i think it would make a difference in how you felt about going to work every day number nine yes uh my name is steve check i'm from

southern california my question has to deal with kind of quality versus price i've been to three annual meetings and i've heard great things about coke every year but as far as i'm aware you have

not bought any additional shares of coke over the last three years even though the stock has done just fine if an investor has a relatively short time frame say three to five years how much weight do you think one should give

to quality versus price well if your time frame is three to five years uh hey hey i wouldn't advise it being that way because i think if you think you're going to get out then

it gets more toward leaning toward the bigger pool there the best way to look at any investment is how well i feel if i own it forever you know and put all my family's net worth in it

but we basically believe in buying if you talk about quality meaning the certainty that the business will perform as you expect it to perform over a period of time so the range of

possible performance is fairly narrow um you know that's the kind of business we like to buy and uh all i can say is that we like to pay a comfortable price and that depends to some extent on what interest rates are

uh we haven't found comfortable prices for the kind of businesses we like in the last year we don't find them uncomfortable in the sense that we want to sell them uh but

they're not prices at which we we added to coke one time about i don't know five years ago or thereabouts and it's conceivable we would add again it's a lot more conceivable we would add and subtract

but that's the way we feel about most of the businesses we did make a decision last year that we thought bonds were relatively attractive and we trimmed certain holdings and

eliminated certain small holdings uh in order to make a big bigger commitment in bonds charlie yeah you you talk about quality versus price

the investment game always involves considering both quality and price and the trick is to get more quality than you're paying for in the

price it's just that simple but not easy no but not easy area 10.

gentlemen good afternoon jeff kirby from green village new jersey would you comment please on tax-free spit-offs to shareholders in general and

particularly how you would feel about those were you to believe that a materially higher value would be ascribed to one of your operating

companies in the public arena than as part of berkshire hathaway well there's certainly been times in berkshire's history when certain certain components

of berkshire might well have sold at higher multiples as individual companies than the amount they contributed to the whole of berkshire although i don't think that would be the case now but

our reaction to spin-offs would be even if we thought there was some immediate market advantage it would have no interest basically to us that uh

we like the uh the group of businesses we have as part of a single unit at berkshire we hope to add to that group of businesses we will add to that group of businesses over time

and the idea of creating a lot of little pieces because we could get a little more market value in the short term it just doesn't mean anything to us charlie yeah it would add a lot of frictional

costs and overheads and we have to i don't know anybody our size who has lower overhead than we do

and uh and we like it that way yeah our right now our after tax cost of running the operation has gotten down to a half a basis point of capital

value when you think that um many mutual funds are at 125 basis points that means they have 250 times the overhead ratio to uh

to capitalization and only guts a bunch of marketable securities and we got that plus businesses yeah we don't need any more but we can get lower we can get a lot lower

i know you think they'd work for 500 a year instead of 900 groans from the front row uh area one

good afternoon mr buffett and mr monger i was kind of curious if you could tell me do you know or can you tell us how much business nebraska furniture mart

and boy tell me do you know or can you tell us how much business nebraska furniture mart and investing in the auto industry and if not interested now what

would change your mind about this industry in the future well the first question i i don't know what the mark did but i do know they had a lot of shareholders there i've gotten

a verbal report on that if there would be less change in their normal but they they do you know you're talking about a company that at the mart that does

800 000 a day on average uh uh it is a big operation so our shareholders have an impact but not the relative impact that they would have at porsche porsche did over

twice as much this year as uh last year and they had a big day and uh what was the other question charlie industry

the auto industry oh the auto industry yeah we charlie charlie was big in uh general motors in the mid 60s right cheerleading was your biggest commitment i had a temper

luckily it passed yeah oh you made money on it yeah i did uh we it's kind of interesting it's a it's interesting for us to follow i mean it

it many years ago it was the dominant factor and or overwhelming factor in the economy it's diminished fair amount but it's still a

very important industry and it's it's the kind of industry that anyone can follow i mean you have experience with the product and and competing products and you

everyone in this room understands in a general way that the economic nature of the industry but we've never felt that we understood it better than other people uh so

we've seen auto companies at very low multiple sometimes and with prices that in hindsight look very attractive but we've never really felt that we knew who among the auto companies five years

from now would have gained the most ground relative to where they are now or to gain the most ground relative to what the market might expect it just isn't given to us that that

knowledge charlie i agree area two hi my name is scott rudd from

eden prairie minnesota and my question is this ten years from now and i'm referring to bore shines as the retail

uh part of it to the consumer not so much the corporate division ten years from now what would be the three things that you would expect division

ten years from now what would be the three things that you would expect on a day-to-day operating basis to change the money are you talking

about borsheim specifically yes yeah i think borsheim's you know what three things but i have borsheims may be one of uh a couple of our companies that where the

internet could be a huge uh have a huge potential for us i don't know if that'll happen but but there's no question that that

we operate and i've got a message on the internet that at considerably very considerably lower gross margins than does

a tiffany or or publicly held jewelry operations we are giving customers considerably more for their money we've got way lower operating costs than than the public companies and i say on the internet our our operating

costs are 15 to 20 percentage points and even more in some cases less than publicly owned publicly owned competitors so we've got a lot to offer now the big question people always have with jewelers is how

do you know who to trust i mean you know it is an article that most people feel very uncomfortable buying and uh i think that the berkshire hathaway

identification can help people feel comfortable on it i think that the experience of customers around the country as they see it and i don't think that uh uh

i i i think it is a product hi it's a it's a high ticket item so saving money gets to be really important just like auto insurance saving money gets to be really important so i think that

the internet could be of significant assistance to borsheims in terms of spreading uh and facilitating uh its its

nationwide reputation so porshams could have a lot of growth in the internet could be a big part of it our job is to get the message to people around the

country that they can literally you know have us send a half a dozen items to them that they can look at with no high pressure salesmanship at all or anything of the sort and look at the

look at the prices decide what they want uh in in their own hide what they want uh in in their own homes and they will do very well with us uh each of that now

but we could have 10 or 20 or 50 times that number uh as the years go by and i think we should we should work very hard on that geico has possibilities through the

internet obviously also anything where you're offering a terrific deal to the consumer but one of the problems has been how do you talk to that consumer you know the internet offers

possibilities that now the thing is that everybody in the world is going to be there and why should they click on you instead of somebody else actually the berkshire hathaway name may help a little bit on that although geico's name

is is extremely well known geico is is i said in the annual report we were going to spend 100 million dollars and basically in promotion this year we'll spend more money than that the the

brand potential in geico is very very big and we intend to to push and push and push on that charlie

well all that said if the internet helped some of our business well certainly the cd-rom uh and the personal computer combined the

clobber world book for us yeah we paid our entry fee yeah we it's not all plus no area three my name is george gotti from zurich

switzerland and my question refers to two food businesses namely mcdonald's and derrick we are there major differences in the investment

characteristics between mcdonald's and dairy greens and if yes would you explain them yeah there are mcdonald's and dairy greens and if yes would you explain them

yeah there are major differences mcglide i can't tell you the exact percentage but if they've got 23 000 outlets they own many many thousands of them and operate them and then of the remainder they own a very high percentage and and

lease them to their operators their franchisees so they have a very large investment on which they get very good returns

in physical facilities all over the world dairy queen has

counting orange julius 6 000 plus operations of which 30 odd are operated by the company and even those some are in in joint ventures or

partnerships so the investment in fixed assets is dramatically different between the two the fixed assets investment

by the franchisee or the person as landlord obviously is significant at a dairy queen but it's not significant to the company as the franchisor so that

the the capital employed in dairy queen is relatively small compared to the capital employed in mcdonald's but mcdonald's also makes a

lot of money out of out of uh out of owning those locations and receives whereas dairy queen will in most cases receive four percent of

of the franchisees uh sales in in terms of a royalty uh at at a mcdonald's the that there's that there's that more than

that percentage plus bus rentals and so on so they're two different very different economic models they both depend on the success

of the franchisee in the end i mean you have to have a good business for the franchisee to over time have a good business for the parent company both both

companies have that to over time have a good business for the parent company both both companies have that charlie

it's not very much when you stop to think about providing a group of franchisees with the nationally recognized brand and quality control and

all sorts of desirable uh business aids four percent is it the law if you look at the whole industry four percent is on the uh

in the lower part of the range but part of the worst part of this yeah yeah part of what attracted us was the fact that the the part of the protected us yeah part of

what attracted us was the fact that the the operation for significantly more than he has invested in tangible assets and and we want it that way obviously

because that means he's got a successful business and it means that that over time we will have a successful business uh you want you want a franchise operate you want

the franchise operator to make money and you want him to create a capital asset that's worth more than he's put in it that's the goal area four

good afternoon mr munger mr public my name is patrick byrne i'm a shareholder and i'm here from cincinnati ohio back again this year to ask a question to see if i can

get the two of you to disagree on a subject i've picked education as an area where we might see some daylight between the two of you first though on the subject of education

i'd like to offer some brief thanks i'm lucky and that my parents uh in the late 70s made them a wise choice of buying some berkshire stock and putting it in a college fund for my brothers and

me and are that basically paid for our higher education i suspect there must be thousands of people like us who had our education

paid for by wealth that the two of you created and we owe you although we probably all have a lot

better to skip college and keep stock [Laughter] well on the subject of education milton friedman has said it was written

that if you if you really care about poverty in the u.s

and the disadvantage of women and minorities and so on that and you could cure one single thing in the u.s it

would be the public education system uh mr mr buffett of course you've been very publicly supportive and done many things and i'm sure mr munger has as well

for the for public education but i i noticed last year uh in this annual meeting mr munger well both of you i noticed last year

uh in this annual meeting mr munger well both of you business schools but mr a he was a tad critical i would say of the

us public education system and i wonder if you two agree with what friedman says and what you think the importance of public education is

and what might be done to improve it charlie go on a second but i just want to say patrick byrne is the son of jack byrne who made a fortune for us uh

by resuscitating geico when he got into trouble in the mid 70s in fact i met patrick's dad on a wednesday night about eight o'clock at night in washington when

geico was it was bankrupt and it was about very close to being declared so and uh after talking with about three hours that night the next day i went out and

bought 500 and some thousand shares of geico that davey referred to at 208 so which is 40 cents on the stock that we paid 70 dollars for later on so

patrick's patrick's dad we made we made the burn family a little money he made us a lot of money uh patrick is now running fetch heimers in cincinnati doing a sensational job as brother mark

uh i on june 30th i if we hit the target date we'll be establishing a a

major operation uh in london and bermuda that will in which we will be a very large partner so he's only got one other

brother left and he's out playing golf in california but if times get tough we're going to try and recruit him too now charlie with that all that time

to prepare what do you have to say about education well i certainly agree with milton friedman that there's it'll be hard to name one factor if we

could fix it that would be more worthy of fixing than the m1 factor if we could fix it that would be more worthy of fixing than the uh

particularly the education where the failures are so horrible in many big cities particularly so

yes i think it's a terrible problem and it needs fixing of course there's a huge debate as to what the best ways to

what the best way is to fix it and i am skeptical myself of big city school systems getting fixed uh under their own

momentums in other words i'm quite sympathetic to the people who say we may have to go to an alternative like that the incentive structure is

has gotten so bad in some places that that you can't fix it with evolution it takes revolution warren you're more optimistic about well i'm not necessarily more optimistic i

probably feel though that that democracy without a a good public school system available to

the entire population is sort of a mockery because there's there's so much inequality to start with i mean it isn't just an inequality of money but i mean my kids whether they

inherit any money or your kids whether they inherit any money uh compared to the kids of somebody that or both parents are struggling to keep the place going or maybe just one parent and

living in poverty i mean it is so unequal to start with that if you extend maybe just one parent and living in poverty i mean it is so unequal to start with that if you accept

uh giving those who are generally higher up who have chosen the wrong womb uh i think that that just i don't think the society should tolerate that our

rich society should tolerate that doesn't mean it's easy to solve because i've said a lot of times that unfortunately it seems like a good public school system is

is like virginity that it can be preserved but not restored and it's it's it's very hard when you get a system that's lousy to do much about it because under those

circumstances the wealthy people are going to all opt out of the system and they're going to be less interested in the bond issues they're going to be less interested in the pta they're going to be less interested all opt out of the system and they're going to be less interested in the bond issues they're

going to be less interested in the pta they're going to be less involved with the other people's children if they've got if they have all opted out from another for the poor uh with the poor being uh

getting the poorer system strikes me as doing nothing but accentuating inequality and other problems that result from that in the future so i don't know the answers on on improving

the system you know i read some of the experiments that take place but i do believe to start with that you have a good public school system as we do in omaha that you do

your damnedest to to maintain that so that there is no incentive for the rich grandparent or the rich parent to say you know i love the idea of equality but i love my grandchildren and

my child more so i'm going to yank him from the public school system and then you get this sort of exodus which leaves behind which leaves behind

only those who can't afford to make that shot there were a way the idea of competition i like you know and i think a good parochial system does for example create a better

public system when i think we've had that situation omaha but i think the voucher system if it simply amounts to giving everyone an additional amount simply means that the the rich get

x dollars of the of the public school system subsidized but uh the poor still or whatever that differential is uh remains i mean you could have a golf voucher

system because i play golf i don't play very often but if i play at the omaha country club then you could have a because i play golf i don't play very often but if i play at the omaha country

club and you could have a voucher system so that everybody in omaha uh would have more access to the they wouldn't do the job for the guy who's on the

public course because he'd still still be beyond his means to move to full-scale equality with me i you know i don't think there's anything more important

and i agree with charlie totally i think the first eight grades you know you can forget it after that if you have the first eight grades right uh good things are going to flow and if you have those wrong

you're not going to correct it as as you get beyond that point and i think that wrong you're not going to correct it as as you get beyond that point and i think that

on the 500 million dollars i think it is very tough to see results and producing results i think it should be replicated elsewhere i think that obviously uh fellow chicago says that

the unions have caused considerable problems in getting adjustments made but he had the political clout behind him to overcome some of those problems uh it ought to be it ought to be a top

national priority we have the money to any to educate everybody well in this country and the question is is if we got you know can we and uh that's something i hope good minds like

patrick's work on charlie you have anything for that yeah i think when something is demonstrably failing at performing the function which is assigned

by a civilization just to keep pouring more and more money into a failing modality it's not the monger system so i'm all for

taking the worst places where there's failure and trying a new modality and it wouldn't bother me at all to have vouchers only for the poor but i think we have to do something in

our most troubled schools to to to change our techniques i think it's insane to keep going the way we are so you go for means tested vouchers basically oh i i mean i i i i don't

disagree with that idea but all i know is where it is a terrible place to fail and

and part of the trouble is ideological if you have a absolute rule there can't be any tracking by ability no matter how much better reading can measurably be taught

by by systems that involve tracking well people that brain blocked shouldn't have the power you know we should we should we we should do what works

you always got plenty i mean all mod works the the problem is the problem is that once it gets behind beyond a certain point on a downhill slope essentially you have the citizens that are able to do

something about it essentially opt out and that i don't know i am a product of the omaha public schools and in my day and i my the people who went to private schools

where those who couldn't quite hack it in the public schools that is still a situation in germany today i mean private schools are people who aren't up to the public schools i prefer

a system like that but once a big segment of that system measurably fails then i think you have to do something

you don't just keep repeating what isn't working well i agree with that patrick have you gotten your answer let's go to area five

my name is kevin murphy i'm from camarillo california and my question is what do you look for when det when determining a pers if a person is honest

or not well that's a good question kevin uh you i think i think generally charlie and i can do

pretty well with the situations we see but we have to we have to have some evidence of behavior in front of us and uh i would say even there's some occupations where we're going to expect

to find a higher percentage of people who behave well than others but if we work with someone over a period of

a few months or more i think we've got we can come up with uh a pretty high batting average uh in in terms of how they behave but at solomon i i think i

i was able to separate out the people who i felt very good about and the people i was a little more nervous about uh fairly quickly among the ones i worked

with actively but how you spot that precisely uh you know leave your lunch money on there on their desks sometimes maybe you'll find out in a hurry but

we we like people you know you i mean the the the great example you know is somebody like a tom murphy where they they're just bending over backwards all the time to make sure that

you get the better end of the deal or that that doesn't mean they aren't competitive i mean if you play my golf game for money or something like that you know he wants to win the worst way but it but he

but there are people that just they don't take credit for things that they didn't do they in fact they give you credit for some of the things that maybe they did and

you can you can you can get a feel for it over time charlie you have any good guidelines on that yes i i think that people leave track records in life

and so somebody at your age should figure that by the time he's 22 or 3 well he will have left quite a track record and the world will be able to figure you out so

so i think that i think track records are are very important and if you start early trying to have a perfect record and in

some simple thing like honesty you're well on the way to success in this world johnny angeli one time told me he said he said when you get older you have the reputation you deserve he said you can

get away with it for a while uh early on buddy by the time anybody gets to be uh 60 or so they they very probably have the

reputation you deserve and the truth is you can have the reputation that you want if you if you list all of the things that you admire in other people you'll find out that

almost everything you list you may not be able to kick a football 60 yards or something of that sort but every almost everything you listen the people that you admire and like they're qualities that that

that you can have if you just set out to do that and ben franklin do that charlie oh sure i always say that to get what you want is to deserve what you want

i'll have some more peanut brittle [Laughter] uh area six i'm nancy sell from atlanta georgia

you were asked earlier this morning a question about the year 2000 computer problem do you anticipate any negative financial impact to the economy

or to our companies due to the millennium problem and if so what financial strategies are you considering well i don't think there'll be major problems

for our companies you know there are going to be some problems anytime you have something that big uh if people didn't see it coming in 1980 or 1985 they're not going

to be perfect at solving it by by 2000 and you can count on that but i don't think i don't think it has any investment consequences uh

for berkshire hathaway that that we should be considering now and i do think you'll see most of the problems in the governmental area you know maybe they won't find your tax return for two or three years who knows

charlie yeah area seven uh in your description of mcdonald's you have the sense that there's a great

business buried in mcdonald's and two good businesses that are mixed in with it and the problem is with the the real estate and the operational business that as the company is currently capitalized they can earn the

same kind of returns they can earn the franchising business you were or still are as significant shareholders mcdonald's i guess my question is the solution is obvious why

don't you push for a solution that creates the same opportunity you have an international dairy queen well my guess is i don't know the details on it but my guess is that

with 23 000 locations all over the world i think it would be extraordinarily difficult to

separate the real estate business out from the franchising business at this point i think they could have gone a different route i'm not saying it would have been a better route at all in fact i think the odds are they followed the right route and in in

in in owning and controlling so much real estate but i think i just think the problems would be horrendous certainly you wouldn't you wouldn't want to sell it and lease it back because

you would not end up with more value in my view by doing that uh and spinning it off in a real estate trust or something with operating in 100 plus countries uh

and with all the franchise arrangements i think it would be a huge huge problem i would not want to tackle it myself so i i think that you should look at mcdonald's and i don't know anything about their

plans on this but i think you should look at mcdonald's as being a a very good business but the one that will continue in its present mode visa to be the real estate although i

think they've signaled that they're going to do less on new properties uh somewhat less in connection with ownership than they've done to this point but there's 23 000 locations out

there and every operator his own arrangement is very important to him and it just it would be it would be a mammoth job and i'm not sure how much extra value would be created in the end

anyway charlie yeah the net returns on capitol mcdonald is earned all these years are high even though they have owned a lot of the

real estate i think it's hard to quarrel with the way they did it they had a they had the best record and the multiple is not greatly different in my view than if the real

estate were separate you know i mean now if you if you get all the real estate detached in some arrangement you might get a little more out of it but it doesn't strike me as a big deal

area yeah hi i'm rachel white from missoula montana and during the lunch break i heard some people talking about

double taxation and how that impacts berkshire's investment philosophy so i was wondering if you could talk a little bit about it i'm not sure i understood it and if you could explain whether that

impacts your investments well we are structured very poorly uh and if you were looking if you if you're going to start all over again and

do some most of the things we've done you would you'd probably not do it in in corporate form or price precisely like we do it i mean what that gentleman was talking about in connection with mcdonald's applies much more to

berkshire hathaway even by far than mcdonald's in terms of detaching part of the income stream if if we own coca-cola with the cost of a billion two or a billion three and a

market value of 15 billion we're not going to sell it but if we did sell it we would incur a capital gains tax on the order almost a 5 billion

uh that means that the 15 becomes 10 billion now if that 10 billion is reflected in berkshire's value and you bought your stock when we bought

our coke then you pay a second tax in in in turn in in in the re in uh in reflection of the coca-cola appreciation that's taking place after

tax so it's a very disadvantageous way of owning securities to have a corporation in between you and the securities themselves if we ran as a partnership that would not be the case i ran berkshire hathaway i mean i ran

buffett partnership for many years and we only had one tax at the at the individual level so our stockholders uh are to the extent that we own marketable

securities and we own a lot of them at the extent that we have a lot of profits over time in those all those securities in a disadvantageous way now one of the we also have a float which helps us own

them which is a big plus but corporate ownership of securities if you have the option of owning them directly or through a partnership

corporate ownership is disadvantageous and we are we're stuck with it we've had it for all these years we've got no plans to do anything about it we couldn't probably do anything about it if we wanted to

uh so that is a drag on our performance compared to what would be the situation if we operated as a partnership and lloyd's syndicates for example didn't have that problem

some insurance companies that operate and bermuda may not have that problem to the same extent certainly partnerships don't have that problem to the extent they own securities but it's it's a fact of life with us and

we're going to pay a lot of taxes charlie yeah we we have no cure for the corporate income tax and it is a big disadvantage

for the indirect owner of securities so far we've surmounted it well enough but but we're we're carrying a load there it's become a bigger disadvantage since the

individual rate went to 20 with our corporate rate being 35 yes if we make a dollar on a stock it becomes 65 cents and to the extent that you've owned berkshire that's 65 cents

now 20 off that becomes becomes 52 cents whereas if you'd own the stock correctly you'd have had 80 cents now when we owned geico and it wasn't consolidated with us you could have carried that one more extreme i mean

geico had had capital gains and we had a capital gain proportionally in geico and so on i mean it how your structure does make a real difference but

usually once you get into a given structure you're kind of stuck with it as i indicated in the answer to the gentleman on mcdonald's now to the extent we have very long holding periods at the corporate level

the real mathematical disadvantage shrinks yeah and we might not have been able to get the float that we have if we hadn't been operating it in a corporate structure so that is a mitigating factor too but

we like to have the mitigating factors without anything to mitigate if we get our choice area nine please good afternoon my name is fred

strossheim and i'm from here in omaha i have a question about your acquisition methodology and i was intrigued to read in your annual report about your acquisition of

star furniture and as i understand the process you followed mr buffett you met with mr are you i'm sorry you reviewed financials

for a brief period liked what you saw and then you met with mr melvin wolfe for two hours and struck a deal and you you wrote you had no need to check leases work out

employment contracts etc right i think that most companies when they do acquisitions would feel the need to do a significant amount of legal due diligence to do things like check the

leases check into things like undisclosed environmental liability or perhaps threaten litigation and i guess my question is have you ever been burned by your approach

we've never been burned by the the we've been burned only in the sense that we've made mistakes on judging the future economics of the

business which would have had nothing to do with due diligence we regard you regard what people normally refer to due diligence as as really sort of boilerplate in most cases it's a process

that big companies go through and they feel they have to go through it and they're ignoring oftentimes in our view they're ignoring what really counts which is evaluating the people they're getting in with it

and evaluating the economics of the business that's 99 of the deal you know you may run into an environmental liability problem you know one time in a in a hundred or you may you know you may find a bad lease i asked melvin about

you know do you have any bad leases i mean that's the easiest way to do it and uh i can read them all and try and look for every clause or something but it isn't gonna you know it that is not the problem

we've made bad lots of bad deals we made a bad deal when we bought hoshocone for example a department store operation back in 1966 but it had fine people

but we were wrong on the economics of the business but the leases didn't make any difference or you know that sort of thing just was not important and i can't recall anytime that that what

other people referred to as due diligence would have avoided a bad deal for us i can't either no that's 30-something years and i the key thing

you just don't want to do i i go into i'm on various public company boards i've been on 19 public company boards and you know their idea of the due diligence to send the lawyers out and have a bunch of investment bankers come in and make presentations and all that

and i regard that as as terribly diversionary because the board sits there you know entranced by all of that and everybody reporting how wonderful this thing is now they've checked out patents and all that sort of thing and

nobody is focusing really on where the business is going to be in five or ten years and uh you know business judgment about economics and and people to some extent the the

business economics that is 99 of deal making and the rest uh people may do it for their protection

i think too often they do it as a crutch just to go through with the deal that they want to go through with any anyway and of course all the professionals know that so believe me they they come back with the diligence where they're due or not and

uh we we are we are not big fans of that uh we have i don't know how many deals we've made over the years but i i cannot think of

anything that traditional due diligence has had a thing to do with and and no we've had surprises in the on the favorable side a couple of times that is true that is true the kind of people that

we've generally dealt with have usually told us the bad things first and good things after we made the deal that uh we made a deal with a fellow over in rockford in 1969 eugene abeg

the illinois national bank and trust company i made that deal on a couple of hours and i mean there was just wasn't any way that gene was going to be hiding anything bad for the next 10 years when i went over every time i go to lunch

he'd point out some building it down that we owned that wasn't on the books or some foundation we had that had money in it he hadn't told me about and he even gave me some bills one of which i carry in my pocket that he had still

sitting around with with the uh that were issued by the bank that were our own money which he never told me about yet and we could cut them out like paper dolls i mean gene was not a guy to show all his cards and

those are the kind of people we've generally dealt with and i would certainly say that the uh that melvin and and shirley fit that description in spades we're now at 3 30. it's been a lot of

fun this weekend i'm glad you came and i hope to see you next year thank you