The Best of Berkshire: 2010-2018

ARNOLD KENNEDY
Copyright © 2019 Arnold Kennedy

All rights reserved.

ISBN: 1091075078
ISBN-13: 9781091075078
 CONTENTS

1 Valuation & Accounting 1

2 Technology & Future Trends 31
3 Specific Industries 52
4 Life Philosophy & Advice 91
5 Wall Street 113
6 Investing Tips 132
7 Business Philosophy 157
8 Buffett’s Life Story 194
9 Berkshire Hathaway 201
 1
VALUATION & ACCOUNTING

.
Putting business values in income account is
“enormously deceptive” – 2018 Meeting
AUDIENCE: Mr. Buffett, in this year’s shareholder letter you have
harsh words for the new accounting rule that requires companies to use
market value accounting for their investment holdings. ″‘For analytical
purposes,’ you said, ‘Berkshire’s bottom-line will be useless.’ “I’d like to
argue with you about that. Shouldn’t a company’s earnings report cite
everything that happened to, and within, a company during an accounting
period?
Shouldn’t the income statement be like an objectively written newspaper
informing shareholders of what happened under the management for that
period, showing what management did to increase shareholder value and
how outside forces may have affected the firm?
If securities increased in value, surely the company and the shareholders
are better off. And surely they’re worse off if securities decreased in value.
Those changes are most certainly real. In my opinion, ignoring changes in
the way that some companies ignore restructuring costs, is censoring the
shareholders’ newspaper. So my question is, how would you answer what I
say?
BUFFETT: Well, my answer to the question that asks what my answer
would be to what he said - the - I would ask Jack, if we’ve got $170 billion
of partly-owned companies, which we intend to own for decades, and which
we expect to become worth more money over time, and where we reflect
the market value in our balance sheet, does it make sense to, every quarter,
mark those up and down through the income account, when at the same
time we own businesses that have become worth far more money, in most
cases, and become, you know, since we bought - you name the company -
take GEICO, an extreme case - we bought half the company for $50
million, roughly.
Do we want to be marking that up every quarter to the value - and
having it run through the income account? That becomes an appraisal
process. There’s nothing wrong with doing that, in terms of evaluation. But
in terms of - and you can call it gain in net asset value or loss in net asset
value - that’s what a closed-end investment fund, or an open-investment
fund would do.
But to run that through an income account - if I looked at our 60 or 70
businesses, or whatever number there might be, and every quarter we
marked those to market, we would have, obviously, a great many, in certain
cases, where over time we’d have them at 10 times what we paid, but how
quarter-by-quarter we should mark those up and run it through the income
account, where 99 percent of investors probably look at net income as being
meaningful, in terms of what has been produced from operations during the
year, I think would be - well, I can say it would be enormously deceptive.
I mean, in the first quarter of this year - you saw the figures earlier -
where we had the best what I would call operating earnings in our history,
and our securities went - were down six billion, or whatever it was, to keep
running that through the income account every day you would say that we
might have made on Friday, we probably made 2 1/2 billion dollars. Well, if
you have investors and commentators and analysts and everybody else
working off those net income numbers and trying to project earnings for
quarters, and earnings for future years, to the penny, I think you’re doing a
great disservice by running those through the income account.
 I think it’s fine to have marketable securities on the balance sheet - the
information available as to their market value - but we have businesses
there - we never would do it - but if we were to sell half, we’ll say, of the
BNSF railroad, we would receive more than we carried for them, we could
turn it into a marketable security and it would look like we made a ton of
money overnight. Or if we were to appraise it, you know, appraise it every
three months and write it up and down, A, it could lead to all kinds of
manipulation, but B, and it would just lead to the average - to any investor-
being totally confused. I don’t want to receive data in that manner and
therefore I don’t want to send it out in that manner. Charlie?
MUNGER: Well, to me it’s obvious that the change in valuation should
be noted, and it is and always has been - it goes right into the net worth
figures. So the questioner doesn’t understand his own profession. I’m not
supposed to talk that way but it slips out once in a while.
The Relationship Between Intrinsic Value and Interest
Rates – 2017 Meeting
AUDIENCE: At what rate has Berkshire compounded intrinsic value
over the last 10 years? And at what rate, including your explanation for it
please, do you think intrinsic value can be compounded over the next 10
years?
BUFFETT: Yeah. Intrinsic value, you know, can only be calculated —
or gains — in retrospect. But the intrinsic value pure definition would be
the cash to be generated between now and Judgment Day, discounted at an
interest rate that seems appropriate at the time. And that’s varied
enormously over a 30 or 40-year period. If you pick out 10 years, and
you’re back to May of 2007, you know, we had some unpleasant things
coming up.
But I would say that we’ve probably compounded it at about 10 percent.
And I think that’s going to be tough to achieve, in fact almost impossible to
achieve, if we continued in this interest rate environment.
If you asked me to give the answer to the question, if I could only pick
one statistic to ask you about the future before I gave the answer, I would
not ask you about GDP growth. I would not ask you about who was going
to be president. I would ask you what the interest rate is going to be over
the next 20 years on average, the 10-year or whatever you wanted to do.
And if you assume our present interest rate structure is likely to be the
average over 10 or 20 years, then I would say it’d be very difficult to get to
10 percent.
On the other hand, if I were to pick with a whole range of probabilities
on interest rates, I would say that that rate might be somewhat aspirational.
And it might be doable. And if you would say, “Well, we can’t continue
these interest rates for a long time,” I would ask you to look at Japan, you
know, where 25 years ago, we couldn’t see how their interest rates could be
sustained. And we’re still looking at the same thing.
So I do not think it’s easy to predict the course of interest rates at all.
And unfortunately, predicting that is embedded in giving a good answer to
you. I would say the chances of getting a terrible result in Berkshire are
probably as low as about anything you can find. Chance of getting a
sensational result are also about as low as anything you can find.
So my best guess would be in the 10 percent range, but that assumes
somewhat higher interest rates — not dramatically higher — but somewhat
higher interest rates in the next 10 or 20 years than we’ve experienced in
the last seven years. Charlie?
MUNGER: Well, there’s no question about the fact that the future, with
our present size is, in terms of percentages of rates of return, is going to be
less glorious than our past. And we keep saying that. And now we’re
proving it.
I do think Warren’s right about one thing. I think we have a collection of
businesses that on average has better investment values than, say, the S&P
average. So I don’t think you shareholders have a terrible problem.
BUFFETT: And I would say we have more of a shareholder orientation
than the S&P 500 as a whole. This company has a culture where decisions
are made as an owner, as a private owner would make them. And frankly,
that’s a luxury we have that many companies don’t have.
I mean, they’re under pressures today, sometimes, to do things. One of
the questions I ask the CEO of every public company that I meet is, “What
would you be doing differently if you owned it all yourself?” And the
answer, you know, is usually this, that, and a couple of other things. If you
would ask us, the answer is, you know, we’re doing exactly what we would
do if we owned them all — all the stock ourselves. And I think that’s a
small plus over time. Anything further, Charlie?
MUNGER: I think we have one other advantage. A lot of other people
are trying to be brilliant. And we’re just trying to stay rational. And it’s a
big advantage. Trying to be brilliant is dangerous, particularly when you’re
gambling.
Book value a “whole lot less” relevant to Berkshire –
2017 Meeting
AUDIENCE: This question is on Berkshire’s intrinsic value. A
substantial portion of the company’s value is driven by operating businesses
rather than the performance of the securities portfolio. Also, the values of
previously acquired businesses are not marked up to their economic value,
including GEICO, MidAmerican, and Burlington Northern. Based on these
factors, is book value per share still a relevant metric for valuing Berkshire?
BUFFETT: Well, it’s got some relevance, but it’s got a whole lot less
relevance than it used to. And that’s why — I don’t want to drop the book
value per share factor, but the market value tends to have more significance
as the decades roll along. It’s a starting point. And clearly, our securities
aren’t worth more than we’re carrying for — carrying them for — at that
time. And, on the other hand, we’ve got the kind of businesses you’ve
mentioned.
But we’ve got some small businesses that are worth 10 times or so, you
know, what we could carry it for. We’ve also got some clunkers, too. But I
think the best method, of course, is just to calculate intrinsic business value.
But it can’t be precise. We think the probability’s exceptionally high that
120 percent understates it. Although, if it was all in securities, you know,
120 percent would be too high.
But as the businesses have evolved, as we built in unrecognized value at
the operating businesses — unrecognized for accounting purposes — I
think it still has some use as being kind of the base figure we use. If it were
a private company and 10 of us here owned it, instead we’d just sit down
annually and calculate the businesses one by one and use that as a base
value.
But that gets pretty subjective when you’ve got as many as we do. And
so, I think the easiest thing is to use the standards we’re using now,
recognizing the limitations in them. Charlie?
MUNGER: Yeah. I think the equities in the insurance company
offsetting shareholders equity in the company are really not worth the full
market value because they’re locked away in a high-tax system. And so I,
basically, like it when our marketable securities go down and our own
businesses go up.
BUFFETT: Yeah, we’re working to that end. We’ve been working that
way for 30 years now or something like that.
MUNGER: We’ve replaced a lot of marketable securities with
unmarketable securities that are worth a lot more.
Valuation is not Reducible to any Formula – 2017
Meeting
AUDIENCE: Earlier today, Mr. Munger commented on the valuation of
China versus the U.S. market. My question for you is, are market cap to
GDP and cyclically adjusted P/E still valid ways to consider market
valuation? And how do those influence Berkshire’s investment decisions?
Thank you.
BUFFETT: Charlie, I think — well, I expect that I guess Charlie’s
overall valued in China. I would say that both of the standards you mention
are not paramount at all in our valuation of securities. It’s harder — People
are always looking for a formula. And there is an ultimate formula, but the
trouble is you don’t know what to stick in for the variables. But the — And,
you know, that’s the value of anything, being the present value of all the
cash it’s ever going to distribute. But the P/E ratios — I mean, every
number has some degree of meaning, means more sometimes than others.
Valuation of a business is not reducible to any formula where you can
actually put in the variables perfectly. And both of the things that you
mentioned get bandied around a lot. It’s not that they’re unimportant. But
sometimes they can be very important.
Sometimes they can be almost totally unimportant. It’s just not quite as
simple as having one or two formulas and, then, saying the market is
undervalued or overvalued or a company is undervalued or overvalued. The
most important thing is future interest rates. And, you know, and people
frequently plug in the current interest rate saying that’s the best they can do.
After all, it does reflect a market’s judgment.
And, you know, the 30-year bond should tell you what people who are
willing to put out money for 30 years and have no risk of dollar gain or
dollar loss at the end of the 30-year period. But what better figure can you
come up with? I’m not sure I can come up with a better figure. But that
doesn’t mean I want use the current figure, either. So, I would say I think
Charlie’s answer will be that he does not come up with China versus the
U.S. market based on what you’ve mentioned as yardsticks. But, no,
Charlie, you tell them.
MUNGER: I said before that the first rule of fishing is to fish where the
fish are — is that a good fisherman can find more fish in China if fish is the
stock market. That’s all I meant.
EBIDTA is Nonsense – 2017 Meeting
BUFFETT: In respect to EBITDA, depreciation is an expense. And it’s
the worst kind of an expense. You know, we love to talk about float. And
float is where we get the money first and we have the expense later.
Depreciation is where you spend the money first, you know, and, then,
record the expense later. And it’s reverse float. And it’s not a good thing.
And to have that enter into a multiple — it’s much better to buy a business
that has, everything else being equal — has no depreciation because it has,
essentially, no investment and fixed assets that makes X, than it is to buy a
company where there’s a lot of depreciation in getting to X.
And I — actually, I may write a little bit more on that next year, just
because it’s such a mass delusion. And, of course, it’s in the interests of
Wall Street, enormously, to focus on something called EBITDA because it
results in higher borrowing power, higher valuations, and all of that sort of
thing. So it’s become very popular in the last 20 years, but I — it’s a very
misleading statistic that can be used in very pernicious ways. Charlie, on
either one of those subjects?
MUNGER: I think you’ve understated the horrors of the subject and the
disgusting nature of the people that brought that term into the valuation of
business. It was just — It would be like a leasing broker of real estate who’s
got a thousand square-foot new suite to be leased, and he says it’s got 2,000
feet in it. That’s not honorable behavior. And that’s the way that term got
into common usage. Nobody in his right mind would think that depreciation
is not an expense.
BUFFETT: And what’s amazing is the way it’s accepted, actually. But
anyway, it just illustrates how people use language, you know, and sell
concepts that work to their own use.
And “2 and 20” has the same sort of thing. I mean, the amount of money
that’s overperformed after paying 2 and 20, compared to the expenses that
have been incurred, I will assure you, makes for a terrible indictment of that
particular arrangement. But as long as it can get sold, it will get sold.
MUNGER: And, now, they use it in the business schools. Now, that is
horror squared. I mean it’s bad enough that a bunch of thieves start using a
term. But when it gets so common that the business schools copy it, that is
not a good result.
Due Diligence is Overrated – 2016 Meeting
AUDIENCE: “Warren and Charlie, you’re famous for making a deal
over a day or two with nothing more than a handshake. You pride yourself
on the small overhead of doing the diligence mostly yourself. Other
successful acquisitive companies use teams of internal people, outside
bankers, consultants, and lawyers to due diligence, often over many months
to assess deals. Speed may be a competitive advantage. You’ve done some
amazing deals. But does your diligence process also put us at greater risk?
And if you’re ever gone, how would you recommend Berkshire change how
we approach dealmaking?
BUFFETT: Yeah. I get that question fairly often from lawyers. In fact,
our own — we talked to Munger Tolles, the law firm, and that was one of
the questions I got, why we didn’t do more due diligence, which we would
have paid them by the hour for.
We’ve made plenty of mistakes in acquisitions. Plenty. And we made
mistakes in not making acquisitions, but the mistakes are always about
making an improper assessment of the economic conditions in the future of
the industry of the company. They’re not a bad lease. They’re not a specific
labor contract. They’re not a questionable patent. They’re not the things that
are on the checklist, you know, for every acquisition by every major
corporation in America. Those are not the things that count.
What counts is whether you’re wrong about the basic economics and
how the industry’s likely to develop, or whether Amazon’s likely to kill
them, you know, in a few years, or that sort of thing. We have not found a
due diligence list that gets at what we think are the real risks when we buy a
business.
And like I say, we’ve made oh, at least a half a dozen mistakes and
probably a lot more if you get into mistakes of omission. But none of those
would have been cured by a lot more due diligence. They might have been
cured by us being a little smarter. It isn’t just isn’t the things that are on the
checklist that really count. Assessing whether a manager, who I’m going to
hand a billion dollars to, for his business, and he is going to hand me a
stock certificate, assessing whether he’s going to behave differently in the
future in running that business than he has in the past when he owned it,
that’s incredibly important, but there’s no checklist in the world that’s going
to answer that.
So, if we thought there were items of due diligence — and incidentally,
there are a few that get covered. I mean, you want to make sure that they
don’t have twice as many shares out as you’re buying or something of the
sort. But if we thought there were things that we were missing that were of
importance in assessing the future economic prospects of the business, you
know, we would, by all means, drill down on those.
But you know, when we bought See’s, it probably had 150 leases. You
know, when we buy Precision Castparts, they have 170 plants, you know,
there’s going to be pollution problems at some place. That is not what
determines whether a $32 billion acquisition is going to look good five
years from now, or ten years from now. We try to focus on those things.
And I do think it probably facilitates things with, at least, certain people that
our method of operation does cut down — You get into squabbles on small
things. I’ve seen deals fall apart because people start arguing about some
unimportant point, and their egos get involved, and, you know, they draw
lines in the sand and all of that. I think we gain a lot. When we start to make
a deal, it usually gets done. Charlie?
MUNGER: Well, if you stop to think about it, business quality usually
counts on something more than whether you cross the T in some old lease
or something. And the human quality of the management who are going to
stay are very important.
And how are you going to check that by due diligence, you know? And I
don’t know anybody who’s had a generally better record than Berkshire in
judging business quality and the human quality of the people. We’re going
to lead the business after it’s acquired, and I don’t think it would’ve
improved at all by using some different method. So I think the answer is
that for us, at least, we’re doing it the way we should.
BUFFETT: Negotiations that drag out have a tendency to blow up for
some reason. I mean, people — they can get obstinate about very small
points, and it’s silly to be obstinate, but people get silly sometimes. I like to
keep things moving. I like to show a certain amount of trust in the other
person, because usually trust comes back to you.
But the truth is there’s some bad apples out there, and spotting them is
not going to come from looking at documents. You really have to size up
whether that person who’s getting a lot of cash from you is going — how
they’re going to behave in the future, because we’re counting on them. And
that assessment is as important as anything involved you know, we know all
the figures and everything going in, and we know what we’ll pay, and so we
don’t want things to get gummed up in negotiations.
And I’m perfectly willing to lose small points here and then on a deal. If
I have the deal on the right terms, I mean, you know, you just don’t try and
win every point. It’s a terrible mistake. You make a decent deal, and if you
find something that bends a little different someway, that’s OK. If you think
it’s bad faith and gives an indication of the character of the person you’re
dealing with, then you got another problem, and you’re lucky if you find
that out early. Charlie, any more?
MUNGER: How many people who, in this room, are happily married,
carefully checked their spouse’s birth certificate and so on? My guess is that
our methods are not so uncommon as they appear.
How Interest Rates Effect Valuation – 2016 Meeting
AUDIENCE: When interest rates go from zero to negative in a country,
how does that change the way that you value a company or a stock? Do you
choose a high valuation because the discount rate is low, or on the other
hand, do you choose a low valuation because the cash flow is likely to be
poor?
BUFFETT: Well, going from zero to minus-a half is really no different
than going from 4 to 3 and a half. It has a different feel to it, obviously, if
you have to pay a half a point to somebody. But if you have your yield —
or your base rate — reduced by a half a point, it’s of some significance, but
it isn’t dramatic.
What’s dramatic is interest rates being where they are, generally. I mean,
whether they’re zero, plus a quarter, minus a quarter, plus a half, minus a
half, we are dealing with a situation of, essentially, very close to zero
interest rates, and we have been for a long time and longer than I would’ve
anticipated. The nature of it is that you’ll pay more for a business when
interest rates are zero than if they were, like, 15 percent when Paul Volcker
was around, and you can take that up and down the line.
I mean, we don’t get too exact about it, because it isn’t that exact a
science, but very cheap money makes me pay a little more for businesses
than when money was at what we previously thought was normal rates. And
very tight money would cause me to pay somewhat less. I mean, we had a
rule for 2600 years that — Aesop lived around 600 BC, but he didn’t
happen to know it was BC, but, you know, you can’t know everything —
and it was that a bird in a hand is worth two in the bush. But a bird in the
hand now is worth about nine-tenths of a bird in the bush in Europe, you
know, because it depends on how far out the bush, but it keeps getting a
little less as you go on.
So these are very unusual times that way. And if you ask me whether I
paid a little more for Precision Castparts because interest rates were around
zero, than if they’d been 6 percent, the answer is yes. I try not to pay too
much more, but it has an effect. And if interest rates continue at this rate for
a long time, if people ever really start thinking something close to this is
normal, that will have an enormous effect on asset values. It already has
some effect. Charlie?
MUNGER: Yeah, but I don’t think anybody really knows much about
negative interest rates. We never had them before. And we’ve never had
periods of stasis like — except for the Great Depression — we didn’t have
things like happened in Japan: great modern nation playing all the monetary
tricks, Keynesian tricks, stimulus tricks, and mired in stasis for 25 years.
And none of the great economists who have studied this stuff, and taught it
to our children, understand it, either. So we just do the best we can.
BUFFETT: And they still don’t understand it.
MUNGER: No. Our advantage is that we know we don’t understand it.
Deferred Taxes are good but not that big of an
Advantage to Berkshire’s Companies – 2015 Meeting
AUDIENCE: For a variety of reasons, bonus depreciation on fixed
assets investments in the noninsurance businesses perhaps being the most
important, Berkshire’s cash taxes have been meaningfully lower than
reported taxes for the last several years. The cumulative difference between
cash taxes and reported taxes, which could be viewed as another form of
float, now stands at around 37 billion.
 Do you consider any portion of the cash flow from annual increase in
deferred taxes to be economic earnings? Is this a sustainable dynamic, or do
you expect the relationship between cash and reported taxes to ever flip, for
instance, if bonus depreciation ever expires? Given Berkshire’s massive
appetite for capital spending at the utility and the railroad, is it possible,
instead, that its deferred tax liability will never have to be paid, no matter
what Congress does with bonus depreciation? And is it perhaps even likely
that this form of float will continue to grow?
BUFFETT: There’s two forms of float from deferred taxes. One is the
unrealized appreciation on securities. I don’t think the appreciation is going
to disappear, but we may decide to realize some of it from time to time. In
fact, we could realize a lot of it.
If you move over to the depreciation, which you’re talking about, on the
37 billion — because the total deferred taxes, as I remember, maybe 60
billion or something like that — that is a factor of accelerated depreciation.
And one form or another of accelerated depreciation has been around a long
time. I think the bonus depreciation one year went to 100 percent. I could
be wrong on that. The — certainly in our utility business, that helps our
customer and it doesn’t help us, basically. I mean, we get a — we will get a
return on equity, and that is not — that’s not free equity to us, or anything
of the sort.
The regulatory commissions take that into account. Return on invested
capital, in terms of how the surface transportation board would look at it,
again, I don’t think we benefit enormously by that. But it does mean there’s
less cash going out the door and we, therefore, don’t need to borrow as
much money for capital investment as otherwise. But I don’t think I would
look at that as a hidden form of equity.
I’d rather have the deferred taxes than not have them, but it’s not
meaningful there. Now what could happen, is that, overwhelmingly, those
deferred taxes were probably, entirely even — to the extent they’re in the
United States — were accrued at a 35 percent rate. So if the corporate rate
changed, then you would have a major change in the deferred tax item. And
there’s always a possibility of that.
MUNGER: But it would be a book entry. It wouldn’t mean much.
BUFFETT: It wouldn’t mean much, yeah. The float from the insurance
business, we regard as a terrific asset. The deferred tax liability is a plus,
but it’s not — it’s not a big asset.
 Our Definition of ‘Cost of Capital’ – 2014 Meeting
AUDIENCE: My first question relates to the measurement of
management performance. Berkshire has historically done a good job of
generating outsized returns. But as you’ve noted in the past, the sheer size
of the firm’s operations, which continue to grow, will ultimately limit the
returns that Berkshire could generate. With that in mind, what do you
believe Berkshire’s cost of capital is? How much do you think that this
hurdle rate is increased as you’ve acquired more capital intensive, debt-
heavy firms? And how much confidence do you have that future capital
allocators at Berkshire will be able to generate returns in excess of the
firm’s cost of capital, acknowledging, of course, the fact that Berkshire’s
days of outsized returns are most likely behind it?
BUFFETT: Yeah. Well, there’s no question that size is an anchor to
performance. And we intend to prove that up to the point where it starts
really biting. But we cannot earn the returns on capital with a market cap of
300-plus billion. It just isn’t doable. Archimedes, he said he could move the
world if he had a long enough lever, didn’t he, or something like that,
Charlie?
MUNGER: Yes, he did.
BUFFETT: Well, I wish I had his lever because we don’t have that lever
at Berkshire. So we’ll answer two questions there. In terms of cost of
capital, Charlie and I always figure that our cost of capital is what could be
produced by our second best idea. And then our best idea has to exceed
that. I have listened to so many nonsensical cost of capital discussions, that
MUNGER: I’ve never heard an intelligent one.
BUFFETT: It’s really true. I mean, and that’s another thing. I’ve been
on boards and the CFO comes in and explains why we’re doing this and it
always gets down to, you know, it exceeds our cost of capital. And he
doesn’t know what the hell his cost of capital is, and I don’t know.
And but I don’t embarrass him, you know? So I just sit there and listen
to this stuff and apply my own thing, and then still end up voting for it,
probably, if I don’t like it, although there have been a few exceptions to
that. The real test, you know, over time, is whether the capital we retain
produces more than a dollar of market value as we go along.
And if we keep putting billions in and those billions, in effect, are worth,
in terms of present value terms, in terms of what they add to the value of the
business, more than what we’re putting in, you know, we’ll keep doing it.
 We bought a company day before yesterday, I guess it was. And we are
spending close to $3 billion U.S. It’s a Canadian company. And we think
we will be better off financially because we did that and we thought it was
the best thing that we could do with the $3 billion on that day. And those
are the yardsticks that we have.
And what I do know is that I’ve never seen a CEO who wanted to do a
deal where the CFO didn’t come in and say it exceeded the cost of capital.
It’s just — it’s a game, as far as we’re concerned. And we think we can
evaluate businesses. And we know the capital we have available. And we
have things that we can sell to buy.
Not businesses, but marketable securities that we can sell to buy
businesses if we like. And we are constantly measuring that opportunity
cost that Charlie talked about in the movie. It’s an important subject. And
one that I think has had more nonsense written about it than about anything.
But I’ll turn it over to Charlie.
MUNGER: Well, a phrase like “cost of capital,” which means different
things to different people, and often means silly things to people who teach
in business schools, we just don’t use it. Warren’s definition of behaving in
a corporation, so that every dollar retained tends to create more than a
dollar of market value for the shareholders, is probably the best way of
describing cost of capital.
That is not what they mean in business schools. The answer’s perfectly
simple. We’re right and they’re wrong.
Intrinsic value and the Berkshire model – 2014 Meeting
AUDIENCE: Thank you. You earlier today discussed intrinsic value,
and I’m a big fan of Graham and Fisher, especially “Security Analysis.”
What differences do you have, if any, for calculating intrinsic value, versus
what was said in “Security Analysis?” And for examples, how does
management factor into that? You recently mentioned evaluating
management is like dating, and recently you said, also, management does
matter. My second part is, which company do you fear the most? Why is it
that no one else has done what you have done? I mean, Coca-Cola has their
Pepsi. Thank you.
BUFFETT: Yeah, actually Graham didn’t get too specific about
intrinsic value in terms of precise calculations. But intrinsic value has come
to be equated with, and I think quite properly, with what you might call
private business value. Now, I’m not sure who was the first one that came
up with it, well, the first one that came up with it was Aesop, actually.
But the intrinsic value of any business, if you could foresee the future
perfectly, is the present value of all cash that will be ever distributed for that
business between now and judgment day. And we’re not perfect at
estimating that, obviously.
But that’s what an investment or a business is all about. You put money
in and you take money out. Aesop said, “A bird in the hand is worth two in
the bush.” Now, he said that around 600 B.C. or something like that, but
that hasn’t been improved on very much by the business professors now.
Now the question is, you know, how sure are you that there are two in the
bush, you know? How far away is the bush? There are all kinds of things.
What are interest rates?
But I mean, Aesop wanted to leave us something to play with over the
next couple thousand years, so he didn’t spell the whole thing out. But
that’s what intrinsic value essentially is. And, we don’t — Graham would
say that, Phil Fisher would say that. Phil Fisher would say that in
calculating that, he would want to look a lot harder at the qualitative factors
of the business in making that estimate of how many birds were in the bush.
Graham would say he would want to see the bush — you know, $2 worth of
cash in the bush, you know, and to pay a dollar for it now.
One emphasized quantitative factors and one emphasized qualitative
factors, but neither one would have disagreed with the math. And I started
out very influenced by Graham, so I emphasized quantitative factors.
Charlie came along and said I was all wrong, and that he’d learned more in
law than I’d learned in financial studies and everything, and that I should
think more about qualitative factors, and he was right. And Phil Fisher said
the same thing.
But that’s what intrinsic value is about, you know. if you buy a
McDonald’s franchise, if you buy General Motors, whatever it may be, the
real question is, A) are you going to have to put more cash into after you
buy it? But it’s really cash in, cash out? When? What discount rate? All the
standard stuff.
In terms of — if I had a silver bullet, what company would I shoot as
being a threat to us? I don’t see any competitor to Berkshire. I see private
equity buying lots of businesses and having an advantage in that they’ll
leverage up when we won’t, and also that presently they can borrow money
very cheap and all of that. So I mean, there are always going to be people
competing with us to buy businesses.
But I don’t see anybody that’s got a model, or trying to build a model,
that will essentially go after what we’re trying to achieve, which is to buy
wonderful businesses from people that care about where their business
goes, and who generally want to keep on running them. Charlie?
MUNGER: Well, as I’ve said earlier, I think the Berkshire model as
now constructed will go a long time, and I think it will be quite creditable.
And I think it has enough advantage that it will just keep going a long time.
And I think most big businesses don’t.
If you stop to think about it, all the great big businesses of yesteryear,
how few of them have really gotten big and stayed big. Of the really old
businesses, only one stayed big and that was Rockefeller’s Standard Oil.
And so we’re getting up into a territory where very few people keep going
well. But I think what we’ll be more like Standard Oil, than we’ll be like
ordinary businesses, because I think we will just keep going.
We will keep doing what we’re already doing, and we’ll keep learning
from our mistakes. And the people up here are no longer all that important.
The momentum’s in place, the ethos is in place. It’s going to keep going.
And to you young people in the audience, I always say, “Don’t be too quick
to sell the stock.”
BUFFETT: Why don’t we get more copycats?
MUNGER: It reminds me of our mutual friend, Ed Davis. He figured
out how to do an operation that was so difficult that he operated the bottom
of a dark hole with instruments of his own creation. He gave his own shots
by Novocain, 87 of them, while he was operating. And it was a better
operation.
His death rate was 2 percent and everybody else was 20. And the other
surgeons came to copy him, and they watched him. And they just said,
“Well, I don’t think I’ll try and copy that.” I think it looks just too hard to
do. There’s nothing in the American business school teaches people to be
like Berkshire.
We Don’t use the Numbers to find our Best Investments–
2013 Meeting
AUDIENCE: Hi, Warren and Charlie. My name is Vincent Wong (PH)
from Seattle. When people analyze a stock, a lot of them look at
quantitative metrics, such as P/E ratio, return on equity, debts-toasset ratio,
et cetera. So, Mr. Buffett, when you analyze a stock for purchase, what’s
your top five quantitative metrics that you looked at, and what’s your
preferred number for each metric? Thank you.
BUFFETT: Well, we’re looking at quantitative and quality — we aren’t
looking at the aspects of the stock, we’re looking at the aspects of a
business. It’s very important to have that mindset, that we are buying
businesses, whether we’re buying 100 shares of something or whether
we’re buying the entire company. We always think of them as businesses.
So when Charlie and I leaf through Value Line or look at annual reports
that come across our desk or read the paper, whatever it may be, that, for
one thing, we do have this cumulative knowledge of a good many industries
and a good many companies, not all by a long shot.
And different numbers are of different importance depending on the kind
of business. I mean, if you were a basketball coach, you know, if you were
walking down the street and some guy comes up that’s 5′4″ and says, you
know, “You ought to sign me up because you ought to see me handle the
ball,” you would probably have a certain prejudice against it. But there
might be some — one player out there it made sense on. But on balance, we
would say, “Well, good luck, son, but, you know, we’re looking for 7-
footers.”
And then if we find 7- footers, we have to worry about whether we can
get them halfway coordinated and keep them in school, a few things like
that. But we see certain things that shout out to us, look further or think
further. And over the years, we’ve accumulated this background of
knowledge on various kinds of businesses, and we also have come up with
the conclusion that we can’t make an intelligent analysis out of — about all
kinds of businesses. And then, usually, some little fact slips into view that
causes us to rethink something.
It was mentioned how I got the idea about buying the Bank of America
— or making an offer to Bank of America on a preferred stock — when I
was in the bathtub, which is true. But the bathtub really was not the key
factor. The truth is, I read a book more than 50 years ago called “Biography
of a Bank.” It was a great book, about A.P. Giannini and the history of the
bank. And I have followed the Bank of America, and I’ve followed other
banks, you know, for 50 years. Charlie and I have bought banks. We used to
trudge around Chicago trying to buy more banks in the late ’60s. And so,
we have certain things we think about, in terms of a bank, that are different
than we think about when we’re buying ISCAR. And so there is not one-
size-fits-all.
We have certain things we think about when we’re buying an insurance
company, certain things we think about when we’re buying a company
dependent upon brands. Some brands travel very well, Coca-Cola being a
terrific example, and some brands don’t travel. And, you know, we just
keep learning about things like that, and then every now and then we find
some opportunity.
The Bank of America in 2011 was subject to a lot of rumors, big short
interest, morale was terrible, and everything else. It just struck me that an
investment by Berkshire might be helpful to the bank and might make sense
for us. And I’d never met Brian Moynihan at that point — maybe I’d met
him at some function, some party of something, but I had no memory of it
— and I didn’t have his phone number but I gave him a call. And things
like that happen.
And it’s not because I calculate some price, some precise P/E ratio or
price-book value ratio or whatever it might be. It is because I have some
idea of what the company might look like in five or ten years, and I have a
reasonable amount of confidence in that judgment, and there’s a disparity in
price and value, and it’s big. Charlie, would you like to elaborate?
MUNGER: We don’t know how to buy stocks just by looking at
financial figures and making judgments based on the ratios. We may be
influenced a little by some of that data, but we need to know more about
how the company actually functions. And anything a computer could be
functioned to do, in terms of screening — I know I never do it. Do you use
a computer to screen anything?
BUFFETT: No. I don’t know how to.
MUNGER: No. Bill’s still trying to explain it to me.
BUFFETT: It’s a little hard to be precise on, because we don’t really
use screens. But it’s not like we sit there and say, you know, we want to
look at things that are below the price of book value, or low P/Es, or
something of the sort. We are looking at businesses exactly like we’d look
at them if somebody came in and offered us the entire business, and then we
try to think, what is this place going to look like in five or ten years, and
how sure are we of it.
 And most companies, you know, we just don’t know the answer to it. We
do not know which auto company is going to, you know, be knocking the
ball out of the park ten years from now or which one is going to be hanging
on by its fingernails.
You know, we watched the auto business for 50 years, a very interesting
business, but we don’t know how to — we don’t know how to foresee the
future well enough on something like that.
MUNGER: We think that the Burlington Northern will have a
competitive advantage 15 years from now, with a high degree of
confidence. We would never have that degree of confidence about Apple,
no matter what their financial statement showed.
BUFFETT: Yeah. We don’t know about an oil company ten years from
now, you know, in terms of what the product will be selling for or anything.
I would say we’re virtually 100 percent confident about a Burlington
Northern, or a GEICO, or some other companies that I won’t name.
MUNGER: People with very high IQs who are good at math naturally
look for a system where they can just look at the math and know what
security to buy. It’s not that easy. You really have to understand the
company and its competitive position, and the reasons why its competitive
position is what it is, and that is often not disclosed by the math.
BUFFETT: Yeah. It’s not what I learned from Ben Graham, although
the fundamentals of looking at stocks as businesses, and the attitude toward
the market and all that, is absolutely still part of the catechism. But I don’t
know exactly how I would manage money if I was just trying to do it by the
numbers.
Overpaying for a Great Business – 2013 Meeting
AUDIENCE: Could you be more specific about what factors you
considered when determining what a fair price was for an acquisition such
as Heinz? And also, what sources do you use to make judgments about
major changes that will affect an industry?
BUFFETT: We find the business so compelling, the management, our
associates, so compelling, that we gag and we get there on the price. But
there is no perfect mathematical formula. Looking back, when we’ve
bought wonderful businesses that turned out to continue to be wonderful,
we could’ve paid significantly more money, and they still would have been
great business decisions.
 But you never know 100 percent for sure. And so it isn’t as precise as
you might think. Generally speaking, if you get a chance to buy a wonderful
business — and by that, I would mean one that has economic characteristics
that lead you to believe, with a high degree of certainty, that they will be
earning unusual returns on capital over time — unusually high — and,
better yet, if they get the chance to employ more capital at — again, at high
rates of return — that’s the best of all businesses. And you probably should
stretch a little.
Charlie and I have had several conversations where we were looking at a
business which we liked, and were sort of gagging at the price, and Charlie
or I will say, you know, “Let’s do it,” even though it kind of kills us to pay
that last 5 percent. We did that with See’s Candy. Charlie was the one that
said, “For God’s sakes, Warren, write the check.” I was the one that was
suffering. But it’s happened quite a few times, hasn’t it, Charlie?
MUNGER: It almost always happens. Modern prices are not cheap.
BUFFETT: No, no. And great businesses, you know, you’re not going
to find lots of them, and you’re not going to get the opportunity to buy them
and — although you do in the market. The stock market will offer you
opportunities for profit, percentage-wise, that you’ll never see, in terms of
negotiated purchase of business.
In negotiated purchase of a business, you’re almost always dealing with
someone that has the option of either selling or not selling, and can sort of
pick the time when they decide to sell, and all of that sort of thing. In stock
markets, it’s an auction market. Crazy things can happen. You can have,
you know, some technological blip that will cause a flash crash or
something.
And the world really hasn’t changed at all, but all kinds of selling
mechanisms are tripped off, and that sort of thing. So you will see
opportunities in the stock market that you’ll never really get in the business
market. But what we really like, we really like buying businesses to hold
and keep. We like buying cheap marketable securities, too. But particularly
when you’ve got lots of cash coming in and you’re going to continue to
have lots of cash coming in, you really want to deploy it in great businesses
that you can own forever. Charlie, anything?
MUNGER: No. It — we’re sort of in a different mode now, and that has
a great lesson, in that if we’d kept our earlier modes, if we’d never learned,
we wouldn’t have done very well. The game of life is a game of everlasting
learning. At least it is if you want to win.
Fraudulent Accounting and How to Spot It – 2013
Meeting
AUDIENCE: Earlier in the meeting, you said when reading over
financial statements, you identified companies you were virtually certain
were frauds. What was it in those financial statements that you saw that
made you be so certain they were frauds?
BUFFETT: Well, it varies just enormously over the years, but there are
— we can’t identify 100 percent of the frauds, or 90 percent, or 80 percent,
but there are certain ones that jump out to you, just — people give
themselves away a lot, too.
I mean, in poker they talk about tells. And Charlie and I have bought a
lot of businesses, and it’s very important when we buy those businesses that
we assess the individuals that we’re buying from with some degree of
accuracy. Because, you know, they hand us the stock certificate and we
hand them a lot of money, and then we count on them to run the business
with as much enthusiasm after they have the money as they did before. And
so we are assessing people.
And we don’t think we can assess everyone accurately. We just have to
be right about the ones where we make an affirmative decision. And those
decisions have not always been perfect, but they’ve been pretty good. And I
would say they’ve probably gotten a little bit better, even, as the years have
passed.
Similarly, in looking at financial statements — for example, in the
insurance field, we’ve seen some frauds, and you can see things being done
with loss reserves occasionally. We saw it back in — I won’t name any
names. We’ll call them Company As and Bs instead of naming names.
But you would see companies that, when they were offering stock to the
public, you know, the year or two before that, the reserves would be down
very suspiciously, and — you know, then — or even when they were selling
them to other insurance companies, if they were buying in stock they might
be building the reserves.
But there’s a million different ways. And I don’t claim I know all the
ways, obviously, but I have seen enough situations over the years, and I’ve
seen how promoters act. And you can spot certain people who you know
are, one way or another, playing games with the numbers. They give
themselves away. But I can’t give you a checklist of 40 items or something
of the sort that you look for in the balance sheet or the income account or
the footnotes. Charlie, can you help?
MUNGER: Sometimes it’s pretty obvious. I once was introduced by
Warren, of all people, by accident, to a man who wanted to sell us a fire
insurance company. One of the first things he said, with a thick accent, from
Eastern Europe, I think, he says, “It’s like taking candy from babies,” he
said. “We only write fire insurance on concrete structures that are
underwater.” And I figured out instantly that it was probably fraudulent.
BUFFETT: There are so many ways you can cheat in accounting. And
financial institutions are particularly, probably, prone to it. And there’s been
plenty of it in insurance.
MUNGER: A lot of it, they’re not being deliberately fraudulent,
because they’re deluded. In other words, they believe what they’re saying.
BUFFETT: Yeah. People like to hire them as salesmen. If you’ve got
doubts, forget it. There’s probably some reason you — It’s interesting. The
accounting — they worked harder and harder and harder at coming up with
disclosures in accounting. And I’m not sure I find present financial
statements more useful or, in some cases, as useful as I found them 30 or 40
years ago. Charlie?
MUNGER: Well, I think the financial statements of big banks are way
harder to understand now than they used to be. They just do so many
different things, and they’ve got so many footnotes, and there’s so much
gobbledygook, that it doesn’t — they’re not my grandfather’s banks.
BUFFETT: I mean, we bought a company that — Gen Re — where
they had 23,000 derivative contracts. And Charlie and I could’ve spent 24
hours a day, and had the help of 10 or 20 math Ph.Ds. and we still wouldn’t
have known what was going on. It cost us about $400 million to find out,
but — and that was in a benign market. But nobody can.
MUNGER: It’s a new kind of asset I invented a name for. I said, “Good
until reached for.”
BUFFETT: Yeah. Well, and the same auditing firm would be auditing
two different companies that are on the opposite side of a derivative
transaction and attesting to different values to the same contract. And
Charlie found one mistake at Salomon on a derivative contract. What was
it, 20 million?
 MUNGER: No. It was a big contract, and both sides reported a large
profit, blessed by their accountants, on the same contract just for breaking
it. Once people get in a competitive frenzy, things just go out of control.
BUFFETT: I became the interim chairman of Salomon in 1991, and,
fortunately, I testified to both the House and Senate committee before I
found this out. And, generally speaking, incidentally, Salomon wanted to
have conservative accounting. I think that would be a fair statement. And in
many cases did.
But they did come in to me one day and they said, “Warren, you
probably should know that we have this item” — and I think it was around
180 million or something like that — with a capital base of 4 billion, maybe
— but 180 million. And they said, this is a plug number, and we’ve been
plugging it ever since Phibro merged with Salomon in 1981.
For ten years, this number moved around every day. And as I remember,
Phibro or some — one of them was on a trade date system, and that was on
a settlement date system. And in ten years, with Arthur Andersen as their
accountant, paying a lot of money in auditing fees, they just never figured
out how the hell to get the thing to balance, so they just stuck a number in
every day.
And they literally plugged it for ten years, and I couldn’t figure out how
to unplug it myself. I mean, it was — you almost had to start over. Didn’t
they do that one time out there?
MUNGER: We had a discrepancy when we changed accounting
systems in our savings and loan, and none of the accountants could fix it.
So we just let it run out.
In accounting, you can do things like they do in Italy when they have
trouble with the mail. You know, it piles up and irritates the postal
employees. They just throw away a few carloads. Everything flows
smoothly thereafter.
EBITDA vs EBE – 2012 Meeting
AUDIENCE: Warren, when you discuss Berkshire’s intrinsic value,
why do you value the insurance business at only cash plus investments per
share? And what’s a reasonable multiple to apply to the pretax earnings of
the noninsurance businesses?
BUFFETT: I don’t value the insurance business quite the way you say
it. I would value GEICO, for example, differently than I would value Gen
Re, and I would value even some of our minor companies differently. But
basically, I would say that GEICO has an intrinsic value — that’s
significantly greater than the sum of its net worth and its float.
Now, I wouldn’t say that about some of our other insurance businesses.
But that’s for two reasons. One is, I think it’s quite rational to assume a
significant underwriting profit at GEICO over the next decade or two
decades, and I think it’s likely that it will have significant growth. And both
of those are value — items of enormous value. So that adds to the present
float value, but I can’t say that about some other businesses.
But in any event, once you come up with your own valuation on that, in
terms of the operating business, obviously different ones have different
characteristics. But I would love to buy a new bunch of operating
businesses that had similar competitive positions in everything. Under
today’s conditions, I would love to buy those at certainly nine times pretax
earnings, maybe 10 times pretax earnings.
I’m not talking about EBITDA or anything like that, which is nonsense.
I’m talking about regular pretax earnings. If they have similar
characteristics, we’d probably pay a little more than that, because we know
so much more about them than we might know about some other
businesses. What would you say, Charlie?
MUNGER: When you used the word EBITDA, I thought to myself, I
don’t even like hearing the word. There’s so much nutcase thinking
involving EBITDA. Earnings before what really counts in costs.
BUFFETT: Yeah. We prefer EBE, which is earnings before everything.
I mean, if you compare a business that, you know, leases pencils or
something like that where they all get depreciated in a two-year period and
then compare that to some business that uses virtually no capital, you know,
like See’s Candies, it’s just nonsense. But it works for the people that sell
businesses. It’s like Charlie’s friend that used to sell fishing flies.
Valuing a Declining Business – 2012 Meeting
AUDIENCE: How do you value declining businesses? You were
talking about the encyclopedia businesses brought down by Encarta or
retailing disrupted by Amazon and others by comparison shopping. How do
you value declining businesses?
MUNGER: Want me to answer that one? They’re not worth nearly as
much as growing businesses, but they can still be quite valuable if a lot of
cash is going to come out of them.
BUFFETT: Yeah. Generally speaking, it pays to stay away from
declining businesses. It’s very hard. You’d be amazed at the offerings of
businesses we get where they say, you know, it’s — I don’t want to upset
Charlie, but they say, you know, it’s only six times EBITDA, and then they
project some future that doesn’t have any meaning whatsoever.
If you really think a business is declining, most of the time you should
avoid it. Now, we are in several declining businesses. You know, the
newspaper business is a declining business. We will pay a price in that
business. We do think we understand it pretty well. We will pay a price to
be in that, but that is not where we’re going to make the real money at
Berkshire. The real money is going to be made by being in growing
businesses, and that’s where the focus should be.
I would never spend a lot of time trying to value a declining business
and think, you know, I’m going to get one free — what I call the cigar butt
approach, where you get one free puff out of the cigar butt that you find. It
just isn’t worth it because the same amount of energy and intelligence
brought to other types of businesses is just going to work out better.
And so our general reaction, unless there’s some special case, is to avoid
new ones. We’re playing out certain declining businesses, by their nature,
but you know, we started with declining businesses. We started with textiles
in New England and we tried U.S.-made shoes and we have one business
that did 120 million or so of sales in 1967 or ’8, and what did we do last
year, about 20,000?
MUNGER: Yes. I presided over it myself.
BUFFETT: Yeah. Well, I want to say I helped. I mean, he didn’t do it
all by himself.
MUNGER: No, no, but I sat there on the location and watched.
BUFFETT: We thought of bringing the sales chart down here and
turning it upside down to impress you, but Charlie is still in charge of this
business. I can’t get him to sell it, but make me an offer.
MUNGER: If you think what came out of those three declining
businesses, all of which failed, it’s so many billions you — it’s hard to
imagine how much came out of it. We’re not looking for an opportunity to
do it again.
BUFFETT: In 1966, Sandy Gottesman, one of our directors and Charlie
and I, we put $6 million into a company. We called it Diversified Retailing,
although we only had one operation but, you know — It was kind of like
Angelo Mozilo calling his one location, you know, in New York,
Countrywide Mortgage, at the time.
And we bought a department store at Howard and Lexington Street.
Now, in our defense, I would have to say there were four department stores
at Howard and Lexington Street in Baltimore, and all four of them are gone.
But that $6 million has turned into about $30 billion, starting with that
failed business.
And of course, Blue Chip Stamps was another example of that because
that was another company that — and then, of course, Berkshire was the
textile business. So we were sort of masochistic in the early days.
There is No Magic Number for Calculating Risk – 2012
Meeting
AUDIENCE: Can you please elaborate your views on risk? You clearly
aren’t a fan of relying on statistical probabilities, and you highlight the need
for $20 billion in cash to feel comfortable. Why is that the magic number,
and has it changed over time?
BUFFETT: Yeah. Well, it isn’t the magic number, and there is no magic
number. I would get very worried about somebody that walked in every
morning and told us precisely how many dollars of cash we needed to be,
you know, secured at three sigma or something like that.
Charlie and I saw a lot of problems develop in an organization that
expressed their risks in sigma, and we even argued sometimes with the
appropriateness of how they calculated their risk.
MUNGER: It was truly horrible.
BUFFETT: And they were a lot smarter than we were. That’s what’s
depressing. But we both have the same bend of mind whereby we think
about worst cases all the time, and then we add on a big margin of safety,
and we don’t want to go back to go. I mean, I enjoy tossing those papers in
the other room, but I don’t want to do it for a living again.
So we undoubtedly build in layers of safety that others might regard as
foolish, but we’ve got 600,000 shareholders and we’ve got members of my
family that have 80 or 90 percent of their net worth in the company. And
I’m just not interested in explaining to them that we went broke because
there was a one-hundredth of 1 percent chance that we would go broke and
the remaining probability was filled by the chance of doubling our money,
and I decided that that was just a good gamble to take. We’re not going to
do that. It doesn’t mean that much.
We are never going to risk what we have and need for what we don’t
have and don’t need. We’ll still find things to do where we can make
money, but we don’t have to stretch to do it. And it’s my job, and Charlie
thinks the same way. We don’t have to talk about it much. But it’s our job to
figure out what can really go wrong with this place and, you know, we’ve
seen September 11th, and we’ve seen September of 2008, and we’ll see
other things of a different nature but similar impact in the future. And we
not only want to sleep well all those nights, we want to be thinking about
things to do with some excess money we might have around.
So if you’re calibrating it in some mathematical way, I would say it’s
really dangerous. I could give you a couple examples on that, but
unfortunately I’ve learned about them on a confidential basis. But some
really great organizations have had dozens of people with advanced
mathematical training and thinking about it daily, making computations,
and they don’t really get at the problem. So it’s at the top of the mind,
always, around Berkshire, and your returns in 99 years out of 100 will
probably be penalized by us being excessively conservative, and one year
out of a hundred, we’ll survive when some other people won’t. Charlie?
MUNGER: Yeah, how do these super-smart people with all these
degrees in higher mathematics end up doing these dumb things? I think it’s
explainable by the old proverb that, “To a man with a hammer, every
problem looks pretty much like a nail.” They’ve learned these techniques
and they just twist the problem so they fit the solution, which is not the way
to do it.
BUFFETT: And they have a lack of understanding of history, I would
say. In 1962, when I set up our office in Kiewit Plaza, where we still are,
it’s a different floor, I put seven items on the wall. Our art budget was $7,
and I went down to the library, and for a dollar each I made photo copies of
the pages from financial history. And one of those cases, for example, was
in May of 1901 when the Northern Pacific Corner occurred, and it’s kind of
interesting in terms of being in Omaha because Harriman was trying to get
control of the Northern Pacific, and James J. Hill was trying to control the
Northern Pacific. And unbeknownst to each other, they both bought more
than 50 percent of the stock. Now, when two people buy more than 50
percent of the stock each, and they both really want it, they’re not just going
to resell it. You know, interesting things happen.
And in that paper of May 1901, the whole rest of the market was totally
collapsing because Northern Pacific went from $170 a share to $1000 a
share in one day, trading for cash, because the shorts needed it. And there
was a little item at the top of that paper, which we still have at the office,
where a brewer in Troy, New York, committed suicide by diving into a vat
of hot beer because he’d gotten a margin call.
And to me, the lesson — that fellow probably understood sigmas and
everything and knew how impossible it was that in one day a stock could go
from 170 to 1,000 to cause margin calls on everything else. And he ended
up in a vat of hot beer, and I’ve never wanted to end up in a vat of hot beer.
So those seven days that I put up on the wall — life in financial markets
has got no relation to sigmas. I mean, if everybody that operated in financial
markets had never had any concept of standard errors and so on, they would
be a lot better off. Don’t you think so, Charlie?
MUNGER: Well, sure. It’s created a lot of false confidence and — now,
it has gone away. Again, as I said earlier, the business schools have
improved. So has risk control on Wall Street. They now have taken the
Gaussian curve and they’ve just changed its shape.
They threw it away. Well, they just made a different shape than Gauss
did, and it’s a better curve now, even though it’s less precise.
BUFFETT: They talk about fat tails, but they still don’t know how fat
to make them. They have no idea.
MUNGER: Well, but they knew — they’ve learned through painful
experience they weren’t fat enough.
BUFFETT: Yeah. They learned the other was wrong, but they don’t
know what’s right.
MUNGER: We always knew there were fat tails. Warren and I, in the
Salomon meetings, would look over at one another and roll our eyes when
the risk control people were talking.
Don’t use Goodwill when Valuing a Business – 2011
Meeting
AUDIENCE: What’s the proper way to think about goodwill and return
on capital? Berkshire’s manufacturing, service, and retail businesses earn
pretax returns on tangible capital over 20 percent, which suggests either
skilled managers or fantastic businesses. But the return on allocated equity
is in the single digits, which looks drab. Accountants treat intangibles
similarly because they have different economics.
For an indestructible brand like See’s or Coca-Cola, I can see why the
intangibles should not be amortized because it’s worth more every year, and
your comments on GEICO policyholders were one way to think about that.
But all the tobacco companies have billions of dollars of goodwill in unit
sales of cigarettes to claim every year in developed countries, so perhaps
they should be amortized. And for Time Warner- AOL, goodwill definitely
needed to be amortized.
BUFFETT: Yeah, goodwill — you mention AOL-Time Warner or
something of the sort, it should be written off, actually. It was just a mistake
in purchase price.
Goodwill should not be used in evaluating the fundamental
attractiveness of a business. There you should look at return on tangible
assets, and even then there’s some minor — some other adjustments you
may want to make. But basically, in evaluating the businesses we own, in
terms of what the management are doing and what the underlying
economics of the business are, forget about goodwill.
In terms of evaluating the job we’re doing in allocating capital, you have
to include goodwill, because we paid for it. So if we buy — you know,
Coca-Cola goes back to 1886 and John Pemberton at Jacobs Pharmacy in
Atlanta, and there was not a whole lot of goodwill put on the books when
he sold that first Coca-Cola. If you were to buy the company now, the
whole company, you’d be putting a figure, you know, of 100 billion or
something like that on it. You shouldn’t amortize that, and you shouldn’t, in
judging the economics of the business, look at that.
But in terms of judging the economics of the business that purchased it
— we’ll call it Berkshire — then you have to allow for the goodwill,
because we are allocating capital and paying a lot for it. I don’t think the
amortization of goodwill makes any sense. I think write-offs of it, when you
find out you’ve made the wrong purchase and the business doesn’t earn
commensurate with the tangible assets employed plus the goodwill, I think
write-offs of it make sense. But when looking at businesses as to whether
they’re good businesses, mediocre businesses, poor businesses, look at the
return on net tangible assets. Charlie?
 MUNGER: Well, I think that’s right. But as the gentleman says, when
we buy a business, a whole business, we never get a huge bargain and, of
course, we may get down toward 10 percent pretax earnings on what we
pay. That isn’t so awful as you think when a lot of the money comes from
insurance float that costs you nothing. In other words, if you have 60 billion
of float and God gives you 6 billion a year earnings, it’s not all bad.
BUFFETT: Well, on Lubrizol we’re paying close to 9 billion for the
equity, and it earns — and you should make adjustments for debt but it’s not
an important factor there — and, you know, current rate of earnings is
probably a billion pretax.
And now Lubrizol itself is employing call it 2 1/2 billion of equity to
earn that billion of pretax, so it’s a very good business, in terms of the assets
that are employed. But when we end up paying the premium we pay to buy
into it, it becomes a billion pretax on something close to 9 billion.
You have to judge us based on close to a $9 billion investment. You have
to judge James Hambrick in running the business based on the much lower
capital that he has employed. It can turn out to be a very good business, and
we could turn out to have made at least a minor mistake if it isn’t as good a
business as we think it is now, but still is a very satisfactory business based
on the tangible capital employed. Charlie, can you make that clearer?
MUNGER: Well, it’s just — we are not going to buy, in the climate
we’re in now, operating businesses that are at all decent for low prices. It’s
just not going to happen.
Retained earnings, present value, and dividends - 2010
AUDIENCE: You have previously stated that a company should retain
its earnings only if, quote, ‘For every dollar retained, at least one dollar of
market value will be created for owners,’ unquote. You also noted that if
such conditions will no longer apply to Berkshire, as measured on the basis
of a five-year rolling average, then quote, ‘We will distribute all
unrestricted earnings that we believe cannot be effectively used.’ However,
during the five-year period between July third — I’m sorry, January 3rd,
2005 and December 31st, 2009, the average annual earnings per share for
class A, as reported, amounted to $5,930, while at the same period the
average annual change in the share’s market price was only $2,420.
“Consequently, are you considering a distribution of a dividend or buying
back shares? I imagine I know the answer, but I thought we had to ask.”
 BUFFETT: Well, he does know the answer, but we’ll elaborate. I did
write that, not only in 1984 but continuously in the back of the Berkshire
annual report where I’ve got our economic principles. And frankly, the way
I wrote that the first time was not well thought out.
And in the 2009 annual report, partly because somebody asked that
question last year, I actually rewrote that section. And I pointed out that
even when I wrote it in 1984, we would have flunked the test in many
previous years when, generally speaking, the stock market had suffered a
significant decline over a period of time. As you can tell by looking at our
report, right now every dollar that we have left in the business, you know,
has produced, in present value terms, something over $1.30 of market
value.
We have met the test of retained earnings proving their worth. But the
way I phrased that originally, anytime the stock market went down a whole
lot in a five-year period, because we were carrying our Coca-Cola at a
certain price five years earlier or whatever it was that entered into our asset
value, we could have done a great job of allocating capital in the five-year
period and we still would have looked bad. And similarly if the stock
market had gone up a whole lot, we could have done a dumb job and looked
good.
So, if you will look in the back of the 2009 annual report, I think it’s
number 11, or — I’m not sure about that. But read the economic principles.
You’ll see that I had to confess my error in how I originally worded that.
But I think it is still intellectually honest, in terms of meeting what I
intended to say.
You know, I voted against this before I voted for it, or something like
John Kerry said in 2004. I think it does meet the test of a dollar retained
earnings producing more than a dollar of market value. And we will
continue to measure ourselves based on whether we meet that test. If
keeping a buck doesn’t produce more than a buck in present value, I don’t
mean every day or every week, but over time, we should figure out
something else to do. Charlie?
MUNGER: Well, I like people that parse through a long series of
documents and find an error and rub my nose in it, particularly when it’s
your error.
 Asking the Right Questions To Value a Business – 2010
Meeting
AUDIENCE: It seems like I’ve read all the Berkshire reports and all the
reading I can do about you two, and I thank you for these wonderful
meetings. But it seems like it boils down to some simple things, valuing a
business and applying a margin of safety. So my question is, what do you
recommend for an approach to getting better and better at valuing
companies?
BUFFETT: That was a very, very good question. And in my own case,
you know, I started out without knowing anything about valuing companies.
And Ben Graham taught me a way to value a certain type of company that
would prove successful, except the universe of those companies dried up.
But nevertheless — it was almost a guarantee against failure, but it was
not a guarantee that these things would continue to be available. Charlie
taught me a lot about the value of a durable competitive advantage, and a
really first-class business. But over time, I’ve learned more about various
types of businesses. But you’d be amazed how many businesses I don’t feel
that I understand well.
The biggest thing is not how big your circle of competence is, but
knowing where the perimeter is. You don’t have to be an expert on 90
percent of the businesses, or 80 percent, or 70, or 50. But you do have to
know something about the ones that you actually put your money into, and
if that’s a very small part of the universe, that still is not a killer.
And I think if you think about what you would pay for a McDonald’s
sandwich, you think you would pay for — you know, think about the
businesses in your own hometown of Olathe. Which would you like to buy
into? Which do you think you could understand their economics? Which do
you think will be around 10 or 20 years from now? Which do you think it
would be very tough to compete with? Just keep asking yourself questions
about businesses. Talk with other people about them. You will extend your
knowledge over time. And always remember that margin of safety.
And I think you basically have the right attitude because you recognize
your limitations, and that’s enormously important in this business. You will
find things to do. Six or seven years ago, when I was looking at Korean
stocks, for example, I never had any idea that Korean stocks would be
something that I would be buying. But I looked over there, and I could see
that there were a number of businesses that met the margin of safety test.
 And there I diversified, because I didn’t know that much about any
specific one, but I knew that a package of 20 was going to work out very
well, even if a crook might run one of them, and a couple might run into
competition I didn’t anticipate, because they were so cheap. And that was
sort of the old Graham approach. You will find opportunities from time to
time, and the beauty of it is you don’t have to find very many of them.
Charlie?
MUNGER: Well obviously, if you want to get good at something which
is competitive, you have to think about it a lot, and learn a lot, and practice
doing it a lot. And the way the world is constructed in this field, you have to
keep learning, because the world keeps changing and your competitors keep
learning.
So you just have to get up each morning and try and go to bed that night
a little wiser than you were when you got up. And if you keep doing that for
a long time, and accumulate some experience, good and bad, as you try and
master what you’re trying to do — people who do that almost never fail
utterly. They may have a bad period when luck goes against them or
something. But very few people have ever failed with that. If you have the
right temperament, you may rise slowly but you’re sure to rise.
BUFFETT: Charlie, did you take any business courses in school?
MUNGER: None. I took accounting.
BUFFETT: And when did you start valuing businesses and how did you
go about it?
MUNGER: When I was a little boy. I can remember, I would come
down to the Omaha Club, and there was an old gentleman who hit the
Omaha Club about 10:30 every morning. He obviously did almost no work,
and yet was quite prosperous.
BUFFETT: He became your ideal.
MUNGER: Yeah. But he made me very curious as a little boy. I said to
my father, “How in the hell does he do that?” And he said, “Charlie,” he
said, “A business where he enjoys practically no competition. He gathers up
and renders dead horses.” That was an example of avoiding competition by
one stratagem. And you keep asking questions like that of reality, starting at
a young age, you gradually learn. And weren’t you doing the same thing?
BUFFETT: Yeah, thankfully he went beyond his original insight there.
MUNGER: I noticed, it was rather interesting — you take the rulers of
the businesses when I was a little boy, an awful lot of those businesses, in
Omaha, a lot of those businesses went broke, a lot of them sold out at
modest prices under distress. And some of the people who rose, like Kiewit,
from small beginnings, nobody thought of as the great glories of that early
time.
And I think that’s kind of the way life is. It’s hard to get anywhere near
the top, and it’s hard to hold any position once you’ve attained it. But I
think you can predict that Kiewit was likely to win. They cared more about
doing it right. They cared more about avoiding trouble. They put more
discipline on themselves.
BUFFETT: Well, if you knew the individual well, you would have bet,
right?
MUNGER: I would not have bet on any of the people I knew who were
already wealthy. But I would have bet on Pete Kiewit. His sister taught me
math, and no, half-Dutch, half-German, you know, this is a tough culture.
I was just automatically doing that. What was working, what was failing,
why was it working, why was it failing? If you have that temperament, you
are gradually going to learn. And if you don’t have that temperament, I
can’t help you.
BUFFETT: If you’d followed Pete Kiewit around for 10 years, you
never would have seen him do anything dumb, right? It’s avoiding the
dumb thing. You really don’t have to be brilliant, but, you know, you have
to avoid just sort of what almost seem the obvious mistakes. But I would
say that you’re on the right track back there, in terms of having the basic
fundamentals, knowing your limitations, but still seeking to learn more
about various kinds of businesses.
Charlie, I think, when he practiced law, any client that came in Charlie
was thinking about that business as if he owned the place. And he probably
generally thought he knew more about the place than the guy that actually
owned it, who was his client. But I remember talking to him, you know, 50
years ago, and he would start talking about Caterpillar dealerships in
Bakersfield or something of the sort. He was incapable of looking at a
business without thinking about the fundamental economics of it. How’d
that guy do with the Caterpillar deal?
MUNGER: Well, he sold it for a perfectly ridiculous price to a dumb oil
company. It wasn’t worth half what he got for it.
BUFFETT: But they had a concept and a strategy.
 MUNGER: They had a concept and a strategy, and turned out they had
consultants.
 2
TECHNOLOGY & FUTURE TRENDS

Machine Intelligence & Capital Allocation -2018

AUDIENCE: My question is, facing the fast-growing machine
challenges, how do you see the new competition impact the capital
allocation productivity in the future? For Charlie, what is the first principle
of capital allocation from a general economic interest point of view? Thank
you.
MUNGER: Well, two questions. Machine intelligence. I’m afraid the
only intelligence I have is - is being provided by something that’s not a
machine. And I don’t think I’m going to learn machine intelligence.
If you ask me how to beat the game of Go with my own intelligence, I
couldn’t do it. And I think it’s too old for me to learn computer science.
Generally I’m - I think that the machine intelligence has worked. After all, a
machine now can beat the best human player of Go. But I think there’s
more hype in that field than there is probable achievement. So I don’t think
the world is going to be changed that much by machine intelligence. Some,
but not hugely. And what was the other question?
BUFFETT: I think he was getting at capital allocation –
 MUNGER: Oh yeah. That’s such a general question. Generally
speaking, we’re always trying to get the best - to get something that’s worth
buying. And the human mind rejects that if you’re in academia, because
you could come in and make one declaratory sentence at the opening of the
semester and you wouldn’t have anything to do for the rest of the - of your
time. So people want to find some formula.
It’s what I call “physics envy.” These people want the world to be like
physics. But the world isn’t like physics, outside of physics. And that false
precision just does nothing but get you in trouble. So I would say you’ve
got to master the general ideas, and you’ve got to work to improve your
judgment slowly, the way all the rest of us had. And I don’t think most
individuals have much hope of individual gain from machine intelligence.
BUFFETT: I’m impressed when machines beat Go or something of the
sort, or even win at chess or whatever it may be. I don’t really think they
bring much to the table in terms of capital allocation or investing. And then
I may be missing something entirely, you know, maybe I’m just blind to
what’s out there.
Artificial intelligence impact is hard to predict - 2017
AUDIENCE: What do you think about the implications of artificial
intelligence on Berkshire’s businesses, beyond autonomous driving and
GEICO, which you’ve talked about already? In your conversations with Bill
Gates, have you thought through which other businesses will be most
impacted? And do you think Berkshire’s current businesses will have
significantly more or less employees a decade from now as a function of
artificial intelligence?”
BUFFETT: Yeah. I certainly have no special insights on artificial
intelligence, but I will bet a lot of things happen in that field in the next
couple of decades, and probably a shorter timeframe. But I would certainly
think they would result in significantly less employment in certain areas.
But that’s good for society. And it may not be good for a given business, but
let’s take it to the extreme.
Let’s assume one person could push a button and, essentially, through
various machines and robotics, all kinds of things, turn out all of the output
we have in this country. So there’s just as much output as we have. It’s all
being done by, you know, instead of 150-some million people being
employed, one person. You know, is the world better off or not?
 Well, certainly we’d work a lot less hours a week — of work per week
and so on. I mean, it would be a good thing, but it would require enormous
transformation in how people relate to each other, what they expect of
government, you know, all kinds of things. And, of course, as a practical
matter, more than one person would keep working.
But you’d certainly think that’s one of the consequences of making great
progress in artificial intelligence. And that’s enormously prosocial,
eventually. It’s enormously disruptive in other ways. And it can have huge
problems, in terms of a democracy and how it reacts to that. It’s similar to
the problem we have in trade where trade is beneficial to society, but the
people that see the benefits day by day of a — of trade — don’t see a price
at Walmart on socks or whatever they’re importing, that says, you know,
“you’re buying — you’re paying X, but you would pay X-plus-so-many-
cents if you bought this domestically.”
So they’re getting these small benefits and invisible benefits. And the
guy that gets hurt by it, who’s the roadkill of free trade, feels it very
specifically. And that translates into politics. And so, you can — it gets very
uncertain as to how the world would adjust, in my view, to great increases
in productivity. And without knowing a thing about it, I would think that
artificial intelligence would have that hugely beneficial social effect, but a
very unpredictable political effect if it came in fast, which I think it could.
Charlie?
MUNGER: Well, you’re painting a very funny world where
everybody’s engaged in trade. And the trade is, I give you golf lessons and
you dye my hair. And that would be a world kind of like the royal family of
Kuwait or something. And I don’t think it would be good for America to
have everything produced by one person and the rest of us just engaged in
leisure.
BUFFETT: How about if we got twice as productive in a short period of
time, so that 75 million people could do what 150 million people are doing
now?
MUNGER: That’s what happened during the period when there — I’m
sure everybody remembers with such affection — back in the Eisenhower
years, five percent a year or something — people loved it. Nobody
complained that they were getting air conditioning and they didn’t have it
before. Nobody wanted to go back to stinking, sweating nights in the South
and —
 BUFFETT: Well, if you cut everybody’s hours in half, it’s one thing.
But if you fire half the people and the other people keep working, I just
think it gets very unpredictable. I mean, I think we saw some of that in this
election because I think that —
MUNGER: Well, we’ve adjusted to an enormous amount of it. It just
came along a few percent per year. Don’t think you have to worry — I don’t
think you have to worry about coming out at 25 percent a year. You know, I
think you have to worry about it — you’re going to get less than two
percent a year. That’s what’s worrisome.
BUFFETT: OK. We’ll move on. But it will be, you know, it’s an
absolutely fascinating subject to see what happens with this. But it’s very,
very hard to predict. If in some way, you know, we’ve got 36,000 people,
say, employed at GEICO, you know. And if you could do the same —
perform all the same functions, virtually all the same functions even, and do
it with five- or 10,000 people, and it came on quickly, and the same thing
was happening in a great many other areas, you know, I don’t think we’ve
ever experienced anything quite like that. And maybe we won’t experience
anything like it in the future.

Buffett & Munger are very interested in Solar and Wind

Power – 2017 Meeting
AUDIENCE: Warren, during the past five years, Berkshire Energy’s
investments in solar and wind generation have been about equal, with
around 4.7 billion dedicated to capital projects in each segment. Based on
the company’s end-of-year capital spending forecast for 2017 through 2019,
investments in wind generation were expected to be more than seven times
greater than investments in solar generation the next three years, with just
over $4.5 billion going into wind generation.
Just wondering how much of that future spending is tied to PacifiCorp’s
recently announced $3.5 billion expansion plan, which is heavily weighted
towards improving and expanding the subsidiary’s existing wind fleet, and
whether the economics for wind are that much better than solar given that
MidAmerican has also been spending heavily on wind investments? Or is
this disparity between the two segments being driven more by genuine
capacity needs, which would imply that you have much more solar capacity
than you need?
 BUFFETT: Yeah. We don’t look at it as having more solar capacity than
we need or anything. It’s really a question of what comes along. I mean, and
the projects, they’re internally generated, they’re externally offered to us,
and we’ve got a big appetite for wind or solar.
We have seen more wind lately. But we have no bias toward either one. I
mean, if we saw five billion of attractive solar projects we could do and
didn’t happen to see any wind during that period, it wouldn’t slow us down
from doing the five billion or vice versa. So we have a huge appetite, for
projects in either area. We’re particularly well situated, as I think I’ve
explained or talked about in the past, because we pay lots of taxes. And
therefore, solar and wind projects all involve a tax aspect to them. And we
can handle those much better than many other — certainly, electric utilities.
Most electric utilities really, A, don’t have that much money left over
after dividends and these — frequently, the taxes aren’t that significant. At
Berkshire, we pay lots of taxes, and we’ve got lots of money. So it’s really
just a question of doing the math on the deals as they come along. We’ve
been very fortunate in Iowa, in finding lots of projects that made sense. And
as a result, we’ve had a — we’ve got a much lower price for electricity than
our main competitor in the state. We’ve got a lower price than in any states
that touch us. We’ve told the people of Iowa we won’t — they won’t have a
price increase for many, many, many years — guaranteed that. So this
worked out extremely well.
But if somebody walks in with a solar project tomorrow and it takes a
billion dollars or it takes three billion dollars, we’re ready to do it. And the
more, the better. There’s no specific preference between the two. Obviously,
it depends where you are in the country. I mean, Iowa’s terrific for wind.
And, obviously, California’s terrific for sun. And there are geographical
advantages to one or the other. But from our standpoint, we can do them
anyplace. And we will do them anyplace.
Berkshire’s Renewable Energy Investments – 2016
Meeting
AUDIENCE: Warren, with both coal fired and natural gas plants
continuing to generate around two-thirds of the nation’s electricity, and
renewables accounting for less than 10 percent, there remains plenty of
room for growth. At this point, Berkshire Energy, which has invested
heavily in the segment, is one of the nation’s largest producers of both wind
and solar power, and yet still only generates around one-third of its overall
capacity from renewables.
As you noted earlier, MidAmerican recently committed another $3.6
billion to wind production, which should lift the amount of electricity it
generates from wind to 85 percent by 2020. You’ve also had the company,
overall, pledging to have around 30 billion in renewables longer term. The
recent renewal of both the wind and solar energy tax credits has made this
kind of investment more economically viable and should clear the path for
future investments. Eliminating coal-fired plants looks to be the main
priority, but natural gas-fired plants are also fossil fuel driven and are
exposed to the vagaries of energy prices.
Is the endgame here for Berkshire Energy to get 100 percent of its
generation capacity converted over to renewables, and what are the risks
and rewards associated with that effort? After all, the company operates in a
highly-regulated industry, where rates are driven by an effort to keep
customer costs low, while still providing adequate returns for the utilities.
BUFFETT: Yeah, well, I think implicit in what you say is that any
decision we make has to go through what’s usually called the Public Utility
Commission, they may have different names in a few states. But the utility
industry is overwhelmingly regulated at the state level, and we cannot make
changes that are not approved by the Public Utility Commission.
We’ve had more problems, for example, in bringing in renewables in our
western utility, Pacific Corp, because it’s, in effect, regulated by six states,
and they don’t necessarily agree on how the cost and benefits should be
divided if we put in a bunch of renewables, and we have to follow their
instructions. Iowa was just been marvelous about encouraging — I mean at
every level — I mean the consumer groups, the governor, you name it —
they have seen the benefits.
And in Iowa it’s literally true that we have one major competitor, called
Alliant, and they have not — either been able to — I don’t know the
reasons — but they have not pursued renewables the way we have, so our
rates are considerably lower than theirs. And, if you look at their budget
projections — although they’re substantially higher rates than we have now
— they may well need a rate increase within a year or so. And with our
latest expansion, we have said that we will not need a rate increase till 2029
at the earliest. That’s thirteen years off.
 So there’ve been great benefits if you have a regulation that works with
you on that, but it is a determination that is made at the state level. Now, the
federal government has encouraged, in a major way, the development of
renewables by this production tax credit, which currently amounts to about
2.3 cents per kilowatt hour. We would not have the renewable generation
that we have if it hadn’t been for the fact that that building of those projects
is subsidized by the federal government, because the benefits of reducing
solar emissions are — or carbon emissions — are worldwide, and therefore
it’s deemed proper that the citizenry as a whole should participate in
subsidizing the cost of reducing those emissions. And that has encouraged
— in fact, it’s allowed — things like have happened in Iowa as well.
But the degree to which the renewables replace, primarily coal will
depend on governmental policy. And I think, so far, I think it’s been quite
sensible in encouraging having the cost borne by society as a whole, in
terms of reduced tax revenues, and having the benefits, which is less CO ₂ ,
into the atmosphere.
They also, broadly — you know, they’re not just limited to the people of
Iowa when we build that. That’s a benefit that accrues to the world. I think
you’ll see continued change. It will vary by jurisdiction. And we would
hope — we’ve got the capital, we’ve got lots of taxes, federal taxes, paid in
our consolidated returns — so we’re in a particularly advantageous position
to take advantage of massive investments that companies with limited tax
appetites couldn’t handle. I think you’ll see us be a very big player. But
governmental policy is going to be, you know, the major driver. Charlie?
MUNGER: Yeah, I think we’re doing way more than our share of
shifting to renewable energy, and we’re charging way lower energy prices
to our utility customers than other people. If the whole rest of the world
were behaving the way we are, it would be a much better world.
I will say this about the subject, though, and that is that I think that the
people who worry about climate change as the major trouble of Earth don’t
have my view. I like all this shifting to renewables, but I have a different
reason. I want to conserve the hydrocarbons, because eventually, I think,
we’re going to use every drop, humanity, for chemical feedstocks. And so
I’m in their camp, but I’ve got a different reason.
BUFFETT: One thing you’ll find kind of interesting: Nebraska has not
done much with wind power. And maybe three miles from — two miles —
from where we’re sitting, right across the river, people are buying their
electricity cheaper, in Council Bluffs right across the river, than they are in
Omaha.
And yet Nebraska is entirely a public power state, so there’s no
stockholders who have to have any earnings, the bonds are issued on a tax-
exempt basis, and yet electricity is considerably cheaper right across the
river. And, you know, the wind blowing doesn’t just start at the Missouri
River. I mean, it comes across Nebraska and that wind could be captured.
And, so far, it really hasn’t.
And the real irony is that because our electricity is so much cheaper in
Iowa, you have these massive server farms of people like Google. It’s
become a tech haven for these operations that just gobble up electricity.
And Iowa has gotten plant after plant after plant and job after job after job,
and increased property tax — I mean gotten more property tax revenues —
and that’s being done — the Google server is probably seven or eight miles
from here — and it’s located in Iowa because we have cheap wind-
generated electricity. And it’s creating jobs.
It’s fascinating. Nebraska has prided itself on public power. It was
originated back, I believe, in the ’30s when George Norris was a very
powerful senator here and it’s been a source of pride. But lately, it’s been a
source of cost, too.
How Long Will Household Formation Rates Continue
To Lag Behind Historical Numbers? – 2015 Meeting
AUDIENCE: Berkshire owns many companies that benefit from single-
family home construction: ACME, Johns Manville, Benjamin Moore,
MiTek, and Shaw among them, not to mention the railroad. After the
financial crisis, you said that young adults who are postponing household
formation by living with parents or in-laws would eventually get sick of
that arrangement and we would start to see normal rates of household
formation once the job market improved or even if it didn’t. Jobs are now
more plentiful.
Yet, household formation still continues to be below rates thought to be
normal, whether because of high student debt, a shift in attitudes about
homeownership, or stricter mortgage terms for first-time buyers. Could
something more secular be going on where household formation rates,
relative to the population, could continue to be lower than historical rates?
 Could the U.S. become more like Europe where many adult children live
with their parents or in-laws for quite some time, or do you think, still, that
the subdued rate of household formation is a mostly cyclical phenomenon,
and that the rate will eventually revert to the historical mean, boosting
single-family home starts and earnings for this group of companies?
BUFFETT: Yeah. I don’t know the answer, obviously, but I think the
latter is more likely. I may be wrong. I should know the figures, but I don’t,
for the last six months or nine months. But my impression was they had
turned up somewhat. I did my best on selling that ring in the movie to that
guy, and they’re going to form a household here in another month or two to
which I’ve been invited. But the truth is I don’t know what’s going to
happen on household formation. I would expect it to turn up. It always turns
down in a recession, and you could argue that we’re not all the way back
from the recession yet. Your guess would be as good as mine. Charlie?
MUNGER: I feel exactly the same way, but I think I speak for a lot of
members of the audience when I say I have some grandchildren that I wish
would marry somebody suitable promptly.
Think About What Can Mess Up Your Business Model –
2014 Meeting
AUDIENCE: Energy Future Holdings’ likely bankruptcy is a
consequence of unexpected and dramatic decline in prices of natural gas
prices caused by a revolution in drilling technology. To what extent do you
believe other assets held in Berkshire’s portfolio, debt, equity, et cetera,
may be subject to disruptive technological or other changes that erode
business models and barriers to entry?
For example, changes in consumer behavior and regulation could affect
Coca-Cola. Revolution in payment systems could affect American Express,
ever-increasing rate of change in technology and competitive landscape
could affect IBM, wireless delivery of media content and urbanization
could be disruptive to DirecTV.
Could you also comment on whether participation of some sponsors of
Energy Future Holdings, which include the very best of private equity,
contributed to your decision to invest? Was it the degree of crowd mentality
at play, and what lessons are to be learned from the experience?
BUFFETT: Yeah, well. I would be unwilling to share the credit for my
decision to invest in Energy Future Holdings with anybody else. I would
think that’s very unfair of anyone to insinuate that they had anything to do
with that decision. That was just a mistake on my part. It was a big — it
was a significant mistake, and we will make mistakes in the future.
All businesses should constantly be thinking about what can mess up
their business model. And with Energy Future Holdings it was a fairly
simple assumption that was made that just turned out to be wrong. I mean,
the assumption there was that gas prices would stay roughly as high as they
were or go higher, and instead they went a whole lot lower. And at that
point the whole place toppled. They had a lot of reserve holdings and they
had some futures positions which kept them alive for a while. But that was
a basic error.
We look at all of our businesses as subject to change. A classic case
would be GEICO. I mean, GEICO set out in 1936 to operate at low costs
and pass on those low costs to the customer through lower prices for
something that was a necessity, auto insurance. And they originally did it by
mail offerings, U.S. Postal Service, two people who were government
employees. That’s where the name comes from, GEICO, Government
Employees Insurance Company. And they had to adapt over the years, and
they adapted first to widening classifications.
But they went from the U.S. mail, primarily, to the telephone, and later
went to the internet, and onto social media. But in there they stumbled one
time, too, as they went to adapt, and they — when they left the government
employees classification, at one point they became too aggressive about
expanding and they almost — they really did go broke.
So change is going on all the time, and it’s going on with all of our
businesses. And we want managers that are thinking about change, and
what can — what’s going to be needed for their business model in the
future. And we know they’re not going look the same five or ten years from
now. I mean, BNSF, something as basic as railroads, is looking big at LNG
for its locomotives. Everything is going to change.
Our businesses generally deal from strength and they’re generally not
subject to rapid change. But they’re all subject to change, and of course,
slow change can be much harder to perceive, and can lull you to sleep
easier, sometimes than when rapid change is clearly in sight.
So I would say, in answer to that question, A) I will make mistakes in
the future. I mean, that’s guaranteed. We do not make anything like “bet the
company” decisions that will ever cause us real anguish. That just doesn’t
happen at Berkshire. But you’re not going to make a lot of decisions
without making some significant mistakes. And occasionally they work out
very well.
Charlie and I, and Sandy Gottesman, in 1966, bought a department store
in Baltimore. Now, there’s probably nothing dumber than buying a
department store in the mid-1960s. There were four department stores on
the corner of Howard and Lexington Street in Baltimore in 1966, and none
of them are there. And the number one store, Hutzler’s, went broke a little
later than our store went broke. But fortunately Sandy did a great job of
selling it, so the $6 million invested in that department store became worth
about $45 billion in Berkshire Hathaway stock as we did other things with
the money as we went along.
So you do have to be very alert to what is going on in your businesses,
and we want our managers to do that. But actually, it’s something that
Charlie and I, and our directors, are going to think about, as well as our
managers. Charlie?
MUNGER: Yeah, I spoke earlier about the desirability of removing
your ignorance piece by piece, and there’s another trick, which is
scrambling out of your mistakes. And we’ve been quite good at both, and
it’s enormously useful.
Imagine Berkshire, a textile mill sure to go broke because power costs in
New England were about twice as high as they were in TVA country, a
sure-to-fail department store, and a trading stamp sure to be forced out of
business by change in mode. Out of that comes Berkshire Hathaway.
Talk about scrambling out of mistakes, I think of what we might have
done if we’d had a better start.
BUFFETT: Yeah. The point was driven home to me — my great-
grandfather started a grocery store here in Omaha in 1869. And my
grandfather was running it in 1929, and he wrote my uncle who was going
to be running it with him. And the letter started out, this is in 1929, “The
day of the chain store is over.”
And that is why we ended up with one grocery store, which went out of
business in 1969. It — you really have to face facts around you, and the
wish being father to the thought was, unfortunately, what overcame my
grandfather.
 Uber, Airbnb, and the “disruptive” sharing economy –
2014 Meeting
AUDIENCE: What larger implications do you expect companies like
Uber and Airbnb to have on their sectors, and do you think this business
model is here to stay?
BUFFETT: Well, they are obviously trying to disrupt some other
businesses, and those businesses will fight back in competitive ways, and
they may try to fight back through legislation.
You know, when anybody’s threatened, or any business is threatened, it
tries to fight back. If you go back to when State Farm came on the scene in
1921, that the — or ’20, or whenever it was, the agency system was
sacrosanct, in terms of insurance. It’d been around forever and the big
companies were in Hartford or New York and they fought over having the
number one agency in town. So if you came to Omaha and you were at
Travelers or Aetna, or whomever it might be, your objective was to get the
agent. And the policy holder really wasn’t being thought about. And then
State Farm came along and they had a better mouse trap, and then GEICO
came along with a better mouse trap yet.
And so, the insurance companies fought back in a lot of ways. But one
of the ways they tried to do it was to insist, you know, on various state laws
involving what agents could do and what could not be done in insurance
without agents and all that. That’s standard. And you’ll see that, and in the
end the better mouse trap usually wins.
But the people with the second or third-best mouse trap will try to keep
that from happening. The ones you name, I don’t know anything about. I
mean, I know what they do, but I don’t their specific prospects, which is
why we kind of stay away from that sort of thing because we don’t — we
know there’ll be change, and we don’t know who the winners will be. And
we try to stick with businesses where we know the winners.
A lot of our businesses are very, very, very likely to be winners, and that
doesn’t mean they don’t have some change involved with them, but they’re
going to be winners. And then there’s other fields where we can’t pick the
winners, and so we just sit and watch. We find them interesting but we
don’t get tempted. Charlie?
MUNGER: Well, I think the new technology is going to be quite
disruptive to a lot of people. I think retailing, in particular, is facing some
very significant threats. And you heard Greg Abel talk about a power plant
in Iowa that was huge to serve one Google server farm. When you get
computer capacity all over the world on this scale, it is changing the world.
I mean, you’re talking about —
BUFFETT: Fast, too.
MUNGER: Yeah, fast. So — and I think it’s going to hurt a lot of
people just as all the past technology investments hurt a lot of people. I
think Berkshire, by and large, is in pretty good shape.
How Long with the US Dollar Remain the World
Reserve Currency? – 2013 Meeting
AUDIENCE: What would be the effect upon the U.S. and the world
economy if the dollar loses that status as a world reserve currency?
BUFFETT: Well, I don’t know the answer to that, but fortunately, I
don’t think it’s going to be relevant. I think the dollar bill will be the
world’s reserve currency for some decades to come. I think China and the
United States will be the two super economic powers, but I don’t see any —
I think it’s extremely unlikely — that any currency supplants the U.S. dollar
as the world reserve currency for many decades, if ever. Charlie?
MUNGER: Well, there are advantages to a country that has the reserve
currency, and if you lose that, you lose some advantage. England had a
better hand when it had the reserve currency of the world than it had later
when the United States had the reserve currency of the world.
If that eventually happened to the United States, it would not be, I think,
all that significant. It’s in the nature of things that sooner or later every great
leader is no longer the leader. Over the long run, as Keynes said, we’re all
dead, and over the long run —
BUFFETT: This is the cheery part of the section.
MUNGER: Well, if you stop and think about it, every great leading
civilization of the past passed the baton.
BUFFETT: What do you think the probabilities are that the U.S. dollar
will not be the reserve currency 20 years from now?
MUNGER: Oh, I think it’ll still be the reserve currency of the world 20
years from now. That doesn’t mean that it’s forever.
The Future of Rooftop Solar Power – 2013 Meeting
AUDIENCE: The question is about capital spending plans at your
regulated utilities and a potential long-term risk to realizing returns on
current and future capacity. With the ongoing reduction in the cost of solar
panels causing more utility customers to, at least, consider generating
electricity from their own rooftops, some worry about a vicious circle of
customers reducing their dependence on the grid, forcing utilities to raise
rates, to maintain returns on the remaining customers who, in turn, are then
incentivized to reduce their dependence on the grid, or even exit it.
I understand the risks are greatest to regulated utilities in sunny places
like Arizona and California, but given how much solar power is generated
in cloudy places like Germany, are regulated utilities in Iowa, the Pacific
Northwest, the Rocky Mountains, and the UK really immune?
MUNGER: Well, my answer would be I don’t think anybody really
knows exactly how this is going to play out. I confidently predict there will
be more solar generation in deserts than there is going to be on rooftops in
cloudy places and there’s a good reason for that.
And Berkshire’s big operations, are in what amounts to desert. And we
get very favorable terms and incentives, and I think Berkshire’s going to do
fine in solar. I am skeptical, myself, about trying to run the utilities of the
world from a bunch of little, tiny rooftops.
I suspect there’s some twaddle in that — and some fancy salesmanship
in that arena. And of course, the people that did it early were foolish
because the price came down rapidly thereafter. So put me down as not
totally charmed by rooftops in cloudy areas.
BUFFETT: We have Greg Abel here from MidAmerican Energy. If we
can direct a spotlight down there, Greg can probably speak to this with a lot
more intelligence than Charlie and I. I noticed that Jonathan left me out of
the thing entirely when he wanted to get an intelligent answer, but I’m not
taking any offense at that. Greg?
ABEL: Sure. Happy to touch on it. I would touch on the fact you’re
absolutely right. We’re seeing, when it comes to rooftop solar, a decline in
the total cost of installing them.
At the same time, when you compare it to a regional tariff, or a specific
tariff in most of those states, the utility is extremely still competitive. And I
would highlight that as you see more rooftops coming on, you’ll see a
restructuring of the tariffs, but at the same time, there’s a lot of protection
for the utilities.
So in the regions we’re supplying power, we will see some introduction
of solar, but we’re absolutely comfortable our systems for the long-term are
valuable both to our customers and to our shareholders for the long term..
The USA Still Has Plenty of Potential – 2013 Meeting
AUDIENCE: Looking over your first quarter results in the 10-Q, I was
wondering — and this might apply more to the noninsurance businesses —
what are you seeing in terms of reading the tea leaves for the U.S. economy
right now? Are you starting to see lift? And I’m curious if you feel any need
to start to expand Berkshire internationally outside of the U.S.?
BUFFETT: Well, we’re willing to go, you know, anyplace where we
think we understand what things are going to look like in five or 10 years,
and where we get our money’s worth, and good management, and all of the
things that we emphasize.
But we’ve never foreclosed anything, but we’re going to find most of
our opportunities in the United States. It’s just the nature of things that this
is a huge, huge market for businesses, and we’re better known here. But,
you know, most of our deals will take place here, but we find things outside
the United States, particularly in terms of bolt-on acquisitions.
In terms of current business, ever since the fall of 2009, coming on four
years, we’ve seen a gradual improvement. And sometimes people have
gotten encouraged to think it was speeding up quite a bit, and then they get
feeling that — they start talking about a double-dip, which I’ve never
believed in and hasn’t happened. What we see overall is just a slow
progress in the American economy. You saw those figures on carloadings
for the first 17 weeks.
And, you know, we were up 3-and-a-fraction percent, but the other
railroads were up 4/10 of a percent, so the industry as a whole might be up
1 percent or thereabouts, a little over 1 percent. This economy is not — for
the last four years — it’s not come roaring back in any way, shape, or form.
It’s never faltered, and I wouldn’t be surprised if it keeps going this way.
Now, finally, the overhang in housing ended — it ended about a year ago
— but — so we’re starting to get — we’re seeing some recovery in home
prices, which has a big psychological effect, and we’re seeing some
improvement in construction. But we don’t want to start overbuilding again.
We really want to have housing starts that more or less equal household
formation. And I think we’re seeing that. So if you ask me where we’re
going to be when we meet here next year, you know, I think we will have
moved forward. But I don’t think it will be in any surge of any sort, but I
don’t think we’ll stall, either.
And if we hear about something tomorrow that we can spend 15 or $20
billion on and we feel we like the business, United States or otherwise,
we’ll move in an instant, and if we don’t, we won’t do anything. And we
just never know when opportunity is going to come along, but it does come
along from time to time. And sometimes in financial markets, it comes in a
huge way. I mean, that will happen from time to time.
We may not see very many more, but most of the people in this room
will see four or five times during their lifetimes they will see incredible
opportunities offered in, probably in equity markets, but maybe in bond
markets as well. Things will happen, and then, you know, you have to be
able to act, and that means both in terms of having the ability and also
having the mental fortitude to jump in when most people are jumping out.
Berkshire’s Competitive Advantage in Wind Power with
Tax Credits and Subsidies – 2012 Meeting
AUDIENCE: MidAmerican has a large investment in wind and solar
power. What effect do subsidies and incentives have on that business, and
could you share your thoughts on a sustainable energy policy? I gather we
should be conserving our natural gas. What is the most appropriate use of
that resource?
BUFFETT: Yeah. Well, I believe the — on wind — and we’re much
bigger in wind than solar, although we’ve entered solar in the last six
months or so. We’ve got two solar projects that we own about a half of each
one of them. But we’ve been doing wind for quite a while, and I think the
subsidy is 2.2 cents for ten years per kilowatt hour, and that’s a federal
subsidy.
And there’s no question that that makes wind projects — in areas where
the wind blows fairly often — that makes wind projects work, whereas they
wouldn’t work without that subsidy. The math just wouldn’t work out. So
the government, by putting in that 2.2 cents subsidy, has encouraged a lot of
wind development. And I think if there had been none, my guess is there
would have been no wind development.
I don’t think any of our projects would make sense without that subsidy.
In the case of solar, the projects we have have got a commitment from
Pacific Gas and Electric to a very long-term purchase commitment. How
that ties in with their particular obligations or anything, I mean, there may
be some subsidy involved in why they wish to buy it at the price they do
from us. I’m sure there is; I don’t know the specifics of it.
But neither one of those projects, neither solar nor wind — if Greg Abel
is here and wants to go over to a microphone and correct me on this, it
would be fine — but I don’t think any solar or wind would be working
without subsidy. And, of course, you can’t count on wind for your base
load. I mean, it works and it’s clean, but if the wind isn’t blowing, you
know, it does not mean that everybody wants to have their lights off. So it’s
a supplementary type of generation, but it can’t be part of your base
generation. Charlie, do you have any thoughts on that? And Greg, do we
have Greg up here? Go ahead, Charlie.
MUNGER: Well, I think, of course, it — eventually we’re going to
have to take a lot of power from these renewable sources and, of course,
we’re going to have to help the process along with subsidies. You know, I
think it’s very wise that that’s what the various governments are doing.
BUFFETT: Yeah, you could say the future is subsidizing, you know, oil
and natural gas now, in a sense. Is Greg up there?
ABEL: Just to touch on both the wind projects and the solar, Warren,
you were exactly right.
Obviously the subsidy associated with the wind has allowed us to build,
now, 3,000 megawatts across our two utilities. And you are absolutely
correct, we would have not moved forward without that type of subsidy. On
the solar, there’s actually a couple other incentives that are in place. You get
a very large incentive associated with constructing the assets.
We recover 30 percent of the construction costs as we build it.
Significant advantage there, relative to Berkshire being a full taxpayer,
where a lot of other entities in the U.S. are not, or the corporate entities that
are competing for those projects relative to ourselves often don’t have the
tax appetite for those type of assets. So we do benefit from the ongoing tax
structure, there’s no question, both in wind and in solar.
BUFFETT: Greg has hit on a point that people don’t — often don’t —
understand about Berkshire. We have a distinct competitive advantage. It’s
not unique, but it’s a distinct competitive advantage in that Berkshire pays
lots of federal income tax.
So when there are programs in the energy field, for example, that
involve tax credits, we can use them because we have a lot of taxes that
we’re going to pay, and therefore, we get a dollar-for-dollar benefit.
I don’t have the figures, but I would guess that perhaps 80 percent of the
utilities in the United States cannot reap the full tax benefits, or maybe any
tax benefits, from doing the things that we just talked about because they
don’t pay any federal income taxes.
They’ve used bonus depreciation, which was enacted last year and
where you get 100 percent write-off in the first year. They wipe out their
taxable income. And if they’ve wiped out their taxable income through such
things as bonus depreciation, they cannot have any appetite for wind
projects where they get a tax credit or in the solar arrangement.
So, by being part of Berkshire Hathaway, which is a huge taxpayer,
MidAmerican has extra abilities to go out and do a lot of projects without
worrying about whether they sort of exhausted their tax capacity. It’s an
advantage we have.
Nuclear power is “important” and “safe” - 2011
AUDIENCE: Around 2004, Mr. Buffett, you told us of a great attention
you had given to limiting Berkshire’s exposure to megacatastrophes so that
one could not break Berkshire. Today, MidAmerican Energy is seeking
approval to build a nuclear power plant in eastern Iowa. At the same time,
another utility company, Tokyo Electric and Power, faces claims that
Merrill Lynch has estimated as exceeding 12 trillion yen, or $140 billion, to
compensate residences and businesses that have been displaced and farmers
that cannot produce.
Do you believe that the bond-like return that MidAmerican Energy
might receive from a nuclear power plant can justify the mega-catastrophe
risk that it would pose to Berkshire?
BUFFETT: Yeah, I don’t think it does pose — I don’t know the details
of it, and Greg Abel can speak to it better than I can, but I don’t think
there’s anything like the exposure that you refer to. I think nuclear power is
an important part of the world’s equation, really, in dealing with its
problems on — it’s very long term because you’re not going to change the
installed base in any hurry. And as you know, France has a very high
percentage of nuclear power.
And, actually, 20 percent of the electricity generated in the United States
comes from nuclear power. I probably am getting some of mine from — we
have — at Fort Calhoun, we have a nuclear facility — not we, but Omaha
Public Power District has a nuclear facility I’ve actually been in. But I think
nuclear power is important, and I think it’s safe.
I don’t think nuclear power is going to go any place in the United States
for a while because of the reaction to what happened in Tokyo with Tokyo
Electric Power. But that doesn’t change my view as to the advisability of
continuing to develop nuclear power, not only in the United States, but
around the world.
I think some people misinterpreted what I said when I was interviewed,
when I said that I thought it would have a major setback in its development,
just because of the popular reaction to what happened in Japan. But that
does not change my view that nuclear power is important for the future of
this country and the world. Charlie?
MUNGER: Yeah, we can’t be so risk averse that things that have a very
tiny chance of making a big dent in one subsidiary are unendurable for us.
We have to have a certain reasonable amount of courage in operating this
company.
BUFFETT: We have pipelines — we have gas pipe — you can dream
of all kinds of worst-case situations. We have to carry toxic materials.
We’re required by law to carry those on the railroad, and, you know, you
can picture the wrong place, the wrong time, the wrong everything. But we
are not bearing any risks, in my view, ever, that threaten the enterprise.
I mean, that is one thing I think about all the time. I regard myself as the
Chief Risk Officer of Berkshire, and that is not something to be delegated to
a committee, in my view, at all. So whether I think about derivative
positions, whether I think about leverage, whether I’m thinking about
nuclear power plants or anything, I mean, we are not doing anything that I
know of that — pressing my imagination as far as I can — threatens me
losing a night’s sleep over Berkshire’s well-being.
MUNGER: And I think you’d also count on any new nuclear plant built
in Iowa will be a hell of a lot safer than the ones we already have. We are
learning as we go along here.
BUFFETT: Yeah. Obviously, more people — more people have lost
their lives, by far, in coal mine accidents, you know, than ever in the United
States — have suffered no losses from anything involving nuclear — with it
producing 20 percent of the electricity used by 309 million people.
MUNGER: And if a tsunami gets to Iowa, it will a hell of a tsunami.
BUFFETT: Yeah. And our railroad won’t do so well, either.
 Wind power needs government subsidies – 2011
Meeting
AUDIENCE: Warren, MidAmerican Energy is investing over a billion
dollars in wind power. How do you feel about wind power as a source of
renewable energy and its economics? Will this scale of investment continue
and what type of returns do you expect to come from wind power?
BUFFETT: Yeah, it’s terrific, but wind power is terrific, but only when
the wind blows. And the wind blows about about 35 percent of the time in
Iowa. So you never can count on wind power, obviously, for your base load.
And, you know, that is a real limitation.
On the other hand, wind power, you know, is basically, I guess, the
cleanest energy you can come up with, except for the fact that it can’t be
relied on. The economics only make sense with an incentive credit — tax
credit — provided by the federal government, which they’ve been doing for
a considerable period of time. Standing on their own, the investment will
not return anything like an adequate return on capital. So there is a tax
credit that your government has made a decision that it wants to subsidize,
in effect, wind power. And Iowa is a good wind state.
This whole central belt is good and so it’s made sense to locate a lot of
megawatts of generating capacity in Iowa, and we have more under
construction now, and I think we’re now, I think, number one in the country
in respect to wind power. So we’ll be doing more.
It is dependent, in terms of the price you can get, the percentage of the
time that you’re generating capacities actually get used and everything, it
only makes sense with the tax credits.
And one thing that is kind of interesting, one of the assets of Berkshire is
that it pays a lot of taxes. That doesn’t sound like much of an asset, but in
these days, a lot of utilities, when you get both a hundred percent
depreciation, which has been put in now by the federal government for a
short period of time, and you get these sort of tax credits on wind, they
really don’t have the tax paying capacity to be able to use the tax credits.
So they are in a different position than Berkshire, which pays a lot of
taxes.
We’ve probably paid something like 2 percent of all the corporate taxes
in the United States, maybe, over the last five years. I want to check that,
but it’s not — I don’t think that’s way off. So we have a lot of tax paying
capacity. We can use it to build more wind projects.
 And I think it’s very likely we will continue to do it. It helps our Iowa
customers. Because these projects are successful, it’s enabled us to keep
rates absolutely unchanged now for more than a decade, which is very
unusual among electric utilities in the United States.
The United States Has Plenty of Investment
Opportunities – 2010 Meeting
AUDIENCE: What do you see as the biggest challenge facing the
United States economy relative to other countries? And what are the
implications of that with regard to investing globally over the next decade?
MUNGER: I think the answer to that is that by and large we haven’t
made our way in life by having great global allocations systems.
Berkshire’s attitude, generally, is to find things that seem sensible to us
and to concentrate, to some extent, in those matters. And then let the world
economy and the world’s currency fluctuations fluctuate as they will. I do
think we’d prefer some countries to others, and the more responsible the
countries seem, the more comfortable we are. But beyond that, we can’t
help you very much because we really don’t have a global allocation system
at Berkshire, unless Warren is keeping it secret from me.
BUFFETT: Not that one. We did not buy Burlington Northern with the
idea of moving it to China or India or Brazil, and we love that. We love the
fact that Burlington Northern is in the United States.
The biggest threat we have is some kind of a massive nuclear, chemical,
or biological attack of one sort or another. And if you would say what are
the probabilities of that over a 50-year period, it’s pretty high. Over a one-
year period, it’s very low.
But if you talk about whether the qualities that have led to the last 220
years of incredible progress, with a lot of hiccups, but incredible progress,
you know, in the status of mankind that we’ve experienced in these two
centuries compared to any two centuries you want to pick out in history,
this country is remarkable and its system is remarkable. And it does unleash
human potential like has never been seen before.
This crowd here is not smarter than a similar crowd 200 years ago, and
they don’t work harder. But, boy, do they live differently. And they live
differently because this system has enabled fairly ordinary people, over a
period of time, to do extraordinary things. And that game isn’t over. There
is nothing that says we have come close, in my view, to the limits of what
humans can achieve.
We probably don’t even know our own potential, any more than the
people in 1790 knew their own potential. I mean, they thought it would be
great if somebody finally came along with some farm tool that let them
work 10 hours a day instead of 12 hours a day. So I hope the rest of the
world does well, and I think they will do well. And it is not a zero-sum
game. If China and India do well, that does not mean we do worse; it may
mean we do better. So we are not — it’s not what they get is taking it away
from us.
But I would be perfectly content if Berkshire Hathaway were forced in
some way to limit its investment to the opportunities available in the United
States. We would have plenty of opportunities. I’d rather have the whole
world, obviously, in terms of opportunities, but there will be ample in this
country. I would not run from the United States.
Human Innovation will Solve The Problem of Low Oil
Reserves – 2010 Meeting
AUDIENCE: Chairman Buffett, you frequently speak favorably about
the prosperity of future generations, that our children and our children’s
children will live better than us. How much of our current prosperity do you
attribute to us being able to get oil out of the ground at a fraction of the cost
of its value to us in the economy? And how will we be able to live better in
the future when we can no longer get more and more of this free lunch and
we become dependent on more dilute sources like solar and wind? Couldn’t
this turn out like trying to satisfy a drug addict with a Coca-Cola?
BUFFETT: The oil business — obviously, the discovery of oil — what
was it, about 1850- something? Colonel Drake at Titusville, Pennsylvania,
or something? That changed the world in a very major way, and it was only
150 years ago. And since then we’ve been sticking straws into the earth at
an incredible pace.
There’s over 500,000 producing wells in the United States, would you
believe that? I mean, 11 barrels, 10 barrels a day average or something of
the sort. We have really exploited what may have taken, I don’t know,
whether it was hundreds of thousands of years or millions of years to create.
It’s contributed in a huge way to the prosperity of the world, but the world,
in my view, will not be dependent upon that particular — call it “windfall”
— for the next hundred years.
And Charlie knows way more about this subject than I do, but there will
be other free lunches available. You know, whether it’s solar or — there’s
lots of possibilities.
Don’t ever give up on humans’ ability to innovate in ways that create
solutions to problems that seem insolvable. We’ve faced all kinds of
predictions. You know, all of the inventions having been invented — there’s
some famous statement, I forget who made, on that.
We haven’t really started. I mean, if you could pick a time in history
when you would want to be born — leaving out the nuclear, chemical and
biological threat, which is something to leave out — but I would pick today.
The world has a bright future. Now, Charlie will give you the other side of
that.
MUNGER: No. I think you’re failing to recognize something really
important. In the technology of 150 years ago, they really needed the oil to
get ahead. In our advanced civilization, which has benefited from this last
150 years of technological expertise, we can get ahead without the oil if we
have to. Now, Freeman Dyson is a physicist who is not an economist but a
genius, and he’s been very good at pointing out that it isn’t that horrible to
contemplate a world which goes off oil, provided that world is as rich and
knowledgeable as ours is now.
So the fact that they couldn’t have got to where we are now without the
oil starting 150 years ago, does not mean we can’t do without the oil if we
have to. We need the oil and the gas, and the coal, eventually, for chemical
feed stocks more than we need it for keeping warm and propelling our
vehicles.
BUFFETT: And the adjustment, fortunately, will be fairly gradual. I
mean, it isn’t like 85 million barrels in the day goes to 50 million or
something in five or 10 years. So it’s a workable period of adjustment, in
my view.
MUNGER: If it doesn’t bother Freeman Dyson, who knows more about
it, I don’t think it should bother you too much.
BUFFETT: He’s always pulling that on me.
Munger’s Optimism On Solar Power – 2010 Meeting
 AUDIENCE: Charlie Munger, you are on a YouTube video that
discusses BYD and solar energy, and I really appreciate that interview and
it being available to everyone. I want to talk about that in relationship to
your other companies.
So the BYD was mentioned as electric car and battery, but I understand
their second goal is solar energy. And you also own roofing companies and
buildings companies, (inaudible) and Clayton, as well as utilities,
MidAmerica, PacifiCorp, and Pacific Power. This seems to be a perfect
golden opportunity for solar to be on these buildings in those kinds of utility
companies.
You’ve mentioned you don’t interfere with individual companies, but is
there a way you can direct, suggest, motivate a synergy between all these
companies to bring solar solutions? Thank you.
MUNGER: As the solar solutions are coming, because they’re so
obviously needed. And regarding solar panels on roofs, I never pass an
opportunity to decline to put them in, because I think they’re going to get a
lot cheaper and I’d rather wait. It reminded me of the wife, and the husband
said, “Will you still love me if I lost all of my money?” And she says, “Yes,
I would always love you, but I would miss you terribly.”
Well, the solar is coming because we have no other practical alternative.
And it should be regarded as a very good thing, because what in hell would
modern civilization do if we had no alternative to fossil fuels? That would
be a really serious problem. And so of course, the cities that are choking to
death on their own poisonous air are going to go to electric cars and we’re
going to get a lot more renewable energy from the sun.
I’m also quite negative about growing corn in America using fossil
water and fossil fuels in order to burn up in automobiles. That is a
stunningly stupid idea, and another example of how our politicians have
failed us. But I am enormously optimistic about what is going to happen.
Our politicians will eventually create a big electric grid that’s way better
than what we have now. We’ll eventually have the energy we need, and we
will be way better for it. And it’s wonderful that these technical problems
are proving solvable. It is not all that important over the long term, if solar
power costs twice as much as what we’re used to. That’s a blip in the
economic future of our country, it’s just a blip.
And I think it’s probably a good thing that we have all these big capital
needs coming that will create a better system in the end and solve our
problems in the end. So I’m quite optimistic. But in terms of immediate
business decisions, I think frequently the right answer is counterintuitive,
like mine, to say, if you want to put in solar panels, wait. They’re going to
get cheaper.
 3
SPECIFIC INDUSTRIES & COMPANIES

Newspaper Declines Haven’t Hurt Berkshire But

They’ve Hurt Society – 2018 Meeting
AUDIENCE: In your 2012 letter to shareholders, Mr. Buffett, you had a
section devoted to Berkshire’s buying 28 newspapers during the year just
past. Since then, you have not come back to the newspaper subject.
But this year, at the end of the annual report, you published a list of the
newspapers Berkshire owns today, along with their circulation. I compared
that list with the one you published five years ago at the end of 2012. As
you no doubt know better than anyone, the circulation of the 26 newspapers
that Berkshire still owns, of the 28 originally bought, fell sharply. In many
cases, by big amounts like 30 percent to almost 50 percent.
I know that five years ago, you acknowledged the risk in owning
newspapers, but you still said, ‘Charlie and I believe that papers delivering
comprehensive and reliable information to tightly-bound communities, and
having a sensible internet strategy, will remain viable for a long time.’
Skip to today, and imagine that you are writing about Berkshire’s
experience with newspapers. What would you be saying?
 BUFFETT: The problem has been - about 1,300 daily newspapers in the
United States - there were 1,700 not that long ago - is that no one except
The Wall Street Journal, The New York Times, and now probably The
Washington Post has come up with a digital product that, really in any
really significant way, will replace the revenue that is being lost as print
newspapers lose both circulation and advertising. And if you look at the
communities in which we operate, or the communities in which, you name
it - other newspapers operate, the community could be prospering.
We’re in a prosperous economy presently. And all are losing daily
circulation, they’re losing Sunday circulation, they’re losing street - all
street sales, they’re losing home-delivered. I’ve been surprised that the rate
of decline has not moderated in the last five years. We bought all the papers
at reasonable prices, so it is not of great economic consequence to
Berkshire. But I would like to see daily newspapers, actually, you know, be
economically viable, because of the importance to society.
But I would say that the trends which - I put those circulation figures in
there because I think the shareholder’s entitled to look, year-to-year, at what
is happening. It’s happening to 1,300 newspapers throughout the United
States. And it happens in small towns, where you would think that the
alternative sources of information would not be that good. It happens every
place. And The Journal, The Times, and probably The Post, have a viable
economic model in the digital world, and probably will continue to shrink -
I’m almost certain will continue to shrink - in the print world.
But the digital world will be big enough that - and they’ll be successful
enough - so that they have, in my view, a sustainable business model. But it
is very difficult to see, with the lack of success, in terms of important
dollars arising from digital, it’s difficult to see how the print product
survives over time. And that’s - I’m afraid that’s true of 1,300 papers in this
country. And we’ll keep looking to see if there is a way to do it.
But you’d have to look at our experience, and look at the experience of
everyone else’s. McClatchy newspapers came out the other day, you know,
and I think that newspaper - which is very good - fine cities that they
operate in - and advertising revenue is down something like 17 or 18
percent, and circulation. But it isn’t just them, it’s everybody in the
business.
And I wish I had a better answer for you, but I don’t. I would say that
the economic significance to Berkshire is almost negligible, but the
significance to society, I think, actually is enormous. And, you know, I hope
that we find something. I hope others find something because we’ll copy it.
But so far, we have not succeeded in that. Charlie?
MUNGER: Well, the decline was faster than we thought it was going to
be. So it was not our finest bit of economic prediction. And I think it’s even
worse. I think, to the extent we miscalculated, we may have done it because
we both love newspapers and are - and have considered them so important
in our country. These little local newspaper monopolies tended to be owned
by people who behaved well and tended to control the politicians. And
we’re going to miss these newspapers if they disappear. We’re going to
miss them terribly. And I hope to God it doesn’t happen, but the figures are
not good, Warren.
BUFFETT: No. No, they aren’t. And it isn’t just - you know, it isn’t
some town that has a particular problem with unemployment or anything of
the sort. And it isn’t due to general economic conditions. It’s due to the fact
that a newspaper, if you wanted to know the baseball results from the
present day, and the box scores, and everything else, they told you the
following morning and it was still news to you. And the financial material
that I read from there, and in terms of looking at the stock prices and
everything, they were news to you the following morning.
What was developing in the Pacific in terms of the war was news to you
when you read about it in the morning in The New York Times. And it’s -
news is what you don’t know that you want to know. And the - And those
Help Wanted ads, you know, segregated as they may have been, still were
the place to go to look to find a job.
And you can go up and down the line and one element after another
where the daily print newspaper was primary, they’re no longer primary.
And the business has changed in a very material way, and we haven’t been
able to figure out any solutions to that, and we’ll keep trying. Like I say, it’s
not of economic consequence, but I think it is societal consequence. And
we haven’t been able to solve it.
Why Buffett Invested in the Tough Airline Industry –
2017 Meeting
AUDIENCE: Warren, my question relates to some recent stock
purchases as well. Unlike the railroads, which benefit from colossal barriers
to entry due to their established, practically impossible to replicate,
networks of rail and rights of way, the airline industry seems to have few, if
any advantages.
Even with the consolidation we’ve seen during the past 15 years, the
barriers to entry are few and the exit barriers are high. The industry also
suffers from low switching cost and intense pricing competition, and is
heavily exposed to fuel costs, with rising fuel prices being difficult to pass
on, and declining fuel prices leading to more price competition. Compare
this with rail customers who have few choices and thus wield limiting
buying power, and where fuel charges allow the industry to mitigate fuel
price fluctuations.
While you’ve noted several times since the airline stock purchases were
announced that the two industries are quite different and that comparisons
should not be made to Berkshire’s move into railroads a decade ago, could
you walk us through what convinced you that the airlines were different
enough this time around for Berkshire to invest close to $10 billion in the
four major airlines? Because it would seem to me that UPS, which you have
a small stake in, and FedEx, both of which have wider economic moats
built on more identifiable and durable competitive advantages, would be a
better option for long term investors.
BUFFETT: Yeah, the decision in respect to airlines had no connection
with our being involved in the railroad business. I mean, you can classify
them, you know, maybe in — as transportation businesses or something.
But it had no connection, had no more connection than the fact we own
GEICO or, you know, any other business.
You couldn’t pick a tougher industry, you know, ever since Orville went
up and I said, you know, that if anybody’d really been thinking about
investors, they should have had Wilbur [Wright] shoot him down and save
everybody a lot of money for a hundred years.
You can go to the internet and type in “airlines” and “bankrupt,” and
you’ll see that something like a hundred airlines — in that general range,
you know, gone bankrupt in the last few decades. And actually, Charlie and
I were directors for some time of USAir. And people write about how we
had a terrible experience in USAir. It was the — one of the dumbest things
I’d ever done.
But we made a lot of money out of it, because there was one little brief
period when people got all enthused about USAir. And after we left as
directors and after we sold our position, USAir managed to go bankrupt
twice in the subsequent period. I mean, you’ve named all of the — not all of
them — but you’ve named a number of factors that just make for terrible
economics. And I will tell you that if capacity — you know, it’s a fiercely
competitive industry.
The question is whether it’s a suicidally competitive industry, which it
used to be. I mean, when you get virtually every one of the major carriers,
and dozens and dozens and dozens of minor carriers going bankrupt, you
know, it ought to come upon you, finally, that maybe you’re in the wrong
industry. It has been operating for some time now at 80 percent or better of
capacity — being available seat miles — and you can see what deliveries
are going to be and that sort of thing.
I think it’s fair to say that they will operate at higher degrees of capacity
over the next five or 10 years than the historical rates, which caused all of
them to go broke. Now the question is whether, even when they’re doing it
in the 80s, they will do suicidal things in terms of pricing, remains to be
seen. They actually, at present, are earning quite high returns on invested
capital. I think higher than either FedEx or UPS, if you actually check that
out. But that doesn’t mean — tomorrow morning, you know, if you’re
running one of those airlines and the other guy cuts his prices, you cut your
prices, and as you say, there’s more flexibility when fuel goes down to bring
down prices than there is to raise prices when prices go up.
So it is no cinch that the industry will have some more pricing
sensibility in the next 10 years than they had in the last hundred years. But
the conditions have improved for that. They’ve got more labor stability than
they had before, because they’ve been through bankruptcy. And they’re all
going to sort of have an industry pattern bargaining, it looks to me like.
They’re going to have a shortage of pilots to some degree. But it’s not like
buying See’s Candy. Charlie?
MUNGER: No, but the investment world has gotten tougher with more
competition, more affluence, and more absolute obsession with finance
throughout the whole country. And we picked up a lot of low-hanging fruit
in the old days, where it was very, very easy. And we had huge margins of
safety.
Now we operate with a less advantageous general climate. And maybe
we have small statistical advantages, where in the old days it was like
shooting fish in a barrel. But that’s all right. It’s OK if it gets a little harder
after you get filthy rich.
 BUFFETT: Yeah. Charlie’s more philosophical than I am on that point.
MUNGER: Well, I can’t bring back the low-hanging fruit, Warren.
You’re just going to have to keep reaching for the higher branches.
BUFFETT: I think the odds are very high that there are more revenue
passenger miles five years from now or 10 years from now. If the airlines
— if the airline companies are only worth, five or 10 years from now, what
they’re worth now, in terms of equity, we’ll get a pretty reasonable rate of
return, because they’re going to buy in a lot of stock at fairly low multiples.
So if the company’s worth the same amount at the end of the year and
there’s fewer shares of stock outstanding, over time we make decent money.
And all four of the major airlines are buying in stock at a —
MUNGER: You’ve got to remember that the railroads were a terrible
business for decades and decades and decades and then they got good.
BUFFETT: I like the position. Obviously, by buying all four, it means
that it’s very hard to distinguish who will do the — at least in my mind —
it’s hard to distinguish who will do the best. I do think the odds are quite
high that, if you take revenue passenger miles flown five or 10 years from
now, it will be a higher number.
And that will be — There’ll be low-cost people who come in. And, you
know, the Spirits of the world and JetBlues, whatever it may be. But the —
my guess is that all four of the companies we have will have higher
revenues. The question is what their operating ratio is. They will have fewer
shares outstanding by a significant margin. So even if they’re worth just
what they’re worth today, we could make a fair amount of money. But it is
no cinch, by a long shot.
Berkshire will Probably Own More Utilities- 2017
Meeting
AUDIENCE: Thank you, Warren. As you look forward, in taking into
consideration some of the headwinds faced in the U.S.-based utilities,
including weaker electricity demand growth as increasing energy efficiency
impacts demand, distributed generation, which hits vertically integrated
utilities doubly hard as they face both declining energy sales revenue and
increased network cost to support reliable delivery and, third, higher
interest rates, which would increase borrowing costs, what are the key
attributes that Berkshire Energy would be looking for in future acquisition
candidates?
 In particular, are there advantages or disadvantages attached to, say,
transmission assets relative to generation assets that would make you favor
one over the other?
BUFFETT: Yeah. Well, generation assets, you can say, have inherently
more risk because that — some of them are going to be stranded, yeah, and
obsoleted. Now the question is how they treat stranded and all of that sort of
thing. We — on the other hand, more of the capital investment is in the
generating assets. So that tends to be where a good bit of the capital base is.
We like the utility business OK. I mean — electric — electricity demand is
not increasing like it was, as you point out.
They’re going to be stranded assets. They — If they’re stranded because
of rank foolishness, you know, they will probably be less inclined — or the
utility commissions — will be less inclined to let you figure that in your
rate base as you go forward as opposed to things that are — where societal
demands are just changing. But we still think the utility business is a very
decent asset. The prices are very high, but that’s what happens in a low
interest rate environment. I would be — I’d be surprised if 10 years from
now, we don’t have significantly more money in not only wind and solar,
but probably — we’ll probably own more utility systems than we own now.
We’re a buyer of choice with many utility commissions. In fact, if we
can put up the slide, there’s a slide which shows something about our
pricing compared to other utilities. And Greg Abel and his group have done
an extraordinary job. They’ve done it in safety. They’ve done it in
reliability. They’ve done it in price. They’ve done it in renewables. It’s hard
to imagine a better run operation than exists at MidAmerican Energy. And
people want us — with that record — people want us to come to their state
in many cases.
But when prices get to the level they have, I mean, some utilities have
sold at extraordinary prices. And we can’t pay them and have it make sense
for Berkshire shareholders. But just because we can’t do it this year doesn’t
mean it won’t happen next year or the year after. So I think we’ll get a
chance.
MUNGER: And our utilities are not normal. The way Greg has run
those things, they’re so much better run in every way than normal utilities.
They’re better regarded by the paying customers. They’re better regarded
by the regulators. They have better safety records. They charge — It’s just
everything about it is way the hell better. And it’s a pleasure to be
associated with people like that and to have assets of that quality. And it’s a
lot safer. If somebody asked Berkshire to build a $50 billion nuclear plant,
we wouldn’t do it.
BUFFETT: Yeah. And we have public power here in Nebraska. I mean,
it’s been sort of the pride of Nebraska for many decades. It’s all — there are
no privately-held utility systems, and totally public power. And, you know,
those utilities have no requirements for earnings on equity.
They can borrow at tax-exempt rates. We have to borrow at taxable
rates. And Nebraska — you know, the wind — it’s not that much different
than Iowa. And we’re selling electricity across the river, a few miles from
here, you know, at lower prices than exist in Nebraska. So it’s an
extraordinary utility. And it was lucky when we got involved in it.
I thank Walter Scott, our director, for introducing me to it almost 17 or
18 years ago or so. And — But I don’t think the utility business, as such —
I mean, if I were putting together a portfolio of stocks, I don’t think there
would be any utilities in that group now. But I love the fact we own
Berkshire Hathaway Energy.
Why Berkshire Buys Car Dealers – 2015 Meeting
AUDIENCE: I know at the end of last year, you purchased a car sales
dealer. This year, you said in your public letter that you are going to
continue to buy. The ultimate purpose of investment is to seek the return. So
my question is, whether the rate of return can be necessarily higher with the
scale of the dealers? If so, why we cannot see that happen in China? How
come the differences with the dealership business of the same nature in the
United States and China?
BUFFETT: Yeah. I don’t know the dealership situation in China. I
would say — I think I mentioned this a little earlier — that I don’t think
we’re going to get significant benefits of scale as we buy more units in the
auto field. I just don’t see where it would come from.
But we don’t need it. What we really need is managers in those
individual dealerships that have skin in the game of their own, and that run
them, you know, as first-class businesses, independently. And that’s what
we’ll be looking for. We’ll not be looking for scale. I don’t know the
situation in China. Maybe Charlie knows more about that. I think he does.
MUNGER: No. But I don’t think we’d be very good at running
dealerships in China. And I think the people who run Van Tuyl are very
good at running the ones here.
BUFFETT: Yeah with 17,000 here and we’ve got 81 of them, there’s a
little room to expand. The problem is going to be price. Our purchase
probably caused people to move up their multiples by one or two — people
that have them — and we paid a full, but fair, price for Van Tuyl and we’ll
be using that price, more or less, as a yardstick. And we really thought we
bought the best there, so, if anything, we would be hoping to buy others,
maybe for a bit less.
So we may buy a lot of them, we may buy very few, just depending on
price developments.
We’re having a big car year and profits are good in the dealership field.
But when profits are good, we want to pay a lower multiple. I mean,
because, if we’re going to be in the car business forever, we’re going to
have some good years and we’re going to have some bad years. And we
would rather buy at a 10 or 12 times multiple of a bad year than buy at an
eight times multiple of a good year. And that’s not necessarily the way that
sellers think, although they probably understand it, but they don’t want to
think that way. So we’ll see what happens.
Buying Newspapers at a Bargain – 2013 Meeting
AUDIENCE: I read your reasons for acquiring newspapers, but it still
doesn’t make sense to me, economically, given the downward trends in the
industry. Don’t you think there are other businesses with higher rates of
return that you could buy? Why would you buy such a small business, since
you always say you want to buy elephants? Please quantify exactly what
rate of return you expect from the newspapers.
BUFFETT: Yeah. I would say that we will get a decent rate of return.
Most of them, incidentally, have been bought, and they were either S
corporations or partnerships of some sort. So they — compared to buying a
Heinz, for example, or a BNSF or something of the sort — they actually
have a certain structural advantage in terms of the eventual return after tax,
because we get to write off the intangibles we’re purchasing. That affects
the after-tax return, compared to the pretax return that would come from
this.
But I would say that our after-tax return, with declining earnings, which
I expect, would be at least 10 percent after tax, but I think — and it could
well be somewhat higher. I think it’s very unlikely that it would be
significantly lower. And everything we have seen to date, and it hasn’t been
that long, but we have a number of papers now, would indicate that we will
meet or beat the 10 percent. It doesn’t have — it’s not going to move the
needle at Berkshire.
You know, the papers we have bought now, we’re probably getting close
to maybe having 100 million of pretax earnings, a good bit of which we get
a favorable tax treatment on, because they were bought from S
corporations. You know, and 100 million is real money, but it doesn’t move
the needle at Berkshire. But I think it will be a perfectly decent return in
relation to capital employed.
Now, we wouldn’t have done it in any other business. I mean, the
questioner is right about that. But, it doesn’t require an extra ounce of effort
by me or Charlie or people at headquarters. We will get a decent return and
we like newspapers. Although, the one thing I’ll promise to do with you is I
will be glad to give you figures, annually, as to how we are doing relative to
investment.
We are buying the papers at very, very low prices compared to current
earnings, and we must do that because the earnings will go down. Now, the
interesting thing is, of course, is that we see books from investment bankers
on all kinds of businesses, and always the projected earnings go up in the
book. A lot of times they don’t — you know, in reality — they don’t go up.
The difference is that we expect them to go down in the newspapers, and
whatever the investment salesmen expect, they certainly don’t project that
any business they sell will have declining earnings.
Local Newspapers Can Still Be Valuable – 2012
Meeting
AUDIENCE: You’ve described the newspaper business in the past as
chopping down trees, buying expensive printing presses, and having a fleet
of delivery trucks, all to get pieces of paper to people to read about what
happened yesterday. You constantly mention the importance of future
intrinsic value in evaluating a business or company.
With all of the new options available in today’s social media and the
speculation of the demise of the newspaper media, why buy the Omaha
World-Herald? Was there some self-indulgence in this?
BUFFETT: No, I would say this about newspapers. It’s really
fascinating, because everything she read is true, and it’s even worse than
that.
The newspapers have three problems, two of which are very difficult to
overcome, and one, if they don’t — the third — if they don’t overcome it,
they’re going to have even worse problems, but maybe can be overcome.
Newspapers — you know, news is what you don’t know that you want to
know.
I mean, everybody in this room has a whole bunch of things that they
want to keep informed on. And if you go back 50 years, the newspaper
contained dozens and dozens and dozens of areas of interest to people
where it was the primary source. If you wanted to rent an apartment, you
could learn more about renting apartments by looking at a newspaper than
going anyplace else. If you wanted a job, you could learn more about that
job. If you wanted to know where bananas were selling the cheapest this
weekend, you could find it out. If you wanted to know how — whether Stan
Musial, you know, went two for four, or three for four, last night, you went
to the newspapers. If you wanted to look at what your stocks were selling
at, you went to the newspapers.
Now, all of those things, which are of interest to many, many people,
have now found other means — they’ve found other venues — where that
information is available on a more timely, often cost-free, basis. So
newspapers have to be primary about something of interest to a significant
percentage of the people that live within their distribution area.
And the — there were so many areas where they were primary 30 or 40
years ago that you could buy a newspaper and only use a small portion of it
and it still was valuable to you. But now you don’t use a newspaper to look
for stock prices. You get them instantly off the computer. You don’t look for
the newspapers for apartments to rent, in many cases, or jobs to find, or the
price of bananas, or what happened in the NFL yesterday. So they’ve lost
primacy in all of these areas that were important. They still are primary in a
great many areas.
The World-Herald tells me, every day, a lot of things that I want to know
that I can’t find someplace else. They don’t tell me as many things as they
did 20 or 30 or 40 years ago that I want to know, but they still tell me some
things that I can’t find out elsewhere. Most of those items —
overwhelmingly — those items are going to be local. You know, they’re not
going to tell me a lot about Afghanistan or something of the sort that I want
to know but I don’t know. I’m going to get that through other medium. But
they do tell me a lot of things about my city, about local sports, about my
neighbors, about a lot of things that I want to know. And as long as they
stay primary in that arena, they’ve got an item of interest to me.
Now, the problem they have, they are expensive to distribute, as the
questioner mentioned. And then the second problem is that, throughout this
country, we had 1700 daily newspapers. We have about 1400 now. The —
in a great many cases, they are going up on the web and giving free the
same thing that they’re charging for in delivery. Now, I don’t know of any
business plan that has sustained itself for a long time, maybe you can think
of — maybe Charlie can think of one — but that has charged significantly
in one version and offers the same version free to people, that had a
business model that would work over time.
And lately, in the last year even, many newspapers have experimented
with, and to some extent succeeded, in those experiments, in getting paid
for what they were giving away on the net that otherwise they were trying
to charge for in terms of delivery. I think there is a future for newspapers
that exist in an area where there’s a sense of community, where people
actually care about their schools, and they care about what’s going on in the
given geographic area. I think there’s a market for that. It’s not as bullet
proof, at all, as the old method when you had 50 different reasons to
subscribe to the newspaper.
But I think if you’re in a community where most people have a sense of
community, and you don’t give away the product, and you cover that local
area in telling people about things that are of concern to them, and doing
that better than other people, whether it be high school sports, you know.
I’ve always used the example of obituaries. I mean, people still get their
obituaries from the newspaper. It’s very hard to go to the internet and get
obituaries. But I’m interested in Omaha and knowing who’s getting
married, or dying, or having children, or getting divorced, or whatever it
may be.
When I lived in White Plains, New York, I really wasn’t that interested
in it. I did not feel a sense of community there. So we have bought — and
we own a paper in Buffalo where there’s a strong sense of community, and
we make reasonable money in Buffalo. It’s declined, and we have to have a
internet presence there where people have to pay to come on. We have to
develop that. But I think that the economics, based on the prices we paid —
and we may buy more newspapers — I think the economics will work out
OK. It’s nothing like the old days, but it still fulfills an important function.
It’s not going to come back and tell you what your — and tell you on
Wednesday what stock prices closed at on Tuesday and have you rush to the
paper to find out. It’s not going to tell you what happened in basketball last
night when you’ve gone to ESPN.com and found out about it. But it will
tell you a whole lot about what’s going on, if you’re interested in your local
institutions. And we own papers in towns where people have strong local
interest. Charlie?
MUNGER: Well, we had a similar situation years ago when World
Book’s encyclopedia business was about 80 percent destroyed by Bill
Gates. He gave away a free computer with every bit of software.
BUFFETT: He charged $5, I think, Charlie —
MUNGER: And well, whatever it was. But we are still selling
encyclopedias and we still make a reasonable profit but not nearly as much
as we used to. Some of these newspapers, we hope, will be the same kind of
investments. They’re not going to be our great lollapaloozas.
BUFFETT: The prices were — well, we actually may be doing more in
newspapers, and we will be going where there’s a strong sense of
community. But if you live in Grand Island, Nebraska, where we have a
paper, or North Platte, and your children live there and your parents
probably live there, your church is there, you are going to be quite
interested in a lot of things that are going on in North Platte, and in the state
of Nebraska, that you won’t find readily on television or the internet. And
you’ll be willing to pay something for it, and advertisers will find it a good
way to talk to you, but it won’t be like the old days.
Strong Railroad Economics Will Overcome Political
Problems – 2012 Meeting
AUDIENCE: Politics sometimes affects your businesses. Recently
we’ve seen some coal plant closings, turndown of XL pipeline, all of which
seemed to have potential effect on BNSF revenues. Can you talk about how
you manage that risk or what the impact might be of some of those political
issues?
BUFFETT: Yeah. Well, BNSF runs their own business very much. I
went down to Fort Worth once after we bought it a few years ago, and I
haven’t been there since. And I probably talk to Matt on the phone, I don’t
know, once every three months or something of the sort. But there’s no
question that railroads, utilities, insurance companies, are all very much
affected by the political process.
Fortunately, I think, in the railroad industry, you know, we’ve got
economics on our side. And economics usually win out. I mean, we can
move a ton of product 500 miles on one gallon of diesel, and that may be
three times or so as efficient as trucking. And that may be why the railroads
currently move, say, 42 percent of all intercity traffic. I don’t think our
percentage is going to go down, the railroad industry as a whole, no matter
what the politics may be. It’s just too compelling to move heavy traffic long
distances over steel rail. And in terms of congestion, in terms of emissions,
all kinds of reasons.
So we’ve got a wonderful product, and there will always be struggles in
the political arena between competitors and railroads, and customers and
railroads. It’s just — it’s the nature of the game, and there will be some of
that in utilities, too. But overall, I like our position in it. They do have to be
involved in politics. I mean, the railroads — all four of the big railroads —
are going to be involved in the political process because people have got a
— who would like to change some of the rules, either as customers or
competitors, are going to be in politics, too, and things will get decided in
state capitals ,and more important in Washington, of importance. So they
will — they’ll have lobbyists and they’ll play a political game and their
opponents will.
I like our position. The — it would be very dumb for the country to do
anything that discouraged the railroad industry from spending the kind of
capital that will need to be spent to take care of the transportation needs of
this country in the future. If you think about the money that will have to be
spent on highways, and on the costs involved in there, and the congestion
problems, the emissions problems, everything, the country has a strong
interest in the railroad industry having every incentive to invest.
And the railroad industry pays its own way, you know. We’ll spend $3.9
billion this year, and a lot of it will go to improve our present system an
awful lot, and some will go toward expansion of a type. And the country
will be better off on that, and the Federal Government will not write a check
for it. Charlie?
MUNGER: Yeah. It’s in the nature of things that there are waves of
good breaks and bad breaks. Burlington Northern was enormously helped
when you could double the container carriage by making the tunnels a little
higher and the bridges a little stronger. And they were enormously helped
when they found all this oil in North Dakota and there weren’t any
pipelines.
And they will get some bad breaks, too, occasionally, where somebody
will take away a little break. But averaged out, it’s a terrific business with
terrific management. I don’t think our main problems are political at all.
BUFFETT: No. Right after World War II the railroad industry, I think,
had as many as 1,700,000 employees in the United States. And here we are
today, there’s less than 200,000. I mean, railroads have become so much
more efficient, just by a huge factor, and it’s a fundamentally very good
way to move heavy stuff a long distance.
I mean, it’s hard to conceive of anything, it’s be nice maybe to have
barge traffic, but you only got a few rivers that are going to lend themselves
to real volume along that line. And so, you know, you have air, pipeline,
you know, vehicles, planes, trains. Trains are pretty darn good.
Newspapers are Losing ground in Battle with Internet –
2010 Meeting
AUDIENCE: Last year you said you were down on the newspaper
industry. Given your life-long interest in newspaper companies and your
stake in the Washington Post Company and others, has your view changed
in the past year with the introduction of the iPad and other e-reading
technologies? Do you think we will see a contraction in the value of — in
the value retained by — media houses versus what will be passed on to
distributors of the media?
BUFFETT: Well, you could probably answer it better than I can. My
relatively uninformed opinion — because I’m not that up on the technology
— but I just have a feeling that when the money — has basically — the
money to run good newspapers has come from advertising, you know, three
quarters of the money or thereabouts — the papers become less useful to
advertisers. I mean, they were the only game in town for a long, long time.
They are not the only game in town. And what a difference that makes if
you’re selling something.
So, when the Philadelphia Inquirer, I — Stan Lipsey is here — I called
Stan up and I said, “Stan, this is probably like an old fire horse or
something, but let’s think about it anyway a little bit.” And it was sold
yesterday at a bankruptcy sale, although I think that’s pending confirmation.
But, you know, it is very tempting, if you’ve still got fairly substantial
circulation - The Philadelphia Inquirer and they’ve got the Daily News
there, too. But the math is really tough. I mean, the distribution costs, the
printing costs, everything, and maybe all this changes that in some way that
you would understand better than I would. But since I don’t understand it, I
have to stay with — and there are plenty of things I don’t understand — and
I cannot make an affirmative decision on newspaper ownership.
I just got the — the ABC puts out Fast Facts, this big yellow publication
— I just got it a couple days ago and I can’t resist looking through there.
And I flip the pages and look at circulation of all kinds of papers. Actually,
in Buffalo, we were down less than a great many papers, even though, you
know, our population demographics are very tough. We were down less
than Rochester, I might mention, which is owned by Gannett. But you look
at San Francisco Chronicle, you know, down 20-odd percent. Dallas —
These are communities that are thriving, and it blows your mind how fast
people are dropping it. It’s not just older — it’s not just that younger people
aren’t picking it up. I mean, the world has really changed, in terms of the
essential nature of newspapers.
Back when Charlie and I would talk about them in 1970 or ’65, there
was probably nothing that looked more bulletproof than a daily newspaper
where the competition had melted away. But it’s a form of distributing
information and entertainment that has lost its immediacy in many cases.
It’s certainly — it is not the essential place to get — think about how stock
market quotations were, you know, 30 or 35 years ago. You looked in the
paper to see what stocks had done. You looked in the paper to see how
sports games had turned out.
So its primacy has withered away, and the advertisers weren’t there
because they love the publisher of the newspaper. They were there because
it was a microphone to talk to everybody in town, and they had to talk to
everybody in town. And so you get this chicken and egg thing that the
newspaper becomes less valuable as the advertisers float away, and the
advertisers float away as the subscribers diminish. And I don’t see a good
answer to it, but Charlie, what do you have to say?
MUNGER: Well, the independent newspapers, due to the accidents of
history, as they became dominant in their individual towns, for decades had
impregnable economic strength. And by and large they behaved better
because they were so strong. And they were called the ”Fourth Estate.”
They were really a branch of the government, they helped keep government
honest.
And if you take this state in which we’re located, The World-Herald has
been a very constructive force, net, over a long period of time. As those
dominant franchises have weakened and weakened, it’s not good for the
country. I think we’re losing something that we have no substitute for. And
I think it’s very sad and I don’t have the faintest idea what to do about it.
BUFFETT: Charlie and I love newspapers. I think The World-Herald
hit a 300,000 circulation peak on Sunday at one time. I don’t think they
averaged that for the six-month period, but I seem to remember that, I could
be wrong. And the figures — 100,000 off that or something of the sort, and
the state has gained population, the city’s gained population. I think it’s as
vital to me as ever, but it clearly — it has changed for the populous as a
whole.
And, you know, when I look at the Philadelphia Inquirer and I forget
what it was, 350,000 or something like that of circulation, and, you know,
I’m not worried about Philadelphia going away. But when I look at the
figures being down — I don’t know, I forget what it was now — 30 or
40,000, you know, in a year, it doesn’t work very well as that goes along,
because the advertiser just does not need you the same way as they needed
you 10 or 15 years ago. So your ability to price evaporates in them.
It used to be — Charlie and I met Lord Thompson in 1970 or so, and he
owns the paper — he owned the paper — in Council Bluffs, right across the
river. And he was a jovial fellow, he was very happy to see us. And we said
to him, “Lord Thomson,” we said, “We noticed you own the paper in
Council Bluffs. Have you ever been there?” He said, “I wouldn’t dream of
it.” And then I said, “Well, Lord Thomson,” I said, “You seem to increase
the price of your paper every year and your poor advertisers” — I mean the
advertising price. And I said, “What can they do about it?” He says,
“Nothing.” And then I said to him, “Well, in that case, how do you decide
how much to increase prices, since it’s totally at your discretion?” And he
said — I think Charlie will remember these words — he says, “I tell my
U.S. managers to price to make 40 percent pre-tax. Above that, I feel I may
be gouging.” Those days are gone.
 The Insurance Business
GEICO has no plans to use Driver Tracking Technology
– 2015 Meeting
AUDIENCE: Telematics is the latest pricing technology in the auto
insurance business whereby you put a little device in your car and you can
either get a discount or some other determination of your pricing based on
actual driving behavior. What is GEICO doing to keep pace with that
change, and are there any other initiatives that GEICO has in place to
maintain its competitive advantages in pricing?
BUFFETT: Yeah. Progressive, as you know, has probably been the
leader in what you just described. And we have not done that at GEICO, but
if we think there becomes a superior way to evaluate the likelihood of
anybody having an accident, you know, I think you have to answer 51
questions — which is more than I would like, if you go to our website to get
a quote.
And every one of those is designed to evaluate your propensity to get in
an accident. Obviously, if you could you could ride around in a car with
somebody for six months, you might learn quite a bit about the propensity,
particularly if they didn’t know you were there, you know, like with your
16-year-old son. But I do not see that as being a major change, but if it
becomes something that gives you better predictive value about the
propensity of any given individual to have an accident, we will take it on,
you know, and we will try to get rid of the things that don’t really tell us
that much all the time.
But we’re always looking for more things that will tell us the likelihood
of having an accident in the next year. We know that youth is, for example.
I mean, there is no question that a 16-year-old male is much more likely to
have an accident than some guy like me that drives 3500 miles a year and is
not trying to impress a girl when he does it, you know. So, you know, that
one is pretty obvious.
Some of these others are very good predictors that you wouldn’t
necessarily expect to be. Credit scores are, but they’re not allowed in all
places — but they will tell you a lot about driving habits. We’ll keep
looking at anything, but I don’t see in this new experiment anything that
threatens GEICO in any way.
GEICO, in the first quarter of the year added a very significant number
of policies. I forget what the exact number was, but February turns out to be
the best month for some reason. We were up there getting pretty close to
300,000 policies. So our marketing is working extremely well, and our risk
selection is working extremely well, and our retention is working well. So
GEICO is quite a machine.
That’s the business that we carry, as I’ve mentioned in the past, roughly
a billion dollars over its tangible book value. You know, it’s worth a whole
lot more than that. I mean, based on the price we paid, that figure would
come up these days to, you know, certainly something more like $15 billion
more than carrying value. And we wouldn’t sell it there. We wouldn’t sell it
at all, but that would not tempt us in the least.
Rise in auto death rate hurt GEICO – 2016 Meeting
AUDIENCE: In terms of growth in profitability, GEICO really got
whupped by Progressive Direct over the last year. In 2015, Progressive
Direct’s auto business group grew its policy count by 9.1 percent. GEICO,
only 5.4. And in terms of profitability, the combined ratio at Progressive
was a 95.1 and GEICO’s was a 98.0. Is this evidence that Progressive’s
investments in technology, like Snapshot, investments that GEICO has
spurned, is it making a difference in a time of difficult loss trends? Why is
GEICO suddenly losing to Progressive Direct?
BUFFETT: Yeah, well, I would say this. Over the — over the last —
well, I forget what year it was we passed Progressive and what year it was
we passed Allstate, but GEICO’s growth rate in the first quarter was not as
high as in the past couple first quarters, but it was it was quite satisfactory.
Now the first quarter is, by far, the best quarter for growth. But last year,
how often people had accidents and the severity — which is the cost per
accident; in other words, just how much those accidents cost you — both of
those went up quite suddenly and substantially. And Progressive’s figures
show that they were hit by that less than Allstate and GEICO and some
others. But I don’t think you’ll see, necessarily, those same trends this year.
It’s an interesting thing. Last year, for the first time in I don’t know how
many years, the number of deaths in auto accidents, per 100 million miles,
went up. Now, if you go back to the mid-1930s, there were almost 15
people killed per 100 million miles driven. It got down to just slightly over
one — from 15 — to one. You had roughly as many people killed in auto
accidents in the mid-1930s, about 30, 32,000 a year, as we had last year, or
the year before, when people drove almost 15 times as many miles. Cars
have gotten far, far, far, far safer. And it’s a good thing, because if we’d had
the same rate of deaths from auto accidents as we had in the ’30s, relative to
miles driven, we would have had over a half a million people die last year
from auto accidents, instead of a figure closer to 40,000.
But last year, for the first time, there was more driving, and I think there
was more distracted driving. So you really had this uptick in frequency, and
more important, in severity. GEICO has adjusted its rates. As I mentioned,
my own prediction would be that the underwriting margins at GEICO will
be better this year than last year, although you never know when
catastrophes are coming along. March and April have had a lot of cat
activity.
I made a bet a long time ago on — a mental one — on the GEICO
model versus the Progressive model. And, as I say, they were significantly
ahead of us in volume a few years back. Then we passed them and we
passed Allstate and, as I put in the annual report, I hope on my 100th
birthday that the GEICO people announce to me that they passed State
Farm. But I have to do my share on that, too, by getting to 100. So we’ll see
what happens on that particular one. Charlie?
MUNGER: Well, I don’t think it’s a tragedy that some competitor got a
little better ratio from one period. GEICO’s quintupled its market share
since we bought all of it. I don’t think we should worry about the fact that
somebody else had a good quarter.
BUFFETT: Yeah. I think it’s far more sure that GEICO will pass State
Farm someday than that I’ll make it to 100, I’ll put it that way.
Buffett & Munger do not Consider Climate Change in
Insurance Risk Models – 2015 Meeting
AUDIENCE: Warren, you have said that global warming has not
increased Berkshire’s payouts for weather-related events. Yet, other
insurers, including Travelers, have cited climate change as a risk factor that
they use. Are Berkshire’s models different and, if so, how?
BUFFETT: No. The SEC requires you put in all these risk factors, and
the lawyers will tell you to put in, you know, everything possibly you can
think of, you know, that you’ll develop Alzheimer’s or whatever it may be.
They just want you to have a laundry list so that it’s all been covered in case
of later litigation or something of the sort. So people do put in weather risk,
and maybe they put it in because they’ve got some model that shows it.
But, you know, we price our business — basically, we price it every
year. It’s not like a life insurance company. A life insurance company you
make a contract that — so much a thousand. And if you buy whole life
insurance, you’ve set a price for — if you’re 20, you may have set a price
for 60 or 70 years in the future. But that is not the property casualty
insurance business, which we’re in. We set it one year at a time. And I see
nothing that tells me that on a yearly basis that global warming is something
that should cause me to change my prices a lot, or even a small amount.
That doesn’t mean that it isn’t a threat to humanity or — you know, and
terribly important. It just means that if I’m going to sell a one-year
insurance policy, and I’m going to sell it on a $1 billion plant, I may care
enormously about the fire protection, and other various other kinds of
protection, within that plant. I may care about what’s going on adjacent to
that plant, and all kinds of things, but I am not thinking about global
warming. It does not change the situation, in a material way, in any one-
year period of time, in my judgment.
And, you know, it — if I was writing a 50-year wind storm policy in
Florida, I would think very hard about what global warming might do in
that case to the incidence and the intensity of potential hurricanes. But I do
not think it has any material effect on the likelihood of — or the intensity
— of a hurricane in Florida or Louisiana or Texas or — next year. Soit’s not
something I would put in the 10-K as a threat. Charlie?
MUNGER: I don’t think it’s totally clear what the effects of global
warming will be on extremes of weather. I think there’s a lot of guesswork
in that field, and a lot of people like howling about calamities that are by no
means sure.
A lot of people get very invested. It’s like a crazy ideology. It’s not that
global warming isn’t happening. It’s just that you can get so excited about it
you make all kinds of crazy extrapolations that aren’t necessarily correct.
BUFFETT: Yeah. Look at it this way. Would you change the rate for
tomorrow on insurance from the rate today for global warming? I doubt it
very much. Now, you know, would you change it for 50 years? Might very
well. But I think that one year is much closer to one day than it is to 50
years, in terms of focusing on that factor.
So, I do not want our underwriters to sit there thinking a lot about — in
terms of writing a risk or the price at which to write that risk — I do not
want them thinking about global warming. I want them thinking about
whether there’s a moral risk involved and who owns the property. I mean,
that can be very significant. There used to be one fellow called “Marvin the
Torch,” that if you insured “Marvin the Torch,” global warming didn’t
really make much difference. His building was going to go. Marvin had a
marvelous way of looking at it, though. He said, “I don’t burn buildings; I
create vacant lots.”
Insurance Float Returns in a Low-Interest Environment
- 2012 Meeting
AUDIENCE: My question is regarding some clarification around the
insurance business, and especially how you value it.
Now, typically we’ve had, you know, a lot of float information and the
underwriting profit or loss info. So, in one way we’ve been geared to think
about it is the value of the investments that you get — the present value of
the investments that you get — from the future expected float. However, I
think last year, you also talked about the economic goodwill, especially in
GEICO, and I think you were using some ratio, 90 percent of that year’s
insurance premiums.
So I was wondering if you could just talk to us a little bit about the
different ways you could look at valuing the different insurance businesses.
That would be of huge help. Thank you.
BUFFETT: Well, the economic value comes from the ability to utilize
float if obtained at a bargain rate. Now, if interest rates were 7 or 8 percent
and float even cost you 2 percent to obtain, it still would be very valuable.
At GEICO, for example, I think it’s quite reasonable to expect a fairly
substantial underwriting profit, on average, for as far as the eye can see, and
growth for as far as the eye can see. And then coupled with that is a
growing float, because float grows with the premium volume.
Well, that is a very attractive combination of factors that comes about
because GEICO is a low-cost producer. And it has some real advantages, in
terms of scale, in terms of the whole method of operation, that makes it
very hard for other companies to duplicate their cost structure. It’s always
good, though, to own a low-cost producer in any business, but it’s very,
very nice in the insurance business. Now, Ajit’s business did not come the
same way at all.
I mean, at GEICO we have, you know, we have well over 10 million
policies, and that’s a statistical-type business. And so we have, you know,
hundreds of thousands of drivers in New York, and we have them by age
and profession and all kinds of things. So it’s a very statistical-type
business, and that coupled with a low cost, is very, very likely to produce a
good result over time. In Ajit’s business, he has to be smart on each deal,
because something comes along and somebody wants to buy coverage for
events causing the loss of more than $10 billion in Japan in the next year.
You can’t look it up in any book, and you can’t do enough transactions just
like that one to even know whether your calculation was right on that
specific deal.
Now, if you make 100 calculations on 100 of these type of deals, you’ll
soon find out whether you have the right person making those calculations
or not. But the economic goodwill with Ajit’s operation is based much more
on the skill to price individual transactions and the ability to find the people
even that want those transactions. Whereas at GEICO, it’s based basically
on a machine. But it’s enormously important how that machine is run, and
Tony Nicely has absolutely knocked the ball out of the park, in terms of
managing it. In the years prior to when he took over, it was — you know, it
had gone along at 2 percent of the market and really hardly gone anyplace.
And Tony is — quintupled, virtually, our share of the market, while at the
same time producing great underwriting results. So he took a machine that
had a current — had a lot of potential — and then he exceeded even the
potential that I thought it had. So you get the value in different ways.
It does relate in the end to a combination of growing a large float, and
extremely low-cost float, and in our case, the cost of float has been
negative, so people are actually paying us to hold $70 billion of their
money, and that’s a lot of fun. And I think that the chances of that
continuing are really quite high, although I don’t think the chances of the 70
billion growing at a fast clip are high at all. I think we’ll be lucky to hold
onto the 70 billion. But I think the chances of the fact of us being able to get
that at a less-than-zero cost is good, and I think that will even be true if
interest rates go up to 4 or 5 or 6 or 7 percent. I think we may very well be
able to do it, and that’s a huge asset under circumstances like that. Charlie?
 MUNGER: Yeah. And we’re currently in a low-return environment
from conventional investment float, but that won’t last forever. And there
were times in the past when Ajit would generate a lot of one-of-a-kind float,
and Warren would make 20 or 30 percent with it before we had to give it
back. That was a lot of fun, and we did it over and over and over again.
Whether that will ever come again on that scale, I don’t know, but it doesn’t
have to.
BUFFETT: You know, presently our cash position, if you counted all
the companies, it’s probably 36 or 7 billion — you know, we’re essentially
getting nothing on that. So our earning power today is being affected by
current Fed policies. And you know, that is not going to be a normal rate for
over the longer term. So in that sense, our normal earning power is being
depressed by Mr. Bernanke but probably for very good reason.
The Benefits of Berkshire’s Casualty Insurance
Operation – 2011 Meeting
AUDIENCE: You stated that the operating earnings of the insurance
businesses are excluded from your earnings table, and I know you said this
morning that 2011 is going to be a break-even year at best. But in light of
the disclosure in the annual report that Berkshire earned $17 billion in profit
over the last eight years without a single money-losing year, are you being
overly conservative? Don’t you think the intrinsic value of your insurance
businesses is more than just their float, especially GEICO, for the reasons
you discussed this morning?
BUFFETT: Yeah, I’d agree with that, Whitney, but I — it’s very hard to
estimate, you know, what the normal underwriting profit might be — might
be over the next 20 years or something of the sort. And so I agree with you.
I don’t know whether I’d call it overly conservative. I would say it’s
conservative to assume break-even underwriting.
I mean, if we had another Katrina or something of the sort or, you know,
winter storms in Europe and all that — I mean, we could lose significant
money in underwriting this year, and we expect to lose significant money in
underwriting, you know, maybe every fifth year, every tenth year, whatever
it might be.
But I think you’re right in saying it would not be inappropriate to
include some normalized underwriting profit in addition to the calculation
that I made in the annual report.
 MUNGER: Is there any other large casualty insurance operation in the
world that you know of that you would trade for ours?
BUFFETT: Not remotely — no, no. Nothing close. I mean, we —
however we lucked into it, we’ve got an unbelievable insurance operation.
And, I mean, GEICO, you know, is fabulous. And, you know, if you think
about — since 1936, the idea has been out there, but, you know, with all the
strength that all the other companies had, and the agency plants and
everything else, GEICO has now moved to where it’s the third largest in the
United States and gaining ground every day on the two ahead of them, and
doing it very profitably.
GEICO had an underwriting profit of close to eight points, as I
remember it, in the first quarter. Now that’s going to be, probably, the best
quarter of the year, I should add, but it’s a marvelous business. Ajit Jain has
built an insurance business from scratch in the reinsurance business, that, in
many respects, you know, he operates all alone. He may not see a lot of
transactions in any given period of time, but there are certain things, where
if somebody wants huge amounts of insurance and a quick answer, or even
a slow answer sometimes — we’ll give them a quick one — there’s really
nobody else to call. It’s a little like Charlie mentioned on acquisition
opportunities.
So he’s done it. I mean, it didn’t exist when he got there. Tad Montrose
has got a magnificent operation at Gen Re. It had to get shaken out to quite
a degree, but Tad has got a very, very disciplined business there. And then
we have a group of smaller companies that some of them have some very
unusual franchises. So you know, I didn’t have anything to do with it, so I
can brag about these people, but they have really done a job in building an
insurance company that I don’t think there’s anything like it.
MUNGER: Some of you people that have been around a long time, you
invested with an Omaha boy, and you ended up owning part of the best
casualty insurance business in the world.
BUFFETT: If you go to 30th and Harney, you’ll see a building there,
National Indemnities. We paid 7 million for National Indemnity, a million-
four for its sister company National Fire & Marine, and that’s the same
building that we operated out of in 1967, we’re operating out of today. The
only difference is that today it’s got more net worth than any insurance
company in the world.
 MUNGER: Yeah, it’s not that great a business as a business, casualty
insurance. It’s a tough game. There are temptations to be stupid in it. It’s
like banking. But if you’re in it, I think we’ve got the best one.
Reinsurance is a Lot Harder than it Looks – 2011
Meeting
AUDIENCE: Does Berkshire’s equity ownership in Munich and Swiss
Re reduce the amount of catastrophe-exposed insurance business you are
willing to write directly? If so, assume that prices return to being attractive,
would you then limit the quantity of other reinsurance stocks you buy so
that you could do more direct business?
BUFFETT: We have invested in Munich and Swiss Re less than $4
billion, so we’re talking 2 1/2 percent of our net worth. So those
investments, in aggregate, are not of a magnitude that would cause me to
change at all what we’re willing to do — the risks we’re willing to bear —
in the reinsurance field. We’re way below, sort of, capacity, in terms of risk
that we will tolerate in insurance.
I mean, I put in the report, you know, I expect our normal earning power
to be in the $17 billion or something pretax range. Well, that is so unlike
any other reinsurance company in the world. We went through the worst
quarter in reinsurance history, except for Katrina’s quarter, you know, and
we end up earning, you know, very substantial sums. So those investments
are no constraint at all on our willingness to write insurance. We would love
to have a lot more attractive reinsurance business on the books, we just —
we just can’t find it at prices that we think are commensurate for the risk.
But it’s not because of an aversion to risk overall. Charlie?
MUNGER: Yeah, it’s — insurance, and particularly reinsurance, it’s not
that easy a business. It’s taken you a long time to do as well as you do. And
if it weren’t for Ajit, why, we wouldn’t — we’d be a lot smaller business.
BUFFETT: Well, it should be pointed out, we really didn’t succeed at
all in the reinsurance business in the first 15 years. We started in
reinsurance around 1970, and we had a fellow that I thought the world of
running it, George Young, but net, counting the value of float, it was not a
good business for us for 15 years until Ajit came along. It is not an easy
business. It looks easy most of the time.
MUNGER: That’s the trouble with it. It looks easier than it is.
 BUFFETT: It looks way easier than it is. And, you know, it’s like
having a pair of dice, and, you know, accepting bets on boxcars or
something like that, and, you know, it’s going to come up once in 36 times,
so you can win a lot of bets by giving the wrong odds, but if you keep do it
long enough, you lose a lot of money.
So these infrequent events, you better have factored in to your pricing,
and not fool yourself by whether you make money in a given year or two
years or even three or four years. And most people have a little trouble with
that, and we had a little trouble with it for about 15 years.
MUNGER: And incidentally, the investment bankers of the world, now
that they trade so much for their own account and derivatives, they have
sold some of these products where most of the time the customer wins but
when the customer loses, he really loses big.
In other words, they’re smarter than the customers, and they have caused
some of the most horrendous losses to ordinary businessmen. It happened in
Korea, it happened in Mexico — Just beware of the salesman who’s selling
a new derivative product.
BUFFETT: Or an old one. An old one, too.
 Specific Companies
On Apple and Its Stock Buybacks – 2018 Meeting
AUDIENCE: Warren, you have bought in and sold out of IBM. You
have praised Jeff Bezos but never bought Amazon. And you have doubled
down on Apple. Can you tell us what it is about Apple? And given your
sometimes critical views on buybacks, do you think Apple would do better
spending a hundred billion dollars on buybacks, or buying other productive
businesses the way you have generally preferred? A hundred billion dollars
is a lot of money.
BUFFETT: I used to think so. Apple has an incredible consumer
product which you understand a lot better than I do. Whether they should
buy in their shares - they shouldn’t buy in their shares at all, unless they
think that they’re selling for less than they’re worth. And if they are selling
for less then they’re worth, and they have the money, and they don’t see an
acquisition that’s even more attractive, they should buy in their shares.
Because I think it’s extremely hard to find acquisitions that would be
accretive to Apple that would be in the 50 or 100 billion, or $200 billion
range. They do a lot of small acquisitions.
And, you know, I’m delighted to see them repurchasing shares. Let’s say
we own 250 million or so shares. They have, I think, 4 billion, 923 million
or something like that. And mentally, you can say we own 5 percent of it.
But I figure with, you know, with the passage of a little time we may own 6
or 7 percent simply because they repurchase shares. And it - I find that if
you’ve got an extraordinary product, and ecosystem, and there’s lots to be
done, I love the idea of having our 5 percent, or whatever it may be, grow to
6 or 7 percent without us laying out a dime. I mean, it’s worked for us in
many other situations.
But you have to have some very, very, very special product, and - which
has an enormous wide - enormously widespread ecosystem, and the
product’s extremely sticky, and all of that sort of thing. And they’re not
going to find 50 or a hundred billion dollar acquisitions that they can make
at remotely a sensible price that really become additive to that. And they
may find it, who knows? But there certainly, as I look around the horizon, I
don’t see anything that would make a lot of sense for them in terms of what
they’d have to pay and what they would get. Whereas I do see a business
that they know everything about, and where they may or may not be able to
buy it at an attractive price when they repurchase their shares. That remains
to be seen. Incidentally, that’s one thing that I always enjoy.
From our standpoint, we would love to see Apple go down in price. Just
put it this way. If Andrew and Charlie and I were partners in a business that
was worth $3 million so each of us had a million dollar interest in it, if
Andrew offered to sell out his one-third interest at 800,000 and we had the
money around, we’d jump at the chance to buy him out. I mean, it’s so
simple. But people get all lost - and if he’d wanted a million-two for it, we
wouldn’t pay it to him.
It’s very simple math, but it gets lost in all these discussions. And of
course, like I say, Tim Cook could do simple math. And he could probably
do very complicated math, too. So, we very much approve of them
repurchasing shares. Charlie?
MUNGER: I think, generally speaking in America, when companies go
out hell-bent to buy other companies, they’re worth less after the
transaction is made than they were before. So I don’t think you have a
general way to wealth for American corporations to go out and buy other
corporations. Averaged out, it’s a way down, not up.
And I think that a great many places have nothing better to do than to
buy in their own stock, and nothing as advantageous to do as they can - as
buying in their own stock. So, I think we know pretty damn well what’s
going to happen to Apple. They’d be very lucky to - if there was something
available at a low price that they could buy.
I don’t think the world’s that easy. I think that the reason these
companies are buying their stock is that they’re smart enough to know that
it’s better for them than anything else.
BUFFETT: And that does not mean we approve of every buyback, at
all, though.
MUNGER: No, no, no. I think some people just buy it to keep the stock
up. And that, of course, is insane. And immoral. But apart from that, it’s
fine.
Warren is very Bullish on Berkshire’s American Express
Holdings – 2018 Meeting
 WARREN: Warren, if we look at the performance of your equity
investment portfolio the last three to five years, some of the strongest
performances come from Visa and MasterCard, which put up returns that
are three to four times greater than American Express. Unfortunately, your
holdings of the two names, which we assume were held by Todd [Combs]
or Ted [Wechsler], have accounted for less than one percent of stock
holdings on a combined basis the past five years, while American Express
has tended to be a top-five holding, accounting for 10 percent of the
portfolio, on average, and closer to 8 percent of late.
Given that all three firms benefit from powerful network effects along
with valuable brands, were there any particular reasons Berkshire did not
ramp up its stakes in Visa and MasterCard to more meaningful levels,
especially during those years when American Express was struggling? After
all, you’ve shown a willingness to own several stocks from the same
industry, holding shares in several competing banks, and buying stakes in
all four domestic airlines in fairly equal amounts when you picked them up
in late 2016.
BUFFETT: Yeah. When Ted and Todd, or either one of them - I won’t
get into which specifically - which one of them specifically - bought, or for
that matter they could both have bought Visa and MasterCard, they were
significant portions of their portfolio. And there was no embargo or
anything on them owning those stocks because we had a big investment in
American Express. And I could have bought them as well. And, looking
back, I should have.
On the other hand, I think American Express has done a fabulous job,
and now we own 17 and a large fraction percent of a company that not that
long ago we may have owned 12 percent. We’ve done it without spending a
dime and without - you know, it’s a company that has really done a fantastic
job in a very competitive field where lots of people would love to take their
customers away from them. But they have more customers than ever, and
they’re spending more money than ever. The customers are. And the
international growth has accelerated. The small business penetration is
terrific. It’s really quite a business. And, you know, we love the fact we own
it. Like I say, it didn’t preclude me from, in any way, from buying
MasterCard or Visa. And if I had been as smart as Ted or Todd, I would
have. Charlie?
 MUNGER: Well, we would have been a little better with all of our
stock picking if we could do it in retrospect. But at the time, we have a big
position in American Express, and there is one tiny cloud on the horizon of
the payments processors and that is the system of WeChat in China. And so
it isn’t as though there isn’t a little cloud somewhere off in the distance, and
I don’t have the faintest idea how important that cloud is, and I don’t think
Warren does either.
BUFFETT: No. No. Payments are a huge deal worldwide. And you’ve
got all kinds of smart people working at various ways to change the
payment arrangements. And American Express made a decision a few years
ago not to bid as low as somebody else did to retain the Costco business.
And I think - Charlie and I disagree on this - but I think it was a smart
decision. He doesn’t think it was a smart decision. But one of us will be
right. And - - and one of us will remind you that they were right.
But if you look at American Express, it’s a remarkable company. I mean,
you know, they came after them with Sapphire last year. People want that
business. And payments are changing. And you can see in different
countries different ways things are going on in that. And there are a lot of
people that will play the game of gaming the system, and switch from one
to another based on the rewards on this card or that, and all of that sort of
thing. But there also is a - I think there’s a very substantial group for which
American Express does something very special, and they keep capitalizing
on that premier position with that group. And they’re doing it successfully
around the country.
And you’ll see in the first quarter - you’ve seen in the first quarter - you
know, where in Britain, in Mexico, in Japan, you’re seeing gains of 15
percent or better in local currencies. And the base is not tiny, but it’s not
huge, so there’s a lot of room left to go in that. And the small business
penetration is good. The loan portfolio has behaved sensationally compared
to, really, just about anybody. So, I like very much our holdings of
American Express.
The first half, because of the accounting changes, they had to suspend
their repurchase program for six months. But I - they’ve announced that
they expect to renew it. And someday we’ll even, you know, we’ll own a
greater percentage of American Express and it will be a bigger company, in
my opinion. And I think we’ll do very well. But as Charlie says, nobody
knows how payments for sure comes out. And nobody knows how autos for
sure come out. And that is true of a great many businesses we’re in, and
we’ve faced it before.
We used to buy things that were certain failures, like textiles and second-
rate department stores and trading stamps in California. Now we just face
things that face real difficulty. So we’re actually moving up the ladder.
Why Buffett has Invested in Some Tech Companies but
Not Others – 2018 Meeting
AUDIENCE: I’m wondering about your interests in not just Apple, but
all of the tech stocks, like Amazon and Google. Because you’ve avoided
them, you’ve stated in the past, because they’re complicated, you should
stick with something you understand.
On the other hand, Amazon and Google have what you call a very
durable competitive advantage. They really hardly have any competitor.
And that’s true in China, too, of Alibaba and Tencent. So it seems like it’s a
conflict, and I’m wondering if you’re going to be turning the corner and
going into these tech companies that seem to have no serious competition.
BUFFETT: Well, we certainly looked at them. And we don’t think of
whether we should be in tech companies or not, or that sort of thing. We are
looking for things when we do get into the durability of the competitive
advantage, and whether we think that our opinion might be better than other
people’s opinion in assessing the probability of the durability, so to speak.
But the truth is that I’ve watched Amazon from the start, and I think what
Jeff Bezos has done is something close to a miracle. And the problem is, if I
think something will be a miracle, I tend not to bet on it.
It would have been better if I had some insights into certain businesses.
But you know, in fact, Bill Gates told me early on - you know, that I think I
was on AltaVista and he suggested I turn to Google. But the trouble is I saw
that Google was skipping past AltaVista, and then I wondered if anybody
could skip past Google.
And I saw at GEICO that we were paying a lot of money for something
that cost them nothing incrementally. We’ve looked at it, and you know, I
made a mistake in not being able to come to a conclusion where I really felt
that at the present prices that the prospects were far better than the prices
indicated. And I didn’t go into Apple because it was a tech stock in the
least.
 I mean, I went into Apple because I came to certain conclusions about
both the intelligence with which the capital would be employed, but more
important, about the value of an ecosystem and how permanent that
ecosystem could be, and what the threats were to it, and a whole bunch of
things. And I don’t think that required me to, you know, take apart an
iPhone or something and figure out what all the components were or
anything. It’s much more the nature of consumer behavior. And some things
strike me as having a lot more permanence than others.
But the answer is, we’ll miss a lot of things that - or I’ll miss a lot of
things - that I don’t feel I understand well enough. And there is no penalty
in investing if you don’t swing at a ball that’s in the strike zone, as long as
you swing at something at some point, then you know, eventually that you
find the pitches you like. And that’s the way we’ll continue to do it. We’ll
try to stay within our circle of competence.
And Charlie and I generally agree on sort of where that circle ends, and
what kind of situations where we might have some kind of an edge in our
reasoning or our experience or something that - where we might evaluate
something differently than other people. But the answer is, we’re going to
miss a lot of things. Charlie?
MUNGER: Yeah, we have a wonderful system. If one of us is stupid in
some area, so is the other. And of course, we were not ideally located to be
high-tech wizards. How many people of our age quickly mastered Google?
I’ve been to Google headquarters. It looks like a kindergarten.
BUFFETT: No, it’s extraordinarily impressive, what they’ve done. And
like I say, at GEICO we were paying them a lot of money at the time they
went public. And all three of the main characters - Eric Schmidt and Larry
Page and Sergey Brin - they actually came and saw me. But they were more
interested in talking about going public and the mechanics of it and various
things along that line. But it wasn’t like what they were doing was a
mystery to me. The mystery was how much competition would come along,
and how effective they would be, and whether it would be a game where
four or five people were slugging it out without making as much money as
they could if one company dominated. Those are tough decisions to make.
You can have industries where there’s only two people in it, and they
still don’t return very good because they beat each other’s brains out. And
that’s one of the questions in the airline business. It’s a better business now
than it used to be, but it used to be suicide. And you know that the
competitive factors are extraordinary in airlines, and how much better
business is it with four people operating at 85 percent capacity than it was
at - with seven or eight operating in the mid-70s, and with more planes run.
Those are tough decisions.
But I made the wrong decision on Google. And Amazon, I just - I really
consider that a miracle, that you could be doing Amazon web services and
changing retail at the same time, with - you know, without enormous
amounts of capital, and with the speed and effectiveness of what Amazon
has done. I had a very, very, very high opinion of Jeff’s ability when I first
met him. And I underestimated him. Charlie?
MUNGER: Well, my comment would be that the shareholders have one
thing to be thankful for. Some of the age-related stupidity at headquarters
has been ameliorated by Ted and Todd joining us. We are looking at the
world with the aid of some younger eyes now. And they’ve had a
contribution beyond their own investments. And so you’re very lucky to
have them be shareholders. Because there’s a lot of ignorance in the older
generation that needs removal.
Making mistakes with IBM, Google, and Amazon –
2017 Meeting
AUDIENCE: Warren, for years, you stayed away from technology
companies, saying they were too hard to predict and didn’t have moats.
Then you seemed to change your view about technology when you invested
in IBM, and again when you recently invested in Apple. But then on Friday
you said IBM had not met your expectations and sold a third of our stake.
Do you view IBM and Apple differently? And what have you learned about
investing in technology companies?
BUFFETT: Well, I do view them differently. But, you know, obviously,
when I bought the IBM, I thought it would do better in the six years that
have elapsed than it has. And Apple, I regard them as being in quite
different businesses. I think Apple is much more of a consumer products
business, in terms of sort of analyzing moats around it, and consumer
behavior, and all that sort of thing. It’s obviously a product with all kinds of
tech built into it. But in terms of laying out what their prospective
customers will do in the future, as opposed to, say, IBM’s customers, it’s a
different sort of analysis.
 That doesn’t mean it’s correct. And we’ll find out over time. But they
are two different types of decisions. And I was wrong on the first one, and
we’ll find out whether I’m right or wrong on the second. But I do not regard
them as apples and apples, and I don’t quite regard them as apples and
oranges, but it’s somewhat in between on that. Charlie?
MUNGER: Well, we avoided the tech stocks, because we felt we had
no advantage there and other people did. And I think that’s a good idea not
to play where the other people are better. But, you know, if you ask me, in
retrospect, what was our worst mistake in the tech field, I think we were
smart enough to figure out Google. Those ads worked so much better in the
early days than anything else. So I would say that we failed you there. And
we were smart enough to do it and didn’t do it. We do that all the time, too.
BUFFETT: Yeah. We were their customer very early on with GEICO,
for example. And we were paying them 10 or 11 dollars a click or
something like that. And any time you’re paying somebody 10 or 11 bucks
every time somebody just punches a little thing where you’ve got no cost at
all, you know, that’s a good business, unless somebody’s going to take it
away from you. And so we were close up, seeing the impact of that.
But, you know, that is and you’ve almost never seen a business like it.
And I think for LASIK surgery and things like that, I think the figures were,
you know, 60 or 70 bucks a click with no incremental. I mean, they actually
designed their prospectus. They came to see me. And a little bit after the
original one, when they went public, a little bit after Berkshire even. And so
I had plenty of ways to ask questions or anything of the sort, educate
myself. But I blew it.
MUNGER: We blew Walmart, too. When it was a total cinch, we were
smart enough to figure that out and we didn’t.
BUFFETT: Yeah, execution is what counts. So I could be making two
mistakes on IBM. I mean, it’s harder to predict, in my view, the winners in
various items, or how much price competition will enter in to something
like cloud services and all of that. I made a statement the other day, which
it’s really remarkable, and I asked Charlie whether he could think of a
situation like it where one person has built an extraordinary economic
machine in two really pretty different industries, you know, almost
simultaneously, as has happened from a standing start at zero, with other —
with competitors with lots of capital and everything else.
 To do it in retailing and to do it with the cloud, like Jeff Bezos has done,
I mean, people like the Mellons invested in a lot of different industries and
all of that. But he has been, in effect, the CEO, simultaneously, of two
businesses starting from scratch that if — you know, Andy Grove used to
use — at Intel — used to say, you know, “Think about if you had a silver
bullet and you could shoot it at — and get rid of one of your competitors,
who would it be?”
Well, I think that both in the cloud and in retail, there are a lot of people
that would aim that silver bullet at Jeff. And he’s done — it’s a different
sort of game — but he’s, you know, at The Washington Post, he’s played
that hand as well as anybody I think possibly could. So it’s a remarkable
business achievement, where he’s been involved, actually, in the execution,
not just bankrolling it, of two businesses that are probably as feared by their
competitors, almost, as any you can find.
Underestimating Jeff Bezos – 2017 Meeting
AUDIENCE: Amazon has been hugely disruptive, due to the brilliance
of Jeff Bezos, whom Charlie earlier called the business mind of our
generation. What is your current outlook on Amazon? And why hasn’t
Berkshire bought in?
BUFFETT: Well, because I was too dumb to realize what was going to
happen even though I admired Jeff. I’ve admired him for a long, long time
and watched what he was doing. But I did not think that he could succeed
on the scale he has. And I certainly didn’t even think about the possibility
of doing anything with Amazon Web Services or the cloud.
So if you’d asked me the chances that, while he was building up the
retail operation, that he would also be doing something that was disrupting
the tech industry, you know, that would’ve been a very, very long shot for
me. And I’ve really underestimated the brilliance of the execution. I mean,
it’s one thing to dream about doing this stuff online, but it takes a lot of
ability. And, you know, you can read his 1997 annual report. And he laid
out a roadmap. And he’s done it, and done it in spades.
And if you haven’t seen his interview on Charlie Rose three or four
months ago, go to it and listen to it because you’ll learn a lot. At least, I did.
It always looked expensive. And I really never thought that he would be
where he is today. I thought he was really brilliant. But I did not think he
would be where he is today when I looked at it three, five, eight, 12 years
ago — whenever it may have been. Charlie, how did you miss it?
MUNGER: It was easy. What was done there was very difficult, and it
was not at all obvious that it was all going to work as well as it did. I don’t
feel any regret about missing out on the achievements of Amazon. But other
things were easier. And I think we screwed up a little. Luckily, we don’t
miss everything, Warren. That’s our secret. We don’t miss them all.
Amazon has Disrupted the Traditional Sales Process –
2016 Meeting
AUDIENCE: My question is about the future of salesmanship in our
companies. Warren, you have always demonstrated a heart for direct
selling. When we met you in the midst of a tornado warning, in the
barbershop, you immediately offered to write insurance for us.
BUFFETT: That’s true. They were all huddled down there in the
barbershop. There wasn’t going to be any tornadoes, so I told them they
give me a dollar, I said they can go upstairs and if anything happened to
them I’d pay them — I forget — a million dollars, or something of the sort.
AUDIENCE: Now we see with the rise of Amazon.com and others a
shift from push marketing to pull marketing. From millions of catalogs
having been sent out in the past, to now consumers searching on what they
are looking for. What is your take on how this shift from push to pull
marketing will affect our companies?
BUFFETT: Well the development you refer to is huge. I mean, really
huge. And it isn’t just Amazon, but Amazon is a huge part of it and what
they’ve accomplished, in a fairly short period of time, and continue to
accomplish, is remarkable. The number of satisfied customers they’ve
developed and — We don’t make any decision involving even the
manufacturing of goods, the retailing, whatever it is, without thinking long
and hard about what the world will look like in five or 10 or 20 years with
that powerful trend — really hugely powerful trend — that you just
described.
So, we don’t look at that as something where we’re going to try and beat
them at their own game, you know. They’re better than we are at that. And
so, Charlie and I are not going to out-Bezos Bezos, by a long shot. But we
are going to think about that. It does not worry us, obviously, with Precision
Cast, in terms of the overwhelming majority of our businesses. But it is a
huge economic trend that, 20 years ago, was not on anybody’s radar screen,
and lately, has been on everybody’s radar screen. And many of have not
figured the way to either participate in it or to counter it.
GEICO’s a good example of a company in an industry that had to adjust
to change, and some people made the change better than others. We were
slow on the internet. The phone had worked so well for us, you know, this
traditional advertising, and the phone had worked so well, you know,
there’s always a resistance to think about new possibilities. When we saw
what was happening on the internet, we jumped in with both feet and you
know, with mobile and whatever.
But the nature of capitalism is somebody’s always trying to figure out
how to take it away from you and improve on it. And the effect — I would
say just of Amazon, but others that are playing the same game — is far
from having been seen. I mean, it is a big, big force and it’s disrupted plenty
of people and it will disrupt more. I think Berkshire is quite well situated.
For one thing, one big advantage we have is we didn’t ever see ourselves
as starting out in one industry. I mean, we went into department stores but
we didn’t think of ourselves as department store guys, or we didn’t think of
ourselves as steel guys, or tire guys, or anything of that sort. So we’ve
thought of ourselves as having capital to allocate.
If you start with a given industry focus and you spend your whole time
working on a way to make a better tire, or whatever it may be, I think it’s
hard to have the flexibility of mind that you have if you just think you have
a large and growing pile of capital, and trying to figure out what is the next
best next move that you can make with that capital. And I think we do have
a real advantage that way. But I think Amazon’s got a real advantage, too,
in this intense focus on having, you know, hundreds of millions of,
generally, very happy customers getting very quick delivery of something
that they want to get promptly, and they want to shop the way they shop.
And if I owned a bunch of shopping malls, or something like that, I’d be
thinking plenty hard about what they might look like 10 or 20 years from
now. Charlie?
MUNGER: Well, I would say that we failed so thoroughly in retailing
when we were young that we pretty well avoided the worst troubles when
we were old. I think, net, Berkshire has been helped by the internet. The
help at GEICO has been enormous. And it’s contributed greatly to the huge
increase in market share. And our biggest retailers are so strong that they’ll
be among the last people to have troubles from Amazon.
Defending Coca-Cola from Sugar Health Worries –
2016 Meeting
AUDIENCE: Warren, for the last several years at this meeting, you’ve
been asked about the negative health effects of Coca-Cola products, and
you’ve done a masterful job dodging the question, by telling us how much
Coke you drink personally. Statistically, you may be the exception.
According to a peer-reviewed study by Tufts University, soda and sugary
drinks may lead to 184,000 deaths among adults every year.
The study found that sugar-sweetened beverages contributed to 133,000
deaths from diabetes, 45,000 deaths from cardiovascular disease, 6,450
deaths from cancer. Another shareholder wrote in about Coke, noted that
you declined to invest in the cigarette business on ethical grounds, despite
once saying, quote, It was a perfect business because it cost a penny to
make, sell it for a dollar, it’s addictive, and there’s fantastic brand loyalty.
Again, removing your own beverage consumption from the equation,
please explain directly why we Berkshire Hathaway shareholders should be
proud to own Coke.”
BUFFETT: Yeah, I think people confuse you know, the amount of
calories consumed. I mean, I happen to elect to consume about 700 calories
a day from Coca-Cola. So I’m about one-quarter Coca-Cola, roughly. Not
sure which quarter, and I’m not sure we want to pursue the question.
I think if you decide that sugar, generally, is something that the human
race shouldn’t have — I think the average person consumes something like
150 pounds of dry weight sugar. What’s in Coca-Cola, largely, are more of
the calories come from is sugar. I elect to get my 26 or 2700 calories a day
from things that make me feel good when I eat them. And that’s been my
sole test. That wasn’t a test that my mother necessarily thought was great,
or my grandfather. But there are over 1.9 billion 8-ounce servings of some
Coca-Cola drink.
Now they have an enormous range of products, you know. I mean, you
have a few that are called Coke, Diet Coke, Coke Zero and that sort of
thing, but they have literally thousands of products. One-point-nine billion.
That’s — what is that — 693,500,000,000 8-ounce servings a year, except
it’s a leap year. That’s almost 100 8-ounce servings per capita for 7 billion
people in the world every year. And that’s been going on since 1886. And I
would find quite spurious the fact that somebody says, if you’re eating 3500
or so calories a day, and you’re consuming 27-or-8 hundred, and some of
the 3500 is Coca-Cola, to lay any particular obesity-related illnesses on the
Coca-Cola you drink.
You have the choice of consuming more than you use, I mean. And I
make a choice to eat 700 calories from this, and I like fudge a lot, peanut
brittle. And I am a very, very, very happy guy and I think if you are happy
every day, you know, it may be hard to measure, but I think you’re going to
live longer as well. So there may be a compensating factor. And I really
wish I’d had a twin, and that twin had eaten broccoli his entire life, and we
both consume the same number of calories. I know I would have been
happier. And I think the odds are fairly good I would have loved longer. I
think Coca-Cola is a marvelous product, you know.
I mean, if you consume 3500 or 4000 calories a day, and live a normal
life, in terms of your metabolism, you know, something’s going to go wrong
with your body at some point. But I think if you balance out the calories so
that you don’t become obese, I have not seen evidence that convinces me
that, you know, it will be more likely I reach 100 if I suddenly switch to
water and broccoli.
Incidentally, a friend of mine, Arjay Miller, a remarkable man — born
about 100 miles from here, west — eighth child — near Shelby, Nebraska.
He said Shelby’s population was 596 and it never changed because every
time some girl had a baby a guy had to leave town, it was a very stable. But
Arjay went on to be president of Ford Motor Company, from this farm near
Shelby, and he had his 100th birthday on March 4th of this year. So I went
out to see Arjay for his birthday on March 4th, and Arjay told me that there
were 10,000 men in the United States that had lived to be 100 or greater,
and there were 45,000 women that were 100 or greater.
So I came back and I checked that on the internet — I went to the census
figures — and sure enough, that is the ratio. There’s 10,000 men over 100,
roughly, and 45,000 women. So if you really want to improve your
longevity prospects, I mean a guy in my position, you have a sex change.
I mean as a woman you’re 4 1/2 times more likely to get to be 100. That
sounds like one of those studies that people put out. It’s just a matter of
facts, folks. I think I’ll have Charlie go first, though, on that one. Charlie,
do you have any comments?
 MUNGER: I like the peanut brittle better than the Coke. I drink a lot of
Diet Coke and I think the people who ask questions like that one always
make one ghastly error that’s really inexcusable. They measure the
detriment without considering the advantage. Well, that’s really stupid.
That’s like saying we should give up air travel through airlines because
100 people die a year in air crashes or something. That would be crazy. The
benefit is worth the risk. And if every person has to have about 8 or 10
glasses of water every day to stay alive, and it’s pretty cheap and sensible,
and it improves life to have a little extra flavor to your water, and a little
stimulation, and a little calories, if you want to eat that way, there are huge
benefits to humanity in that, and it’s worth having some disadvantage.
We ought to have, almost, a law in the editorial — I’m sounding like
Donald Trump — where these people shouldn’t be allowed to cite the
defects without citing the offsetting advantage. It’s immature and stupid.
Learning, Accumulation of Knowledge & See’s Candy –
2017 Meeting
MEMBER: This question is for Mr. Munger. In your career of thousands
of negotiations and business dealings, could you describe for the crowd
which one sticks out in your mind as your favorite or is otherwise
noteworthy?
MUNGER: Well, I don’t think I’ve got a favorite. But the one that
probably did us the most good as a learning experience was See’s Candy.
It’s just the power of the brand, the unending flow of ever-increasing money
with no work. I’m not sure we would have bought the Coca-Cola if we
hadn’t bought the See’s.
I think that a life properly lived is just learn, learn, learn all the time.
And I think Berkshire’s gained enormously from these investment decisions
by learning through a long, long period. Every time you appoint a new
person that’s never had big capital allocation experience, it’s like rolling the
dice. And I think we’re way better off having done it so long. But the
decisions blend, and the one feature that comes through is the continuous
learning. If we had not kept learning, you wouldn’t even be here. You’d be
alive probably, but not here.
BUFFETT: There’s nothing like the pain of being in a lousy business to
make you appreciate a good one.
 MUNGER: Well, there’s nothing like getting into a really good one
that’s a very pleasant experience and it’s a learning experience. I have a
friend who says, “The first rule of fishing is to fish where the fish are. And
the second rule of fishing is to never forget the first rule.” And we’ve gotten
good at fishing where the fish are. There are too many other boats in the
damn water. But the fish are still there.
BUFFETT: Yeah, we bought a department store in Baltimore in 1966.
And there’s really nothing like being in an experience of trying to decide
whether you’re going to put a new store in an area that hasn’t really
developed yet enough to support it, but your competitor may move there
first.
And then you have the decision of whether to jump in. And if you jump
in, that kind of spoils it. Now you’ve got two stores where even one store
isn’t quite justified. How to play those games, those business games — is
— you learn a lot by trying. And what you really learn is which ones to
avoid. I mean, you just stay out of a bunch of terrible businesses, you’re off
to a very great start, because we’ve tried them all.
The Advantages and Disadvantages of Buying See’s
Candies – 2014 Meeting
AUDIENCE: See’s Candy is obviously small in the context of
Berkshire’s currently expansive operations, but has long been one of your
favorite businesses. And no wonder, given that its pre-tax profits grew
consistently from less than $5 million in 1972 when Berkshire acquired it,
to $74 million in 1999. However, since 1999, profit growth appears to have
stalled.
Can you explain why See’s was able to grow its profits through the ’70s,
‘80s and ’90s, but not, so far, in this millennium? Did something change
about the business, for instance, the growth and demand for boxed
chocolates or its market position? Could you or Brad Kinstler discuss
whether the relatively recent geographic expansion could help reignite See’s
growth? Thank you.
BUFFETT: Yeah, the boxed chocolate business is, basically, not
growing. I mean, if you go back 100 years, each city of any size was
characterized by lots of candy shops. Chicago was a big leader. New York
was a big leader. Believe it or not, the predecessor company to Pepsi Cola
was a company called Loft’s that had the most candy shops in New York
City.
It was a candy shop company, originally, that a fellow named Charles
Guth acquired Pepsi for a few thousand bucks, stuck it in Loft’s. And the
corporate name, if you go all the way back on Pepsi, is Loft’s. So there
were loads of candy shops around everyplace. And including in Omaha.
Boxed chocolates have lost position dramatically. Primarily, I would
guess, to salted snacks of one sort or another. Various things. See’s has done
remarkably well, far better than any chocolate company in the country.
Russell Stover did very well for a while. Very well, with a different
business model. But, you know, they ran into their problems as well. So, we
can’t do much about increasing the size of the market.
And we’ve tried a lot of ways. And we’ve tried moving out of our strong
geography, multiple times. I mean, Charlie and I looked at what we were
earning in California in the ’70s and said to ourselves, “If we could do this
in 50 states instead of one, you know, we’ll get very rich.” So we tried it
and we didn’t get very rich. It doesn’t travel that well.
MUNGER: Well, sometimes it does and sometimes it doesn’t. And you
figure out whether it’s going to work by trying it.
BUFFETT: Yeah. And we’ve tried it many times. But so far it’s
interesting. Two-thirds of the people in the East prefer dark chocolate, two-
thirds to one-third. In the West, they prefer milk chocolate, two-thirds to
one-third. They like miniatures in the East. They won’t eat miniatures in the
West. There’s a lot of different things. But in the end, there isn’t a lot of
boxed chocolates volume. And we’ve done very, very, very well in See’s.
And it not only has provided us with earnings that we’ve used to buy other
businesses, so we’ve added lots of earnings power through See’s, beyond
the earning power we’ve added at See’s.
But it opened my eyes to the power of brands and probably you could
say that we made a lot of money in Coca-Cola partly because we bought
See’s, or at least in my case, bought See’s, because I’d understood brands to
some degree, but there’s nothing like owning one, and sort of seeing the
possibilities with it as well as the limitations, to educate yourself about
things you might do in the future. And in 1972, we bought See’s. And in
1988 we bought Coca-Cola. And I wouldn’t be at all surprised, if we had
not owned See’s, whether we would’ve owned Coca-Cola later on. Charlie?
 MUNGER: Yeah. There’s no question about the fact that its main
contribution to Berkshire was ignorance removal. And it’s not the only big
contributor to ignorance removal. If it weren’t for the fact we were so good
at removing our ignorance, step by step, Berkshire would be practically
nothing today. What we knew originally wasn’t enough. We were pretty
damn stupid when we bought See’s. We were just barely smart enough to
buy it. And if there’s any secret to Berkshire, it’s the fact that we’re pretty
good at ignorance removal. And the nice thing about that is we have a lot of
ignorance left to remove.
Fruit of the Loom’s Brand Advantages vs Gildan
Activewear – 2013 Meeting
AUDIENCE: Over time, Fruit of the Loom and others have lost nearly
all of the T-shirt-focused wholesale screen print market to Gildan, a
relatively new player with very low cost structure. Gildan is now going
after the underwear-focused retail market and is having some success with
certain large customers.
Branding is obviously more important in the retail market, but is there
any reason to think Fruit of the Loom won’t lose significant amounts of
share here over time, just as they did in the wholesale screen print market?
What can they do to protect what remains of their franchise?
BUFFETT: Yeah. You keep your costs down and you constantly work
at brand building, and you try very hard to make sure that your main
customers, in turn, have their customers happy with the product, and are
happy with the price points that you can deliver it at. And you’re correct
that Gildan, in terms of certain aspects, the non-branded aspects, basically,
of some parts of the business, has hurt Fruit in the last — well, last 10
years, certainly.
But we turn out first-quality, low-priced underwear with a strong brand
recognition. And I think it will be very tough to either build a brand against
it or to beat our costs significantly. Now Gildan pays very little in the way
of income taxes, you know, because they route stuff through the Cayman
Islands, and that’s a modest factor. But I think you’ll find five years from
now, or 10 years from now, that our market share in men’s and boys’,
particularly underwear, will hold up.
But you’re right. They’re a competitive threat. Hanes is a competitive
threat. And it’s not a business that you can coast on. It’s not Coca-Cola, but
it’s not an unbranded product, either. And I think Fruit will do reasonably
well, but it will not get anything like, you know, the kind of profit margins
that you can get in certain branded products. Charlie?
MUNGER: Yeah. And then, too, as many products as we have, we may
average out pretty well, in terms of market shares, but we’re not going to
win every skirmish or every battle.
 4
LIFE PHILOSOPHY & ADVICE

Being Sensible, Opportunistic & Using the “Scuttlebutt

Method” to learn about an Industry – 2017 Meeting
AUDIENCE: Mr. Buffett, I have heard that Mr. Munger says your
greatest talent is that you’re a learning machine, that you never stop
updating your views. What are the most interesting things you’ve learned
over the last few years?
BUFFETT: Well, it is fun to learn. I would say Charlie is much more of
a learning machine than I am. I’m a specialized one, and he’s a much — he
does as well as I do in my specialty. And, then, he’s got a much more
general absorption rate than I have about what’s going on in the world. But,
you know, it’s a world that gets more fascinating all the time. And a lot of
fun can occur when you learn you were wrong on something.
You know, that’s when you really learn that the old ideas really weren’t
so correct. And you have to adapt to new ones. And that, of course, is
difficult. I don’t know that I would pick out — well, I think, actually, what’s
going on, you know, in America is terribly, terribly interesting, you know,
and politically, all kinds of things. But just the way the world’s unfolding,
it’s moving fast. I do enjoy trying, you know, to figure out not only what’s
going to happen, but what’s even happening now. But I don’t think I’ve got
any special insights that would be useful to you. But maybe Charlie does.
MUNGER: Well, I think buying the Apple stock is a good sign in
Warren. And he did run around Omaha and ask if he could take his
grandchildren’s tablets away. And he did market research. And I do think
we keep learning. And more important, we keep — we don’t unlearn the
old tricks. And that is really important. You look at the people who try and
solve their problems by printing money and lying and so forth. Take Puerto
Rico. Who would’ve guessed that a territory of the United States would be
in bankruptcy? Well, I would’ve predicted it because they behave like
idiots.
BUFFETT: And we did not buy any Puerto Rico bonds.
MUNGER: No. And if you go to Europe — you go to Europe, you
should look at the government bond portfolios we’re required to hold in
Europe. There’s not only no Greek bonds, they’re the bonds of nobody but
Germany. Everywhere you look in Berkshire, somebody is being sensible.
And that is a great pleasure. And if you combine that with being very
opportunistic so that when something comes along like a panic, it’s like
playing with two hands instead of one on a game that requires two hands. It
helps to have a fair-sized repertoire. And, Warren, we’ve learned so damn
much. There are all kinds of things we’ve done over the last 10 years we
would not have done 20 years ago.
BUFFETT: I’ve mentioned this before. But one of the best books on
investment was written, I think, in 1958. I think I read it around 1960, by
Phil Fisher, called Common Stocks and Uncommon Profits. And he talked
about the importance of the “scuttlebutt method.”
And, you know, that was something I didn’t learn from Benjamin
Graham. But every now and then, it’s turned out to be very useful. Now, it
doesn’t solve everything. In certain cases, you actually can learn a lot just
by asking a lot of questions. And I give Phil Fisher credit. That book goes
back a lot of years. But as Charlie said, some of the companies he picked as
winners forever did sort of peter out on him. But the basic idea, that you can
learn a lot of things just by asking.
For example, if I was interested in coal, and if I went and talked to the
heads of 10 coal companies and I asked each one of them, “If you had to go
away for 10 years on a desert island and you had to put all of your family’s
money into one of your competitors, which one would it be and why?” And
then, you know, and then I’d ask them if they had to sell short one of their
competitors for 10 years, all their family money, why? And everybody
loves talking about their competitors. And if you do that with 10 different
companies, you’ll probably have a better fix on the economics of the coal
industry than any one of those individuals has.
I mean, there’s ways of getting at things. And sometimes they’re useful.
Sometimes, they’re not. But sometimes, they can be very useful. And, you
know, I’m more specialized in that by far than Charlie. I mean, he wants to
learn about everything. And I just want to learn about something that’ll help
Berkshire.
But it’s a very useful attitude to have toward the world. And, of course, I
don’t know who said it. But somebody said the problem is not in getting the
new ideas but shedding the old ones. And there’s a lot of truth to that.
MUNGER: We would never have bought ISCAR if it had come along
10 years earlier. We would never have bought Precision Castparts if it had
come along 10 years earlier. We are learning. And, my God, we’re still
learning.
The Importance of a Great Reputation – 2016 Meeting
AUDIENCE: So, my question to both of you is what practical mental
model or mental models would you impress upon a young, enterprising
individual at the infancy of their career to build an important enduring
enterprise of that particular distinction and impact?
MUNGER: Yes. Well, of course, reputation you get over a long period
of time. Very few people are like Charles Lindbergh where you just
suddenly have a great reputation. Most of us have to acquire one very
slowly, and that was true in Berkshire’s case. And any individual you just
have to get the best reputation you can in the years you’re allotted and the
time available. And it may work out well, it may work out poorly. But it’s a
wise investment.
I see, all the time, opportunities come to people where it’s the credibility
they’ve gotten in the past that causes them to have the new opportunity. So,
I think hardly anything is more important than behaving well as you go
through life. I think we actually try to behave better as we got more
prosperous, and I think you’d be crazy if you didn’t. So, I’d certainly
recommend that you follow those old-fashioned principles. And I don’t
think there’s any way of guaranteeing a total powerhouse brand, nor can —
if a result is a one in 50 million-type result, you’re probably not going to get
it.
BUFFETT: Gianni Agnelli of Fiat, back in — I think it was 1988 — I
was at dinner with him one time, and he said something to me that stuck
with me. He said, “When you get old,” he says, “You’ll have the reputation
you deserve.”
He says, “For a while you can fool people,” but he says, “When you get
to be my age,” he said, “Whatever reputation you have, it’s probably the
one you deserve.” And I think the same is true of companies. And, frankly,
you know, it has helped Berkshire a whole lot that it has gotten a reputation
to be a somewhat different sort of company. I mean, I don’t think we set out
to do that, exactly, but it has worked out that way.
 Human Behavior and Becoming More Likeable – 2016
Meeting
AUDIENCE: My question is how do you make lots of friends and get
people to like you and work with you?
MUNGER: Well, you know, I was pretty obnoxious when I was your
age and asked a lot of impertinent questions, and not everybody liked me.
And so the only way I could get the people to like me a little bit was to get
very rich and very generous. That will work.
BUFFETT: People will see all kinds of virtues in you if they think
you’ll write a check. Yeah. The two of us — both Charlie and I were on the
obnoxious side early on, but you should get a little smarter about human
behavior as you get older. And I turned out to have some pretty good
teachers as I went along, in terms of what worked. I mean, I have looked at
other people during my lifetime and at these wonderful teachers. They
weren’t teachers in the standard definition, but they were people I admired
and I thought to myself, “Why do I admire these people?” And if I want to
be admired myself, you know, why shouldn’t I take on some of their
qualities?
So, it’s not a complicated proposition, you know. If you look around you
at the people you like in your school, write down three or four things they
do that make you like them, and then look around at the three or four people
that turn you off, and write down those qualities, and decide that you’re
going to be a person you, yourself, would like, that you’d take on the
qualities of the person on the left.
You’re generous, you’re friendly, you know, you accept things with good
humor, you don’t claim credit for things you don’t do, all of these things.
And they’re all possible to do. And if you like that in other people, people
are going to like it in you. And if you find things that are kind of obnoxious,
you’re always late, you’re always claiming credit for more than you do, and
you’re kind of negative on everything, and you don’t like those in other
people, get rid of them in yourself and you’ll find out it works pretty well.
MUNGER: And it really works in marriage. If you can change yourself
instead of trying to change your spouse, that’s a good idea.
BUFFETT: Charlie has said the most important thing in selecting a
marriage partner is that you don’t look for intelligence or humor or
character. He says you look for someone with low expectations.
 Why Children need Good Financial Habits – 2015
Meeting
AUDIENCE: Hi. I’ve been traveling more than 27 countries, and last
year I taught financial literacy lesson in one of the local elementary school
in (inaudible) city. Today here, we’re talking about investments in capital
markets, but young students in developing countries, they don’t know how
to save money, or they don’t know the concept of interest.
So, in order to overcome the educational challenges, I would like to
provide volunteer opportunities to talented Americans to teach in South
American schools to overcome the — while they are traveling. So, what do
you think about my plan or do you have any advice?
BUFFETT: You know someone said the chains of habit are too light to
be felt until they’re too heavy to be broken. And habits really make an
enormous difference in your life. So Andy and Amy Heyward have
developed the “Secret Millionaires Club,” which I’ve helped out with a
little, and our goal is to, in an entertaining way, present good habits to
young kids through a kind of a comedy series.
But the importance of developing good habits yourself, or encouraging
good habits in your children very early on, in respect to money, can change
their lives. And, you know, I was 9 or $10,000 ahead when I got out of
college, and I got married young and had kids very fast. And if I hadn’t had
that start, my life would have been vastly different. So it — you can’t start
young enough on working on good money habits.
College is overpriced and Degrees are Over Valued –
2015 Meeting
AUDIENCE: Hi. I’m Michael Monahan (PH) from Long Island, New
York. Warren, Charlie, the higher education system has expanded, covering
almost everyone who would like to receive a college education. This
demand has translated into rising college costs. As a high school junior, I’m
looking at prestigious institutions such as UPenn, Villanova, NYU,
Fordham, and Boston University.
On the other hand, my parents are experiencing sticker shock. All of
these schools have a sticker price of over $60,000, with some students, as
shown in a businessinsider.com article, can pay over $70,000, as the case at
NYU. How will the average American family be able to pay this in the
future and, more importantly, how do you two feel about this?
 MUNGER: Well, the average American family does it by going to less
expensive places and getting massive subsidies from the expensive places.
If we had to give our college education to only people who could write cash
checks for 60 or $70,000 a year, we wouldn’t have that many college
students.
BUFFETT: No.
MUNGER: So most people are paying less or getting subsidies. And —
but I think it is a big problem, that education has just kept raising the price,
raising the price, raising the price. And they say, but college educated
people do better. It’s a big bargain. But maybe they do better because they
were better to start with before they ever went to college, and they never tell
you that.
BUFFETT: I think that’s one of the silliest statistics that they publish, I
mean, to say that a college education is worth X because people that go to
college earn this much more than the ones that don’t. You’re talking about
two different universes. And to attribute the entire difference to the one
variable, that they went to college as opposed to the difference between the
people who want to go to college and have the ability to get into college —
MUNGER: It’s completely nutty and about 70 percent of the people
believe in it. So it gives you a certain hesitation about relying on your
fellow man.
So I think most people have to struggle through with the system the way
it is. There’s a big tendency to have prices rise to what can be collected.
And people just rationalize that the service is worth it. And I think a lot of
that has happened in education, and, of course a lot is taught in higher
education that isn’t very useful to the people who are learning it and, of
course, a lot of those people would never learn much from anything.
So it’s really wasting your time, and that’s just the way it works. So I
think there’s a lot wrong. What I noticed that was very interesting is that
when the Great Recession came, every successful university in America
was horribly overstaffed and they all behaved just like 3G. They all, with a
shortage of money, laid off a lot of people. And the net result was they all
worked better when it was all over with the people gone. And so this right-
sizing is not all bad. I don’t think there’s a college in America that wants to
go back to its old habits. And — but you put your finger on — it is a real
problem to look as those sticker shocks. It’s like any other problem in life.
You figure out your best option and just live with it. We can’t change
Villanova or Fordham. They’re going to do what they’re going to do. And
as long as it works, they’ll keep raising the prices.
And that’s pretty much the way the system works. When it really gets
awful there’s finally a rebellion. In my place in Los Angeles, the little
traffic accident got so it cost too much to everybody because of so much
fraud, and the chiropractors, and some of the plaintiffs’ attorneys, and so
on. And finally, the little accidents were costing so much that they worried
about the guy who lived in a tough neighborhood who couldn’t afford to
drive out to get a job.
And the auto insurance companies thought, my God, with prices going
up like this, they’ll have legislation creating state auto insurance or
something. So the net result is they put the plaintiffs’ attorneys to trial in
every case, and that fixed it. And maybe something like that will happen in
higher education. But without some big incentive, I think higher education
will just keep raising the prices.
What Matters most to Warren and Charlie – 2015
Meeting
AUDIENCE: Hi. My name is Arthur. I’m from Los Angeles. I want to
thank you for having us in your hometown. And we’ve all been listening to
your business prowess and all your successes. There’s no question that
you’re good at business and finance and have fun doing it. But there are
comments that you’ve made on income inequality, giving away 99 percent
of your wealth, and I’m led to believe that you’re motivated by more than
just amassing wealth or financial gains. So, I’d like to speak to your value
core and ask what matters to you most and why?
MUNGER: Well, I think that I had an unfortunate channeling device. I
was better at figuring things out than I was at everything else. I was never
going to succeed as a movie star, or as an athlete, or as an actor, something,
so — and I, early, got the idea that — partly from my family, my
grandfather, in particular, whose name I bore, had the same idea — that
really, your main duty is to become as rational as you could possibly be.
I mean, rationality was just totally worshiped by Judge Munger, and my
father and others. And since I was good at that and no good at anything
else, I was steered in something that worked well for me and — but I do
think rationality is a moral duty. That’s the reason I like Confucius. He had
the same idea all those years ago. And I think Berkshire is sort of a temple
of rationality. What’s really admired around Berkshire is somebody who
sees it the way it is.
And so, that’s the way I did it. But that goes beyond a technique for
amassing wealth. To me that’s a moral principle. I think if you have some
easily removable ignorance and keep it, it’s dishonorable. I don’t think it’s
just a mistake or a lack of diligence. I think it’s dishonorable to stay
stupider than you have to be, and so that’s my ethos. And I think you have
to be generous because it’s crazy not to be. We’re a social animal, and we’re
tied to other people.
BUFFETT: Well, I would say — this doesn’t sound very noble, but the
— what matters to me most now, and probably has for some time — I
mean, there are things that matter that you can’t do anything about, I mean,
in terms of health and the health of those around you and all that — but
actually, what matters to me most is that Berkshire does well. Basically, I’m
in a position where we’ve probably got a million or more people that are
involved with us, and it just so happens that it’s enormously enjoyable to
me so I can rationalize it, the activity.
But I would not be happy if Berkshire were doing poorly. That doesn’t
mean whether the stock goes down or whether, you know, the economy has
a bad year. But if I felt that we weren’t building something every year that
was better than what we had the year before, I would not be happy. And,
you know, I get this enormous fun out of it and I get to work with people I
like and —
MUNGER: But that’s very important. Truth of the matter is it’s easy for
somebody like Warren or me to lose a little of our own money, because it
doesn’t matter that much, but we hate losing somebody else’s. It’s — and
that’s a very desirable attitude to have in a civilization.
BUFFETT: Yeah. We won’t do it. We can lose money on individual
things, obviously. We can have bad years in the economy, and we can have
years the stock market goes down a lot. That doesn’t bother me in the least.
What bothers me is if I do something that actually costs Berkshire, in terms
of its long-term value, and then I feel, you know, I do not feel good about
life on that day. But we can avoid most of that, fortunately. We do get to
pick our spots. We’re very fortunate with that.
MUNGER: Well, a good doctor doesn’t like it when the patient dies on
the table, either, you know. Not a new thought.
 How to Figure out Your Circle of Competence – 2014
Meeting
AUDIENCE: Hello, Mr. Buffett, and hello, Mr. Munger. Thank you for
being extremely generous with sharing your wisdom. My name is Chander
Chawla, and I am visiting from San Francisco. In the past, you have said
that people should operate within their circle of competence. My question
is, how does one figure out what one’s circle of competence is?
BUFFETT: Good question. Some of the people in the audience are
identifying with it, I can hear them. It’s a question of being self-realistic,
and that applies outside of business as well. And, I think Charlie and I have
been reasonably good at identifying what I would call the perimeter of that
circle of competence, but obviously we’ve gone out of it. I would say that
in my own case, I’ve gone out of it more often in retail than in any other
arena. I think it’s easy to sort of think you understand retail, and then
subsequently find out you don’t, as we did with the department store in
Baltimore.
You could say I was outside of my circle of competence when I bought
Berkshire Hathaway, although I bought it, really, to resell as a stock,
originally. I probably was out of my circle of competence when I decided
that I should go in and buy control of the company.
That was a dumb decision — which worked out.
Being realistic in appraising your own talents and shortcomings, I think
— I don’t know whether that’s innate, but some people seem a whole lot
better at it than the others. And I certainly know of a number of CEOs that I
feel have no idea of where their circle of competence begins and ends. But,
we’ve got a number of managers who I think are just terrific at it. I mean,
they really know when they’re playing in the game they’re going win in,
and they don’t go outside of that game.
The ultimate was Mrs. B, at the Furniture Mart. She told me that she did
not want stock, in terms of the Berkshire Hathaway deal. Now, that may
sound like it was a bad decision. It was a splendid decision. She did not
know anything about stock, but she knew a lot about what to do with cash.
She knew real estate, she knew retailing, and she knew exactly what she
knew and what she didn’t know, and that took her a long, long, long, long
way in business life. And that ability to know when you’re playing the
game in which you’re going to win, and playing outside of that game, is a
huge asset.
 I can’t tell you the best way to develop a great sense of that about
yourself. You might get some of your friends that know you well to offer
contributions. Charlie’s given me a few contributions occasionally, saying,
“What the hell do you know about that?” That’s one way of putting it, of
course. But Charlie, do — can you help him out?
MUNGER: Well, I don’t think it’s as difficult to figure out competence
as it may appear to you. If you’re five-foot-two, you don’t have much of a
future in the National Basketball League. And if you’re 95 years of age, you
probably shouldn’t try and act the romantic lead part in Hollywood. And if
you weigh 350 pounds, you probably shouldn’t try and dance the lead part
in the Bolshoi Ballet. And if you can hardly count cards at all, you probably
shouldn’t try and win chess tournaments playing blindfolded, and so on and
so on.
BUFFETT: You’re ruling out everything I want to do.
MUNGER: But competency is a relative concept. And what a lot of us
need, including the one speaking, is — what I needed to get ahead was to
compete against idiots, and luckily there’s a large supply.
How to Find Your Personal Competitive Advantage-
2014 Meeting
AUDIENCE: So I guess this is a follow up question to the question
before. I really connect with the idea of not investing in industries you can’t
fully understand. Being a young guy who has limited ability to code and
who can’t build robots, tech is certainly not an industry I fully understand.
And yet these days, the concept of entrepreneurship is nearly synonymous
with tech amongst people my age. So my question to you, Mr. Buffett, is if
you were 23-years-old with entrepreneurial tendencies, what non-tech
industry would you start a business in and why?
BUFFETT: I’d probably do just what I did when I was 23. The — you
know, I would go in the investment business. And I would look at lots of
companies and I would go and talk to lots of people, and I would try to
learn from them what I could about different industries. One thing I did
when I was 23, if I got interested in the coal business, I would go out and
see the CEOs of eight or ten coal companies. And the interesting thing was
I never made appointments usually or anything, I just dropped in. But they
felt a fellow from Omaha who looked like me couldn’t be too harmful. So
they’d always see me.
 And I would ask them a lot of questions, but one question I’d always ask
them, two questions at the end, I would ask them if they had to put all of
their money into any coal company except their own and go away for ten
years and couldn’t change it, which one would it be and why? And then I
would say, after I got an answer to that, I would say, and if as part of that
deal they had to sell short in the equivalent amount of money — in one coal
company — which would it be and why? And if I went around and talked to
everybody in the coal business about that, I would know more about the
coal companies from an economic standpoint than any one of those
managers probably would.
So, I think there’s lots of ways to learn about business. You’re not going
learn how to start another Facebook or Google that way, but you can learn a
lot about the economic characteristics of companies by reading, personal
contact. You have to have a real curiosity about it. I mean, I don’t think you
can do it because your mother’s telling you to do it, or something of the
sort. I think it really has to turn you on. And I mean, what could turn you
on more than running around asking questions about coal companies?
You have to maybe be a little odd, too. But that’s what I would do. And I
might, in the process of doing that, find some industry that particularly
interested me, in my case the insurance industry did, and you might become
very well equipped, even perhaps, to start your own insurance company, but
perhaps to pick the most logical one to go to work for. If you just keep
learning things, something will come along that you’ll find extremely useful
to do. I mean, but you’ve got to be open to it. Charlie?
MUNGER: Well, you might try a version of the trick that Larry Bird
used. When he wanted an agent to negotiate his new contract, he asked
every agent why he should be selected. And if he was not going be selected,
whom the agent would recommend. And since everybody recommended the
same number two choice, Larry Bird just hired him and negotiated the best
contract in history.
BUFFETT: We did the same thing with Solomon, actually. It was a
Saturday morning. I had just gotten in there on Friday afternoon, and now
it’s Saturday morning and we had to open for business Sunday night in
Tokyo, and I had to have somebody to run the place. So I called in eight
people and I said, you know, “Who besides you would be the ideal person
to run this, and why?”
 One guy told me that there was nobody compared to him. He was gone
from the firm within a few months. But — the — it’s not a bad system to
use. You can really learn a lot just by asking. I mean, it’s starting to sound a
little bit like a Yogi Berra quote or something, but it is — it is literally true
that you — if you talk to enough people about something they know
something about, and people like to talk. You know, and — here we are
talking ourselves.
And you just have to be open to it. And you will find your spot. You
may not find it the first day, or the week, or month, but you’ll find what
fascinates you. I was very lucky because I found what fascinated me when I
was seven or eight years of age. But — you know, some people find chess
or music, you know, fascinates them when they’re four or five. If you’re
lucky you find it early, and sometimes it takes you longer, but you’ll find it.
MUNGER: If it’s a very competitive business, and it plainly requires
the qualities that you lack, it should probably be avoided. When I was at
Caltech I took thermodynamics, and Homer Joe Stewart, who was a genius,
taught the course. And it was fairly apparent to me that no amount of time
or effort would turn me into a Homer Joe Stewart. He was utterly,
impossibly more talented than I could be. Gave up. I immediately said I
wasn’t going try and be a professor of thermodynamics at Caltech. And I’ve
done that with field after field, and pretty soon there was only one or two
left.
BUFFETT: Yeah, I had a similar experience in athletics.
The importance of Financial Literacy Education for
Children – 2014 Meeting
AUDIENCE: My question is, do you think that financial literacy should
be a standard part of the curriculum in our nation’s schools and, if so, how
early do you think it should begin and what do you think some of the most
important learning goals would be?
BUFFETT: Well, certainly the earlier the better. I mean, habits are such
a powerful force in everyone’s life, and certainly good financial habits. You
know, I see it all the time. I get letters every day from people that have
committed some kind of financial lunacy or another, but they didn’t know it
was lunacy and, you know, they didn’t get taught that. Their parents didn’t
teach it to them. And digging yourself out of the holes that financial
illiteracy can cause, you know, you can spend the rest of your lifetime doing
it. So I’m very sympathetic to what you’re talking about.
We’ve done a little bit. I don’t know whether you saw our “Secret
Millionaire’s Club” exhibit in the exhibition hall. And you want to talk to
people at a very young age. Charlie and I were lucky. I mean, we got it in
our families so that, you know, we were learning it at the dinner table when
we were — before we knew what we were learning. And that happens in a
lot of families, and in a lot of families it doesn’t happen. And, of course,
you mention about childhood financial literacy. Then there’s a big problem
with adulthood, adult financial illiteracy.
And it’s harder to be smarter or have better habits than your parents
unless the schools intercede or —probably, you know, the schools are your
best bet, but it can be done — a lot can be done on television or through the
internet. But it is really important to have good financial habits, and I think
anything you can do very early through the school system, you know,
would certainly have my vote. Charlie?
MUNGER: Well, I’m not sure if the schools are at fault. I would place
most of the fault with the parents. I think the most powerful example is the
behavior of the parent, it’s very hard to fix people who have the wrong
parents.
BUFFETT: Well, let’s just say you have the job of fixing people that
have the wrong parents. What would you do about it?
MUNGER: Well, what’s the — if you had the job of living forever,
what would you do about it? It gets to be so impractical. Who would ever
believe that I would have any ability to fix all the people that have the
wrong parents?
BUFFETT: How about a few?
MUNGER: I don’t think I’m good at that, either. The only thing I’ve
ever been slightly good at in my life is raising the top higher. It’s just —
they left the talent out of me. I don’t scorn it. I think it’s a noble work. I just
— I’m no good at it. I don’t think you’re so hot, either.
BUFFETT: If he hadn’t been in public, it would have been stronger.
Stop by our “Secret Millionaire’s Club,” though. You may get some ideas.
MUNGER: By the way, the main troubles with education in this field
are probably not in the grade schools. They’re probably in the colleges.
There’s a lot of asininity taught in the finance courses at the major
universities, and even the departments of economics have much wrong with
them. So, if you really want to start fixing the world, you shouldn’t assume
that when it gets highfalutin, it’s a lot better.
BUFFETT: Well — There was certainly a period of at least 20 years, I
would say, when I think the net utility of knowledge given to finance
majors was negative in major universities. I think maybe it’s getting better
now.
BUFFETT: I’m worried about what English you’re going to use. I don’t
want to egg him on. The — it was — frankly, it was fascinating to me
because here was something I understood. And to watch — I mean
extraordinary universities that, essentially, were teaching people some very,
very dumb things. And where even to obtain the positions in the
departments of those schools, you had to subscribe to this orthodoxy, which
made no sense at all. And it got stronger and stronger, and then — now it’s
changing to quite a degree. But it may have soured my feeling on higher
education to an unwarranted degree because that — you know, it may have
been particularly bad in the area that I was familiar with, but it was bad.
The Importance of Luck & Timing – 2013 Meeting
AUDIENCE: Thank you. Marc Marzotto, Toronto, Canada. Bill Gross
made recent comments that his generation of investors, yourselves included,
owed a deal of their success to timing. Do you agree with Bill’s comment,
and do you think a similar opportunity will provide itself to today’s
investors? Thank you.
BUFFETT: Yeah, there’s no question that being born in the United
States was a huge, huge, huge advantage to me, and as I’ve pointed out in a
recent article, being born male was a big advantage. I would not have had
the same opportunities in the investment, or in the business world, remotely,
that I’ve had if I’d been a female born in 1930. And the timing could have
been a little better.
Actually, my dad was a security salesman and, you know, I was
conceived in November, 1929. And if you remember, the stocks had gone
down dramatically at that time. There really wasn’t anybody to call on, for
my dad, and there wasn’t any television at home or anything. So here I am,
you know. So I feel myself very lucky that the crash of 1929 came along.
And that also provided a decade, more than a decade, of people who were
very turned off. Well, it was a decade of terrible business for quite a while,
and then a decade of — more of people that were turned off on stocks, just
as we sort of had a decade like that in the past decade going up to 2010 or
so, people that — a lot of people — that had gotten turned off by stocks. So
that was a favorable environment.
But the United States itself was an incredibly favorable environment. If
I’d been born five years earlier, I probably would have made more money.
But if I’d been born 10 or 15 years later, I would’ve made, probably, less
money. But, it— I envy the baby that’s being born today in the United
States. I mean, I think, on a probability basis, that’s the luckiest individual
that’s ever been born. And I think that they will do very well in life in all
kinds of ways, on a probability basis, better than existed when I was born.
And I think they’ll have opportunities to do very well in the investment
field. It may not be as good a field as it was for me starting in 19-, say, ’50,
’51 or thereabouts, but it will be a very good field to operate in. The person
that has a passion for investing, born today, coming of age 20 years from
now, is likely, in my view, to do very well, and to live far better than we live
today, just as we live far better than John D. Rockefeller lived many years
ago.
“Find what turns you on” – 2013 Meeting
AUDIENCE: My question for both Mr. Buffett and Mr. Munger is: how
do you think you’ve changed over the last 50 years? And if you could
communicate to yourself 50 years ago, what would you tell them, one piece
of advice, business or personal, and how would you do it in a way where
your former self would actually heed it?
MUNGER: We’re basically so old-fashioned that we’re boringly trite.
We think you ought to keep plugging along and stay rational and stay
energetic and just all the old virtues still work, you’ve got to work where
you’re turned on. I don’t know about Warren, but I have never succeeded to
any great extent in something I didn’t like doing.
BUFFETT: Charlie and I both started in the same grocery store, and
neither one of us are in the grocery business.
MUNGER: We were not going to be promoted, either, and even though
you had the family name.
BUFFETT: Yeah. My grandfather was right, too. It’s really — I mean,
if you’re lucky, and Charlie and I were lucky in this respect. We — well, we
were lucky to be in this country to start with — but we found things we like
to do very early in life, and then we, you know, we pushed very hard in
doing those things, but we were enjoying it while we did it.
We have had so much fun running Berkshire, I mean, it’s almost sinful.
But, we were lucky to — you know, my dad happened to be in a business
that he didn’t find very interesting but I found very interesting. And so
when I would go down on Saturday, there were a lot of books to read, and,
you know, it just flowed from a very early age.
MUNGER: We found a way to atone by your sins in having so much
fun. You’re giving all the money back.
BUFFETT: Yeah, but you give it all back whether you want to or not, in
the end.
MUNGER: That’s true, too.
Read over your will with your Children – 2013 Meeting
AUDIENCE: Thank you. We love you, too, and your presence in our
community. I’m an estate planning lawyer, and it’s interesting as we wrap
up today to ponder that the Baby Boomer generation is about to pass along
the greatest transfer of wealth in history.
I can design plans that eliminate estate tax and pass down great amounts
of wealth to the next generation, but many of my clients come to me and
say they want a plan like Warren Buffett’s, leaving their kids enough so
they can do anything, but not so much that they can do nothing. Now they
ask me, and I’m asking you, how much is that, and how do you keep from
ruining your kids?
BUFFETT: I think more kids are ruined by the behavior of their parents
than by the amount of the inheritance. Your children are learning about the
world through you, and more through your actions than through your
words, you know, from the moment they’re born. You’re their natural
teacher, and, you know, it’s a very important and serious job. And I don’t
think that the amount of money that a rich person leaves to their children is
the determining factor, at all, in terms of how those children turn out.
But I think that the atmosphere, and what they see about them, and how
their parents behave, is enormously important. I would say this: I’ve
loosened up a little bit as I go along. Every time I rewrite my will, my kids
are happy because they know I’m not reducing the amount, anyway.
And I do something else that — I find that — which I think is an
obvious thing, but it’s amazing to me how many don’t do it. I think that
your children are going to read the will someday — that’s assuming you’re
a wealthy person — your children are going the read the will someday. It’s
crazy to have them read it after you’re dead, for the first time.
I mean, you’re not in a position to answer questions then unless the
Ouija board really works or something of the sort. So if they’re going to
have questions about how to carry out your wishes, or why you did this or
that, you know, why leave them endlessly wondering after you die? So in
my own case, I always have my children — I rewrite a will every five or six
years or something like that — and I have them read it.
They’re the executors under it. They should understand how to carry out
their obligations that are embodied in the will, and they should — also, if
they feel there’s anything unfair about it, they should express themselves
before I sign that will, and we should talk it over, and we should figure out
whether they’re right or I’m right, or someplace in between. So I do think
it’s very important in wealthy families, once the kids are of a certain age. I
mean, I don’t advise doing this with your 14-year-old or something, but
when they get — you know, certainly by the time they’re in the mid-30s or
thereabouts — I think they should be participants in the will.
And I do think that if you get to be very wealthy that the idea of trying
to pass on, create a dynasty of sorts, it just sort of runs against the grain, as
far as I’m concerned. And the money has far more utility — you know, the
last hundreds of millions or billions have far more utility to society than
they would have to make — create a situation — where your kids don’t
have to do anything in life except call a trust officer once a year and tell
them how much money they want.
But there — one of the problems you have — I mean, and what you
want to discuss just for that very situation is there may be circumstances
where one child will have much more of an interest in one type of asset than
others, or something of the sort. And you want to make sure that your
definition of equality, in terms of handling different kinds of assets, meshes,
or at least is understood, by the children so that they don’t think the fact that
you may gave one a farm and another a house or something of the sort
resulted in inequality when you thought it was equality. Charlie, you got
anything?
Incentivizing Kids to Work Hard – 2011 Meeting
 AUDIENCE: Here’s my question. One of the most important things that
drive people are incentives, but if you live in a rich society it’s very hard to
get your kids to work hard and reach their full potential because they just
don’t need to. So if you or Charlie decide to have a kid in the next five
years, how would you incentivize him or her to compete among the hungry
and highly motivated kids from emerging markets like China, Brazil,
Russia, or India?
BUFFETT: I think certainly that if you are very rich and you bring up
your kids to think that they are more important in society, or that they have
some special privilege, simply because they came out of the right womb,
that, you know, that’s just a terrible mistake. But Charlie has raised eight
children that I know quite well, most of them, and I don’t think any of them
have that sense. But it’s — if you really are going to raise your kids to think
that other people should do all the work for them and that they will be
entitled to sit around and fan themselves for the rest of their lives, I mean,
you know, you will probably not get a good result. I — you know, in my —
Charlie has been rich most of the time when his kids — many of his kids —
were growing up — some of his kids were growing up, I’ve been rich while
my kids were getting — certainly when they got into high school and
college — but I don’t think — I certainly didn’t want to give them the idea
that they were special just because their parents were rich.
And I don’t think you necessarily have to get a bad result or have
children that don’t have any incentives simply because their parents are
rich. The one thing I don’t think you want to give them an incentive to do is
try and outdo their parents at what their parents happen to be good at. I
don’t think that makes sense, whether if you are a professional athlete, or a
rich person, or whatever it may be, a great novelist, you name it. But I
really think if you’re rich and your kids turn out to have no incentives, I
don’t think you should point at them. I think you should probably point at
yourself. Charlie?
MUNGER: Well, I don’t think you can raise children in an affluent
family and have them love working 60 hours a week in the hot sun digging
fence post holes or something. That’s not going to work. So to some extent,
you are destroying certain kinds of incentives. And my advice to you is to
lose your fight as gracefully as you can.
BUFFETT: I’m not sure if you’re poor if you can get your kids to love
the idea of working 60 hours a week. They may have to, but —
 MUNGER: Kids that really get interested in something will work no
matter how rich they are. But it’s rare to have an Ajit-like intensity of
interest. You know, if you were a proctologist, you might not like your day
as it went on and on.
Speed Reading is Overrated – 2011 Meeting
AUDIENCE: You have the ability to read much faster than the vast
majority of people. Reading is a fantastic thing. What advice would you
give to children in high school, college, or adults who want to increase their
ability to read faster?
BUFFETT: Well, you know that’s an interesting question because I do
read, as you described, the five papers and lots of 10Ks and 10Qs.
Unfortunately, I’m not a fast reader, and I’m not as fast as I used to be on
reading. But I don’t know how effective various speed reading classes may
be, but if they are effective, you know, I would — I would really suggest
anybody that can improve their speed — I wish I could read a lot faster than
I can. Charlie can read faster than I can. And it’s a huge advantage to be
able to read fast.
And, you know, there’s a that old Woody Allen story about how he took
the speed reading course, and he met somebody, he was telling him how
wonderful it was, and the guy said, “Well, give me an example.” And
Woody Allen said, “Well,” he said. “I read ‘War and Peace’ last night in 20
minutes. It’s about Russia.” That’s the problem I have when I try and read
fast. I get all through reading the book, and I say, it’s about business, you
know, so — I really don’t know the effectiveness of speed reading-type
courses, but if you know of any friends or — you can learn more about that,
and there are effective techniques. Obviously, the thing to do is to learn
them very young because there really — there’s nothing — there’s hardly
anything more pleasurable, you know, than reading and reading and reading
and reading. And Charlie and I do a lot of it. We continue do a lot of it. But
I don’t do it as fast as I would like to. Charlie?
MUNGER: Well, I think speed is overestimated. I had a roommate at
Caltech who had a very distinguished mind, and I could do problems faster
than he could, but he never made a mistake, and I did. So, I wouldn’t be too
discouraged if you have to go a little slower. What the hell difference does
it make?
Invest in your Own Skills First – 2011 Meeting
 AUDIENCE: So considering that these kids are politically savvy, they
like studying economics, they’re brilliant and they’re willing to learn, what
advice can you give them from an investment perspective that could help
them chart their own course, as opposed to get a nine-to-five job?
BUFFETT: I used to do it by doing a lot of reading. I practically lived
at the Omaha Public Library for three or four years when I was 9 or 10 or
11. I mean, anything you do to improve your own skills, you know, you
never know where it’s going to pay off later on.
I have one diploma hanging in my office, and I got a couple of others,
but the one diploma I have hanging up there is one I got from a Dale
Carnegie course, which cost me a hundred bucks back in 1951, and it’s
incalculable how much value I got from that hundred dollars. There’s
nothing like working to improve your own skills, and I would say
communications skills are the first area I would work on to enhance your
value throughout life, no matter what you do.
I mean, if I had stayed in the same position I was in, in terms of
communicating, back in 1950 or ’51, my life would have turned out
differently. I mean, I started selling securities. If you can’t talk to people,
you’ve got a real problem selling securities. I think if you get lucky, you
find your passion early on, but you want to work at something you’re
passionate about, and then you want to work to improve your skills in that.
And I think if you do both of those things, I think you’re likely to do very
well.
The Best ways to Teach Positive Financial Habits –
2010 Meeting
AUDIENCE: What can be done to educate the children about the sage
of Omaha’s philosophy of successful money management, and to prevent
another reoccurrence of the financial mayhem that we’ve all seen and
experienced in the 2007 and 2008 years?
BUFFETT: We will see financial mayhem, as you put it, from time to
time. I hope we reduce it, I hope we reduce the magnitude, et cetera. But
people do crazy things, and it’s not a function of IQ, and sometimes it’s not
a function of education. In fact, I would argue that some of the problems,
and not a small part of what’s occurred in the last 30 years, has been
because of what became the prevailing conventional wisdom in the leading
business schools. So, I’m not particularly positive about modifying the
madness of mankind from time to time. The first part though, however, is
the kind of thing in our movie.
I really do believe that getting good financial habits — other kinds of
habits, too, but what I’m thinking about here is primarily financial habits —
getting those early in life is enormously important. I mean, Charlie and I
were probably lucky that we grew up in households where we were getting
all kinds of unspoken lessons, even, in terms of how to handle our life, but
in particular, how to handle finances. And not everybody gets that. And
Andy Heyward, who did a terrific job with “Liberty’s Kids” in teaching
about the history of America three or four years ago, has come up with this
idea of “The Secret Millionaires Club.”
And if we get through to 2 or 3 percent, or 5 percent, or whatever it may
be, of the kids, in terms of giving them some ideas they might not otherwise
have, and they build some habits around it, you know, it isn’t going to
change the world, but it could be a plus in their lives. It’s very important to
get the financial habits. And really, Charlie’s a big fan, and so am I, of Ben
Franklin’s. And he was teaching those habits a couple hundred years ago.
So we’re just going to try and take Ben Franklin’s ideas and make them
entertaining for children’s stories, in effect. And I think that’s about what
you should be doing. I don’t think — I think it’s much more important to
have good learning at the elementary level than, frankly, to have it in terms
of advanced degrees and graduate schools. Charlie?
MUNGER: Yeah, there are other great educational institutions in
America to help handle this problem. One of the ones I admire most is
McDonald’s. I had fun once at a major university when I said I thought
McDonald’s succeeded better as an educator than the people in the
university did. And what I meant was McDonald’s hires a lot of people who
are quite marginal at the very start of their working career. And they learn
to show up on time for work and observe the discipline. A lot of them go on
in employment to much higher jobs. And they’ve had an enormous
constructive effect about educating into responsibility a lot of people who
were threatened with not making it. So I think we all owe a lot to the
employment culture of McDonald’s. And it’s not enough appreciated.
BUFFETT: I learned a lot from a paper manager at The Washington
Times-Herald named John Daley (PH). And probably 13 years old or 14
years old, and I was lucky to run into him. Basically, my life would have
been somewhat different if I didn’t get those lessons from a guy that taught
them to me in a very enjoyable manner. He wasn’t preaching them to me, he
just told me I’d do better if I did this and that, and it worked. So you’re
lucky if you’ve got the parents to teach you that. But anything that brings it
into a broader teaching environment, I’m for.
The Importance of Reputation – 2010 Meeting
AUDIENCE: One of the keys to the success of Berkshire is your policy
to allow the managers of the various Berkshire Hathaway companies to
operate with minimal interference from Omaha. But if you became aware of
unethical or illegal activities at a Berkshire Hathaway-owned company,
would you directly and personally intervene?
BUFFETT: Sure. We have to jump in. We have a hotline, which I think
was a very good invention of — it wasn’t an invention, but a good policy
embodied in Sarbanes-Oxley. And, you know, that’s been a plus to us. I get
letters directly sometimes. So I want to hear about problems. I hope
somebody else has heard about them first and already gotten them solved,
but if they don’t get solved someplace else, I want to hear about them. And
we have an internal audit function, which is important at Berkshire. And
anything that comes in, you know, when somebody calls in on the
complaint line and says, “The guy works next to me has bad breath,” I tend
to skip over those. But if anything comes in that relates to alleged bad
behavior, it’s going to get investigated at Berkshire. And it does. And every
now and then, there have been some important transgressions that have
come to us via either letters to me, or calls on the hotline, or maybe letters
to the audit committee, whatever. We encourage that.
We have a letter that goes out every roughly two years; it’s the only
communication. I probably ought to put a copy of it in the annual report
sometime so that the shareholders see it. But it’s a page and a half long. It
asks the manager to tell me who, if something happened to them that night,
who I should consider putting in charge of the place the next day. Doesn’t
mean I’ll follow their advice, but I want to know their reasons and the
pluses and minuses. But it starts off basically and it says, “Look, we’ve got
all the money we need.” We’d like to make more money. We love making
money.
But we don’t have a shred more reputation than we need, and we won’t
trade reputation for money. And we want that message to get out. It’s the
reason we stick that Salomon thing in the movie every year. I mean, you
can — probably some of you can recite it by now, but I don’t think it can
hurt to keep repeating that story. And the one thing we tell — we tell them
that message, and then I’ve added a new line in this. And I say, if the reason
you’re doing something, the best reason you can come up with, is that the
other guy is doing it, it’s not good enough. There’s must be — there’s got to
be some other reason besides, “The other fellow’s doing it,” or you’re in
trouble. And I tell them, “Call me if anything’s questionable. You think it’s
close to the line, give me a call.” By saying that, nobody gives me a call
because they know that the very fact that they think it’s that close to the line
probably tells them it’s over the line. But I want to hear about stuff. We can
cure any problem if we hear about it soon enough and take action soon
enough.
But if it’s allowed to fester out someplace and people cover it up — and
sometimes they have — then we’ve got a problem. And we will have more
of that in the future, there’s no getting around it, you know. If you have
260,000 people, there can be some things going on. I just hope we hear
about them fast. And I hope their managers hear about them even faster and
do something before it even gets to us. But we want very much to protect
the reputation of Berkshire. It’s the right thing to do. Charlie?
MUNGER: Well, it is absolutely essential. And Berkshire, averaged
out, has a very good reputation, as you can tell by the ratings from major
media and surveys. And that is absolutely precious to us. In a sense, you
people are part of the culture, too. The ideal is not to just make all the
money that can be legally be made without causing too much legal trouble.
The idea is bigger than that. It’s that we celebrate wealth only when it’s
been fairly won and wisely used. And if that idea pervades the culture of a
place, including the shareholders, we think that’s very helpful to us.
The Importance of Finding Your Passion – 2010
Meeting
AUDIENCE: What advice could you give a young entrepreneur as
myself on how to go about defining and both building wealth within their
own business, as I hope to build a business that, one day, you’d be
interested in acquiring.
BUFFETT: You know, it may not quite get to the size that — and we’re
a moving target as well — but if you start off with that principle you just
enunciated, there are probably some other similar principles that you’ll have
that we would also agree with. There’s nothing like following your passion.
I mean, I love what I do, obviously, and I’ve loved it the whole time I’ve
done it. Charlie is the same way.
We have managers, you know, they come — some of them went to
business school, some of them didn’t, you know. They’re all types. But the
common factor is they love what they do, you know. And you’ve got to find
that in life. And some people are very lucky in finding it very early. It was
dumb luck that my father happened to be in the securities business, so when
I would go to his office there were a lot of books to read, and I got
entranced with that.
But, you know, if he’d been in some other occupation, I think I would
have read those books eventually, but it would have been a lot later. So if
you find something that turns you on, my guess is you’re going to do very
well in it. And the beauty of it is, in a sense, there’s not that much
competition. There are not a lot of people out there that are going to be
running faster than you in the race that you elect to get into. And if you
haven’t found it yet — you may well have found it — but if you haven’t
found it yet, you know, you’ve got to keep looking. And we’ve got 70-plus
managers. You know, we had one guy that didn’t go to high school, even.
He quit in fourth grade, I think.
Well, Mrs. B never went to school a day in her life. And when you go
out to the Furniture Mart — I hope you go out this evening, we expect to set
a record today in sales — what you are looking at on those 78 acres, you
know, is the largest home furnishing store, about 400 million in sales. The
largest store in the United States, and it comes from $500 of capital paid in
by a woman that never went to a day of school in her life and couldn’t read
or write. She loved what she was doing, and, you know, I tell the story, this
is a true story. When she was well into her 90s, she invited me over to her
house for dinner. That was very unusual. And a very nice house, six or
seven blocks away from the store.
And I went into the house, and the sofa, the chairs, the lamp, the dining
room table, they all had little green price tags hanging down. It made her
feel at home. And I said to her, “Mrs. B, you are my kind of woman.”
Forget Sophia Loren and all of that, this is my kind of woman. She loved it.
And she loved it all her life, and just think of what that produced. I mean, it
just — it’s incredible. I mean, you know, one time — my dad used to quote
Emerson, that “the power that lies within you is new in nature.” And
basically, the power that was within Mrs. B was new in nature. And over a
lifetime it produced amazing things. So find your passion, and then don’t let
anything stop you.
 5
WALL STREET

The Strategy Behind Stock Buybacks – 2016 Meeting

AUDIENCE: While Berkshire has authorized a share repurchase
program, originally aimed at buying back shares at prices no higher than 10
percent premium to the firm’s most recent book value per share, a figure
that was subsequently increased to repurchase shares at prices no higher
than 20 percent premium to book value, there’s been relatively little share
repurchase activity during the last four-and-a-half years.
Even as the shares dipped down below the 1.2 times book value
threshold during both January and February of this year, if you base it on a
buyback price calculated on Berkshire’s book value per share at the end of
2015, a number that had not yet been published when the stock did dip that
low.
Given your belief that Berkshire’s intrinsic value continues to exceed its
book value, with the difference continuing to widen over time, are we at a
point where it makes sense to consider buying back stock at a higher break
point than Berkshire currently has in place, and would you ever consider
stepping in and buying back shares if they dip down blow 1.2 times book
value per share even if that prior year’s figure had not yet been released?
BUFFETT: Yeah. Gregg, you mentioned that it sold below 1.2, and I
don’t think that’s correct. I keep a pretty close eye on that, and it’s come
fairly close to 1.2. But I could almost guarantee you that it has not hit 1.2,
or we would’ve done it. And I’d be happy to send you figures on any day
that you might feel that it did hit the 1.2.
Clearly the stock is worth significantly more than 1.2, but it should be
worth significantly more, or we wouldn’t have it at that level. On the other
hand, we did move it up from 1.1 to 1.2 because we had acquired more
businesses over time where the differential between our carrying value and
the book value and the intrinsic value really had widened from when we set
the 1.1. I have mixed emotions on the whole thing, in that from strictly a
financial standpoint, and from the standpoint of the continuing
shareholders, I love the idea of buying it at 1.2, which means I probably
would love the idea of buying it a little higher than 1.2, and it’s the surest
way of making money per share there is.
I mean, if you can buy dollar bills for anything less than a dollar, you
know, there’s no more certain way of making money. On the other hand, I
don’t particularly enjoy the actual act of buying out people who are my
partners at a price that is below what I think the stock is worth. But we will
buy stock, almost certainly. We don’t make it a 100 percent pledge because
there’d be a lot of ramifications to that, but the odds are extremely high that
we would buy a lot of stock at 1.2 times or less. But we would do it in a
manner where we were not propping the stock at any given level.
And if it happens, it will be very good for the stockholders who
continue. It is kind of an interesting situation, though, because if it’s true
that we will, and are eager even, from a financial standpoint, to buy it at
that price, it’s really like having a savings account where if you take your
money out as a dividend, or as an interest payment on a savings account,
you know, you get a dollar. But if you leave it in, you’re almost guaranteed
that we’ll pay you $1.20. I mean, why would anybody want to take money
out of a savings account if they could cash it in, what they left, at 120
percent?
So it acts as a backstop for ensuring that a no-dividend policy results in
greater returns than it would be if we paid out a dollar and people got a
dollar. If they leave a dollar in, they’re going to get at least $1.20 in my
view, at least — it’s not a total guarantee, but it’s a pretty strong probability.
So would we increase that number? Perhaps. If we run out of ideas, and I
don’t mean, you know, day by day, but if it really becomes apparent that we
can’t use capital effectively within the company, in the quantities with
which it’s being generated, then at some point the threshold might be
moved up a little because it could still be attractive to buy it.
And you don’t want to keep accumulating so much money that it burns a
hole in your pocket. And it’s been said that a full wallet is a little like a full
bladder, that you may get an urge fairly quickly to pee it away, and we don’t
want that to happen. But so far that hasn’t happened, and if it ever gets to
where we have 100 billion or 120 billion or something like that around, we
might have to increase the price. Anytime you can buy stock in for less than
it’s worth, it’s advantageous to the continuing shareholders, but it should be
by a demonstrable margin. Intrinsic value can’t be that finely calculated that
you can figure it out to four decimal places or anything of the sort. Charlie?
MUNGER: Well, you’ll notice that elsewhere in corporate America,
these buyback plans get a life of their own, and it’s gotten quite common to
buy back stock at very high prices that really don’t do the shareholders any
good at all. I don’t know why people exactly are doing it. I think it gets to
be fashionable.
BUFFETT: Yeah. Can you imagine somebody going out and saying,
we’re going to buy a business and we don’t care what the price is? You
know, we’re going to spend $5 billion this year buying a business, we don’t
care what the price is. But that’s what companies do when they don’t attach
some kind of a metric to what they’re doing on their buybacks.
To say we’re going to buy back 5 billion of stock, maybe they don’t
want to publicize the metric, but certainly they should say, we’re going to
buy back 5 billion of stock if it’s advantageous to buy it back.
Jamie Dimon is very explicit about saying he’s going to buy back the
stock when he’s buying it below what he considers intrinsic value to be. But
I have seen hundreds of buyback notices, and I’ve sat on boards of directors
one after another where they have voted buybacks and they said they were
doing it to prevent dilution or something like that. It’s got nothing to do
with preventing dilution. I mean, dilution by itself is a negative and buying
back your stock at too high a price is another negative. So it has to be
related to valuation. And as I say, you will not find a lot of press releases
about buybacks that say a word about valuation.
 Stock Buybacks and Intrinsic Value aren’t an Exact
Science – 2014 Meeting
AUDIENCE: Warren, this question is on Berkshire’s intrinsic value. In
the annual letter, you appear to strongly signal that Berkshire’s shares are
undervalued, especially relative to intrinsic value. Aside from share
buybacks, what actions can Berkshire take to narrow the discount between
the current share price and intrinsic value? For example, would you ever
consider an IPO of Berkshire’s individual operating units?
BUFFETT: The answer to the last part is no. But I’ve never seen an
annual report that uses the term, “intrinsic value,” or even talks about the
intrinsic value of its units or business, as much as Berkshire does. So,
Charlie and I really devote considerable effort to explaining which of our
businesses have really a significant discrepancy between what carrying
value and the intrinsic value of the business. And I got very specific in the
case of GEICO in the past year, for example.
And I said that GEICO, which is carried at about 1 billion over tangible
assets, may be worth as much as 20 billion over tangible assets. And I
wouldn’t be surprised if five years or ten years from now that that figure
itself will be a lot larger. So we’ve talked about it. We said we are not only
willing, but eager to buy stock at 120 percent of book value. Well, with
book value being close to 230 billion now, that obviously means we think
that at $45 billion, roughly, over that figure, we are getting a bargain, in
relation to intrinsic value.
But we’re never going to try and put out an exact number because we
don’t know an exact number. And it changes from day to day. And it
certainly changes, you know, over the quarters and over the years. And the
second reason is, if you ask Charlie and me to write down a figure as we sit
here as to the intrinsic value of Berkshire, we’d probably be within 5
percent of each other. But we probably would not be within 1 percent of
each other. And so we will continue to try to give shareholders information
about the important units.
The small ones are not unimportant to us, but they do not have a big
impact on the overall intrinsic value. We’ve got a few businesses. I mean,
we have some businesses that may be carried at a few hundred million that
might be worth a billion or maybe 2 billion, even. But that isn’t where the
big, undisclosed by the balance sheet, values are. You know, they’re in the
railroad, they’re in the insurance business, they’re in our utility business.
And they add up to some pretty big numbers.
We try to tell you exactly the numbers and use the words that we use
when we’re thinking about those businesses ourselves, in terms of
estimating their value. But we don’t want to go further than that. The 120
percent, obviously, is a loud shoutout as to a figure that we think is very
significantly below intrinsic value, or we wouldn’t use it to repurchase
shares. We only believe in repurchasing shares when we can do so at a
significant discount from intrinsic value.
Some companies talk about buying in shares to cover options. That
actually isn’t the best reason to buy in shares. I mean, the stock could be
overpriced, and even though you issued on options, you shouldn’t be
buying it in. But that’s become sort of a mantra throughout corporate
America, that if you buy shares to cover the option exercises that you’ve
negated the dilution to shareholders. But again, if you buy shares — if you
buy a dollar bill for 90 cents, you’re doing your shareholders a favor. And if
you buy it for $1.10, you are doing them no favor at all. Charlie?
MUNGER: Well, I don’t believe we’ve ever wanted to get the stock
way over intrinsic value so that we can issue it to other people and get an
advantage for ourselves and a disadvantage for them. And, I think the
people that want the stock up very close to intrinsic value, or higher, really
want egg in their beer.
It’s okay if it’s a little below. And we’re not in the game of ballooning
our stock up as high as we can get it so we can issue it more at a profit to
ourselves. I think over the long term, our system will work pretty well. And
I think the stock will eventually go above intrinsic value, whether we like it
or not.
BUFFETT: Yeah. But we have really watched a lot over the years of
certain managers attempting to get their stock to sell for way more than it
was worth, so they could use it to trade for other companies. I mean, that
was all the rage in the late ’60s. One of the reasons that I wound up my
partnership was that that activity was going on so much and it affected all
other values. And it was really a game. And it was a game that some people
played sort of halfway honestly, and other people really cheated like crazy,
because if you’re trying to get your stock to be overpriced, you’re very
likely to cheat on your earnings and cheat on projections. Cheat on
everything. And it works, incidentally.
 It doesn’t work indefinitely, but it works. Some companies, whose
names you know, were, to some extent, built on that principle. That’s a
game that we not only don’t want to play, we really found it very
distasteful, because we saw a lot of these people in action. And it comes in
waves. And we just — we don’t want to come close to playing it. Unless
I’m careful, Charlie will name names, so we’d better move on to
shareholders.
Most Financial Advisors Aren’t Worth Their Fees –
2017 Meeting
AUDIENCE: Warren, you have made it very clear in your annual letter
that you think the hedge fund compensation scheme of ‘2 and 20’ generally
does not work well for the fund’s investors. And in the past, you have
questioned whether investors should pay, quote, ‘financial helpers,’
unquote, as much as they can. But financial helpers can create tremendous
value for those they help.
Take Charlie Munger, for instance. In nearly every annual letter and on
the movie this morning, you describe how valuable Charlie’s advice and
counsel has been to you and, in turn, to the incredible rise in Berkshire’s
value over time.
Given that, would you be willing to pay the industry standard, quote
‘financial helper’ fee of one percent on assets to Charlie? Or would you
perhaps even consider ‘2 and 20’ for him? What is your judgment about this
matter?
BUFFETT: Yeah. Well, I’ve said in the annual report that I’ve known
maybe a dozen people in my life where I would have predicted or did
predict that the person involved would do better than average in investing
over a long period of time. And obviously, Charlie is one of those people.
So would I pay him? Sure. But would I take financial advisors as a group
and pay them one percent with the idea that they would deliver results to
me that were better than the S&P 500 by one percent, and thereby leave me
breaking even against what I could have done on my own? You know,
there’s very few. So it’s just not a good question to ask whether, you know,
I’d pay Charlie one percent.
That’s like asking, you know, whether I’d have paid Babe Ruth, you
know, 100,000 or whatever it was to come over from the Red Sox to the
Yankees. I mean, sure I would have, but there weren’t very many people I
would have paid 100,000 to in 1919, or whatever it was, to come over to the
Yankees. And it’s a fascinating situation, because the problem isn’t that the
advisors are going to do so terrible. It’s just that you have an option
available that doesn’t cost you anything that is going to do better than they
are, in aggregate.
I mean, if you hire an obstetrician, assuming you need one, they’re
going to do a better job of delivering the baby than, you know, if the spouse
comes in to do it, or if they just pick somebody up off the street. And if you
go to a dentist, if you hire a plumber, in all of the professions, there is value
added by the professionals as a group, compared to doing it yourself or just
randomly picking laymen.
In the investment world, it isn’t true. I mean, the people that are
professionals, in aggregate, cannot do better than the aggregate of the
people who just sit tight. And if you say, “Well, in the active group there’s
some person that’s terrific,” I will agree with you. But the passive people
can’t all pick that person. And they wouldn’t — they don’t know how to
identify them.
MUNGER: It’s even worse than that. The expert who’s really good,
when he gets more and more money in, he suffers just terrible performance
problems. And so you’ll find the person who has a long career at “2 and
20,” and if you analyze it, net, all the people who’ve lost money because
some of the early people have had a good record but more money coming in
later and they lose it.
So, the investing world is just, it’s a morass of wrong incentives, crazy
reporting, and I’d say a fair amount of delusion.
BUFFETT: Yeah, if you asked me whether those 12 people I picked
would do better than the S&P working with a hundred billion dollars, I
would answer that probably none of them would. I mean, that would not be
their prospective performance. When I was talking of them, and when they
actually worked in practice, they dealt, generally, with pretty moderate
sums.
And as the sums grew, their relative advantage diminished. I mean, it’s
so obvious from history. The example I used in the report — I mean, the
guy who made the bet with me, and incidentally all kinds of people didn’t
make the bet with me because they knew better than to make the bet with
me.
 You know there were at least a couple hundred underlying hedge funds.
These guys were incentivized to do well. The fund of a fund manager was
incentivized to pick the best ones he could pick. The guy who made the bet
with me was incentivized to pick the best fund of funds. You know, and
tons of money, and just in with those five funds, a lot of money went to pay
managers for what was subnormal performance over a long period of time.
And it can’t be anything but that.
And you know, it’s an interesting profession when you have tens of
thousands, or hundreds of thousands of people, who are compensated based
on selling something that, in aggregate, can’t be true: superior performance.
But it’ll continue, and the best salespeople will tend to attract the most
money. And because it’s such a big game, people will make huge sums of
money, you know, far beyond what they’re going to make in medicine or
you name it.
I mean, the big money — huge money — is in selling people the idea
that you can do something magical for them. And if you have even have a
billion-dollar fund, you know, and get two percent of it for terrible
performance, that’s $20 million. In any other field, you know, it would just
blow your mind. But people get so used to it, you know, in the field of
investment that it just sort of passes along. And $10 billion, I mean, $200
million fees?
We’ve got two guys in the office, you know, that are managing $11
billion. Well, no they’re not. I’m sorry. Yeah, they’re managing 20 billion,
you know, between the two of them, 21 billion maybe. And, you know, we
pay them a million dollars a year, plus the amount by which they beat the
S&P. They have to actually do something to get contingent compensation,
which is much more reasonable than the 20 percent.
But how many hedge fund managers in the last 40 years have said, “I
only want to get paid if I do something for you?” You know, “Unless I
actually deliver something beyond what you can get yourself, you know, I
don’t want to get paid.” It just doesn’t happen.
And, you know, it gets back to that line that I’ve used, but when I asked
a guy, you know, “How can you, in good conscience, charge ‘2 and 20?’”
And he said, “Because I can’t get 3 and 30.” You know — Any more,
Charlie? Or have we used up our —
 Most Derivative Speculation Adds No Value To Society
– 2010 Meeting
AUDIENCE: What useful function do derivatives serve in our
economy? We got along quite well without them for many years. If they
serve no useful purpose, and in fact, have demonstrated that they can do
considerable damage to the economy, why are they not made illegal,
especially the naked ones? There is precedent for that. I believe that short
selling of stocks that one does not own or has managed to borrow is illegal.
MUNGER: Well, I think the usefulness of derivatives has always been
overrated. If we didn’t have any derivatives at all, including contracts to
buy and sell grain that were traded on exchanges, we’d still have plenty of
oats and wheat. I mean, I think it is slightly more convenient for people to
be able to hedge their risks of farming by using derivative markets and
commodities.
And the test is not, “Is there any benefit in derivatives?” The question is,
is the net benefit versus disadvantage from derivatives useful? Or would we
be better off without it? My own view is that, if we went back to having
nothing but derivative trading in commodities, metals, currencies, safely
conducted under responsible rules, and all other derivatives contracts
vanished from the earth, it would be a better place.
BUFFETT: We’ll take a current example. Burlington Northern has
hedged diesel fuel, which they use a lot of, over the years. And then they
also have fuel adjustment clauses in a lot of their contracts for
transportation. With Matt Rose, who does a wonderful job of running
Burlington, I basically say, “Look at. If I were running the place, I wouldn’t
bother to hedge them,” because if you hedge it — if you hedge it for a
million years, you know, you’re going to be out the frictional costs,
probably, of doing it, unless you’re smarter than the market generally on
diesel fuel.
And if you’re smarter than the market on diesel fuel generally, we’ll go
into the business of speculating on diesel fuel. I mean, if we’ve really got an
edge, you know, why bother to run the trains? Let’s just speculate diesel
fuel. And if you have an organization where you have somebody in charge
of that activity, it’s going to take place. On the other hand, Matt Rose has
done a fabulous job, as well as his management team, in running Burlington
Northern. If they are more comfortable, or they find it useful in any way, in
terms of pricing contracts, or anything, to hedge it, that’s fine with me, too.
 I mean, it’s his company, he can figure out the best way of running it. I’ll
hold him responsible for how it does over time. And, you know, I would do
it one way and somebody else would do it another way. I would not
condemn anybody that’s running a railroad for hedging diesel fuel, nor
would I condemn anybody that runs an energy company, like we do at
MidAmerican, for hedging energy costs in certain ways. But I do think it
was said very well in 1935. In fact chapter 12 of Keynes’s “General
Theory” is, by far, in my view, probably Charlie’s too, the best description
of the way capital markets function, the real way people operate. It’s
prescriptive, it’s descriptive. Everybody should read chapter 12.
It’s starts a little slow in the first few pages. But the first part of it is very
familiar to people. I mean, this quote has been used a lot. But every word in
this, to me, is right on the money. “Speculators may do no harm as bubbles
on a steady stream of enterprise. But the position is serious when enterprise
becomes the bubble on a whirlpool of speculation.” You can change that to
“gambling” if you want to. “When the capital development of a country
becomes a by-product of the activities of a casino, the job is likely to be ill-
done.” That’s the famous part of the quote.
Keynes went on to say, “The measure of success attained by Wall Street,
regarded as an institution of which the proper social purpose is to direct
new investment into the most profitable channels in terms of future yield,
cannot be claimed as one of the outstanding triumphs of laissez-faire
capitalism - which is not surprising, if I am right in thinking that the best
brains of Wall Street have been in fact directed towards a different object.”
That was written in 1935.
I don’t think there’s been anything better written about how government,
how citizens, should look at Wall Street and what it does and it doesn’t. It’s
always had this mixture of a casino operation and a very socially important
operation. And when derivatives became popular, academia was behind
them 100 percent.
They were teaching more about how to value an option than they were
about how to value a business. And I witnessed that and it drove me crazy.
But in 1982, Congress was considering, really, the expansion of a derivative
contract to the general public in a huge, publicized way. It was the S&P 500
contract. That changed the whole derivatives game. At that point, basically,
Wall Street just said, “Come on in, and everybody can speculate in an
index. Not any real company, just an index. And you can buy it at 10
o’clock in the morning and sell it at 10:01, and you’re contributing to this
wonderful society by doing it.”
And I wrote a letter to Congressman Dingle. This was one month before
they put in trading in the S&P 500, April. They put it in April, 1982, in
Chicago; did a little in Kansas City first. And I went through four pages of
things and I just pulled out a few things. But I think that, to some extent,
what I forecasted then has turned out to be the case. And then it got squared
and all of that, as both the people in Wall Street kept dreaming up new and
new ways for people to gamble.
And as I say, academia was applauding all along the way and getting
hired as consultants to various exchanges to tell them how wonderful they
were, in terms of their social purpose.
MUNGER: By the way, if I remember right, this was like the only letter
in opposition to this uniformly acclaimed new world of better gambling in
things related to securities. He basically said the idea’s insane. It will do
more harm than good. Then, as now, people didn’t pay that much attention
to him.
BUFFETT: And I’ll venture that very few people in this room know —
you all know that if you buy a stock, you have to hold it for a very long
period of time to get a special capital gains treatment on it. If you buy an
S&P 500 contract at 11 o’clock and sell it at 11:01 and have a profit, it’s
taxed 60 percent as a long-term capital gain, and 40 percent as short-term
capital gain. So you really get better tax treatment if you’re gambling on an
S&P 500 derivative, which is what it is, in Chicago, than you do if you
invest for four or five months in some security and then have to sell it for
some reason.
It’s a tribute to the lobbying power of a rather small group that has done
very well off this particular activity. Charlie, can you think of any reason
why it’s 60 percent long-term gain if you hold something for 30 seconds?
MUNGER: Well, of course it’s crazy. It’s neither fair nor sensible. But
if a small group with a lot of money and influence cares a great deal about
something and the rest of us are indifferent, why, they tend to win before
our legislative bodies. That’s just the way it is. I always liked Bismarck’s
remark that you shouldn’t watch two things: sausage making and legislation
making.
 Bonds, Borrowing & Interest Rates
Savings Bonds are a Ridiculous Investment at Current
Rates – 2018 Meeting
AUDIENCE: I read the newspapers about the Federal Reserve and the
inflation numbers. And there must be an increase supply of Treasury bonds
that must go to auction. And my question is how would - what do you
expect that to impact yield or interest rate?
BUFFETT: Yeah. The answer is, I don’t know. And the good news is,
nobody else knows, including members of the Federal Reserve and
everyone - There are a lot of variables in the picture. And the one thing we
know is we think that long-term bonds are a terrible investment, and we - at
current rates or anything close to current rates.
So basically all of our money that is waiting to be placed is in Treasury
bills that, I think, have an average maturity of four months, or something
like that, at most. The rates on those have gone up lately, so that in 2018,
my guess is we’ll have at least $500 million more of pretax income than we
would’ve had in the bills last year. But it’s not because we want to hold
them. We’re waiting to do something else.
But long-term bonds at these rates - it’s almost ridiculous when you
think about it. Because here the Federal Reserve Board is telling you we
want 2 percent a year inflation. And the very long bond is not much more
than 3 percent. And of course, if you’re an individual, then you pay tax on
it. You’re going to have some income taxes to pay. And let’s say it brings
your after-tax return down to 2 1/2 percent. So the Federal Reserve is telling
you that they’re going to do whatever’s in their power to make sure that you
don’t get more than a half a percent a year of inflation-adjusted income.
And that seems to me, a very - I wouldn’t go back to penny stocks - but I
think I would stick with productive businesses, or productive - certain other
productive assets - by far. But what the bond market does in the next year,
you know - you’ve got trillions of dollars in the hands of people that are
trying to guess which maturity would be the best to own and all that sort of
thing. And we do not bring anything to that game that would allow us to
think that we’ve got an edge. Charlie?
 MUNGER: Well, it really wasn’t fair for our monetary authorities to
reduce the savings rates, paid mostly to our old people with savings
accounts, as much as they did. But they probably had to do it to fight the
Great Recession, appropriately. But it clearly wasn’t fair. And the
conditions were weird.
In my whole lifetime, it’s only happened once that interest rates went
down so low and stayed low for a long time. And it was quite unfair to a lot
of people. And it benefited the people in this room enormously because it
drove asset prices up, including the price of Berkshire Hathaway stock. So
we’re all a bunch of undeserving people and I hope that we continue to be
so.
BUFFETT: At the time this newspaper came out in 1942, the
government was appealing to the patriotism of everybody. As kids, we went
to school and we bought Savings Stamps- well, they first called them U.S.
War Bonds, then they called them U.S. Defense Bonds, then they called
them U.S. Savings Bonds. But they were called war bonds then. And you
put up $18.75 and you got back $25 in ten years. And that’s when I learned
that that $4 for three - in ten years - was 2.9 percent compounded. They had
to put it in small print then. And even an 11-year-old could understand that
2.9 percent compounded for ten years was not a good investment.
But we all bought them. It was - you know, it was part of the war effort,
basically. And the government knew - I mean, you knew that significant
inflation was coming from what was taking place in finance, in World War
II. We actually were on a massive Keynesian-type behavior, not because we
elected to follow Keynes, but because war forced us to have this huge
deficit in our finances, which took our debt up to 120 percent of GDP. And
it was the great Keynesian experiment of all time, and we backed into it,
and it sent us on a wave of prosperity like we’ve never seen. So you get
some accidental benefits sometimes. But the United States government
incentivizes every citizen to put their money into a fixed-dollar investment
at 2.9 percent compounded for ten years.
And I think Treasury bonds have been unattractive ever since, with the
exception of the early ’80s. That was something at that time. I mean, you
really had a chance to buy - you had a chance to invest your money by
buying zero-coupon Treasury bonds, and in effect, guarantee yourself that
for 30 years you would get a compounded return, you know, something like
14 percent for 30 years of your lifetime. So every now and then, something
really strange happens in markets and the trick is to not only be prepared
but to take action when it happens.
Why Berkshire Doesn’t Borrow More Despite Cheap
Money – 2014 Meeting
AUDIENCE: I have a question about increasing leverage for Berkshire
in this day. This question is really to trigger a discussion and to hear your
thoughts on that. And also, this question was triggered by the fact that
following the acquisition of BNSF, few years ago, which was partially
financed by Berkshire stock, shortly after, there was plenty of cash around.
There could be different advantages for Berkshire to wisely increase
leverage these days. Some generally true for all the companies. Some
Berkshire specific. And the Berkshire specific, most important one for me
as a shareholder, is that the investment decision made to invest the funds
would be made by the present team, you and the other managers.
Question is then, why not go out and ask for several billions in bonds
with a long maturity, and maybe even with some earlier endorsement or
callable options embedded at Berkshire discretion, and make a good use of
it? Thank you.
BUFFETT: Well, what you say makes great sense. And I think if you’d
asked Charlie and me 40 years ago, that if we were looking at the present
set of interest rates and we had some wonderful businesses that were
making a lot of money, whether we would have gone out and borrowed a
whole lot of money for the long term. We would’ve said yes, right, Charlie?
MUNGER: Wouldn’t have been a hard decision.
BUFFETT: But, we’ve got several reasons not to. We do have a good
way of generating funds other than through equity: through float. And
we’ve done that to the tune of 77 billion. And we don’t like the idea of
operating a very conservatively-leveraged company, and then changing
courses so that the people who bought bonds that were rated double-A, sort
of find themselves with much lower rated bonds of the sort.
We don’t have any problem leveraging up the utility or the railroad.
They deserve to have even a lot more debt than they do, but we keep it sort
of in line with what the rating agencies think should be conventional ratios.
But if you analytically look at them — both of them could withstand a fair
amount more debt. At the parent level, we borrowed some money that time
and we used some equity. I think using equity helped us make the deal. But
it was not a smart thing to do, basically. I could’ve always gone to the
market and repurchased a bunch of stocks subsequently, and that’s probably
what I should’ve done on that. So I understand your point.
Another 30 or 40 billion of debt at Berkshire would be nothing and it
would cost very little. We don’t actually have great places to put it now, as
evidenced by the fact that we’ve got 25 billion or so of excess cash. We are
reluctant to leverage it up a lot at the parent now, since we have these other
sources of money that are really pretty attractive. We are selling what we
call structured settlements, for example, that have a very long duration. And
they actually have an interest cost to us of less than if we were to sell bonds.
So we are doing certain things that are along the lines you urge, but not
nearly as aggressively as you urge. And you probably are right. If we see a
really good $50 billion deal, we’ll figure out a way to do it.
 Effects of Low Interest rates on Berkshire’s Businesses –
2013 Meeting
AUDIENCE: How has the Fed’s zero-interest policy affected Berkshire
Hathaway’s various business segments? For example, has it helped or hurt
their operations and profitability?
BUFFETT: Well, it’s helped. Interest rates are to asset prices, you
know, sort of like gravity is to the apple. And when there are very low
interest rates, there’s a very small gravitational pull on asset prices. And we
have seen that getting played out. I mean, people make different decisions
when they can borrow money for practically nothing than they made back
in 1981 and 82 when Volcker was trying to stem inflation and use — and
the government bond rates got up to 15 percent. So, interest rates power
everything in the economic universe, and they have some effect on the
decisions we make. We borrowed the money on the Heinz purchase a lot
cheaper than we could’ve borrowed it 10 or 15 years ago, so that does affect
what people are willing to pay. So it’s a huge factor and, of course, it will
change at some point, although, as Charlie was pointing out in Japan, it
hasn’t changed for decades.
So, if you wanted to inflate asset prices, you know, bringing down
interest rates and keeping them down — at first, nobody believed they’d
stay down there very long, so it reflects the permanence that people feel
will be attached to the lower rates. But when you get the 30-year bond
down to 2.8 percent, you know, you’re able to have transactions take place.
It makes houses more attractive.
I mean, it’s been a very smart policy, but the unwind of it, you know, has
got to be more difficult, by far, than buying. I mean, it is very easy if you’re
the Fed to buy 85 billion a month. I don’t know what would happen if they
started trying to sell 85 billion. Now, when you’ve got the banks with loads
of reserves there, it’d certainly be a lot easier than if those reserves had
already been deployed out into the real economy. Then you would really be
tightening things up. But you know, this is like watching a good movie, as
far as I’m concerned, because I do not know the end, and that’s what makes
for a good movie. So, we will be back here next year and I will tell you I
told you so and hope you have a bad memory. Charlie?
MUNGER: Well, I strongly suspect that interest rates aren’t going to
stay this low for hugely extended periods. But as I pointed out, practically
everybody has been very surprised by what’s happened, because what’s
happened would’ve seemed impossible to practically all intelligent people
not very long ago.
At Berkshire, of course, we’ve got this enormous float in the insurance
business, and our incremental float, when we’re carrying huge amounts of
cash, is worth less than it was in the old days. And that, I suppose, should
give some cheer to you people because if that changes, we may get an
advantage.
BUFFETT: Yeah, at the end of the first quarter, we had, whatever it
was, 48 or maybe 9 billion or something like that in short-term securities.
We’re earning basically nothing on that. We never stretch for yield in terms
of commercial paper that brings ten basis points more than Treasury. We
don’t count on anybody else, so we keep it in Treasuries, basically, and so
we’re earning nothing on that. So if we get back to an environment where
short-term rates are 5 percent, and we would still have the same amount,
then that would be a couple billion dollars of annual earnings, pretax, that
we don’t have now.
But of course, it would have lots of other effects in our business. We
have benefited significantly, and the country has benefited significantly, by
what the Fed has done in the last few years. And if they can successfully
pull off a reversal of this without getting a lot of surprises, you know, we
will all have been a lot better off.
Making loans vs. buying stock in credit crisis – 2012
Meeting
AUDIENCE: When you made investments during the financial crisis in
February of 2009, why did you lean towards debt instruments rather than
equity?
For example, why did you invest $300 million in Harley-Davidson at 15
percent interest instead of buying equity when the shares were at $12?
Today, they’re at $33.
BUFFETT: Well, I would say that if I were writing that question now, I
might write the same question. But I’m not so sure you would have written
the same question in February.
Now, there were different risk profiles, obviously, in investing. And the
truth is, I don’t know whether Harley Davidson equity is worth $33 or $20
or $45. I just have no view on that. You know, I kind of like a business
where your customers tattoo your name on their chest or something. But
figuring out the economic value of that, you know. I’m not sure even going
out and questioning those guys I’d learn much from them.
But I do know, or I thought I knew, and I think I was right, that, A)
Harley-Davidson was not going out of business. And that, B) 15 percent
was going to look pretty damned attractive. And the truth is, we could
probably sell those bonds, I don’t know, probably at 135 or something like
that. So we could have a very substantial capital gain, a lot of income. I
knew enough to lend them money; I didn’t know enough to buy the equity.
And that’s frequently the case.
And, you know, we love buying equities, but we love buying the
Goldman preferred at 10 percent. Now, let’s say Goldman, instead of
offering me the 10 percent preferred and warrants had said, “You can have a
12 percent preferred, non-callable,” I might have taken that one instead. I
mean, the callable — so there’s a tradeoff involved in all these securities.
And obviously, if I think I can make very good money, as we did on
Harley-Davidson, with a very simple decision, just a question of, “Are they
going to go broke or not?” as opposed to a tougher decision, “Is the
motorcycle market going to get diminished significantly? And, you know,
are the margins going to get squeezed somewhat?” And all of that. I’ll go
with a simple decision. Charlie?
MUNGER: Well, of course your one good answer, that you simply
didn’t know enough to buy the stock but you did know enough to buy the
bond, is a very good response. The other side to that is, after all, we are a
fiduciary for a lot of people, including people with permanent injuries and
et cetera, et cetera.
And to some extent, we are constrained by how aggressively we buy
stocks versus something else. And you mix those together, why, you get our
investment policy. I think, generally speaking, you raise a very good
question. I think very often, when you’re looking at a distress situation and
buy the bonds, you should have bought the stock. So I think you’re looking
in a promising area.
BUFFETT: Yeah. Ben Graham wrote about that in 1934, actually, in
“Security Analysis,” that in the analysis of senior securities, the junior
securities usually do better, but you may sleep better with the senior
securities. And we, as Charlie points out, we have 60 billion of liabilities to
people in our insurance operation that, in some cases, extend out for 50
years or more. And we would never have all of our money in stocks.
I mean, we might have very significant amounts, but we are running this
place so that it can stand anything. And a couple years ago, we felt very
good about where that philosophy left us. I mean, we actually could do
things at a time when most people were paralyzed, and we’ll keep running
it that way.
Low Interest rates are Hurting People Scared out of
Stocks – 2010 Meeting
AUDIENCE: Very short question. Please comment on the implications
of our existing, and perhaps continuing, zero percent interest rate.
BUFFETT: Well, it’s very tough for anybody that’s got their investment
in short-term money. You know, if you’re getting a tenth of a percent on
some money market fund currently that if you’d started doing that when
Columbus landed, and didn’t pay any taxes, you’d have almost doubled
your money by now. It’s really — I mean, people talk about easy money
policies, but it isn’t so easy on the people who’ve got the money. It won’t
go on forever, but it may seem like forever to people that are on fixed
income. I’m very sympathetic with them.
Basically they got, many of them, became fearful when the world was
looking like it was collapsing in late 2008. And the price they pay is really
in terms of returns and their purchasing power will be eaten away. But this
will end at some point. I don’t know how it will end, but I would not like to
be chairman of the Fed or secretary of the treasury. Nobody’s ever asked
me, but maybe that’s why I say I wouldn’t want to do it. But it won’t work
forever to run huge budget deficits and try and have very easy monetary
policy. And if we do run into trouble, the blame should not go to the Fed,
the blame should go to Congress.
MUNGER: In some sense, the reality of our situation is almost
amusingly depressing. Stocks are up because the return from loaning your
money out at interest in a safe way is so lousy, and of course, one answer is
that can’t last. In which case, stocks won’t be as pronounced a value,
relatively speaking. And of course, if it does last, as it has in Japan, we
won’t like that either because it will mean we’re mired in some horrible
stagnation. This is a very cheery message.
 BUFFETT: The pressure that is exerted by extremely low interest rates
on the value of everything else, it’s hard to overestimate that. I mean, the
reason people have their money out at one-tenth of 1 percent is that they’re
afraid of everything else. But as they’re being afraid of everything else
abates, as it has over the last couple years, the pressure to push stock prices
up, push real estate prices back up, it’s enormous.
And of course, that’s understood by people who have something to do
with those matters. But I don’t think you should underestimate the degree to
which the last year of stock prices has been a result of the agony that people
are being put through that keep their money in short-term money
instruments. Unless they’re terrified of the world, they get pushed into other
investments, and I think we’ve seen a lot of that, and we’ll see what
happens when money rates do go up, if they do.
Competing Against Government Guaranteed Debt is
one of Berkshire’s Disadvantage – 2010 Meeting
AUDIENCE: How does Berkshire’s strong balance sheet and credit
rating help take advantage of buying opportunities when even weak
financial companies can now borrow more cheaply than Berkshire by using
U.S. government guarantees of their debt?
BUFFETT: Yeah, well, as I pointed out in the annual report, we are at a
significant disadvantage in any financing-type business where we are
competing against people who are getting their funding and their financing
with a government guarantee. Our raw material costs us a lot more money.
And that’s particularly applicable at Clayton where we have 10 or $11
billion of, really, mortgage paper on mostly manufactured homes. And it’s
exceptionally good quality portfolio.
Kevin Clayton and the people at Clayton Homes have done a great job
in terms of lending responsibly. Our borrowers have behaved very well. But
the raw material to fund that portfolio — money — costs us a whole lot
more than some bank that’s in trouble. And that’s a real problem for us.
And it’s forcing us to try to come up with various other sources of funding
that portfolio where, one way or another, we get people with government
guarantees involved in the program. That’s just a fact of life with us now.
There are the blessed who have government guarantees. And there’re the
ones that aren’t.
 And of course, you see that dramatically, in the case of some companies
that have a government guarantee for part of their money and then sell other
bonds that aren’t guaranteed. I mean, just the other day, as I remember, I
may be wrong on this, but I think Goldman Sachs sold something with a
400 basis point spread that wasn’t guaranteed. Whereas their guaranteed
paper would be hundreds of basis points underneath that. General Electric
sold something earlier this year that wasn’t guaranteed. And the spread
between the guaranteed and the un-guaranteed was huge. We don’t have
anything guaranteed to sell, so we are not in that favored class in any way.
And we can’t become a bank holding company. So as long as the situation
goes on, we have to figure out ways that we adjust.
We only really use borrowed money in our utility business. But other
utilities are not in this favored class. I mean, the utility industry generally.
So our utility borrows money quite well, compared to most utilities.
MidAmerican’s credit is regarded as very good. And generally speaking,
we’ve raised our money at a lower rate, which benefits our customers in the
utility business. We don’t use much money in the rest of our businesses,
except for the financing at Clayton. And we won’t use much money. So we
get our money by float, basically.
And our float was $58 billion. I mentioned a little while ago, that Wells
Fargo raises its money in the first quarter at, I think, 1.12 percent — 112
basis points — which is very cheap. But our money’s cheaper. We can’t get
as much of it as Wells does. But we do have 58 billion that you would think
will cost us less than zero over time, although there will be given periods
when we have a cost to it. But we don’t have an answer for going head-to-
head against a government-sponsored business that can raise money with a
government guarantee. We do not have a way of going head-to-head with
them at any business, no matter how prudently we conduct our operations.
Charlie?
MUNGER: Well, of course we’re at a funding disadvantage. But on the
other hand, we aren’t regulated like a bank or a bank holding company. I
think we’d be pretty ungrateful if we took this one disadvantage that has
come to us and obsessed on it.
BUFFETT: I get those kind of lectures all the time.
 6
INVESTING TIPS

Learning, Accumulation of Knowledge & See’s Candy –

2017 Meeting
AUDIENCE: This question is for Mr. Munger. In your career of
thousands of negotiations and business dealings, could you describe for the
crowd which one sticks out in your mind as your favorite or is otherwise
noteworthy?
MUNGER: Well, I don’t think I’ve got a favorite. But the one that
probably did us the most good as a learning experience was See’s Candy.
It’s just the power of the brand, the unending flow of ever-increasing money
with no work. I’m not sure we would have bought the Coca-Cola if we
hadn’t bought the See’s.
I think that a life properly lived is just learn, learn, learn all the time.
And I think Berkshire’s gained enormously from these investment decisions
by learning through a long, long period. Every time you appoint a new
person that’s never had big capital allocation experience, it’s like rolling the
dice. And I think we’re way better off having done it so long. But the
decisions blend, and the one feature that comes through is the continuous
learning. If we had not kept learning, you wouldn’t even be here. You’d be
alive probably, but not here.
BUFFETT: There’s nothing like the pain of being in a lousy business to
make you appreciate a good one.
MUNGER: Well, there’s nothing like getting into a really good one
that’s a very pleasant experience and it’s a learning experience. I have a
friend who says, “The first rule of fishing is to fish where the fish are. And
the second rule of fishing is to never forget the first rule.” And we’ve gotten
good at fishing where the fish are. There are too many other boats in the
damn water. But the fish are still there.
BUFFETT: Yeah, we bought a department store in Baltimore in 1966.
And there’s really nothing like being in an experience of trying to decide
whether you’re going to put a new store in an area that hasn’t really
developed yet enough to support it, but your competitor may move there
first.
And then you have the decision of whether to jump in. And if you jump
in, that kind of spoils it. Now you’ve got two stores where even one store
isn’t quite justified. How to play those games, those business games — is
— you learn a lot by trying. And what you really learn is which ones to
avoid. I mean, you just stay out of a bunch of terrible businesses, you’re off
to a very great start, because we’ve tried them all.
Being Sensible, Opportunistic & Using the “Scuttlebutt
Method” to learn about an Industry – 2017 Meeting
AUDIENCE: Mr. Buffett, I have heard that Mr. Munger says your
greatest talent is that you’re a learning machine, that you never stop
updating your views. What are the most interesting things you’ve learned
over the last few years?
BUFFETT: Well, it is fun to learn. I would say Charlie is much more of
a learning machine than I am. I’m a specialized one, and he’s a much — he
does as well as I do in my specialty. And, then, he’s got a much more
general absorption rate than I have about what’s going on in the world. But,
you know, it’s a world that gets more fascinating all the time. And a lot of
fun can occur when you learn you were wrong on something.
That’s when you really learn that the old ideas really weren’t so correct.
And you have to adapt to new ones. Just the way the world’s unfolding, it’s
moving fast. I do enjoy trying, you know, to figure out not only what’s
going to happen, but what’s even happening now. But I don’t think I’ve got
any special insights that would be useful to you. But maybe Charlie does.
MUNGER: Well, I think buying the Apple stock is a good sign in
Warren. And he did run around Omaha and ask if he could take his
grandchildren’s tablets away. And he did market research. And I do think
we keep learning. And more important, we don’t unlearn the old tricks. And
that is really important.
You look at the people who try and solve their problems by printing
money and lying and so forth. Take Puerto Rico. Who would’ve guessed
that a territory of the United States would be in bankruptcy? Well, I
would’ve predicted it because they behave like idiots.
BUFFETT: And we did not buy any Puerto Rico bonds.
MUNGER: No. And if you go to Europe, you should look at the
government bond portfolios we’re required to hold in Europe. There’s not
only no Greek bonds, they’re the bonds of nobody but Germany.
Everywhere you look in Berkshire, somebody is being sensible. And that is
a great pleasure. And if you combine that with being very opportunistic so
that when something comes along like a panic, it’s like playing with two
hands instead of one on a game that requires two hands. It helps to have a
fair-sized repertoire. And, Warren, we’ve learned so damn much. There are
all kinds of things we’ve done over the last 10 years we would not have
done 20 years ago.
BUFFETT: I’ve mentioned this before. But one of the best books on
investment was written, I think, in 1958. I think I read it around 1960, by
Phil Fisher, called Common Stocks and Uncommon Profits. And he talked
about the importance of the “scuttlebutt method.” And, you know, that was
something I didn’t learn from Benjamin Graham. But every now and then,
it’s turned out to be very useful. Now, it doesn’t solve everything. In certain
cases, you actually can learn a lot just by asking a lot of questions. And I
give Phil Fisher credit. That book goes back a lot of years. But as Charlie
said, some of the companies he picked as winners forever did sort of peter
out on him.
But the basic idea is that you can learn a lot of things just by asking. For
example, if I was interested in coal, and if I went and talked to the heads of
10 coal companies and I asked each one of them, “If you had to go away for
10 years on a desert island and you had to put all of your family’s money
into one of your competitors, which one would it be and why?” And then,
you know, and then I’d ask them if they had to sell short one of their
competitors for 10 years, all their family money, why? And everybody
loves talking about their competitors. And if you do that with 10 different
companies, you’ll probably have a better fix on the economics of the coal
industry than any one of those individuals has.
I mean, there’s ways of getting at things. And sometimes they’re useful.
Sometimes, they’re not. But sometimes, they can be very useful. And, you
know, the idea of just learning more all the time about things, I’m more
specialized in that by far than Charlie. I mean, he wants to learn about
everything. And I just want to learn about something that’ll help Berkshire.
But it’s a very useful attitude to have toward the world. And, of course, I
don’t know who said it. But somebody said the problem is not in getting the
new ideas but shedding the old ones. And there’s a lot of truth to that.
MUNGER: We would never have bought ISCAR if it had come along
10 years earlier. We would never have bought Precision Castparts if it had
come along 10 years earlier. We are learning. And, my God, we’re still
learning.
How Prosperity Has Changed Berkshire’s Investment
Strategy - 2016 Meeting
AUDIENCE: In your 1987 letter to shareholders, you commented on
the kind of companies Berkshire likes to buy, those that required only small
amounts of capital. You said, quote, ‘Because so little capital is required to
run these businesses, they can grow, while concurrently making almost all
of their earnings available for deployment in new opportunities.’
Today the company has changed its strategy. It now invests in
companies that need tons of capital expenditures, are overregulated, and
earn lower returns on equity capital. Why did this happen?
BUFFETT: Yeah. Well, it’s one of the problems of prosperity. The ideal
business is one that takes no capital, but still grows, and there are a few
businesses like that, and we own some. We’d love to find one that we could
buy for $10 or $20 or $30 billion that was not capital intensive and we may,
but it’s harder. And that does hurt us, in terms of compounding earnings
growth, because, obviously, if you have a business that grows and gives you
a lot of money every year and doesn’t take it, it isn’t required in its growth.
You know, you get a double-barreled effect from the earnings growth that
occurs internally without the use of capital, and then you get the capital it
produces to go and buy other businesses.
And See’s Candy was a good example of that. I’ve used that. Back when
the newspaper business was good, our Buffalo newspaper was, for example,
was a good example of that. The Buffalo newspaper was making, at one
time, $40 million a year and had no capital requirement, so we could take
that whole $40 million and go and go buy something else with it. But
increasing capital acts as an anchor on returns in many ways. And one of
the ways is that, just in terms of availability, it drives us into businesses that
are much more capital intensive. You just saw a slide, for example, on
Berkshire Hathaway Energy, where we just announced, just in the last
couple of weeks, we announced a $3.6 billion investment coming up in
wind generation. And we pledged overall to have $30 billion in renewables.
Anything that Berkshire Hathaway Energy does, anything that BNSF
does, takes lots of money. We get decent returns on capital, but we don’t get
the extraordinary returns on capital that we’ve been able to get in some of
the businesses we acquire that are not capital intensive. As I mentioned in
the annual report, we have a few businesses that actually earn 100 percent a
year on true invested capital. And clearly, that’s a different sort of operation
than something like Berkshire Hathaway Energy, which may earn 11 or 12
percent on capital — and that’s a very decent return — but it’s a different
sort of animal than the business that’s very low capital intensive —
intensity. Charlie?
MUNGER: Well, when our circumstances changed, we changed our
minds.
BUFFETT: Slowly and reluctantly.
MUNGER: In the early days, quite a few times we bought a business
that was soon producing 100 percent per annum on what we paid for it and
didn’t require much reinvestment. If we’d been able to continue doing that,
we would have loved to do it, but when we couldn’t, we got to plan B. And
plan B is working pretty well. In many ways, I’ve gotten so I sort of prefer
it. How about you, Warren?
BUFFETT: Yeah, that’s true. When something’s forced on you, you
might as well prefer it. But, I mean, we knew that was going to happen.
And the question is, does it lead you from what looks like a sensational
result to a satisfactory result. And we don’t — we’re quite happy with a
satisfactory result. The alternative would be to go back to working with
very tiny sums of money, and that really hasn’t gotten a lot of serious
discussion between Charlie and me.
How to think about investments – 2018 Meeting
BUFFETT: I would like to just spend just a couple of minutes giving
you a little perspective on how you might think about investments, as
opposed to the tendency to focus on what’s happening today, or even this
minute, as you go through. And to help me in doing that, I’d like to go back
through a little personal history.
I have here a New York Times of March 12th, 1942. I’m a little behind
on my reading. And if you go back to that time, it was about, what? Just
about three months since we got involved in a war which we were losing at
that point. The newspaper headlines were filled with bad news from the
Pacific. And I’ve taken just a couple of the headlines from the days
preceding March 11th, which I’ll explain was kind of a momentous day for
me. And so you can see these headlines. We’ve got slide two up there, I
believe. And we were in trouble, big trouble, in the Pacific. It was only
going to be a couple months later that the Philippines fell, but we were
getting bad news.
On March 10th, when again, the news was bad: “Foe Clearing Path to
Australia.” And the stock market had been reflecting this. And I’d been
watching a stock called Cities Service preferred stock, which had sold at
$84 the previous year. It had sold at $55 the year - early in January, two
months earlier - and now it was down to $40 on March 10th. So that night,
despite these headlines, I said to my dad - I said, “I think I’d like to pull the
trigger, and I’d like you to buy me three shares of Cities Service preferred”
the next day. And that was all I had. I mean, that was my capital
accumulated over the previous five years or thereabouts. And so my dad,
the next morning, bought three shares.
Well, let’s take a look at what happened the next day. Let’s go to the next
slide, please. And it was not a good day. The stock market, the Dow Jones
Industrials, broke 100 on the downside. Now they were down 2.28 percent
as you see, but that was the equivalent of about a 500-point drop now. So
I’m in school wondering what is going on, of course. Incidentally, the New
York Times put the Dow Jones Industrial Average below all the averages
they calculated. They had their own averages, which have since
disappeared, but the Dow Jones has continued.
 So the next day the stock that was at 39 - my dad bought my stock right
away in the morning because I’d asked him to, my three shares. And so I
paid the high for the day. That 38 1/4 was my tick, which was the high for
the day. And by the end of the day, it was down to 37, which was really
kind of characteristic of my timing in stocks that was going to appear in
future years. But it was on what was then called the New York Curb
Exchange, then became the American Stock Exchange. But things, even
though the war, until the Battle of Midway, looked very bad and you’ll see
that the stock did rather well. I mean, you can see where I bought at 38 1/4.
And then the stock went on, actually, to eventually be called by the
Cities Service Company for over $200 a share. But this is not a happy story
because, I sold it early and made $5 on it. It was, again, typical of my
behavior. But when you watch it go down to 27, you know, it looked pretty
good to get that profit.
Well, what’s the point of all this? Well, we can leave behind the Cities
Service story, and I would like you to, again, imagine yourself back on
March 11th of 1942. And as I say, things were looking bad in the European
theater as well as what was going on in the Pacific. But everybody in this
country knew America was going to win the war. I mean, it was, you know,
we’d gotten blindsided, but we were going to win the war. And we knew
that the American system had been working well since 1776.
So I’d like you to imagine that at that time you had invested $10,000.
And you put that money in an index fund - we didn’t have index funds then
- but you, in effect, bought the S&P 500. Now I would like you to think a
while about how much that $10,000 would now be worth, if you just had
one basic premise, just like in buying a farm you buy it to hold throughout
your lifetime and you look to the output of the farm to determine whether
you made a wise investment. You look to the output of the apartment house
to decide whether you made a wise investment if you buy an apartment -
small apartment house - to hold for your life.
And let’s say, instead, you decided to put the $10,000 in and hold a piece
of American business, and never look another stock quote, never listen to
another person give you advice or anything of this sort. I want you to think
how much money you might have now. And now that you’ve got a number
in your head, we’ll get the answer. You’d have $51 million. And you
wouldn’t have had to do anything.
 You wouldn’t have to understand accounting. You wouldn’t have to look
at your quotations every day like I did that first day when I’d already lost
$3.75 by the time I came home from school. All you had to do was figure
that America was going to do well over time, that we would overcome the
current difficulties, and that if America did well, American business would
do well.
You didn’t have to pick out winning stocks. You didn’t have to pick out
a winning time or anything of the sort. You basically just had to make one
investment decision in your life. And that wasn’t the only time to do it. I
mean, I can go back and pick other times that would work out to even
greater gains. But as you listen to the questions and answers we give today,
just remember that the overriding question is, “How is American business
going to do over your investing lifetime?” I would like to make one other
comment because it’s a little bit interesting.
Let’s say you’d taken that $10,000 and you’d listened to the prophets of
doom and gloom around you, and you’ll get that constantly throughout your
life. And instead, you’d used the $10,000 to buy gold. Now for your
$10,000 you would have been able to buy about 300 ounces of gold. And
while the businesses were reinvesting in more plants, and new inventions
came along, you would go down every year in your - look in your safe
deposit box - and you’d have your 300 ounces of gold. And you could look
at it, and you could fondle it, and you could - I mean, whatever you wanted
to do with it.
But it didn’t produce anything. It was never going to produce anything.
And what would you have today? You would have 300 ounces of gold just
like you had in March of 1942, and it would be worth approximately
$400,000. So if you decided to go with a nonproductive asset - gold -
instead of a productive asset, which actually was earning more money and
reinvesting and paying dividends and maybe purchasing stock - whatever it
might be - you would now have over 100 times the value of what you
would have had with a nonproductive asset.
In other words, for every dollar you had made in American business,
you’d have less than a penny by - of gain - by buying in this store of value,
which people tell you to run to every time you get scared by the headlines
or something of the sort. It’s just remarkable to me that we have operated in
this country with the greatest tailwind at our back that you can imagine. It’s
an investor’s haven - I mean, you can’t really fail at it unless you buy the
wrong stock or just get excited at the wrong time.
But if you owned a cross-section of America and you put your money in
consistently over the years, there’s no comparison against owning
something that’s going to produce nothing. And frankly there’s no
comparison with trying to jump in and out of stocks and pay investment
advisors. If you’d followed my advice, or this retrospective advice - which
is always so easy to give - If you’d follow that, there’s one problem. Your
friendly stock broker would have starved to death.
But the truth is, you would have been better off doing this than a very,
very, very high percentage of investment professionals have done, or people
have done that are active that - it’s very hard to move around successfully
and beat, really, what can be done with a very relaxed philosophy.
And you do not have to know as much about accounting or stock market
terminology or whatever else it may be, or what the Fed is going to do next
time and whether it’s going to raise three times or four times or two times.
None of that counts at all, really, in a lifetime of investing. What counts is
having a philosophy that you stick with, that you understand why you’re in
it, and then you forget about doing things that you don’t know how to do.
Capital-intensive businesses are good enough – 2018
Meeting
AUDIENCE: I’m eight years old and live in New York City. I’ve been a
shareholder for two years and this is my second annual shareholders
meeting. Berkshire Hathaway’s best investments on which the company
built its reputation have been in very capital-efficient businesses such as
Coke, See’s Candy, American Express, and GEICO.
But recently, Berkshire has made really big investments in a few
businesses that require huge capital investments to maintain and that offer
only a regulated low rate of return such as Burlington Northern Railroad.
My question to you, Mr. Buffett, is could you please explain why
Berkshire’s largest recent investments have been departed from your old
capital-efficient philosophy? And why specifically have you invested
Burlington Northern instead of buying a capital-efficient company like
American Express?
BUFFETT: I’m just sitting here thinking which of the six panelists
we’re going to bump next year and put you in. Well, I thought I was doing
well when I bought that City Service at 11. The answer is that we always
prefer the businesses that earn terrific returns on capital, like a See’s Candy
when we bought it or a good many of the businesses. And, you know,
American Express earns a terrific return on equity, and has for a very long
time. The fact that we buy a Burlington - BNSF, Burlington Northern -
means that, essentially, we can’t get more money deployed in capital-light
businesses at prices that make sense to us. And so we have gone into more
capital-intensive businesses that are good businesses.
But wouldn’t it be wonderful if we could run the railroad without trains,
and track, and tunnels, and bridges, and a few things? We get a decent
return on the capital-intensive businesses. We bought most of them at very
decent prices, and they’ve been run very well since we bought them. We
still love a business that takes very little capital and earns high returns, and
continues to grow, and requires very little incremental capital. We can’t
deploy as much money as we have in doing that. And so as the second-best
choice, still a good choice, the answer is yes. It’s not as good as the best
choice. Charlie?
MUNGER: Yes, I like the aspiration of that young lady. She basically
wants her royalty on the other fellow’s sales. And of course that’s a very
good model, and if everybody could do that, why, nobody would do
anything else. The reason we’re satisfied with our utility returns and our
railroad returns is they’re quite satisfactory. And we - and the - quite
satisfactory. I wish we had two more just like them. Don’t you, Warren?
BUFFETT: Definitely.
MUNGER: So the answer is they’re good enough, and you’re asking us
to get perfection if you would want us to have all our money in Coke at, say
five percent of what it’s now selling for.
BUFFETT: Yeah. And a business like Apple really doesn’t take much
capital. But - so, you’ve got to spend a lot of money to buy businesses like
that. Very few are for sale. And the answer is we have not foregone any
opportunity to buy businesses that earn high returns - very high returns - on
equity capital, when we could buy them at a sensible price, to buy these
other businesses. So they haven’t shoved anything else off the table. But
you are - you definitely have a job in our capital allocation department.
Investing doesn’t require advanced learning – 2018
Meeting
 AUDIENCE: Warren, you and Charlie have been critical of business
schools in the past and what they teach. With respect to value investing, in
“Superinvestors of Graham-and-Doddsville,” you featured the returns of
many great investors with different backgrounds’ work in education, with
the lesson being, “Following the philosophy is the key.”
To be successful today, does it still just fall back to chapter eight of “The
Intelligent Investor?” And what do you think of programs and designations
such as CFA, CFP, et cetera, which purport high standards yet root it
heavily into academia?
BUFFETT: I went to three business schools, and at each I found a
teacher or two. I went to one specifically to get a given teacher. But at each
one of them I found a teacher or two that I really got a lot out of. So we’re
not anti-business school here at all. We do think that the priesthood, say, 30
years ago, for example, in terms of efficient market theory and everything.
They strayed pretty far, in our view, from the reality of investing. And I
would rather have a person - if I could hire somebody among the top five
graduates of number one, two or three of the business schools, and my
choice was somebody that had - was bright - but had chapter eight of “The
Intelligent Investor” absolutely - it just was natural to them - they had it in
their bones, basically - I’d take the person from chapter eight.
What we do is not a complicated business. It’s got to be a disciplined
business, but it does not require a super IQ or anything of the sort. And
there are a few fundamentals that are incredibly important, and you do have
to understand accounting. And it helps to get out and talk to consumers and
start thinking like a consumer in many ways in certain - and all of that. But
it just doesn’t require advanced learning. And I certainly didn’t want to go
to college, so I don’t know whether I would have done better or worse if I’d
just quit after high school, you know, and read the books I read and all of
that. I think that if you run into a few great teachers, and they really change
the way you see the world to some degree, you know, you’re lucky. And
you can find them in - you can find them in academia and you can find
them in ordinary life.
And I’ve been extraordinarily lucky in having great teachers, including
Charlie. I mean, Charlie’s been a wonderful teacher. And, you know -
Anyplace you can find somebody that gives you insights into things you
didn’t understand before, maybe makes you a better person than you would
have been before, you know, you get - that’s very lucky, and you want to
make the most of it. If you can find it in academia, make the most of it. And
if you can find it in the rest of your life, make the most of it. Charlie?
MUNGER: Well, when you found Ben Graham he was unconventional,
and he was very smart. And of course, that was very attractive to you. And
then when you found out it worked and you could make a lot of money
while you’re sitting on your ass, of course you were an instant convert.
But the world changed. Before he died, Ben Graham recognized that the
exact way he sought undervalued companies wouldn’t necessarily work for
all times under all conditions. And that’s certainly the way it worked for us.
We gradually morphed into trying to buy the better companies when they
were underpriced, instead of the lousy companies when they were
underpriced. And of course, that worked pretty well for us. And Ben
Graham, he outlived the game that he played personally most of the time.
He lived to see most of it fade away.
I mean, just to find some company that’s selling for one third of its
working capital, and figure out it could easily be liquidated and distribute
$3 for every dollar of market price. Lots of luck if you can find those in the
present market. And if you can find them, they’re so small that Berkshire
wouldn’t find them of any use anyway. So we’ve had to learn a different
game. And that’s a lesson for all the young people in the room. If you’re
going to live a long time, you have to keep learning.
What you formerly knew is never enough. So if you don’t learn to
constantly revise your earlier conclusions and get better, you’re like a one-
legged man in an ass-kicking contest.
BUFFETT: If anybody has suggestions for another metaphor, send them
to me. Graham, incidentally, one point, important point. Graham was not
scalable. I mean, you could not do with really big money. And when I
worked for Graham-Newman Corp, here he was, the dean of all analysts.
And you know, he was an intellect above all others around that time. But
our - the investment fund was $6 million, and the partnership that worked in
tandem with the investment company also had about $6 million in it. So we
had 12 million bucks we were working with. Now, you can make
adjustments for inflation and everything. But it was just a tiny amount. It
wasn’t really scalable.
And the truth is that Graham didn’t care, because he really wasn’t
interested in making a lot of money for himself. So he had no reason to
want to find something that could go on and on, become larger and larger.
And so the utility of chapter eight, in terms of looking at stocks as a
business, is of enormous value. The utility of chapter 20 about a margin of
safety is of enormous value. But that’s not complicated stuff.
MUNGER: I finally figured out why the teachers of corporate finance
often teach a lot of stuff that’s wrong. When I had some eye troubles very
early in life, I consulted a very famous eye doctor. And I realized that his
place of business was doing a totally obsolete cataract operation. They were
still cutting with a knife after better procedures had been invented. I said,
“Why are you in a great medical school performing absolute obsolete
operations?” And he said, “Charlie, it’s such a wonderful operation to
teach.”
Well, that’s what happens in corporate finance. They get these formulas,
and it’s a fine teaching experience. You give them a formula, you present
the problem, they use the formula. You get a real feeling of worthwhile
activity. There’s only one there. It’s all balderdash.
Don’t envy people making money from risky behavior –
2016 Meeting
AUDIENCE: Hi, Warren and Charlie. Great to see you. This annual
meeting reminds me of the magical world of Hogwarts, of Harry Potter.
This arena is our Hogwarts. Warren, you are our Headmaster and Professor
Dumbledore.
BUFFETT: I haven’t read Harry Potter, but I’ll take it as a compliment.
AUDIENCE: Charlie is our Headmaster Snape, direct, and full of
integrity. The magic of long-term, concentrated, value investing is real, yet
similar to Harry Potter, the rest of the world doesn’t believe we exist. Your
letter to me has changed my life.
Your “Secret Millionaire’s Club” has changed my children’s life. They
go to class chatting about investing. My question is for my children
watching at home today and the children in the audience. How should they
look at stocks, when every day in the media they see companies that have
never made a dime in their life go IPO? They’re dilutive and they see a lot
of very short-term spin. The cycle is getting shorter and shorter. How
should they view stocks, and what’s your message for them?
Finally, Cora and I would love to thank you in person and shake your
hand personally today. I’ll repeat what I said last year: thank you for putting
— setting — the seeds for my generation to sit in the shade, and for my
children’s generation to sit in the shade with the “Secret Millionaire’s
Club.” I truly walk amongst giants. Thank you.
BUFFETT: “The Secret Millionaire’s Club,” we want to give great
credit to Andy Heyward on that. I think it has helped — I know it’s helped
— thousands and thousands of children and Andy — it was Andy’s idea —
and it grows in strength. And having young children learn good lessons, in
terms of handling money, and making friendships, and just generally
behaving as better citizens is a great objective, and Andy makes it easy for
them to do. So, on his behalf, I accept your comments.
You don’t really have to worry about, you know, what’s going on in
IPOs, or people making money. People win lotteries every day, but there’s
no reason to have that effect you at all. You shouldn’t be jealous about it. I
mean, you know, if they want to do mathematically unsound things, and one
of them occasionally gets lucky, and they put the one person on television,
and the million that contributed to the winnings, with the big slice taken out
for the state, you know, it’s nothing to worry about.
Just, all you have to do is figure out what makes sense. And when you
buy a stock, you get yourself in the mental frame of mind that you’re
buying a business, and if you don’t look at a quote on it for five years, that’s
fine. You don’t get a quote on your farm every day or every week or every
month. You don’t get it on your apartment house, if you own one. If you
own a McDonald’s franchise, you don’t get a quote every day. You know,
you want to look at your stocks as businesses, and think about their
performance as businesses. Think about what you pay for them, as you
would think about buying a business. And let the rest of the world go its
own way. You don’t want to get into a stupid game just because it’s
available. And I’m going to say a little more about that close to the break.
But with that, I’ll turn it over to Charlie.
MUNGER: Yeah, well, I think that your children are right to look for
people they can trust in dealing with stocks and bonds. Unfortunately, more
than half the time, they will fail, in a conventional answer. So you they have
a hard problem. If you just listen to your elders, they’ll lie to you and spread
a lot of folly.
Characteristics for predictable earnings – 2015 Meeting
AUDIENCE: My question is this: can you name at least five
characteristics of a company that gives you confidence to predict its
earnings ten years out in the future? And can you also use IBM as a case
study, how we check all those boxes?
MUNGER: We don’t have a one-size-fits-all system for buying
businesses. They’re all different, every industry is different, and we also
keep learning. So what we did ten years ago, we hopefully are doing better
now. But we can’t give you a formula that will help you.
BUFFETT: Now, if you’re looking at the BNSF railroad as we were in
2009 or if you’re looking at Van Tuyl in 2014, there are a lot of things that
go through our minds. And most of the things that go through our minds are
things that will stop us from going further. And there are a lot of things that,
if we see it in a business, including, maybe, who we’re dealing with, will
stop us from going on to the next layer. But it’s very different in different
businesses.
We are looking for things where we do think we’ve got some reasonable
fix on how it’s going to look in five or ten years, and that does eliminate a
great many businesses. But it’s not the same five questions at all. Certainly,
when we’re buying a business where we’re going to have somebody that’s
selling it to us continue to run it for us, you know, a very big question is,
you know, do we really want to be in partnership with this person and count
on them to behave in the future when they don’t own the business, as they
behaved in the past when they do own the business. And that stops a fair
number of deals.
But we don’t have a list of five. Or if we do, Charlie has kept it from me.
Buy smaller companies instead of waiting for an
“elephant?” – 2014 Meeting
AUDIENCE: If Berkshire’s size is expected to be an ongoing constraint
for growth, does it make more sense for the firm to target a larger collection
of smaller companies that are growing faster and can do so for a longer
period of time, rather than looking to bag a big elephant that is in all
likelihood already reached maturity, leaves the firm to sit on larger-than-
normal cash balances for a longer period of time, even if it means paying a
higher price for the growth? And if the answer is no, then what is the
opportunity cost to Berkshire shareholders for keeping a lot of excess cash
on hand until the right deal comes along?
BUFFETT: Well, the answer to the first is one doesn’t preclude the
other. You know, we’d be delighted to buy some company for 2 or 3 billion
that we thought would do very well over time. But that applies to one for 20
or 30 billion. Now, if you get down to buying one for a couple hundred
million, that may fit one of our subsidiaries to do that that knows the
business.
But we’re not passing up anything of any size that can have any real
impact on Berkshire. And like I say, our subsidiaries made 25 tuck-ins last
year, and they’ll keep making more. They’ll see things that fit them. But
one, you know, one $30 billion deal is ten $3 billion deals, and a hundred
$300 million deals. So, in terms of the reality of how we build a lot more
earning power into Berkshire, which is what we’re trying to do, our main
emphasis should be on bigger deals. Charlie?
BUFFETT: Yeah, there’s lots of competition for the small deals. I mean,
private equity is going after all kinds of small deals. In fact they just keep
selling them to each other to some degree. We don’t feel envious when we
look at what they’re doing, in the least. But that doesn’t mean we can’t find
an occasional small business that fits in and that will do well. It’s not going
be the future of Berkshire, though. But I want to emphasize one does not
preclude the other.
Questions About Stock strategy – 2013 Meeting
AUDIENCE: First of all, thank you, Warren, for sharing all your
information. You’ve changed my life. I took finance in university, couldn’t
understand Greek formulas, but now I can invest reasonably well.
My question to you is, in the past you’ve said for an investor, you should
simply stick money in an index fund and let it go and don’t worry about it.
Those 1 percent of investors, choose your best five stocks and put a
substantial amount of money in it. I’m just wondering, how about a strategy
of, perhaps, buying 20 of the best stocks in America, you know, Procter &
Gamble, Coca-Cola, Johnson & Johnson, whatever, the companies that
have been around for centuries and just leaving it at that. Do you think that
that would outperform an index fund over the long term? And I want
Charlie’s opinion as well.
BUFFETT: Well, I don’t know whether you’re saying the 20 largest
companies or the 20 best. You might get different thoughts from different
people on what they are. But probably the 20 you would pick would
virtually match the results of an index fund. Who knows exactly which ones
would be the best?
 But the real distinction — and Graham made this in his book, basically
— is between the person who is going to spend an appreciable amount of
time becoming something of an expert on businesses, because that’s what
stocks are, or the person who is going to be busy with another profession,
wants to own equities, and actually will actually do very well in equities.
But the real problem they have is that they may tend to get excited about
stocks at the wrong time.
You know, the idea of buying an index fund over time is not to buy
stocks at the right time or the right stocks. It’s to avoid buying them at the
wrong time, the wrong stocks. So equities will do well over time, and you
just have to avoid getting excited when other people are excited, or getting
excited about certain industries when other people are, trying to behave like
a professional when you aren’t spending the time and bringing what’s
needed to the game to be a professional. And if you’re an amateur investor,
there’s nothing wrong with being an amateur investor, and you’ve got a
very logical, profitable course of action available to you, and that is simply
to buy into American business in a broadly diversified way and put your
money in over time.
So I would say your group of 20 will probably match an index fund, and
you’ll probably do well in that, and you will do well in an index fund.
Charlie?
MUNGER: Well, I have nothing to add. I do think it’s — that knowing
the edge of your own competency is very important. If you think you know
a lot more than you do, well, you’re really asking for a lot of trouble.
BUFFETT: Yeah. And that’s true outside of investments, too.
MUNGER: Yes. Works particularly well in matrimony.
AUDIENCE: You have mentioned that you are 85 percent Benjamin
Graham and 15 percent Phil Fisher, and you have also said that if you only
had $1 million today, you could generate 50 percent returns. Since I’m a
young investor, this is my question for the both of you: how was your
investment strategy different when you were still accumulating money as
opposed to managing billions? Did you focus on specific industries, small
cap, large cap, et cetera? Thank you.
BUFFETT: Well, managing a million dollars is an entirely different
game than running Berkshire Hathaway, or running some 20 or $50 billion
fund of money. And if Charlie and I were running a million dollars now or
100,000 we’d be looking at some very small things. We would be looking
for small discrepancies in certain situations. And the opportunities are out
there, and periodically, they’re extraordinary. But that’s something we really
don’t think about anymore because our problem is handling 12 or 14
billion, or whatever it might be, coming in every year, and that means we
have to be looking for very big deals and forget about what we used to do
when we were very young. Charlie?
MUNGER: I used to make big returns on my float on my own income
taxes. Between the time I got the money and I paid it to the government, I
frequently made enough money to pay the tax. It was working for small
amounts of money and doing it on most things.
Don’t invest in countries or categories – 2013 Meeting
AUDIENCE: People around the globe have benefited a lot from your
philosophies, so you have fans — even a lot of fans — even in China. My
question is: how did you see investments in emerging markets where
Berkshire is spend its investments in places like China? If yes, what kind of
industries and companies you are interested in? Thank you.
BUFFETT: Yeah. We don’t really start out looking to either emerging
markets or specific countries or anything of the sort. We may find things,
you know, as we go around, but it isn’t like Charlie and I talk in the
morning and we say, you know, it’s a particularly good idea to invest in
Brazil or India or China or whatever it may be. We’ve never had a
conversation like that. It just won’t happen.
We don’t think that’s where our strength is. We know that our strength is
not there. And we think, probably, most people’s strength isn’t there either. I
mean, it sounds good, but I don’t really think it’s the best way to look at
investments. We owned a lot of PetroChina at one time. We own some BYD
now. We’ve owned securities outside the United States and will continue to.
But if you told us that we could only invest in the United States the rest of
our lives, we would not regard that as a huge hardship, would we, Charlie?
MUNGER: Yeah. It’s a great way to sell investment advice, to have a
whole lot of different categories, lots of commissions, lots of advice, lots of
action. And a lot of things we don’t feel we’ve got enough of an edge so
that we want to play.
BUFFETT: When we hear somebody talking concepts, of any sort,
including country-by-country concepts or whatever it might be, we tend to
think that they’re probably going to do better at selling than at investing.
It’s what people expect to hear when somebody comes calling that, you
know, today we think you ought to be looking at this or that around the
world. The thing to do is just find a good business at an attractive price and
buy it.
MUNGER: Our experts really like Bolivia. And you say, “Well, last
year you liked Sri Lanka.” It’s just — we’re not comfortable with that.
 Take advantage when “Mr. Market” acts like a
“psychotic drunk” – 2012 Meeting
AUDIENCE: This question comes from a man who believes the stock
— that Berkshire stock — is being held down some by your talking about
the Buffett Rule. I know you said you doubt that, but he suspects that at
least 95 percent of the people in this arena believe that Berkshire Hathaway
stock is undervalued. If you don’t think it’s the Buffett Rule, could each of
you give us your opinions about why the stock stays stuck at these levels?
BUFFETT: Yeah. We’ve run Berkshire now for 47 years. There have
been several times — oh, four or five times — when we’ve thought it was
significantly undervalued. We saw the price get cut in half at least four
times — or roughly in half — in fairly short periods of time. And I would
say this: if you run any business for a long period of time, there are going to
be times when it’s overvalued and sometimes when it’s undervalued.
Tom Murphy ran one of the most successful companies [Capital Cities]
the world has ever seen, and in the early 1970s, his stock was selling for
about a third of what you could have sold the properties for. And, you
know, Berkshire, back in 2000/2001, whenever it was that I wrote in the
annual report that we were also going to repurchase shares, was selling at
what I thought was a very low price, and we didn’t get any repurchase.
But the beauty of stocks is they do sell at silly prices from time to time.
That’s how Charlie and I have gotten rich. You know, Ben Graham writes
about it in Chapter 8 of the Intelligent Investor. Chapters 8 and Chapters 20
are really all you need to do to get rich in this world. And Chapter 8 says
that in the market you’re going to have a partner named “Mr. Market,” and
the beauty of him as your partner is that he’s kind of a psychotic drunk —
— and he will do very weird things over time and your job is to remember
that he’s there to serve you and not to advise you. And if you can keep that
mental state, then all those thousands of prices that Mr. Market is offering
you every day on every major business in the world, practically, that he is
making lots of mistakes, and he makes them for all kinds of weird reasons.
And all you have to do is occasionally oblige him when he offers to
either buy or sell from you at the same price on any given day, any given
security. So it’s built into the system that stocks get mispriced, and
Berkshire has been no exception to that. I think Berkshire, generally
speaking, has come closer to selling around its intrinsic value, over a 47-
year period or so, than most large companies. If you look at the range from
our high to low in a given year and compare that to the range high and low
on a hundred other stocks, I think you’ll find that our stock fluctuates
somewhat less than most, which is a good sign. But I will tell you, in the
next 20 years, Berkshire will someday be significantly overvalued, and at
some points significantly undervalued. And that will be true for Coca-Cola
and Wells Fargo and IBM and all of the other securities that I just don’t
know in which order and at which times.
But the important thing is that you make your decisions based on what
you think the business is worth. And if you make your buy and sell
decisions based on what you think a business is worth, and you stick with
businesses that you think you can value, you simply have to do well in
stocks. The stock market is the most obliging, money-making place in the
world because you don’t have to do anything. You know, you sit there with
thousands of businesses being priced at the same price for the buyer and the
seller, and you don’t have to do anything.
Compare that to any other investment alternative you’ve got. I mean,
you can’t do that with farms. If you own a farm and the guy has the farm
next to you and you’d kind of like to buy him out or something, he’s not
going to name a price every day at which he’ll buy your farm or sell you his
farm, but you can do that with Berkshire Hathaway or IBM. It’s a
marvelous game. The rules are stacked in your favor, if you don’t turn those
rules upside down and start behaving like the drunken psychotic instead of
the guy that’s there to take advantage of it. Charlie?
MUNGER: Well, what’s interesting about this place is I think we’ve
had a lot more fun and we got rich enough so we bought businesses and
stocks to hold instead of to resell. It’s an enormously more constructive life.
So as fast as you can work yourself into our position, the better off you’ll
be.
BUFFETT: And you should be very encouraged by the fact he’s only 88
and I’m only 81. Just think, it may take you a little while.
Making money by trading oil is too hard – 2011 Meeting
AUDIENCE: I invest primarily in commodities and commodity
equities. I started out back 2007 buying oil. In the summer of 2008, we
reached the peak of the oil bubble. That’s when I reversed my holdings and
started shorting oil. I made a nice profit. In 2009, I started buying oil again
and oil equities, and I’ve been doing pretty well.
But given the status of the world today and the price of oil, I’m
questioning my investments. Is this another oil bubble? Has oil reached its
peak? Should I keep my holdings? Should I short oil? Should I exit oil
altogether and move into other commodities or other investments? So my
question to you is, what your sentiments regarding oil?
BUFFETT: Well, I would say you’ve done a whole lot better than we
have. I think the crowd would rather hear from you. We actually did take a
position in oil — I don’t know how many years ago.
It wasn’t that long ago though, incidentally. That was in the 1990s,
although we’ve seen oil a lot cheaper than that. East Texas Oil sold for a
dime a barrel in 1932. We really don’t know. I mean, obviously, you’re
dealing with a finite resource.
I don’t know whether the world is up to 88 million barrels or it was
down around 85 million barrels, but there’s got to be some comeback, so I
wouldn’t be surprised if the current figure is getting pretty close to 88
million barrels a day. That’s a lot of oil to take out of the ground every day.
And, of course, it is a finite number. So, the one thing I can promise you is
— almost promise you — is that oil will sell for a lot more someday.
Interestingly enough, how many producing oil wells do you think there are
in the United States? The answer is something like 500,000. You know,
there’s these stripper wells, there’s wells out near Charlie that have been
going for a hundred years.
But we have looked in a lot of places now. And what’s happening, of
course, from the standpoint of United States companies, is that the smaller
countries where oil is being found now are quite a bit smarter about how
they grant their concessions than people were 50 or 75 or 100 years ago, so
that they drive much more intelligent deals than was originally the case
when we went exploring around the world. But I have no idea — you know,
traditionally, BNSF had hedged a certain amount of oil and — because they
obviously use huge quantities of diesel — I really didn’t think we could
guess the price of oil. And I thought if we could guess the price of oil, we
didn’t need to run the railroad.
I mean, it took a lot of effort, time to run that railroad. And if we know
how to make money just sitting in a room trading oil, why not do that
instead? So in terms of Berkshire’s parent company policies, we don’t
hedge anything in the way of commodities. Some of our subsidiaries do,
and that’s fine. They’re responsible for their businesses. But there are very,
very few commodities that I’ve ever thought I would know the direction of
their movement in the next six months or a year. The one thing I’m quite
convinced of, as we talked about this morning, is the fact the dollar will
become less valuable over time, so that the dollar price of most things will
go up, and maybe go up very substantially.
Whether they go up enough so that you have the same amount of
purchasing power after you pay tax on your nominal gains is another
question. I really think that an intelligent person can make more money,
over time, thinking about productive assets rather than speculating in
commodities, or for that matter, fixed dollar investments, but that’s maybe
my own bias. Charlie?
MUNGER: Well, if we’d done nothing but oil from the very beginning,
I’m confident that we would not have done nearly as well as we have. To
me, that’s perfectly obvious. So I think what we’ve done is much easier
than what you’re trying to do.
BUFFETT: And we like easy.
MUNGER: We’re not trying to make it any more difficult than we have
to.
BUFFETT: I really don’t know any way to have an edge in that sort of
activity. I mean, if you are going to try and figure out whether when to be
long or short oil, or natural gas, or copper or cotton or whatever, I don’t
know of people who I feel would have an edge in trying to do that over the
next 10 years. But I do know people where I think they’d have a very
significant edge in investing in common stocks, and maybe distressed
bonds, for that matter, too.
MUNGER: Yeah, trading oil worked best of all for the people who
bribed Nigeria. That’s not our milieu.
BUFFETT: Well, that’s an insight I hadn’t heard before.
Societal issues are important but don’t affect investment
decisions – 2011 Meeting
AUDIENCE: Given your interest in renewable energy and natural
resources, I wonder if you’d be willing to share your thoughts on how a
world of limited and depleting clean water supplies and declining food
stocks affects your investment strategies and thinking on the future.
 BUFFETT: Yeah, I would say it’s an important subject but it doesn’t
affect our investment strategy to any real degree. In other words, you know,
we would love to buy another GEICO. We would love to buy another
BNSF. We’d love to buy another MidAmerican. And we look at those
businesses over a long time frame, but we are looking at what we expect
their earning power to be three, five, 10, 15 years down the road compared
to what we are paying. So I would say that there are a number of societal
issues that really do not enter into our investment or purchase of business-
type decisions. Charlie?
MUNGER: Well, I would advise not paying too much attention to the
clean water issue. If there’s enough energy, you can always get enough
clean water. Israel sometimes goes month after month making half its water
from sea water. With enough energy, the water problem goes away. And
that’s very helpful in considering the future. And regarding the agricultural
productivity, I think one of the main reasons for being restrained in the use
of hydrocarbons is that modern agriculture won’t work without them.
So I’m a great believer in being conservative, in terms of blowing all the
hydrocarbons on heating houses and running cars. Think of how happy
we’d be if we’d taken a bunch of that dollar oil in the Middle East and just
carted it here and put it in salt caverns. I mean you could argue that we
really screwed up the past, and you could argue all the people who think
that our main solution is to drill, drill, drill. They’re all nuts.
It’s probably quite wise to use up the other fellow’s hydrocarbon while
preserving our own. It’s not going away because we are not drilling it now.
But you can see that this will lead into unproductive discussion.
Don’t compare opportunities now to your best-ever deal
– 2011 Meeting
AUDIENCE: This question is from Mike Rifkin. He wants to ask about
five transactions you’ve made in recent years with very different terms.
Goldman, 5 billion at 10 percent plus warrants; GE, five billion at ten
percent plus warrants; Dow Chemical, 3 billion at 8.5 percent convertible to
common; Wrigley- M&M Mars, 4.4 billion at 11.45; Swiss Re 2.7 billion at
12 percent. Now, why the different interest rates you set and how about why
the warrants in some cases, and why did the rich Mars family need 4.4
billion to do a deal, and at 11.45 percent?
 BUFFETT: Well, we’ll let the Mars family speak for themselves. But in
terms of comparing those five deals, it was 3 billion with GE, and the Mars
deal actually involved a $2.1 billion preferred stock, which has some usual
characteristics, so you have to look at it as a package. But the important
thing is that every one of these deals was done at a different time, although
the Goldman and the GE deals were done in close proximity with each
other. And market conditions — you know, you heard Charlie in the movie
talk about opportunity costs.
Our opportunity costs were different in every single one of those five
transactions. And incidentally, I could have done a much better job of
allocating our money, you know, in terms of the post-panic period. I was
early on Goldman and GE, compared to the situation five months later. But,
you know, we not only don’t have perfect foresight, sometimes it’s pretty
bad. But when I did the Swiss Re deal, I was not thinking about the Dow
Chemical deal, which was committed to, maybe, a year-plus earlier. I was
thinking about what else I could do with $2.7 billion, and that’s the way all
the decisions are made.
So they’re not related to each other. They go through a mind that is
looking at everything available that day, including the amount of cash we
have, the likelihood of being able to do something else next week or next
month, what else we can do that day. And past deals we’ve made don’t
really make any difference. In fact, one of the errors people make in
business is that they try and measure every deal against the best deal
they’ve ever made.
So they say, you know, I made this wonderful deal for, maybe, an
insurance policy written, or it might be a company bought, it might be a
stock bought, and they’re determined that they’re never going to make a
deal that isn’t that attractive in the future. So sometimes they take
themselves out of the game. The goal is not to make a better deal than
you’ve ever made before. The goal is to make a satisfactory deal that’s the
best deal you can make at the time. And Charlie relates it to marriage, and
I’ll let him expand on that.
MUNGER: Of course, we’re going to make different deals at different
times based on different opportunity costs. There’s no other rational way to
make deals.
 There will always be opportunities to overperform –
2010 Meeting
AUDIENCE: I’m starting a career in investing, and many, if not most,
investors my age think they’re value investors. Also, there’s a record
number of people here to see you this year, and the same value investors
who were laughed at three years ago are now celebrated by the financial
press. Will there be fewer metaphorical $100 bills left on the street going
forward, and if so, should I look for a career in managing a business instead
of managing money?
BUFFETT: There will probably be fewer, but I would say there will
always be opportunities if you’re not working with large amounts of money.
The money manager — there’s a basic conflict. There’s conflicts in most
businesses. Everybody’s pointing out the conflicts now in the investment
banking business. But the investment management business has a conflict
that’s equally as significant in the fact that asset gathering can become a
way more important part of your income than asset managing. But if you
manage moderate sums of money, I think there will always be opportunities
to overperform.
That doesn’t mean lots of people are going to do it, but they will be out
there. And, you know, it might have been easier many years ago when there
were fewer people looking and not as much information was available on
the internet and all that. But people still make the same mistakes and they
still get — well, I’ll give you an illustration.
Charlie has a company called the Daily Journal Company. And the Daily
Journal Company has a bunch of cash. And it sat there with cash, and it sat
there with cash, and I own 100 shares — which is all he’ll let me own —
and I got their annual report here a while back. And in their fiscal year of
2009, they never bought stocks before that I’d seen, and all of a sudden
they’d bought $15 million worth of stocks and they were worth 45 million.
So by sitting around for a while, but waiting until things got really
ridiculous in certain cases, he put $15 million out that became 45 million
within, probably, a six month period or so.
So opportunities come around. You have to be prepared to grab them
when they come. And you can’t do it with the kind of money that we’re
running. With moderate amounts of money, I think there will always be
opportunities. Charlie’s going to tell you something more pessimistic now,
probably.
 MUNGER: Yes. One piece of advice that Warren frequently gives —
and it’s particularly useful to those going into money management — take
the high road. It’s far less crowded.
BUFFETT: Alan Simpson used to say, he said, “Those who take the
high road in Washington are seldom bothered by heavy traffic.” But getting
to the last part of your question, there’s going to be opportunities for talent,
whether it’s in money management, operating management, whatever. It’s
going to work.
Money management, you know, is easier to scale up and easier to get
into and all of that. So it was certainly my natural inclination, in any event.
I would not have wanted to work my way up to plant superintendent until I
got a job at the top, you know, about the time they were going to give me a
gold watch. But there’s opportunities in both places.
Short-term stock moves aren’t predictable and don’t
matter – 2010 Meeting
AUDIENCE: Back in October of 2008, you highly recommended
buying U.S. stocks and that was a brilliant idea, it worked very well. And I
just want to get your opinion how you think about the market going
forward. Are you still that optimistic, and what’s a reasonable rate of return
to expect from equities in the next decade or so?
BUFFETT: Well, I write articles very infrequently, or get interviewed
very infrequently, on the subject of the general level of the market itself.
Probably only four or five times in 40 years have I really declared myself
about the general level of the stock market. And it turned out I was pretty
premature, actually, in October of 2008, as was pointed out to me by a
number of people.
But what I said in that article really was that it would be way better to
own stocks over the long term than to follow a policy of buying either long-
term bonds or holding cash. And I knew I could make that statement
eventually I’d be proven right on that. But I don’t know what the stock
market’s going to do next week, or next month, or next year. I don’t have
any idea. People always think I do. I know I don’t have any idea, I don’t
think about it, I can’t recall a discussion we’ve ever had on it, basically.
But I do think over the next 10 years or 20 years, I’d much rather own
equities than cash, or I’d much rather own them than a 10 or 20-year bond.
But that’s partly because I’m very unenthusiastic about the alternatives. I
think equities are likely to give you some real modest positive real return
over time. But beyond that I really don’t know anything. Charlie?
MUNGER: That’s a cheerful thought that equities are the best of a bad
lot of available opportunities.
BUFFETT: You disagree with it?
MUNGER: No, I think you’re right. I think people should get
accustomed, on average, to doing less well in their investment portfolios, in
real terms. I think we’re in for a long period of where the ordinary result is
not going to be very exciting.
BUFFETT: But we like owning businesses. And we’re in a position
where we can own entire businesses, but we also like partial ownership of
businesses. And we want to own businesses where we really think they
have some competitive advantage over time, and where we feel good about
the management, and where we think the price is reasonably attractive. I
think you can find things like that now, but they aren’t dramatically
attractive at all. They do beat, in my view, they do beat holding cash or five,
10, or 20-year bonds.
You Can’t make money if you’re scared when everyone
else is scared – 2010 Meeting
AUDIENCE: I have read an enormous amount about past market
declines and the opportunities they presented to investors. The last two
years have seemed to me, a 43-year-old investor, a real opportunity. Yet in
the thick of the action, I was too scared, because I felt the market decline,
while severe, was not necessarily sufficient to match the risks of global
financial meltdown.
So my question is, given that we are possibly not totally out of the
woods, how did the two of you assess this latest buying opportunity against
the previous opportunities of your life?”
BUFFETT: It’s not the greatest one. We’ve seen a few that scream at us,
and we’ve seen a few periods of overvaluation that scream at us. And 90
percent of the time we’re somewhere in between and we don’t know exactly
where we are in between. The business of being scared, you know, I don’t
know what you do about that.
If you have a temperament that when others are fearful you’re going to
get scared yourself, you know, you are not going to make a lot of money in
securities over time, in all probability. But think how much more rational
investing in a farm is than the way many people buy stocks. If you buy a
farm, do you get a quote next week, do you get a quote next month? If you
buy an apartment house, do you get a quote next week or month? No, you
look at the apartment house or the farm and you say, “I expect it to produce
so many bushels of soy beans and corn, and if it does that, it meets my
expectations.” If they buy a stock and they think if it goes up it’s wonderful,
and if it goes down it’s bad.
We think just the opposite. When it goes down we love it, because we’ll
buy more. And if it goes up, it kills us to buy more. And if you can’t get
yourself in that mental attitude, you’re going to be scared whenever
everybody else is scared.
And to expect somebody else to tell you when to buy and therefore get
your courage back up or something, you know, I could get this fellow’s
courage up substantially by saying this is a wonderful time to buy, and then
a week from now he’d run into somebody else that tells him the world is
coming to an end and he’d sell. I mean, he’s a broker’s friend, but he’s not
going to make a lot of money. Charlie?
MUNGER: Yeah, I think I developed more courage after I learned I
could handle hardship. So maybe you should get your feet wet with a little
more failure.
BUFFETT: I’ve certainly followed that advice. No, some people really
don’t have the temperament, or emotional stability, or whatever it may be,
to invest in securities. They’d be much better off if there were no quotations
at all. And Keynes talked about that some in the past, too. To take
something that should be an asset, a quotation every day, you know, terrific
liquidity, nobody says, “How liquid is my farm?” or something of the sort.
So they’re not expecting the prices to tell them something about how
they’re doing.
The market is saying this or that. Whenever anybody says, “The market
is saying this or that,” you know, it’s sort of unbelievable. But there’s a lot
of interest in investing, and people are going to yak about it all the time.
And in the end, what counts is buying a good business at a decent price, and
then forgetting about it for a long, long, long time. And some people can do
it and some people can’t.
 7
BUSINESS PHILOSOPHY

“We really want products where people feel like kissing

you” – 2018 Meeting
AUDIENCE: Our question for you is how you go about attempting to
forecast the degree of future success of one specific product in a good
business versus another, such that you invest in American Express and
Coca-Cola rather than Diners Club or RC Cola, for example.
BUFFETT: Well, with American Express, it was an interesting
situation, because Diners Club got there first. I think American Express, in
a certain sense went into the credit card business because they were worried
about what was going to happen to traveler’s checks. Although traveler’s
checks still exist in a significant way.
But the interesting thing when American Express went into competition
with Diners Club, and with Carte Blanche, as I remember that - which also
existed at the time - was that instead of charging less than Diners Club and
going in figuring they were going against the established guy and they’d
come in at a lower price, they went in it at a higher price, as I remember.
And the American Express centurion was on that card. I’ve got one that I
got in 1964, but they were in it before that. It had more value in time. I
mean, it got better representation.
And frankly, if you were a salesperson out with somebody, and you
could pull out that American Express card with that centurion, you looked
you were JP Morgan. And if you pulled out the Diners Club, it had a whole
bunch of flashy symbols, you looked like a guy that was kiting his checks
from one month to the next, and Ralph Schneider and Al Bloomingdale
developed the Diners Club. And they were very smart about getting there
first, but they weren’t smart about how they merchandised it subsequently.
RC Cola, you know, there are all kinds of colas that came after Coke. I
mean, you know, you go back to 1886 and come up with something at
Jacobs’ Pharmacy that’s incredibly successful, you know, fairly soon you’re
going to get lots of imitators. But Coke really is the real thing. And you
know, you offer me RC Cola and say, “I’ll give it to you at half the price of
Coca-Cola,” in terms of drinking it, I mean, just, this is a product that’s 6
1/2 ounces, sold for a nickel in 1900, you know. And now if you buy it on
the weekend and buy it in large quantities and everything, you’re not paying
that much more. This newspaper was three cents in 1942, you know. I
mean, the amount of enjoyment per real - in terms of the real - of what you
pay for this, has gone dramatically down in inflation-adjusted money. So it
is a bargain product.
You know, you have to look at - See’s Candy, you know, if you live in
California and you were a teenage boy, and you went to your girlfriend’s
house and you gave the box of candy to her or to her mother or father and
she kissed you, you know, you lose price sensitivity at that point. So we
really want products where people feel like kissing you, you know rather
than slapping you.
It’s an interesting thing. I mean, you know, in effect we’re betting on the
ecosystem of Apple products, but - led by the iPhone. And I see
characteristics in that that make me think that it’s extraordinary. But I may
be wrong. And you know, so far we’ve been - I would say we’ve been right
on American Express and Coca-Cola. American Express had this huge
salad oil scandal in 1960 happen in ’63, November, right around the time
[President John] Kennedy was shot. And there was really worry about
whether the company would survive. But nobody quit using the card.
Nobody quit using the traveler’s checks. And they charged a premium price
for their traveler’s checks. So there are things you can see around consumer
products that sometimes can give you a pretty good insight into the future.
And then sometimes we make mistakes.
BUFFETT: We want to see a lot of - if we’re talking about a consumer
product - we want to see how a consumer product behaves under a lot of
different circumstances, and then we want to use something - actually, there
was a book by Phil Fisher written around 1960 called “Common Stocks and
Uncommon Profits.” It’s one of the great books on investing. And it talks
about the “scuttlebutt method” of investing, which was quite a ways from
what Ben Graham taught me in terms of figures. But it’s a very, very good
book.
And you can learn a lot, you know, just by going out and using some
shoe leather. Now they call them channel checks now or something like
that. But you can get a feel for some products, and then there are others you
can’t. And then sometimes you’re wrong. But it is a good technique. It’s an
important investing technique, I would say that. And Ted [Weschler] and
Todd [Combs] do a lot of that. And they have people - some people that
help them out on doing it, too. Charlie’s done it with Costco.
I mean, all the time he is finding new virtues in Costco, you know, and
then it - and he’s right, incidentally. I mean, Costco has an enormous appeal
to its constituency. They surprise and delight their customers. And there is
nothing like that in business. You have delighted customers, you’re a long
way home.
There are going to be marauders at the moat – 2017
Meeting
AUDIENCE: There has been more news than usual in some of
Berkshire’s core stock holdings. Wells Fargo in the incentive and new
account scandal, American Express losing the Costco relationship and
playing catch-up in the premium card space, United Airlines and customer
service issues, Coca-Cola and slowing soda consumption. How much time
is spent reviewing Berkshire’s stock holdings? And is it safe to assume, if
Berkshire continues to hold these stocks, that the thesis remains intact?
BUFFETT: Well, we spend a lot of time thinking about them, those are
very large holdings. If you add up American Express, Coca-Cola, and Wells
Fargo, I mean, you’re getting up, you know, well into the high tens of
billions of dollars. And those are businesses we like very much. There are
different characteristics.
 In the case of United Airlines, we actually are the largest holder of all
four of the four largest airlines. And that is much more of an industry
thought. But all businesses have problems. And some of them have some
very big plusses.
If you read American Express’s first quarter report and talk about their
Platinum Card, the Platinum Card is doing very well. The gains around the
world. You know, I think there were 17 percent or something like that in
billings in the U.K. and 15 percent is original currency — or the local
currency — Japan, Mexico, and very good in the United States. There’s
competition in all these businesses. We did not buy American Express or
Wells Fargo or United Airlines, Coca-Cola, with the idea that they would
never have problems or never have competition.
The reason we bought them is we thought they had very, very strong
hands. And we liked the financial policies in the cases of many of them. We
liked their position. We’ve bought a lot of businesses. And we do look to
see where we think they have durable competitive advantage. And we
recognize that if you’ve got a very good business, you’re going to have
plenty of competitors that are going to try and take it away from you. And
then you make a judgment as to the ability of your particular company and
product and management to ward off competitors. They won’t go away, but
we think — I’m not going to get into specific names on it — but those
companies generally are very well-positioned.
If you’ve got a wonderful business, even if it was a small one like See’s
Candy, you basically have an economic castle. And in capitalism, people
are going to try and take away that castle from you. So, you want a moat
around it, protecting it in various ways that can protect it. And then you
want a knight in the castle that’s pretty darn good at warding off marauders.
But there are going to be marauders. And they’ll never go away.
And if you look at — I think Coca-Cola was 1886. American Express
was 18 — I don’t know — ’51 or ’52 — starting out with an express
business. Wells Fargo was — I don’t know what year they were started.
Incidentally, American Express was started by [Henry] Wells and [William]
Fargo as well. So these companies had lots of challenges. And they’ll have
more challenges. And the companies we own have had challenges. Our
insurance business has had challenges.
But, you know, we started with National Indemnity’s $8 million
purchase in 1968. And fortunately, we’ve had people like Tony Nicely at
GEICO. And we’ve had Ajit Jain, who’s added tens of billions of value.
And we’ve got some smaller companies that you probably don’t even know
about, but really have done a terrific job for us. So there’ll always be
competition in insurance, but there’ll always be things to do that a really
intelligent management with a decent distribution system, various things
going for him, can do to ward off the marauders. So I — there was a
specific question, “How much time is spent reviewing the holdings?” I
would say that I do it every day. I’m sure Charlie does it every day. Charlie?
MUNGER: Well, I don’t think I had anything to add to that, either.
BUFFETT: We’ll cut his salary if he doesn’t participate here.
Berkshire’s $20B cash cushion is an absolute minimum
– 2017 Meeting
AUDIENCE: I understand that Berkshire is much more liquid than is
ideal right now with a 113 billion of consolidated cash and bonds versus
policyholder float of 105 billion. But I have trouble calculating how much
incremental buying power Berkshire has at any point in time.
You’ve talked about having a minimum of 20 billion in cash on a
consolidated basis. But for regulatory, risk control, or liquidity purposes, is
there some minimum amount of float beyond the 20 billion that has to be in
cash bonds or, say, preferred stocks? Or can all but 20 billion be put into
either common stocks or invested into wholly-owned businesses if you
found attractive opportunities?
BUFFETT: Yeah.
AUDIENCE: What does the balance sheet look like if you were fully
invested? And where does additional debt fit into the equation, if at all?
BUFFETT: Yeah. I wouldn’t conflate the cash and the bonds. I mean,
when we talk about 20 billion in cash, we can own no bond beyond that.
Twenty billion would be the absolute minimum.
As a practical matter, I never — Since I’ve set 20 billion as a minimum,
I’m not going to operate with 21 billion any more than I’m going to see a
highway, a truck sign that says maximum load 30,000 pounds or something
and, then, drive 29,800 across it. So, we won’t come that close. But the
answer is that, A, we could use — we’re not inclined to use debt.
Obviously, if we found something that really lit the — lit our fire — we
might use some more debt, although that’d be a — it’s unlikely under
today’s circumstances. But we can — Twenty billion’s an absolutely
minimum.
You can say that because I say 20 billion’s an absolute minimum, it
probably wouldn’t be below 24 or 25. And we could do a very large deal if
we thought it was sufficiently attractive. I mean, we have not put our foot to
the floor on anything for really a very long time. But if we saw something
really attractive — We spent 16 billion back when we were much smaller in
a period of two or three weeks in the fall of 2008. And we never got to a
point where it was any problem for me sleeping at night. And now, we,
obviously, have a lot more money to put out.
So, Charlie, at what point, if I called you, would you say, “I think that’s
a little bit big for us today?”
MUNGER: I would say about $150 billion.
BUFFETT: Well, in that case, I’ll call you.
Float still useful despite low interest rates – 2016
Meeting
AUDIENCE: My question concerns the float generated by Berkshire’s
insurance companies. In Mr. Buffett’s 2015 annual letter, he said that the
large amount of float that Berkshire possesses allows the company to
significantly increase its investment income.
But what happens when interest rates decline? If the U.S. were to
implement negative interest rates in the same way that the eurozone and
Japan have done, how would Berkshire be affected?
BUFFETT: Yeah, well some of our float actually exists in Europe,
where we have the problem of negative interest rates on very high-grade
and short-term and medium-term bonds — and obviously anything that
reduces the value of having money is going to affect Berkshire, because
we’re always going to have a lot of money.
Because we have so much capital, and so many sources of earning
power, we have the ability, quite properly, to use our float in ways that most
insurance companies can’t think about. So we can find things to do, but
sometimes we get, you know we — we’ve got fifty-odd billion of short-
term government securities now, and we’re going to get another $8.3
billion, in all likelihood, early in June when our Kraft Heinz preferred is
called, so we’ll be back over 60 billion again very soon.
 So we’ve got 60 billion out, that’s out at, say, a quarter of 1 percent.
Well, the difference between a quarter of 1 percent and minus a quarter of 1
percent, you know, is not that great. I mean, it’s almost as painful to have 60
million out at a quarter of a percent, as to have it out at a negative rate.
Float is not worth as much to insurance companies now as it was 10 years
ago or 15 years ago. And that’s true at Berkshire.
I think it’s worth considerably more to us than it is to the typical
insurance company, because I think we have a broader range of options as
to what to do with it. But there’s no question about it, that having a lot of
money around now is not just a problem for insurance companies. It’s a
problem for retirees.
It’s a problem for anybody that’s stuck with fixed-dollar investments and
finds that their income now is a pittance or, you know, in Europe, perhaps a
negative rate. And that was not something in their calculation at all 15 years
ago. We love the idea, however, of increasing our float. I mean that money
has been very useful to us over time. It’s useful to us today, even under
present conditions, and it’s likely to be very useful to us in the future. It’s
shown as a liability, but it’s actually a huge asset.
We like to look at micro factors – 2016 Meeting
AUDIENCE: My question for both of you is related to psychological
biases. Through Berkshire Hathaway’s operations, you get a very good read
on macroeconomic factors. Yet, Berkshire does not make investment
decisions based upon macroeconomic factors.
How do you control the effect of information, such as knowing
macroeconomic factors, or the anchoring effect of knowing stock prices,
because after a while it’s hard not to once you’ve analyzed them before?
And how does that influence your rational decision making, whether you
should ignore it, or whether you should try to use it in a positive way?
MUNGER: If you talk about macro, we don’t know any more than
anybody else.
BUFFETT: He summed it up. In terms of the businesses we buy, and
when we buy stocks, we look at it as buying businesses, so they’re very
similar decisions — we try to know all, or as many as we can know, of the
microeconomic factors. I like looking at the details of a business whether
we buy it or not. I mean, I just find it interesting to study the species, and
that’s the way you do study it. So I don’t think there’s any lack of interest in
those factors or denying the importance of them. So am I getting his
question or not, Charlie?
MUNGER: Well, there hardly could be anything more important than
the microeconomics. That is business. Business and microeconomics is sort
of the same term. Microeconomics is what we do, and macroeconomics is
what we put up with.
AUDIENCE: The anchoring effect, I mean, how do you deal with that
as well?
MUNGER: Well, we’re not anchored to what we’re ignoring.
BUFFETT: But Charlie and I are the kind that literally find it
interesting in every business — we like to look at micro factors. If we buy
— when we buy a See’s Candy in 1972, you know, there may have been
140 shops or something. We’ll look at numbers on each one, and we’ll
watch them over time, and we’ll see how third-year shops behave in the
second year — we really like understanding businesses.
It’s just interesting to us. And some of the information is very useful,
and some of it may look like it’s not helpful, but who knows when some
little fact stored in the back of your mind pops up and really does make a
difference. So, we’re fortunate in that we’re doing what we love doing. I
mean, we love doing this like other people like watching baseball games,
and which I like to do, too. But just the very act, every pitch is interesting,
and every movement, you know, and whether the guy’s — you know, a
double steal is interesting, or whatever it may be, and so that’s what our
activity is really devoted to, and we talk about that sort of thing.
MUNGER: We try and avoid the worst anchoring effect, which is
always your previous conclusion. We really try and destroy our previous
ideas.
BUFFETT: Charlie says that if you disagree with somebody, you want
to be able to state their case better than they can.
MUNGER: Absolutely.
BUFFETT: And at that point, you’ve earned the right to disagree with
them.
MUNGER: Otherwise, you should just keep quiet. It would do wonders
for our politics if everybody followed my system.
We’ve avoided the self-destructive behavior – 2016
Meeting
 AUDIENCE: Warren, what elusive, yet obvious to you, truth has
allowed you to think ahead of the crowd and build a clear mental
framework to produce a historically significant institution powerhouse
brand? And, Charlie, same to you, what obvious truth presents itself so
clearly to you, but many would fervently disagree with you upon?
BUFFETT: I owe a great deal to Ben Graham in terms of learning about
investing. And I owe a great deal to Charlie, in terms of learning a lot about
business. And then I’ve also been around — I mean, I spent a lifetime, you
know, looking at businesses and why some work and why some don’t work.
You know, as Yogi Berra said, you can see a lot just by observing. And
that’s pretty much what Charlie and I have been doing for a long time.
And you do — I mentioned pattern recognition earlier — and I would
say it’s important to recognize what you can’t do. So we may have tried the
department store business and a few things, but we’ve generally tried to
only swing at things in the strike zone, and our particular strike zone. And it
really hasn’t been much more complicated than that. You do not need the
IQ in the investment business that you need in certain activities in life. But
you do have to have emotional control.
I mean, we see very smart people do very stupid things, and it’s
fascinating how humans do that. Just take the people that get very rich and
then leverage themselves up in some way that they lose everything. I mean,
they are risking something that’s important to them for something that isn’t
important to them. Well, you can say, you could figure that one out in first
grade, but people do it time after time. And you see that constantly, self-
destructive behavior of one way or another. I think we’ve probably — and it
doesn’t take a genius to do it, but I think we’ve sort of avoided the self-
destructive behavior. Charlie?
MUNGER: Well, there’s just a few simple tricks that work well, and
particularly if you’ve got a temperament that has a combination of patience
and opportunism in it. And I think that’s largely inherited, although I
suppose it can be learned to some extent. Then I think there’s another factor
that accounts for the fact that Berkshire has done as well as it has, is that
we’re really trying to behave well. And I had a great-grandfather. When he
died, the preacher gave the talk, and he said none envied this man’s success,
so fairly won and wisely used. That’s a very simple idea, but it’s exactly
what Berkshire’s trying to do.
 There are a lot of people who make a lot of money and everybody hates
them, and they don’t admire the way they earned the money. And I’m not
particularly admirable of making money running gambling casinos. And,
you know, we don’t own any. And we’ve turned down businesses, including
a big tobacco business. So, I don’t think Berkshire would work as well if we
were just terribly shrewd, but didn’t have a little bit of what the preacher
said about my grandfather, Ingham. We want to have people think of us as
having won fairly and used wisely. It works.
BUFFETT: And we were very, very lucky to be born when we were and
where we were. And I mean, you could’ve dropped us at some other place
in time or some other part of the world, and things would’ve turned out
much differently.
MUNGER: And think of how lucky you were to have your Uncle Fred.
Warren had an uncle who was one of the finest men I ever knew. I used to
work for him, too. You know, a lot of people have terrible relatives.
Any company with an economist has one employee too
many – 2015 Meeting
AUDIENCE: This question concerns two indicators, Warren, that you
have discussed in the past about the general level of the stock market. The
first one is the percentage of total market cap relative to the U.S. GNP,
which you have said is probably the best single measure of where
valuations stand at any given moment.
This indicator is at about 125 percent. That is the ratio of total market
cap to U.S. GNP, and that’s about what it was when Warren talked about
this back in 1999 just before the — shortly before — the bubble broke.
The second indicator, which you mentioned in a famous 1999 speech
that subsequently became an article in Fortune, is the corporate profits — is
corporate profits — as percent of GNP. You had said at the time that that
number ranged between 4 percent to 6 1/2 percent over a long period of
time, which I believe was 1951 to 1999. Well, as of Friday, it is about 10
1/2 percent, according to the St. Louis Federal Reserve site. That is way
above the range you had mentioned.
Are the current levels of either one, or both, of these indicators a matter
of concern for the general investing public?
BUFFETT: Well, the second figure, which is the profits as a percentage
of GDP, might be a concern for other segments of society because what it
indicates is that American business has done wonderfully well in recent
years. And I know what a terrible disadvantage it has, because of U.S. tax
rates and a host of other things, you know, the facts are that American
business has prospered incredibly.
And the first comparison is very much affected by the fact that we live
in an interest rate environment, which Charlie and I probably would have
thought was almost impossible, not too many years ago. And, obviously,
profits are worth a whole lot more if the government bond yield is 1
percent, than they’re worth if the government bond yield is 5 percent.
So it gets back — and, you know, Charlie in that movie talked about
alternatives and opportunity cost. And for many people, the opportunity
cost is owning a lot of bonds, which pay practically nothing, or owning
stocks, which are selling at fairly high prices historically, but they weren’t
selling at those historic prices with interest rates like this.
So I look at those numbers, but I also look at them in the context of the
fact that we’re living in a world that has incredibly low interest rates, and
the question is how long those are going to prevail. Is it going to be
something like Japan that goes on decade after decade, or will we be back
to what we thought was normal interest rates? If we get back to what are
normal interest rates, stocks at these prices will look pretty high. If we
continue with these kinds of interest rates, stocks will look very cheap. And
now I’ve given you the answer and you can take your pick. Charlie?
MUNGER: Well, since we failed to predict what happened, and what
exists now, why would anybody ask us what our prediction is in the future?
BUFFETT: Incidentally, the one thing I can assure you, Charlie and I,
to my knowledge, or my memory, I can’t recall ever us making an
acquisition or turning down one based on macro factors. We talk about
deals when they come along, but whether it was See’s Candy, or whatever it
might have been, the Burlington Northern we bought at a terrible time, in
general economic conditions. But we don’t know what the next 12 months,
24 months, 30 — we know we don’t know what that’s going to look like.
But it doesn’t really make any difference if we’re buying a business to
hold for a hundred years. What we have to do is figure out what’s likely to
be the average profitability of the business over time and how strong its
competitive mode is and that sort of thing. So, people have trouble
believing that. They think we talk about it. We think any company that has
an economist, you know, certainly, has one employee too many.
 Great brands will survive and the great retailers will do
well – 2015 Meeting
AUDIENCE: When we look at the body of work that the firm has put
together in the consumer staples universe, Anheuser-Busch, InBev, Burger
King, Tim Hortons, and now Kraft Heinz, one gets the sense that they view
the average consumer staples firm as being undermanaged, with a potential
for substantially greater levels of profitability.
Given the ongoing struggles of many packaged food firms, most of
which compete in a mature category against private label and/or store brand
offerings that undercut them in price and diminish the value of their brands,
and many of them having to deal with large retailers, like Walmart, that
provide meaningful sales volumes but are also quite demanding and
continuously pushing for the lowest price available, do you see the potential
for further consolidation in the industry with a firm like Kraft Heinz
emerging as a big consolidator? Or do you feel that Nestle’s more recent
squawking about the deal, and 3G Capital’s reputation as being a bit heavy-
handed with cost cutting, being enough to keep further consolidation at
bay?
BUFFETT: Well, there will be deals in the future. I mean, there are
bound to be. But the strong brands — you know, just look at the ones that
General Foods added in the 1980s and the ones that Kraft has now that
come from that same company.
And, I mean, Coca-Cola sold more cases of beverages last year than any
year in their history and they’ll sell more this year. I mean, a strong brand is
really potent stuff. I mean, take Heinz Ketchup or something of the sort. It’s
60 percent brand share in the United States, but it’s much higher in many
other countries.
So you’ll always have the fight between the retailer and the brand, and
the retailer is going to use all the pressure they’ve got and, therefore, the
brand has to stand for something in the consumer’s mind. Because, in the
end, the retailer may want to shift to a house brand, a private label, but
private labels have been around forever in the soft drink field. I mean, I can
remember when I was looking at Cott Beverage and all of those and
thinking, what will it do to us? I remember when Sam Walton sent me the
first six-pack. He told me, it’s the first six-pack of Sam’s Cola, 20 years
ago, and believe me, Walmart has plenty of power, but so does Coca-Cola.
And the brand, you’ve got to nourish them.
 You know, you’ve got to take very, very, very good care of them. They
have to stand for the promise that’s in people’s mind about them. But I
don’t know how many dozens, or maybe hundreds, of cola beverages there
have been over the years. RC Cola. You know, they came up with the first
diet product back in the early ’60s, and that looked like a big maneuver.
Wilkinson came up with the blade back in the ’60s after Gillette, but
Gillette ends up with 70 percent, by dollar value, worldwide of razor blades
after 100 years.
So you’ve got to protect a brand. You’ve got to enhance it in every way.
You’ve got to get a promise in people’s minds that gets delivered that way.
But that’s the question Charlie and I faced in 1972 when we looked at See’s.
See’s was selling for $1.95 a pound, Russell Stover was selling a little
cheaper, and you had to decide how much damage could a Russell Stover
do if they came after See’s, and they copied our shops, and all that sort of
thing.
If you protect a brand — if you got a terrific brand and you protect it,
it’s a fabulous asset. But you’ll always have trouble dealing with Costco
and Walmart and the rest of the guys — Kroger, you name it, you know,
they’re tough, too. But the great brands will survive and the great retailers
will do well. Charlie?
MUNGER: Well, we’ve almost exhausted this topic. There’s no
question about the fact that waves of layoffs frighten people. A job is a very
important part of a person’s life, and it’s no small thing to lose it. But on the
other hand, what would our country be if we kept everybody on the farms?
All this prosperous group would be pitching hay and milking cows at 4:00
in the morning. No, we need our businesses to be right sized.
No tears for corporations on taxes – 2015 Meeting
AUDIENCE: I believe you are two of the most knowledgeable and
authoritative people on planet Earth on the U.S. tax code. Our tax code is
obviously broken at both the individual and the corporate levels. Today, we
have 2.1 trillion in offshore corporate cash sitting there not being brought
home. We have the highest corporate tax rates in the world, and for high-
income earners in the U.S., other than hedge fund managers, in states like
New York and California, an all-in rate greater than 50 percent. What can
be done to effect real change to bring about a simpler, more rational tax
code? Thank you.
 BUFFETT: Well, it takes 218 members of the House of Representatives
and 51 U.S. senators, and a president that will sign the bill. The question is:
how much you think the country should spend and then from whom do you
get it? And I would point out that despite the tax rates that all the corporate
chieftains complain about, the share of earnings — share of GDP —
accounted for by corporate profits is at a record.
Corporate taxes 40 years ago were 4 percent of GDP. They’re now
running about 2 percent. They’ve decreased significantly while payroll
taxes have increased. You know, it’s a real question. And once you get
special provisions in the code, it is really hard to get rid of them, absent a
major revision of the code. I actually think both Ron Wyden and Orrin
Hatch, the two ranking members, Senate Finance Committee, I think
they’re capable of working out something that neither one of them likes but
they both like it better than what exists now, and I think it can be made
considerably more rational. But in the end, if we’re going to spend 21 or 2
percent of GDP, we should probably raise 19 percent of GDP.
We can take a gap of a couple percent without getting further into debt
as a proportion of GDP than we are, so we’ve got that leeway. But, you
know, you take 19 percent of 17 1/2 trillion, or thereabouts, and you’re
talking, as Senator Dirksen said one time, real money. And how much you
get from corporations, how much you get from individuals, how much you
get from estate taxes, you know, it’s a fight up and down the line. So in
terms of the cash abroad, basically you can bring it back, you just have to
pay tax at U.S. corporate rates.
And our corporate rates are 35 percent. Charlie and I, a good bit of our
life, operated with corporate rates of 52 percent, later at 48 percent, and the
country grew well. American business prospered during that period. I don’t
shed any tears for American business, in terms of the tax rate overall. I
think there could be a much more equitable code, in terms of the corporate
tax, but I do not think that the 2 percent of GDP that’s being raised from
corporate taxes, which is far lower than was the percentage 30 or 40 years
ago, I do not think that’s an onerous number. And for people who are
getting 1/4 or 1/2 percent on their CDs, who have retired, and with
American business earning, on tangible equity, which is the way they
measure it, you know, probably averaging close to 15 percent, I think equity
holders are getting treated extraordinarily well compared to debt holders in
this economy. (Scattered applause) Charlie?
 MUNGER: Well, I agree with you, and I don’t die over these little
differences in the tax code, either. I live in California, of course, where —
there’s, like, a 13 1/2 percent tax on long-term capital gains, nondeductible
for federal purposes. That’s a ridiculous kind of a tax to have in California
because it drives rich people out.
Hawaii and Florida have enough sense to know that rich people don’t
commit a lot of crimes, they don’t burden the schools, and they provide a
whole lot of medical expenditures that are good for everybody else’s
income. I think California has a really stupid tax policy. But I don’t think
the U.S. — but I don’t think the U.S. policy is — — I don’t think the U.S.
policy is bad at all.
But it’s amazing. The idea of driving the rich people out, Florida is so
much smarter than California on that subject. And it is really demented.
Who in the hell doesn’t want rich people coming in and spending in their
state?
BUFFETT: Yeah, yeah. Remember that as you come here to Nebraska
for the meeting. I would say I really do think there’s some chance this year
— and not a tiny chance.
I know both Ron Wyden and Orrin Hatch. They’re patriotic, they’re
smart, they want to do the right thing. They’ve got different ideas about
what the right thing is, there’s no question about that, but they also know
they can’t get any place without cooperating. But I think the real
opportunity is if they work out of the public eye in doing — in working on
something — and I wouldn’t be surprised if they are. I think that’s the way
to get it done. Charlie has always pointed out, what would have happened if
the Constitutional Convention back there in Philadelphia had been held
with every delegate running out immediately to tell the TV cameras how
right he was and how wrong everybody else was.
It doesn’t accomplish much to dig in on positions, and not be in a
position to compromise, because it takes a lot of compromise to write
something when you have two different — fundamentally different —
views on some important aspects of the tax code. But those are two good
guys, and I would not — I don’t think it’s impossible that we have a new
corporate tax code within a year.
“Social dynamics” weaken oversight by corporate
boards – 2014 Meeting
 AUDIENCE: Your son Howard serves on the board of Coke and voted
to support its CEO pay package proposal, which you have said was
excessive and you were against.
You have said Howard will become non-executive chairman of
Berkshire after you step down, as its, quote, ‘protector of culture,’ to uphold
the morals that you and we all hold so dear. Given his role in the Coke vote,
how can we count on Howard to defend the culture of Berkshire and ensure
that the future management of Berkshire does not benefit at the expense of
its shareholders?
BUFFETT: Yeah. Well, I think, as I mentioned in at least one interview,
I voted for not — I’m not referring to Coke here necessarily — but as a
director of various companies, I not only voted for comp plans that were far
from what I would’ve come up myself, but I voted for acquisitions that I
didn’t think make much sense. I voted against a few. And they attracted a
lot of attention. But they were big ones, where I really think — where I
thought — it really made a difference.
But the nature of boards is such that they’re part business organizations
and part social organizations. And people behave in some ways with their
business brain and they behave to some extent with their social brain. And I
would say that in 55 years of being on corporate boards, and 19 companies
aside from Berkshire, I don’t think I’ve ever seen a comp committee report
come in and get a dissenting vote. And the social reason for that is that the
board organizes itself in a way whereby certain activities are delegated to a
smaller portion of the board, one being a compensation committee. And that
committee presumably meets for a few hours the day before the meeting, or
maybe the morning of the meeting. And then they go into a board meeting.
And the comp committee reports on its activities. And you’ve delegated
that activity, as a board member, to that group. It’s almost unheard of to
question that.
I’m not saying that maybe it shouldn’t be questioned, but I’m just saying
that that is the way it works. Now bear in mind that the so-called
independent directors on such a board are probably receiving maybe
$200,000 a year, maybe $300,000 a year. Believe me, they are not
independent. They’re independent as measured by some standards, perhaps,
at the SEC, but you know, how would you feel about having a job that
required you to go to work four or six times a year, pleasant company, you
know, certain amount of prestige attached with it, and on top of it, you get
paid maybe $300,000 a year and you kind of hope to get another job like
that? That is not independence.
So, you get a group coming in like that from the comp committee. And
in those 19 boards, I was put on the comp committee exactly once. Charlie
might be able to tell you exactly what the result was that time. They do not
look for Dobermans. They look for cocker spaniels. And then they make
sure that the tails are wagging.
But don’t condemn it too much because you and I are doing similar
things in other parts of our lives. You know, the social dynamics are
important in board actions. My son Howard — in fact, my other two
children as well, if they were involved, they would have a dedication, and
do have a dedication, to the culture of Berkshire, which is clearly defined.
It’s one of the reasons I want it clearly defined. And it’s reinforced by the
behavior and it’s reinforced by results. And, incidentally, their job would
not be to set the compensation. I mean, the non-executive board chairman is
not there to select the compensation of the CEO or others. He’s not there to
select the CEO. He is there to facilitate a change if the board of directors
decides a change is needed. And that can be important.
Very, very, very unlikely to be important in the case of Berkshire. But
it’s a nice, little, extra safety valve. And Howie’s the perfect guy to carry
that out. And like I say, I voted for comp plans at various places, including
way back, you know, at Coke that were far from what I would’ve designed
myself. And the ones I designed myself would have worked. But that is the
way boards work. I was made chairman of one comp committee, and
Charlie can tell you a little about that.
MUNGER: Yeah. Warren was totally voted down at Salomon Inc. In
fact, people acted like, what in the hell is he doing? How could he be
disapproving compensation on Wall Street? And I think the general idea
that a person should just shout disapproval all day long of everything he
disapproves of is very suspect. In the world in which we inhabit, people
accomplish more if they pick their spots for public disapproval. And
knowing both Howie and Warren Buffett, I don’t think you have to worry
that they’re going to go crazy or be soft and foolish just because they don’t
shout all the time about everything they disapprove of. If we all did that, we
wouldn’t be able to hear each other.
BUFFETT: Yeah. If you’re in any social organization and you keep
belching at the dinner table, you’ll be eating in the kitchen before very long.
And people won’t pay any attention to you. I mean, you not only have to
pick your spots, you have to pick how you do it. I mean, sure, Charlie gives
the marital advice around here, as you noticed, in the movie, but it’s not
even a bad thought to keep in mind in marriage, I mean, in terms of
attempting to change the behavior of others, which you’ll have a very
limited ability to do, in any event. It’s not helped by shouting a lot.
MUNGER: I offend more people than you do. And I’m quite satisfied
with your level of disapproval.
Why companies make “dumb” deals – 2014 Meeting
AUDIENCE: In evaluating the after-tax returns Berkshire earns on its
acquisitions of non-insurance businesses, whether it be the utilities, the
railroad, or the manufacturing service and retailing business, in terms of
choosing a benchmark, what would be your best estimate of the returns on
acquisitions earned by an aggregate of all American industry, adjusted, of
course, to exclude the impact of accounting write-offs and equalizing for
leverage?
BUFFETT: That sounds too tough for me, but go ahead, Charlie. I’ll be
thinking.
MUNGER: Well, let me summarize. I think the sum total of all
acquisitions done by American industry will be lousy. It’s in the nature of
corporations that are prosperous to be talked into dumb deals, and
bureaucracy tends to feed on itself and create unnecessary costs. So I think
the history of acquisitions is that it’s not an enormous way to wealth. Now,
it has been for us, but we’re very peculiar, and luckily a lot of people don’t
want to be peculiar in our way.
BUFFETT: Yeah, I would agree. It’s really hard to, you know, come up
with a useful answer on that.
MUNGER: But you don’t have a great deal of optimism, do you?
BUFFETT: When we read that a company we don’t control is going to
make an acquisition, I’m much more inclined to cry than to smile. But on
the other hand, we love making acquisitions ourselves, so it’s a little hard to
get too harsh just because we don’t like the other guy’s acquisitions. I have
sat in on, probably, hundreds of acquisition discussions conducted by
people I didn’t control, as a director. And most of them have been bad
ideas, but there have been some —
MUNGER: Some are mediocre.
 BUFFETT: A great case is GEICO. I mean, it’s really a great case study
because GEICO had this wonderful business prior to going off the tracks in
the early 1970s, but it’d been an incredible business and everybody — it
was well known in the financial world. And then it went off the tracks in its
own business, got back on the tracks. And then in the next — after it got
back on the tracks, it made a couple of acquisitions. And they weren’t
disasters, but they certainly weren’t successes, and they tended to take
people’s — I think they took their eyes off the ball in terms of the potential
of GEICO itself.
So the accounting costs of those — there were two acquisitions in
particular — the accounting costs of those two acquisitions was was poor,
but it wasn’t disastrous. But if you look to secondary effects, it was huge. I
mean, there were a dozen years there or so where all kinds of gains could
have been made that weren’t. And you don’t get those years back.
Now, that was probably a net plus for Berkshire, you know, in the end,
because we’d bought half of the company then we got to buy the other half
later on. If they’d done wonderfully, we probably would have never bought
the second half. Now, maybe the first half would have been worth that
much more.
But it’s human nature, I mean, normally the people who get to be CEOs
are not shrinking violets, you know. And they have animal spirits, as
Keynes talked about, and they like to do things. And the supporting staff
certainly senses that they like to do things. I mean, they often have people
in charge of strategy or acquisitions, or all of those things. What do you
think those people are going to do? Sit around and suck their thumbs? No,
they’re going keep coming up with deals.
And the investment bankers will be, you know, calling on them daily. So
there are all these forces that push toward deals, and if you try to push
toward deals, you’re going to get a lot of dumb deals. We try very hard,
Charlie and I, not to get eager to do a deal. We’re just eager to do a deal that
makes sense. And that would be a lot harder if we had directors, strategy
departments, whatever it might be, all pushing us toward, you know, what
have you done in the last three months, or something of the sort. So the
setting in which you operate really can be very important. Charlie, anything
further?
 Buy a sports team or sports equipment company? –
2014 Meeting
AUDIENCE: My question’s for Warren and Charlie. Do you ever have
any plans, or would you be interested, in buying a professional sport team
or sports equipment manufacturing company, being that sports is in a global
world today? Or is this out of the Berkshire game?
MUNGER: Warren’s already done it.
BUFFETT: I owned a quarter of a minor-league team, but it’s not
responsible for my position on the Forbes 400. The answer to your question
about buying a sports team is no. In fact, if you read that either one of us is
buying a sports team, it may be time to talk about successors. Sports
equipment has generally not been a very good business, although, you
know, obviously Nike’s done incredibly well in its overall operation. But
we own Spalding. We own Russell. And you know, Spalding has been
around a long, long time.
A.G. Spalding, I forget when the hell he was — I think he was trying to
take baseball to the rest of the world back in the, I don’t know, the 1880s or
something like that. But generally speaking, if you look at the people that
have made golf equipment, footballs, helmets particularly, baseball gloves,
baseballs, it’s not been a particularly profitable business. And certain
aspects of it, like helmets, you know — the last thing Berkshire should do is
own a helmet company.
A helmet company should be owned by some guy that owes about a
million dollars and doesn’t have a dime to his name, because, you know, he
is not going to be a target. And we would be the ultimate target. We used to
be involved in Pinkerton, and we got offered the chance to buy the whole
place, and the idea of owning a business that provided guards at airports,
you know, when anything went wrong, you know, you’re going to say that it
was the guard’s fault. And here’s this super-rich corporation around there
that is a perfect target. I mean, a guard company at airports, again, should
be owned by somebody whose net worth does not get out to two figures.
So, you won’t see much of us in the sports arena. But Charlie here, are
you looking at the Clippers or —? Now I’m worried that he is. No —
MUNGER: Whatever Warren thinks about sports teams ownership, I
like it less.
 “It’s amazing how little influence we’ve had” – 2012
Meeting
AUDIENCE: In the past, you’ve made a few investments in China:
PetroChina and BYD, to name two. Given the growing importance of China
in the world, what advice would you give the new Chinese leadership and
corporate CEOs such that you would make more investments in China?
MUNGER: Yeah, we’re not spending much time giving advice to
China.
BUFFETT: That’s not because they’re not hungry for our advice.
MUNGER: If you stop to think about it, China has been doing very,
very well from a very tough start. To some extent, we ought to seek advice
there instead of give it.
BUFFETT: I would say that we’ve found it almost useless in 60 years
of investing to give advice to anybody in business.
MUNGER: We have found that we have a lot of control — it’s kind of
like controlling affairs by pushing on a noodle. It’s amazing how little
influence we’ve had when we had 20 percent of the stock. And people have
this illusion of mass control at headquarters. The beauty of Berkshire is that
we created a system that doesn’t require much control at headquarters.
BUFFETT: But if you look at our four largest investments, which are
worth, they’re certainly worth $50 billion today. We’ve had some of them
for 25 years — one of them — and another one for 20 years. The number of
times that we have talked — unless we were on the board, which I was at
Coca-Cola — but the number of times we’ve talked to the CEO of those
companies, where we have $50 billion, I would say doesn’t average more
than twice a year, and we are not in the business of giving them advice. If
we thought that the success of our investment depended upon them
following our advice, we’d go onto something else.
Business schools are improving but still teach nonsense
– 2012 Meeting
AUDIENCE: In recent years, business schools have taken a lot of
blame for some of the recent state of the economy. What would you suggest
to change the way that business leaders are trained in our country?
BUFFETT: Well, I don’t know. Charlie, I wouldn’t blame business
schools particularly for most of the ills, would you? I think they’ve taught
to students a lot of nonsense about investments, but I don’t think that’s been
the cause of great societal problems. What do you think?
MUNGER: I think business school education is improving.
BUFFETT: I’d agree with that. No, in investing, I would say that
probably the silliest stuff that we’ve seen taught at major business schools
probably has been — maybe it’s because it’s the area that we operate in —
but has been in the investment area.
I mean, it is astounding to me how the schools have focused on sort of
one fad after another in finance theory, and it’s usually been very
mathematically based. When it’s become very popular, it’s almost
impossible to resist if you hope to make progress in faculty advancement.
Going against the revealed wisdom of your elders can be very dangerous to
your career path at major business schools. And you know, really, investing
is not that complicated.
I would have a course on how to value a business, and I would have a
course on how to think about markets. And I think if people grasped the
basic principles in those two courses that they would be far better off than if
they were exposed to a lot of things like modern portfolio theory or option
pricing. Who needs option pricing to be in an investment business?
You know, when Ray Kroc started McDonald’s, I mean, he was not
thinking about the option value of what the McDonald’s stock might be or
something. He was thinking about whether people would buy hamburgers,
you know, and what would cause them to come in, and how to make those
fries different than other people’s, and that sort of thing. It’s totally drifted
away — the teaching of investments.
I look at the books that are used, sometimes, and there’s really nothing
in there about valuing businesses, and that’s what investing is all about. If
you buy businesses for less than they’re worth, you’re going to make
money. And if you know the difference between the businesses that you can
value and the ones that you can’t value, you know, which is key, you’re
going to make money. But they’ve tried to make it a lot more difficult and,
of course, that’s what the high priests in any particular arena do. They have
to convince the laity that the priests have to be listened to. Charlie?
MUNGER: The folly creeps into the accounting, too. A very long-term
option on a big business you understand — the stock of a big business that
you understand — or even a stock market index — should not be — the
optimal way to price it is not by using Black Scholes, and yet the
accounting profession does that. They want some kind of a standardized
solution that requires them not to think too hard, and they have one.
We don’t build strong barriers to entries, we buy them –
2012 Meeting
AUDIENCE: My question is how do you build barriers to entry,
especially in industries which have few?
MUNGER: We sort of buy barriers; we don’t build them.
BUFFETT: Yeah. Well, think about that because it’s true.
There are some industries that are just never going to have barriers to
entry. And in those industries, you better be running very fast because there
are a lot of other people that are going to be running and looking at what
you’re doing and trying to figure out, you know, what your weakness is or
what they can do a little bit better. You know, a great barrier to entry, you
know, is something like this. If you gave me 10, 20, $30 billion and told me
to go in and try and knock off the Coca-Cola Company with some new cola
drink, I wouldn’t have the faintest idea how to do it. I mean, there are
billions of people around the world that have something in their mind about
Coca-Cola, and you’re not going to change that with 10 or $20 billion.
MUNGER: Yeah, but our great brands we bought, we didn’t create.
BUFFETT: We didn’t create them, no. We eat them but we don’t create
them.
But you know, not so many years ago, you remember Richard Branson,
he came to this country and he came up with something called Virgin Cola.
And, you know, they say a brand is a promise. Well, I’m not sure what
promise he was trying to convey by that particular branding but you know,
you haven’t heard anything about that since. I don’t know how many cola
drinks there have been in the history. Don Keough would probably know
but there’s been hundreds, I’m sure. And those are real barriers, but it’s hard
to do.
I mean, as Pfizer finds out with Lipitor, you know, the time runs out and
what was an absolute gold mine still is a pretty good mine, it’s not what it
was by a long shot. But we’ve got a number of businesses that have — well,
nobody’s going to build another railroad, you know. We have a competitor
and we will have competitors in alternative methods of transportation and
all of that. But if you’re buying something at a huge discount from
replacement cost and it’s an essential sort of activity, you’ve certainly got a
barrier to new competition. But the UP is out there fighting for every bit of
business every day, of course. Charlie?
MUNGER: Yeah. We have found in a long life that one competitor is
frequently enough to ruin a business.
BUFFETT: Well, I did find that out. I started with a gas station out at
30th and Redick here in Omaha, and we had a Phillips station next to it. I
had a Sinclair station. And you know, whatever he charged for gas was my
price. I didn’t have much choice. You don’t like to be in a business like that.
No dividend, so sell a slice of Berkshire if you need cash
– 2011 Meeting
AUDIENCE: I know that Berkshire is a great allocator of capital, but as
an owner of stock and as I get closer to retirement, there will be a time
when I will need income from my assets. “Currently Berkshire does not pay
dividends, yet it loves collecting on dividends on its investments. It also
generates extensive cash flow in which it could pay dividends if it chooses
to.
Currently the only real option to get income from your Berkshire
investment is to sell a share or two of the stock. Is there a point in the future
where Berkshire shareholders may expect a dividend payment, or what
conditions would be needed for Berkshire to consider paying a dividend?”
BUFFETT: Yeah, we will pay dividend — as a matter of fact, there may
be an argument that when we pay dividends we should pay out almost 100
percent, because it does mean that we lost the ability to find ways to invest
a dollar in a manner that creates more than a dollar of present value for the
shareholders.
But let’s assume you had a savings account, and the savings account
paid 5 percent. And you had your choice of taking $50 a year out, or letting
the $50 stay in and somebody would pay you 120 percent of that savings
account any time you wanted to sell a piece of it. Now, would you want to
take the $5 out or would you rather let it accumulate and have the ability to
sell at 120 cents on the dollar, that account? Every dollar that’s been
reinvested in Berkshire has created more than a dollar of market value, so
it’s much more intelligent, if you control the dividend policy of Berkshire,
it’s much more intelligent for people to leave the dollar in, have it valued at
$1.20 or $1.30 or whatever it may be valued, and then sell off a little piece
if they want the income, or if they want to receive some cash. And the logic
of it, I think, is unquestionable.
The execution of it is a problem. I mean, the question of whether we can
keep investing dollars to create more than a dollar of present market value,
you know, there’s an end to that at some point. But so far, people, by
leaving 160 billion at the end of third quarter in the business, have $200
billion that they can cash out for at any time they wish. There will come a
time and, you know, who knows how soon, because the numbers are getting
big — there will come a time when we do not think we can lay out, you
know, 15 or 20 billion a year and get something that’s immediately worth
more than that for our shareholders. And like I say, when the time comes
where a dollar is only buying us 90 cents of value, we’ll quit spending the
dollar. We’ll give it to the shareholders.
But I predict that the day that Berkshire declares a dividend, the stock
will go down. I mean, it will — and it should go down — because it’s an
admission, essentially, that a compounding machine has lost its ability to
continue on that course. Charlie?
MUNGER: Well, and there’s nothing wrong with selling a little
Berkshire stock to buy jewelry if you do it in the right place.
Why we hate projections – 2011 Meeting
AUDIENCE: When you think about long-term cash flows, do you try to
forecast growth? Or do you just think about certainty? If you have an
indestructible company like Coca-Cola or Burlington Northern, do you try
to estimate growth?
BUFFETT: Growth is part of the investment equation, and obviously,
we love profitable growth. So we would love to figure out a way to, say,
take a See’s Candy, to move it geographically into new areas, all kinds of
things. I mean, if we could find areas for growth with See’s, it would be
likely to be very, very profitable.
If Coca-Cola, which is in 200 countries, I mean they have pursued that
policy successfully now for 125 years. And some products travel way better
than others. But when we look at a business and we’re looking out in the
future, obviously, if we see growth in that picture and it’s growth which
produces a high return on incremental capital involved, we love it, but we
do not rule out companies where we think there will be little or no growth,
if the price is attractive relative to the earning power.
 You know, there will be some growth, over time, in something like
lubricants, you know, at Lubrizol, but it won’t be dramatic growth. Would
we love it if it, you know, if it were going to grow ten percent a year in
units or something of the sort? Sure. But that’s not going to happen. So it’s
a factor in every investment decision because we’re really looking out to
the future as to future earning power, but also future capital requirements.
And we think plenty about whether any business we go into is likely to
grow profitably, and sometimes we’re right and sometimes we’re wrong.
But we don’t rule out companies that have very slow growth or no-growth
possibilities. Charlie?
MUNGER: Yeah, well, the interesting thing is that in our country, the
business schools teach people to make these projections way in the future,
and they program these computers to grind these projections out. And then
they use them in their business decision making, et cetera, et cetera. I’ve
always regarded those projections as doing more harm than good. And
Warren has never prepared one that I know of, and where an investment
banker prepares one, we tend to throw them aside without reading them.
BUFFETT: When we bought Scott Fetzer, which was back in about
1985, it had been shopped by First Boston to more than 30 parties. They
never got around to calling us. So after shopping it to about 30 parties, Scott
Fetzer, finally, was working on a deal with an ESOP after something else
had fallen through, I forget the exact details. And I sent a letter to Ralph
Schey. I’d read about it in the paper. I’d never met him, never talked to the
guy. But I sent him a letter. I figured I’d gamble 21-cents, or whatever the
first class rate was then, and I said, “We’ll pay $60 a share. If you like the
idea, I’ll meet you in Chicago Sunday, and if you don’t like the idea tear up
the letter.” So that took place and Ralph met me, and we made the deal, and
we paid the $60 a share or whatever it was. And Charlie and I went back to
sign up the deal, and the follow from First Boston was there, and he was a
little abashed since he had not contacted us at all when they were looking
for something.
But naturally he had a contract that called for a few million dollars of
commission even though he’d not bothered to ever contact us and we made
the deal by ourselves. So, in a moment of exuberance while he was
collecting his few million dollars, he said to Charlie, he said, “Well, we
prepared this book in connection with Scott Fetzer, and since you’re paying
us a couple million dollars and have gotten nothing so far,” he said, “maybe
you would like to have this book.”
And Charlie, with his usual tact, said I’ll pay you $2 million if you don’t
show me the book. And I should mention, in connection with Lubrizol,
Dave Sokol met James Hambrick, I think on whatever it was, January 25, or
whatever the date, and Lubrizol had already made projections publicly out
to 2013. And Dave told me that James had also given him some projections,
I guess out to 2015 or something, and did I want to see them? And I told
him no. I mean, I don’t want to look at the other follow’s projections.
I’ve never seen a projection from an investment banker that didn’t show
the earnings going up over time, and believe me, the earnings don’t always
go up over time. So, you know, it’s the old story: don’t ask the barber
whether you need a haircut, you know. You do not want to ask an
investment banker what he thinks the earnings are going to be in five years
of something he’s trying to sell. So I pay no attention to that sort of thing.
But we do, as Charlie says, we are doing projections in our head, obviously,
when we look at a business. I mean, when we look at any company to buy,
or any stock to buy, we are thinking in our mind, we’ve got a model in our
mind, of what that place is likely to look like over some period of years.
And then we also have some model in our mind of how far off we can be. I
mean there’s some things we can be way off on, there’s other things we’re
likely to be in a fairly narrow range on. So all that is taking place, but we
sure don’t want to listen to anybody else’s projections.
MUNGER: Those of you about to enter business school, or who are
there, I recommend you learn to do it our way, but at least until you’re out
of school you have to pretend to do it their way.
Why we won’t issue stock to make an acquisition – 2011
Meeting
AUDIENCE: Pre-Lubrizol, we estimated Berkshire’s year-end 2011
cash balance could approach $60 billion. I believe you commented recently
on an elephant that you thought was too big. What is your acquisition
appetite? What size is too big? Has the phone been ringing lately? And
what if anything can we, as shareholders, do to help?
BUFFETT: I got through college answering fewer questions than that.
But anything you can do to help, I appreciate, Glenn. You know, it’s hard to
name a precise figure. This one, you know, was way too big unless we used
a lot of stock, which, like I say, we wouldn’t do. Our appetite is always
there.
We are not going to borrow a lot of money. We’re not going to issue
shares, except perhaps in some minor amount to make a deal that couldn’t
get made otherwise, and, obviously, we’ll never sell a business to buy some
other business. So, you know, our cash balances will tend to build month to
month unless we do something. And we can, and will, sell some portfolio
securities.
But doing Lubrizol requires close to $9 billion of cash, and obviously
we could do another one of that size. In fact, we’re looking at a couple, but
they’re no more than a gleam in the eye, but they would take sums roughly
similar to Lubrizol, and, you know, we would be comfortable doing those,
and they would add significantly to Berkshire’s earning power. They’re
worth doing. But we can’t do a really big elephant now, and we won’t
stretch. We’ve never really taken any risks because we don’t need to, and
we will not trade something that we have and need for something that we
don’t have and don’t need, even if we’d kind of like to have it. Charlie?
MUNGER: Well, I certainly agree with all that. We are very reluctant to
issue shares. And in that, we’re different from most places. I have a friend
that sold out to a socialist country, and they issued shares in a controlled
corporation, and the socialist executive said, “Isn’t this wonderful we’re
getting this business for nothing.”
BUFFETT: Some people really have that, and, of course, there are some
companies — and we talked about the wave that took place in the late ’60s,
but periodically — one certainly happened during the internet period —
companies just couldn’t issue shares fast enough, because they basically
were trading confetti for real assets. And that is a business model that has
been applied successfully for some periods of time by certain companies in
the past. It usually ends in some kind of a fiasco, well, I shouldn’t say it
usually does, but it runs out of gas at some point.
But, you know, essentially, we’ve never been in that game. We hate
issuing shares and the idea of selling our — when we issue shares we’re
divesting ourselves of a portion of every wonderful business we have, from
GEICO to ISCAR to you name it. And we don’t like doing that. We like
owning those businesses. We’d like to own more of them.
We have a deal, for example, on Marmon where we bought some more
of it this year, and we will buy the rest of it a few more years, and we feel
good about that. We pay a fair price for it, but we get a business we know, a
management we like, and that’s really what we’d like to continue doing at
Berkshire. In fact, we will continue doing it.
Good, but not brilliant, returns for businesses needing
capital – 2010 Meeting
AUDIENCE: My question’s focused on the shift, if you will, to
investing in the capital-intensive businesses and the related impact on
intrinsic value. You again stated in the annual report that best businesses for
owners are those that have high returns on capital and require little
incremental capital. I realize this decision is somewhat driven by the
substantial amounts of cash that the current operating companies are
spinning off, but I would like you to contrast the requirement for this capital
against the definition of intrinsic value, which is the discounted value of the
cash that’s being taken out.
And just for all of us to be aware, you’ve mentioned the fact that you
think these businesses will require tens of billions of dollars over the few
decades, and just the time value of that, I’d like to understand a little bit
more of your insight into that.
BUFFETT: OK. We are putting money into good businesses from an
economic standpoint. But they are not as good as some we could buy when
we were dealing with smaller amounts of money. If you take See’s Candy, it
has 40 million or so of required capital in the business, and, you know, it
earns something well above that. Now, if we could double the capital, if we
could put another 40 million in at anything like the returns we receive on
the first 40 million, I mean, we’d be down there this afternoon with the
money. Unfortunately, the wonderful businesses don’t soak up capital.
That’s one of the reasons they’re wonderful.
At the size we are, we earn operating earnings, $2.2 billion, or whatever
it was in the first quarter, and we don’t pay it out, and our job is to put that
out as intelligently as we can. And we can’t find the See’s Candies that will
sop up that kind of money. When we find them, we’ll buy them, but they
will not sop up the kind of money we’ll generate. And then the question is,
can we put it to work intelligently, if not brilliantly? And so far, we think
the answer to that is yes. We think it makes sense to go into the capital-
intensive businesses that we have. And incidentally, so far, it has made
sense. I mean, it’s worked quite well. But it can’t work brilliantly.
 The world is not set up so that you can reinvest tens of billions of
dollars, and many, many tens over time, and get huge returns. It just doesn’t
happen. And we try to spell that out as carefully as we can so that the
shareholders will understand our limitations. Now, you could say, “Well,
then aren’t you better off paying it out?” We’re not better off paying it out
as long as we can translate, as you mentioned, the discounted value of
future cash generation. If we can translate it into a little something more
than a dollar of present value, we’ll keep looking for ways to do that. In our
judgment, we did that with BNSF, but the scorecard will be written on that
in 10 or 20 years. We did it with MidAmerican Energy.
We went into a business, very capital intensive, and so far, we’ve done
very well, in terms of compounding equity. But it can’t be a Coca-Cola, in
terms of a basic business where you really don’t need very much capital, if
any, hardly. And you can keep growing the business if you’re lucky, if
you’ve got a growing business. See’s is not a growing business. It’s a
wonderful business, but it doesn’t translate itself around the world like
something like Coca-Cola would.
So I would say you’ve got your finger right on the right point. I think
you understand it as well as we do. I hope we don’t disappoint you, in terms
of putting money out to work at decent returns, good returns. But if
anybody expects brilliant returns from this base in Berkshire, you know, we
don’t know how to do it. Charlie?
MUNGER: Well, I’m just as good at not knowing as you are.
Creating a good corporate culture is easier than
changing a bad one – 2010 Meeting
AUDIENCE: Mr. Munger and Mr. Buffett, thanks for having us here. I
recently joined a new organization and for me to succeed there, the culture
of the organization needs to change. So I’m interested in hearing your
thoughts about how do you change culture of an organization? And if
you’re building a new organization, then how do you make sure you have a
strong and unique culture?
BUFFETT: Well, I think it’s a lot easier to build a new organization
around a culture than it is to change the culture of an existing organization.
It is really tough. And I like that fact, in the sense of Berkshire. I mean, it
would be very tough to change the culture of Berkshire. It’s so ingrained in
all our managers, our owners. Everything about the place is designed, in
effect, to reinforce a culture. And for anybody to come in and try and
change it very much, I think the culture would basically reject it.
And the problem you describe, if you want to walk into, you know,
whatever kind of organization you want to name — I’ve got to be a little
careful here — it is tough to change cultures. Charlie and I have bucked up
against that a few times. And I would say if you have any choice in the
matter, I would much rather start from scratch and build it around it. But
I’ve had the luxury of time with Berkshire.
I mean, it goes back to 1965, and there really wasn’t much of anything
there, you know, except some textile miles, so I didn’t have to fight
anything. And as we added companies, they became complementary and
they bought into something that they felt good about, but it took decades.
And, you know, at Salomon, I attempted to change the culture, in terms of
some respects, and I would not grade myself A+ in terms of the result.
Charlie?
MUNGER: Well, I’m quite flattered that a man would say that he’s in a
new place where he can’t succeed unless he changes the culture and he
wants us to tell him how to change the culture. In your position, my failure
rate has been 100 percent.
Biggest threat to integrity: “everyone else is doing it” –
2010 Meeting
BUFFETT: OK Number 8.
AUDIENCE: Dear Mr. Buffett, dear Mr. Munger. My name is Richard
Rentrop. I’m a shareholder from Germany. Mr. Munger, you just mentioned
again the importance of integrity. My question is about changes in integrity
of management. One of your three key questions is, does management love
what they do or does management love the money? So how do you see the
crisis having changed integrity of management?
MUNGER: I think what led to the crisis involved, to some extent, a
lack of integrity in many a management. Fortunately, some of them are now
gone. So, integrity’s very important. It’s the safest way to make money,
also. There’s an occasional perfect knave who succeeds pretty well with
money, but that kind of success reminds me of what Pope Urban said about
Cardinal Richelieu.
He said, “If there is a God, Cardinal Richelieu has much to answer for.
But if there is no God, he’s done rather well.” And too many people want to
be like Pope Urban’s view of Cardinal Richelieu. And the integrity is
important, it’s terribly important. And of course everybody mouths the
integrity, even when it’s lacking. So it’s difficult to be sure that professing
integrity is the same as having it.
BUFFETT: The “everyone else is doing it” is the toughest thing. I
think.
You had this classic example. In about 1993, roughly, you know, the
Accounting Standards Board came out and says what was obvious to
everybody all along, was that stock options were actually expense, and that
expenses, for some reason or another, belonged on the income statement.
And America — corporate America — fought back like you cannot believe.
I mean, it was like World War III had broken out, in terms of armies of
CEOs marching on Washington. So the Accounting Standard Board backed
off.
Congress voted 88 to 9 to tell them that, you know, what the hell did the
Accounting Standards Board know about accounting, and that the Senate
would tell them what accounting was all about. When the Accounting
Standards Board backed off, they said, “We’ll now say that you can do it
one of two ways. Number one is preferred,” which was to expense. Number
two was acceptable, but not preferred. Of the Standard & Poor’s 500
companies, 498 chose number two, the non-preferred way. Two took the
preferred method. And I talked to a number of people in that 498 that I
would trust to be a trustee of my will, you know, I’d love to have them as a
next door neighbor, they could marry my daughter, but in the end they said,
“I can’t do it if the other guy isn’t doing it.” It was a variation on the, “I’m
doing it because the other guy is doing it.”
They basically said, “I’ll be penalizing my shareholders if I report less in
the way of earnings than I can report. And all the other guys are doing it
that way, and I understand your point.” And the situational ethics problem
is huge.
I gave you earlier that illustration of how rare it is to find, if you carry it
out to tenths of a cent, a four in reported earnings, quarterly. That’s not
accidental and it’s — but if you talk to the people that play games to get
that four up to five, they would say, “Everybody else is doing it, your own
statistics proved that.” And that is, you know, it is a tough problem to deal
with. We try to create as few situations in Berkshire as we can that would
induce such behavior.
 I don’t have the managers submit budgets to me, there is no Berkshire
budget, you know. They can use them in their own operations. Some do and
some don’t. Many do, a great many do. But if they submit them to me, you
know, and the temptation becomes, if they’re not quite making it and they
think I’m looking at them all the time, the temptation becomes to fudge in
some way.
And very few would do it, but the more that thought the other ones were
doing it, the more that would do it. It’s just human behavior. And you want
to try and create a structure that minimizes the weaknesses in human
behavior. And I think Berkshire’s about as good a place at that as any,
although I’m sure we’re not perfect at it. Charlie?
MUNGER: Yeah, what’s really interesting on this issue is that so much
of the bad behavior does not come from malevolence or overweening greed
or anything like that. It comes from subconscious poor cognition that
justifies a lot of behavior that’s really not justifiable if it’s better understood.
And that happens to practically everybody. And the cure is very difficult.
The best cure is to have a system where the people who are making the
decisions bear the consequences. And that’s why the system that Wall Street
created where nobody really owned the mortgages, they just passed them
rapidly to somebody else at a profit. And so nobody felt any responsibility
that the mortgages be any good. Systems like that, at a basic level, are
irresponsible systems, and it’s deeply immoral to create irresponsible
systems like that. But the people who create them don’t realize they’re
being immoral, they think those systems are wonderful. Who do you see
apologizing for the behavior you now find so regrettable in our recent
mess? There are very few apologies, you’ll note. People think they did fine.
Companies with the best return on capital – 2010
Meeting
AUDIENCE: What business has had the best return on capital for
Berkshire, and what business of any on earth has had the best return on
capital?
BUFFETT: There’s two ways of looking at it. If you talk about the
capital necessary to run the business, as opposed to what we might have
paid for the business — I mean, if we buy a wonderful business — you
could run the Coca-Cola Company —assuming you had the bottling
systems — you could run it with no capital.
 Now, if you buy it for $100 billion, you can look at that as your capital
or you can look at the basic capital. When we look at what’s a good
business, we’re defining it in terms of the capital actually needed in the
business. Whether it’s a good investment for us depends on how much we
pay for that in the end. There are a number of businesses that operate on
negative capital. Carol’s with Fortune magazine. You know, any of the great
magazines operate with negative capital. I mean, the subscribers pay in
advance, there are no fixed assets to speak of, and the receivables are not
that much, the inventory is nothing. So my guess is that People magazine
operates, or Sports Illustrated operates, with negative capital, and
particularly People makes a lot of money.
Well, we had a company called Blue Chip Stamps where we got the float
ahead of time, and operated with really substantial negative capital. But
there are a lot of great businesses that need very, very little capital. Apple
doesn’t need that much capital, you know. The best ones, of course, are the
ones that can get very large while needing no capital. See’s is a wonderful
business, needs very little capital, but we can’t get people eating ten pounds
of boxed chocolates every day.
Generally, the great consumer businesses need relatively little capital.
The businesses where people pay you in advance, you know, magazine
subscriptions being a case, insurance being a case, you know, you’re using
your customer’s capital. And we like those kind of businesses, but of
course, so does the rest of the world, so they can become very competitive
in buying them.
We have a business, for example, that’s run wonderfully by Cathy Baron
Tamraz, called Business Wire. Business Wire does not require a lot of
capital. It has receivables and everything, but it is a service-type business
and many of the service-type businesses and consumer-type businesses
require little capital. And when they get to be successful, you know, they
can really be something. Charlie?
MUNGER: I’ve got nothing to add, but at any rate, the formula never
changes.
 Executive Compensation
Don’t reward profits in compensation plans – 2016
Meeting
AUDIENCE: Charlie, you clearly understand the power of incentives.
How do you apply this at Berkshire when designing compensation formula?
Without naming names or dollar amounts, please illustrate for us with
examples of how Berkshire’s operating managers get paid for performance
in different industries.
Also, Warren, you once said you’d write about how we should
compensate the next Berkshire CEO. Can you describe exactly how we
should do it now?”
MUNGER: I’ll let Warren worry about the next CEO. But when it
comes to assess our incentive systems are different and what they try and
adapt to is the reality of each situation. And the basic rule on incentives is
you get what you reward for. So, if you have a dumb incentive system, you
get dumb outcomes. And one of our really interesting incentive systems is
at GEICO, and I’ll let Warren explain it to you, because we don’t have a
normal profits-type incentive for the people at GEICO. Warren, tell them,
because it’s really interesting.
BUFFETT: Yeah. Well at GEICO, we have two variables, and they
apply to well over 20,000 people. I think you have to be there a year, but
beyond that point, anybody that’s been there a year or more that these two
variables will determine bonus compensation. And as you go up the ladder,
it has a multiplier effect. It’s still the same two variables, but it gets to be
larger and larger, in terms of bonus compensation as a percentage of your
base, but it’s always significant. It’s always significant. And those two
variables are very simple.
I care about growing the business, and I care about growing it with a
profitable business. So we have a grid, which consists of growth and
policies in force on one axis — not gross in dollars, because that’s reflected
by average premiums, which are outside their control — but growth in
policies in force. And then on the other grid, we have the profitability of
seasoned business. It costs a lot of money to put business on the books. I
mean, we spend a lot of money on advertising and all of that. So the first
year, any business we put on the books is going to reduce profits
significantly. And I don’t want people to be worried about the profit if it’s
going — that comes — that might be impaired by growing the business
fast. So, profit of seasoned business, growth of policies in force.
Very simple. We’ve used it since 1995. We put a tiny little tweak or two
in for new businesses or something, but it’s overwhelmingly a simple
system. Everybody understands it. In February, or so, it’s a big day when
the two variables are announced and people figure out how they come out
on it. And it totally aligns the goals of the organization, in terms of
compensation, with the goals of the owner. And that’s a simple one.
MUNGER: It’s simple, but other people might reward something like
just profits, and so the people don’t take on new business, they should take
it on, because it hurts profits. So you’ve got to think these things through,
and, of course, Warren’s good at that, and so is GEICO CEO Tony Nicely.
BUFFETT: Yeah. And just thinking about — somebody comes in and
says, well, if you reward profits — you don’t want to award profits, alone.
It’d be the dumbest thing you could do. You just quit advertising, and, you
know, start shrinking the business a little. That’s a — and like I said, that —
people there know that the very top person is getting paid based on those
same two variables.
So that they don’t think that the guys at the top have got a cushy deal
compared to them, and all of that. It’s just a very logical system. The
interesting thing is that if we brought in a compensation consultant, they
would start coming up with plans that would be designed for all of
Berkshire, and get us all pulling together, you know, the idea of having a
coordinated arrangement for incentive compensation across 70 or 80
businesses, or whatever, is just totally nuts. And yet, I would almost
guarantee you that if we brought in somebody, they would be thinking in
terms of some master plan, and little subplans, and all this kind of thing,
and explain it with all kinds of objectives.
We try to figure out what makes sense in each business we’re in. There’s
some businesses where the top person is enormously important, or some
businesses where the business itself dominates the result. We try to design
plans that make sense.
In certain cases — I asked one fellow that came to work for us — or that
was selling me his business — the day I met him he came to the office, and
he had a business he wanted to sell, but he also wanted to keep running it.
And I made a deal with him on it. And then I said, you know, tell me what
the compensation plan should be. And he said, well, he said, I thought you
told me that. I said no. I said, I don’t want a guy working for me that has a
plan that he thinks doesn’t make sense, or that he’s unhappy with, or
chewing at him, or he’s complaining to his wife about it, whatever it may
be. You tell me what makes sense.
And he told me what made sense, and it made sense, and we’ve been
using it ever since. Never changed a word. We have so many different kinds
of businesses. Some of them are very tough businesses. Some of them are
very easy businesses. Some of them are capital intensive. Some of them
don’t take capital. I mean, you just go up and down the line, and to think
that you’ll have a simple formula that can be sort of stamped out for the
whole place, and then with some overall stuff for corporate results on top of
it, you’d be wasting a lot of money, and you’d be misdirecting incentives.
So we think it through one at a time, and it seems to work out pretty well.
In terms of the person that succeeds me, it’s true, I have sent two memos
to the board — with some thoughts on that. Maybe I’ll send a third one. But
I don’t think it would be wise to disclose exactly what’s in those letters. But
it’s the same principle as I’ve just gotten through describing.
MUNGER: And he wanted more bad examples. A lot of the bad
examples of incentives come from banking and investment banking. And if
you reward somebody with some share of the profits, and the profits are
being reported using accounting practices that cause the profit to exist on
paper that are not really happening in terms of underlying economics, then
people are doing the wrong thing, and it’s endangering the bank and hurting
the country and everything else.
And that was a major part of the cause of the great financial crisis: it’s
that the banks were reporting a lot of income they weren’t making, and the
investment banks were, too. The accounting allowed, for a long time, a
lender to use his bad — as his bad debt provision — his previous historical
loss rate. So an idiot could make a lot of money by just making way-gamier
loans at high interest, and accruing a lot of interest, and saying, “I’m not
going to lose any more money on these, because I didn’t lose money on
different loans in the past.”
That was insane for the accountants to allow that. That’s not too strong a
word. And yet nobody’s ashamed of it. I’ve never met an accountant that’s
ashamed of it.
 BUFFETT: The other possibility is when you get the very greedy chief
executive who wants an enormous payoff for himself, and to justify it,
designs a pyramid, so that a whole bunch of other people down the line get
overpaid in some relation — or get paid — in relation to something they
have no control over, just so it doesn’t look like he’s all by himself, in terms
of that fantastic payoff he’s arranged for himself.
There’s a lot of misbehavior. And, you know, we saw it — you saw it in
pricing of stock options. I mean, I literally would hear conversations in a
board room where they hoped they were issuing the options, you know, at a
terribly low price. Well, if you’ve got people interested in having options
issued at a terribly low price, they may occasionally do something that
might cause that. And what could be dumber than a company looking for a
way to issue shares at the lowest price? Compensation isn’t as complicated
as the world would like to make it, but if you were a consultant, you would
want to make people think it’s very complicated, and that only you could
solve this terrible problem for them that they couldn’t solve.
MUNGER: We want it simple and right, and we don’t want it to reward
what we don’t want. Those of you with children — just imagine how your
household would work if you constantly rewarded every child for bad
behavior. The house would be ungovernable in short order.
Shareholders aren’t helped by rule requiring CEO pay
disclosure – 2014 Meeting
AUDIENCE: As a shareholder for about a dozen corporations in
addition to Berkshire, I always see a number of proxy statements each year.
In all, except Berkshire, the summary compensation table has the
compensation listed for at least five or more of the highest paid executives.
Berkshire lists three, Warren, Charlie and Mark.
I assume that since Berkshire is a holding company structure, that’s the
way it is. I think it would be instructive to include at least two of the highest
paid executives from the wholly-owned subsidiaries in the summary table,
Ajit, Tony, or Greg, or Matt, to give the shareholders, your partners, a sense
of how Berkshire compensates its strongest and highest-paid leaders, as
other companies do.
This would be particularly valuable since two-thirds of the current
listees, Warren and Charlie, only receive nominal salaries of $100,000 per
year, a figure that is vastly below the value they bring to the company.
 Would you, in the spirit of transparency, be willing to add at least two of
the highest-paid subsidiary officers in the table in future years? And how
much do you think the next CEO of Berkshire should be paid?
BUFFETT: Well, the answer to the last is he certainly will be entitled to
pay — get paid a lot. But their decision as to how much they accept is
another question. But I’m going to write about that very end question next
year in the annual report because it has a lot of interesting ramifications.
We, obviously, are following the SEC rules, which I can’t recite, in terms of
the officers required to be in the proxy statement as to their pay.
But, you know, Andrew, in my sporting mood, I would say that Comcast
probably has some people in the employ that make a lot more money that
would exceed the salaries of the people that they list in the proxy statement,
as well. And there’s a real question as to whether it’s in the interests of the
shareholders of the company to start listing, you know, how much the
person who’s the anchor of the nightly news or whomever it might be, gets
paid because it might have a very negative effect, in terms of negotiating
salaries with other people within the organization.
I would say the shareholders of Comcast would be hurt, actually, if you
published the five highest salaries paid at the subsidiaries or at Comcast
itself. And certainly, if you carried it to every subsidiary there was. I mean,
if you were to publish the five highest salaries at CNBC, I don’t think the
salaries overall would go down the following year. So, I think that’s a good
reason for us not publishing the salaries of, you know, say, our top ten
managers of the company.
At Salomon virtually everybody was dissatisfied with what they were
getting paid. And they were getting paid enormous amounts of money. But
they were disappointed, not because of the absolute amount. They were
disappointed because they looked at somebody else in the place and it drove
them crazy. And as a matter of fact, the first big crisis we had in
compensation was when the management made what was regarded as a
secret deal, with the arb group, as I remember — whereby, John Meriwether
and his crew got paid a lot of money, which I would argue they earned.
I mean, I think they deserved it. But as soon as that happened, it made
compensation, which had always been a terrible problem, an even greater
problem because of the jealousy that broke out among the people that
weren’t in John Meriwether’s group. I think it’s very seldom that publishing
compensation accomplishes much for the shareholders. In fact, you can
argue that much of what’s going on in corporate America — well, I would
put it this way: corporate CEOs, as a group, would be being paid a lot less
money if proxy statements hadn’t revealed how much other people were
getting paid.
It is only human to look at a whole bunch of proxy statements and say,
“Well, I’m worth more than that guy,” and negotiate that way. And a comp
committee is going to respond to that. So, American shareholders are
paying a significant price for the fact that they get to look at that proxy
statement every year and see how much those top five officers are earning.
Charlie?
MUNGER: In the spirit of transparency, you’re asking for something
that wouldn’t be good for the shareholders. And it’s not going to happen
unless the SEC makes it happen. We’re way better off without adding to the
culture of envy in America.
Why we will never hire a compensation consultant –
2010 Meeting
AUDIENCE: How does Berkshire structure the performance based-
compensation of the CEOs of its subsidiaries? Please because as specific as
you can regarding the metrics on which you focus the most, and how the
degree to which those are attained translates into compensation.
BUFFETT: Yeah, well, the first thing we do is we never engage a
compensation consultant. And we have, whatever it may be, 70-plus or
whatever number businesses we have. They have very different economic
characteristics. To try to set some Berkshire standard to apply to businesses
such as insurance, which has capital as a bulwark but which we get to invest
in other things we’d invest in anyway, so there’s minus capital involved, to
a BNSF or our utility business where there’s tons of capital involved, or in
between See’s where there is very little capital involved. We have other
businesses that are basically just so damn good that a, you know, a
chimpanzee could run them, and we have other business that are so tough at
times that, you know, if we had Alfred P. Sloan back, you know, we
wouldn’t be able to do very well with them. So there’s enormous
differences in the economic characteristics of our business.
I try to figure out what — if I owned the whole business — what is a
sensible way to employ somebody and compensate them, considering the
economic characteristics of the business. So we have all kinds of different
plans. It doesn’t take a couple of hours of my time a year to do it. We have
managers who stay with us, so they must be reasonably happy with the
plans. And, you know, it is not rocket science, but it does require — it
requires the ability to differentiate.
If we had a human relations department, it would be a disaster. They
would be attending conferences and people would be telling them all these
different things to put in equations and so on. It just requires a certain
amount of common sense. And it requires, incidentally, an interaction with
the managers where, you know, I listen to them, they listen to me, and we
sort of agree on what really is the measure of what they’re actually adding
to the company. And — what do you — what do you say to that, Charlie?
MUNGER: Well, I think the U.S. Army and General Electric have
centralized personnel policies that probably work best for them, and we
have just the opposite system, and I think it clearly works best for us. And
practically nobody else is entirely like us, which makes us very peculiar.
And I like it that way, don’t you?
BUFFETT: Yeah, we really like it that way. We get worried when
people agree with us. We pay people — we pay some very big money. We
have managers that have made and will make in the tens of millions
annually, and we have managers that, you know, when we suffer, they
suffer. But you’ve got to treat people fairly. Even though they don’t need
the money, everybody wants to be treated fairly. And so the rationale for
how you’re doing it should be understood, but there is no cross-Berkshire
rationale at all.
I mean, if you run See’s Candy, to put a cost of capital factor in or
something like that, what the consultant would tell you, it’s nonsense. It
isn’t going to make any difference whether there’s 40 million or 43 million
or 37 million of capital in the business. The main thing to do is, in terms of
market position and all that sort of thing, the real thing I really want to pay
managers for is widening the moat that separates our business from our
competitors’ businesses over time. Now, that gets very subjective, so I don’t
have any perfect way of doing that. But that is always going through my
mind in trying to design compensation systems.
So far, like I say, I don’t think — I can’t — can you recall any manager
that’s ever left us over compensation, Charlie?
MUNGER: I think it’s amazing how simple it’s been and how little time
it has taken and how well it has worked. There’s this idea that headquarters
can do these wonderful things. Headquarters, in a conglomerate kind of a
company, is frequently hated in the field. We don’t want to be hated in the
field. We don’t want an imperial headquarters with big costs that’s imposed
everywhere. And averaged out, it’s worked wonderfully well for us.
BUFFETT: Yeah, we make no headquarters charges. We charge for our
credit with a couple of companies, but — most companies are allocating a
couple percent of sales, maybe, or whatever it might be, to all their different
operations. And usually it’s resented out in the field. So we don’t do it.
 8
BUFFETT’S LIFE STORY

Buffett’s most memorable failure – 2015 Meeting

AUDIENCE: As we reflect on the last 50 years, I’d like to ask you this
question: what was your most memorable failure and how did you deal with
it?
BUFFETT: Yeah. Well, we’ve discussed Dexter many times in the
annual report, where back in the mid-1990s — I looked at a shoe business
in Dexter, Maine, and decided to pay 400-or-so million dollars for
something that was destined to go to zero in a few years, and I didn’t figure
that out. And then on top of that, I gave the purchase price in stock, and I
guess that stock would be worth, I don’t know, maybe 6 or 7 billion now.
It makes me feel better when the stock goes down because the stupidity
gets reduced. Nobody misled me on that, in any way. I just looked at it and
came up with the wrong answer. But I would say almost any time we’ve
issued shares, it’s been a mistake.
We probably could have pushed harder, particularly in the earlier years.
We’ve always been — well, we’ve had all of our own net worth in the
company, we’ve had all our family’s net worth, and we’ve had all these
friends that came out of our partnership, many of whom put half or more of
their net worth with us, so we’ve been very, very, very cautious in what
we’ve done. And there probably were times when we could have stretched
it a little and pulled off something quite large, that we made a mistake,
looking back.
But, I wouldn’t want to take a 1 percent chance, you know, of wiping out
my Aunt Katie’s net worth or something. It’s just not something in life that I
could live with. So I would rather be, you know, a hundred times too
cautious than 1 percent too incautious, and that will continue as long as I’m
around. But people looking at our past would say that we missed some big
opportunities that we understood, and could have swung, if we wanted to go
out and borrow more money.
How Buffett found his first investors – 2015 Meeting
AUDIENCE: Hi, Warren and Charlie. How were you able to persuade
your early investors, all early on, besides your family and friends, to
overcome their doubts and fears and to believe in what you’re doing?
There’s a lot of other asset classes out there, such as — a lot of people
believe, real estate, bonds, gold. How were you able to get over that?
And something I’ve been really dying to ask you, prior to the early
winning record, how were you able to get them to buy into what you were
trying to do? I mean, no one has ever done what you’re doing, and no one
has, still.
And I’ve been really wanting to ask you, in the past, you said you’re 90
percent Graham and 10 percent Fisher. Where does that percentage stand
today? Thank you again from a grateful student of your teachings, and my
children love what you do, too. They wrote you a letter.
BUFFETT: A lot of it — you know, I started selling stocks here when I
was 20 years old. I got out of Columbia. And although I was 20, I looked
about 16 and I behaved like I was about 12. So I was not — I did not make
a huge impression selling stocks. I used to just walk around downtown and
call on people, which is the way it was done, and then I went to work for
Graham. But when I came back, the people that joined me, actually — one
of my sisters, her husband, my father-in-law, my Aunt Alice, a guy I
roomed with in college, and his mother, and I’ve skipped one — but in any
event, those people just had faith in me. And my father-in-law, who was a
dean at the University — what was then the University of Omaha — he
gave me everything he had, you know, and to quite an extent they all did.
And so it was — they knew I’d done reasonably well by that time. That
would have been 1956, so I’d been investing five or six years. And actually,
I was in a position where when I left New York and came back to Omaha, I
had about $175,000 and I was retired. So I guess they figured if I was
retired at 26, I must be doing something right and they gave me their
money. And then it just unfolded after that. An ex-stockholder of Graham-
Newman, the president of a college came out, Ben Graham was winding up
his partnership for his fund and he recommended me. And then another
fellow saw the announcement in the paper that we formed a partnership and
he called me and he joined, and just one after another. And then, actually, a
year or two later, a doctor family called and they were the ones that ended
up with me meeting Charlie.
So a lot of stuff just comes along if you just keep plodding along. But
the record, later on, of the partnership attracted money, but initially it was
much more just people that knew me and had faith in me. But these were
small sums of money. We started with 105,000. Charlie?
MUNGER: Well, of course that’s the way you start, but it’s amazing.
We’ve now watched a lot of other people start. And the people that have
followed the old Graham-Newman path have one thing in common: they’ve
all done pretty well. I can hardly think of anybody who hasn’t done
moderately well. So, if you just avoid being a perfect idiot and have a good
character and just keep doing it day after day, it’s amazing how it will work.
BUFFETT: Yeah. It was accident, to a significant extent. If a few of
those people hadn’t have said to me, you know, “What should I buy?” And I
said, “I’m not going to go back in the stock brokerage business, but we’ll
form a partnership and, you know, your fate will be the same as mine and I
won’t tell you what I’m doing.”
And they joined in, and it went from there. But it was not — it was not
planned out in the least. Zero. I met Charlie, and he was practicing law, and
I told him that was OK as a hobby, but it was a lousy business
MUNGER: Fortunately, I listened. It took a while, however.
We rely on sugar and caffeine, not to-do lists – 2013
Meeting
 AUDIENCE: Mr. Buffett, I’ve heard that one of your ways of focusing
your energy is that you write down the 25 things you want to achieve,
choose the top 5, and then avoid the bottom 20. I’m really curious how you
came up with this, and what other methods you have to prioritizing your
desires?
BUFFETT: Well, I’m actually more curious about how you came up
with it, because it really isn’t the case. It sounds like a very good method of
operating, but it’s much more disciplined than I actually am. If they stick
fudge down in front of me, I eat it, you know, I’m not thinking about 25
other choices. So you know, Charlie and I live very simple lives. We know
what we do enjoy, and we now have the option of doing it, pretty much.
Charlie likes to design buildings.
I mean, he’s no longer a frustrated architect — he’s a full-fledged
architect now. And we both like to read a lot. But I’ve never made lists. I
can’t recall making a list in my life, but maybe I’ll start. You’ve given me
an idea. Thank you. Charlie?
MUNGER: Well, what’s really interesting on the subject of Warren’s
operating methods, you can see happening here. We didn’t know, when we
started out, this modern psychological evidence to the effect that you
shouldn’t make a lot of important decisions when you’re tired and that
making a lot of difficult decisions is tiring.
And we didn’t also know, as well as we now do, how helpful it is to be
consuming caffeine and sugar when you’re making important decisions.
And what happens, of course, is that both Warren and I live entirely on
autopilot, in terms of the ordinary decisions in life, which is totally habitual,
so we don’t waste any decision making energy on that stuff, and we’re
ingesting caffeine and sugar. And, it turns out, under the modern evidence,
this is an ideal way to sit where Warren sits. And he didn’t know that, he
just stumbled into it.
BUFFETT: When we write our book on nutrition, it promises to be a
huge seller.
MUNGER: I cannot remember an important decision that Warren has
made when he was tired. He’s never tired. He sleeps soundly, and he
doesn’t waste time thinking about what he’s going to eat. As you say, he
just eats what he’s always eaten. You know, his style turns out to be
absolutely ideal for human cognition. It looks peculiar, but he stumbled into
something very good.
 Influential books and early investments – 2013 Meeting
AUDIENCE: I’d like to know what 10 books influenced you the most
and that weren’t written by Graham and Fisher, and I’d also like to tell you
that I think it would be great if you would publish the portfolio statements
of the Buffett Partnership years. I think there are a lot of small investors that
would get a kick out of knowing, you know, what you invested and how
you went ahead and analyzed the companies. Thank you.
BUFFETT: Yeah. Well, Charlie ran something called Wheeler, Munger
and his portfolio was even more interesting, so we’ll start with you, Charlie.
He ran a more concentrated portfolio than I did in those days.
MUNGER: Yeah. I don’t think people would be greatly helped. You
wouldn’t recognize the names, most of them, clearly, by the partnership.
You’d recognize American Express. Rattle off some of the names.
BUFFETT: Yeah. Well, we can start with Mosaic Tile and —
MUNGER: The map company.
BUFFETT: — Meadow River Coal & Land. There’s hundreds of them.
Flagg-Utica, Philadelphia Reading Coal & Iron, you name it. I’ve literally
owned — I bet I’ve owned 4- or 500 names at one time or another, but most
of the money’s been made in about 10 of them.
MUNGER: And I couldn’t name 10 books either that I regard as that
much better than the next 10. My mind is a blend of so many books I can’t
even sort it out anymore.
BUFFETT: Yeah. “The Intelligent Investor” changed my life. I literally
had read every book in the Omaha Public Library by the time I was 11 on
the subject of investing, and there were a lot of books. And there were
technical books, Edwards & Magee, I mean, that was a classic in those
days, and a whole bunch of them, Garfield Drew, and I enjoyed reading
them a lot. Some of them I read more than once. But I never developed a
philosophy about it. I enjoyed it. I charted stocks. I did all that sort of thing.
Graham’s book gave me a philosophy, a bedrock philosophy, on
investing that made sense. I mean, he taught me how to think about a stock,
he taught me how to think about the stock market, and he taught me that the
market was there not to instruct me but to serve me. And he used that
famous “Mr. Market” example. He taught me to think about stocks as
pieces of businesses, rather than ticker symbols or things that, you know,
you could chart, or something of the sort.
 And so it was that philosophy — and in some way, further influenced by
Phil Fisher’s book — and Phil Fisher was just telling me the same thing that
Charlie was telling me, which was that it’s very important to get into a
business with fundamentally good economics, and one that you could ride
with for decades, rather than one where you had to go from flower to flower
every day. And that philosophy has carried me along.
Now, I’ve learned different ways of applying it over the years, but it’s
the way I think about businesses now. I have not found any aspect of that
bedrock philosophy that has flaws in it. You have to learn how to apply it in
different ways. So those are the books that influenced me. And, of course,
in other arenas, Charlie’s probably read more biography than anybody that I
know of. And I like to read a lot of it. We’re just about through reading the
Joe Kennedy biography.
You know, I’m not sure you want to emulate everything he did, but it’s
still interesting reading. We read for the enjoyment of it. I mean, it’s been
enormously beneficial to us, but the reason we read is that it’s fun. And, you
know, it’s still fun. And on top of it, we have gotten very substantial
benefits from it. My life would have been different if Ben Graham hadn’t
gone to the trouble of writing a book, which he had no financial need to do
at all. You know, I would have a very different life.
17. Buffett on getting his first investors - 2011
AUDIENCE: Mr. Buffett and Mr. Munger, when you were raising your
first investment funds, how did you go about attracting investors, and once
you had your first funds and your first investors, how did you go about
growing them?
BUFFETT: Sounds to me like a man that’s about ready to start a hedge
fund. In my case, I’d moved back here from New York in March or so of
1956, and a few members of my family said we’d like you to manage our
investments just like I did when I was selling securities out here before I
went to New York.
And I didn’t like being in the securities selling business, partly because
if I sold somebody a stock at 20 and it went down to 10, I wanted to buy
more, but I couldn’t face the idea of people that had bought at 20 and, based
only on confidence in me not because they understood it, and now they
were feeling depressed, and it was — it just wasn’t — it wasn’t very
satisfactory.
 I could not do as well managing money if people were watching every
decision as I could if I did it in a room all by myself. So I just told these
seven members of the family — one of them, actually, was my roommate in
college and his mother, they came in also — I said, you know, if you’d like
to join up in a partnership, I’m not going to tell you what’s going on, but I
will tell you that I will be doing with my own money what I’m doing with
yours. Later on, I put all my own money in. And it just was very slow.
A few months later, Graham-Newman, that I’d worked for, was
liquidating, and a fellow named Homer Dodge asked Ben Graham what he
should do with the money he was getting out of Graham-Newman. He said,
“This kid used to work for me and he’s OK.” And so he came out and went
in with me. And another fellow, late in the fall, had seen the notice of
partnership formed in some legal paper and he said, “What’s this?” and
came in with me. It’s just — we just stumbled along.
And for almost six years, I operated out of my house, no employee. I
kept all the books, I filed the tax returns, I, you know, went out and picked
up the stocks personally and stuck them in a safe deposit box. When Charlie
came along, I kept chiding him about the fact — I met him in 1959 — and I
said, “Law is OK as a hobby, but it’s no place for a man with your intellect
to spend his time.” And, well, I’ll let Charlie take it over from there.
MUNGER: It actually took me a long time to leave what was a family
business. And so any of you who are having a slow time accepting good
ideas, why, you should be cheered by my example, because it was some
years after you started working on me, and you pounded on me, and I
slowly got the point.
BUFFETT: And he was actually asking about attracting money.
MUNGER: Well, of course, it helps if you conducted yourself in life so
that other people trust you. And then it helps even more if other people are
right to trust you. So the formula is quite simple. First one, then the other.
BUFFETT: Unfortunately, with the present fee structure, just attracting
money, rather than performing with it, can be enormously lucrative. So the
skill of attracting money may be — at least in the short run, and maybe the
intermediate run — it may be a more important quality than the ability to
manage money. But we, neither one of us, ever charged any fixed fee of any
kind. Am I right on that, Charlie?
MUNGER: Well, we stopped taking any significant overrides on other
people’s money at very young ages and at very small amounts of net worth.
I wish our example were more common. But I like our compensation
practices, too, and they’re spreading slowly. We get a new company every,
what, five years?
BUFFETT: Yeah.
 9
BERKSHIRE HATHAWAY

Berkshire’s culture will continue because “it works” –

2018 Meeting
GREGG WARREN: Warren, you’ve noted time and again that there is a
strong common culture shared across Berkshire subsidiaries built on a
commitment to honesty and integrity, a focus on the long-term, and an
emphasis on customer care. And it’s also critical to find cultures that mesh
well with Berkshire’s when acquiring operating companies. In most cases,
the managers that are currently running these subsidiaries are the same
individuals who are members of the families that originally sold their firms
to Berkshire, leaving them with a vested interest in the businesses they are
running and a strong connection to the culture they tend to share in common
with Berkshire.
It seems to me that the greater challenge is in ensuring that the large
publicly-traded firms that have been acquired and account for a meaningful
and growing amount of Berkshire’s overall value, stay the course. Could
you comment on whether or not this is the case and what the greatest
challenge is for you and Charlie when it comes to not only maintaining
Berkshire’s culture but in finding firms that would fit in well with what
you’ve built?
BUFFETT: Yeah, I think the culture is very, very strong. And I think it
gets reinforced - frankly, I think it gets reinforced by the shareholders we
have. I mean, we have a different body of shareholders and we look at those
shareholders, I think, in a somewhat different way than a good many other
companies do.
I mean, I think there are a fair number of public companies that wish
they didn’t have, you know, public shareholders. We’re happy to have
public shareholders. And we like having individual shareholders. And we
don’t favor institutions. And we’re not going to, you know, give guidance
and talk especially to them on investor calls and all that sort of thing. We
want shareholders who are partners, basically. And it begins with that. It
goes to the directors.
I’ve been on 19 boards, and I’ve never seen another board like ours. And
I think it’s terrific that we’ve got the people who represent, in many cases,
lots of shares themselves. They didn’t gets special deals. It’s a group of
owner-oriented, Berkshire-conscious, business-savvy owners. And we don’t
have anybody on the board because they’re a leading, you know, educator
or whatever it may be. We want people who, basically, think about how to
run a business well for themselves and for their partners. And we’ve got
managers who fit into that culture, who have chosen that culture in coming
with us.
And sometimes we have the second or the third or fourth generation, say
at the Nebraska Furniture Mart, that share that. Is it perfect? No, it’s far
from perfect. I mean, you don’t get everybody thinking the same way. We
have people - we have people that are very independently minded running a
lot of businesses. And some of them have different political beliefs, they
have different - they see through different lenses than we do, to some
degree. But in terms of having a common, strong, positive culture, I don’t
think there’s any big public company that has it any better than Berkshire.
And I think that will continue because people opt into it to a great deal.
Cultures get passed along. You do things that are consistent with the
culture, so you do - what you talk about is what you do.
And you don’t find people saying, you know, “We’re a wonderful
partnership,” and then voting themselves, you know, huge options. And
then a whole bunch of other people will say options beneath them because
they can’t look like they’re taking it all for themselves, and arranging - I
read about some deal where it could pay off with many, many, many
billions of dollars, the other day. We won’t name names. But we’ve got as
good a culture as you can get. And I would say, net, it grows stronger. We
have a few people all of the time that really don’t buy into it entirely. I
mean, it is not 100 percent. But it’s as close to it. And I think it gets closer
all the time as we go along. And we will try to keep behaving in a way that
reinforces it and doesn’t dilute it. And I think that will not only work for
Charlie and me but it will work for our successors very well. It won’t be
perfect. Charlie?
MUNGER: Every time I come to one of these meetings and sit in the
manager’s luncheon, I feel more strongly at the end of the luncheon that the
culture and values of Berkshire Hathaway will go on and on for a long time
after the present management is gone. In fact, I think it’ll go on after all of
the present managers are gone. I think we’ve started something here that
will work well enough that it will last. And one of the reasons it will last is
it’s not that damned easy to duplicate. So the one that is present is likely to
just keep going and going.
Benefits of Berkshire’s “management by abdication” –
2017 Meeting
AUDIENCE: Every Berkshire shareholder knows about the stock
market value of Berkshire, but my question is about the value of Berkshire
to the world.
For instance, the value of Apple to the world has been iPhones. The
value of GEICO is cost-effective auto insurance. The value of 3G is
improved operations.
But about Berkshire, I just don’t know. In managing Berkshire’s
subsidiaries, as Mr. Munger once famously said, you practice ‘delegation
just short of abdication.’ So, hands-on management can’t be the answer.
That means the majority of Berkshire’s subsidiaries would do just as
well if they were to stay independent companies. So that’s my question.
What is the value of Berkshire to the world?”
BUFFETT: Yeah, well, the — I would say the question about — I’m
with him to the point where he says that our — which he accurately
describes as “delegation to the point of abdication.” But I would argue that
that abdication, actually, in many cases, will enable those businesses to be
run better than they would if they were part of the S&P 500 and the target,
perhaps, of activists or somebody that wants to get some kind of a jiggle in
the short term. So I think that our abdication actually has some very
positive value on the companies. But that, you know, you’d have to look at
it company by company.
We’ve got probably 50 managers in attendance here. And naturally,
they’re not going to say anything, probably, on television or anything where
they knock a certain thing. But get them off in a private corner and just ask
them whether they think their business can be run better with a
“management by abdication” from Berkshire, but with also all the capital
strengths of Berkshire, that when any project that makes sense can be
funded in a moment without worrying whether the banks are still lending,
like in 2008, you know, or whether Wall Street will applaud it or something
of that sort.
So I think our hands-off style, actually, I think can add significant value
in many companies, but we do have managers here you could ask about
that. We certainly don’t add to value by calling them up and saying that
we’ve developed a better system, you know, for turning out additives at
Lubrizol, or running GEICO better than Tony Nicely can run it or anything
of the sort. But we have a very objective view about capital allocation. We
can free managers up. I would say that we might very well free up at least
20 percent of the time of a CEO in the normal public — who would have —
otherwise have a public company — just in terms of meeting with analysts,
and the calls, and dealing with banks, and all kinds of things that,
essentially, we relieve them of so that they can spend all of their time
figuring out the best way to run their business. So I think we bring
something to the party, even if it — even if we’re just sitting there with our
feet up on the desk. Charlie?
MUNGER: Yeah. We’re trying to be a good example for the world. I
don’t think we’d be having these big shareholders meetings if there weren’t
a little bit of teaching ethos in Berkshire. And I’ve watched it closely for a
long time. I’d argue that that’s what we’re trying to do, is set a proper
example. Stay sane. Be honest. Yeah. So I’m proud of Berkshire, and I
don’t worry too much if we sell Coca-Cola.
BUFFETT: I would say, you know, GEICO is an extraordinarily well-
run company and it would be extraordinarily well-run if it were public. But
it has gone from 2-and-a-fraction percent of the auto insurance market to 12
percent. And part of the reason — the real key is GEICO and Tony Nicely
— but part of the reason is that when at least two of our competitors — and
big competitors — said that they would not meet their profit objectives if
they didn’t lighten up their interest in new business, eight or 10 months ago,
I think our business decision to step on the gas is a better business decision.
But I think that GEICO, as a public company, would have more trouble
making that decision than they do when they’re part of GEICO [Berkshire].
Because we are thinking about nothing but where GEICO’s going to be in
five or 10 years, and if that requires having new— we want new business
cost to penalize our earnings in the short-term. And other people have
different pressures. I’m not arguing about how the —how they behave,
because they have a different constituency than GEICO has with Berkshire
and what Berkshire has with its shareholders, in turn. And I think in that
case, our system’s superior. But it’s not because we work harder. Charlie
and I don’t do hardly anything.
Berkshire’s buying advantage: “There just isn’t anyone
else” – 2016 Meeting
AUDIENCE: My question is, where do you want to go fishing for the
next three to five years? Which sectors are you most bullish on, and which
sectors are you most bearish on?
BUFFETT: Yeah. Charlie and I do not really discuss sectors much. Nor
do we let the macro environment or thoughts about it enter into our
decisions. We’re really opportunistic. And we, obviously, are looking at all
kinds of businesses all the time. I mean, it’s a hobby with us, almost —
probably more with me than Charlie. But we’re hoping we get a call, and
we’ve got a bunch of filters. And I would say this is true of both of us. We
probably know in the first five minutes or less whether something is likely
to — or has a reasonable chance of happening. And it’s just going to go
through there, and it’s going to — first question is, “Can we really ever
know enough about this to come to a decision?”
You know, and that knocks out a whole bunch of things. And there’s a
few. And then if it makes it through there, there’s a pretty good —
reasonable chance we’re going to — we may do something. But it’s not
sector specific. We do love the companies, obviously, with the moats
around the product long — where consumer behavior can be, perhaps,
predicted further out. But I would say it’s getting harder to — for us,
anyway — to anticipate consumer behavior than we might’ve thought 20 or
30 years ago.
I think that it’s just a tougher game now. But we’ll measure it and we’ll
look at it in terms of returns on present capital, returns on prospective
capital. A lot of people give you some signals as to what kind of people
they are, even in talking in the first five minutes, and whether you’re likely
to actually have a satisfactory arrangement with them over time. So a lot of
things go on fast, but we know the kind of sectors we kind of like to — or
the type of business we’d kind of like to end up in. But we don’t really say,
“We’re going to go after companies in this field, or that field, or another
field.” Charlie, you want to?
MUNGER: Yeah. Some of our subsidiaries do little bolt-on acquisitions
that make sense, and that’s going on all the time. And, of course we like it
when that happens. But I would say the general field of buying whole
companies, it’s gotten very competitive. There’s a huge industry of doing
these leveraged buyouts. That’s what I still call them.
The people who do them think that’s a kind of a bad marker, so they say
they do private equity. You know, it’s like a janitor calling himself the chief
of engineering or something. But at any rate, the people who do the
leveraged buyouts, they can finance practically anything in about a week or
so through shadow banking. And they can pay very high prices and get very
good terms and so on. So, it’s very, very hard to buy businesses. And we’ve
done well, because there’s a certain small group of people that don’t want to
sell to private equity. And they love the business so much that they don’t
want it just dressed up for resale.
BUFFETT: We had a guy some years ago, came to see me, and he was
61 at the time. And he said, “Look, I’ve got a fine business. I got all the
money I can possibly need.” But he said, “There’s only one thing that
worries me when I drive to work.” Actually, there’s more than one guy’s
told me that that’s used the same term. He said, “There’s only one thing that
bothers me when I go to work. You know, if something happens to me
today, my wife’s left.
“You know, I’ve seen these cases where executives in the company try
to buy them out cheap or they sell to a competitor and all the people —” He
says, “I don’t want to leave her with the business. I want to decide where it
goes, but I want to keep running it, and I love it.” And he said, “I thought
about selling it to a competitor, but if I sell it to a competitor, you know,
their CFO’s going to become the CFO of the new company, and there, you
know, on down the line.
“And all these people who helped me build the business, you know,
they’re — a lot of them are going to get dumped. And I’ll walk away with a
ton of money, and some of them will lose their job.” He said, “I don’t want
to do that.” And he says, “I can sell it to a leveraged buyout firm, who
would prefer to call themselves private equity, but they’re going to leverage
it to the hilt and they’re going to resell it. And they’re going to dress it up
some, but in the end, it’s not going to be in the same place. I don’t know
where it’s going to go.” He said, “I don’t want to do that.” So he said, “It
isn’t because you’re so special.” He says, “There just isn’t anyone else.”
And if you’re ever proposing to a potential spouse, don’t use that line,
you know. But that’s what he told me. I took it well, and we made a deal.
So, logically, unless somebody had that attitude, we should lose in this
market. I mean, you can borrow so much money so cheap. And we’re
looking at the money as pretty much all equity capital. And we are not
competitive with somebody that’s going to have a very significant portion
of the purchase price carried in debt, maybe averaging, you know, 4 percent
or something.
MUNGER: And he won’t take the losses if it goes down. He gets part
of the profit if it goes up.
BUFFETT: Yeah, his calculus is just so different than ours. And he’s
got the money to make the deal. So, if all you care about is getting the
highest price for your business, you know, we are not a good call. And we
will get some calls in any event. And we can offer something that —
wouldn’t call it unique, but it’s unusual. The person that sold us that
business and a couple of others that have — actually it’s almost, word for
word, the same thing they say. They are all happy with the sale they made,
very happy. And, you know, they are — they have lots and lots and lots of
money, and they’re doing what they love doing, which is still running the
business. And they know that they made a decision that will leave their
family and the people who work with them all their lives in the best
possible position. And that’s — in their equation, they have done what’s
best.
But that is not the equation of many people, and it certainly isn’t the
equation of somebody who buys and borrows every dime they can with the
idea of reselling it after they, you know, maybe dress up the accounting and
do some other things. And when the disparity gets so wide between what a
heavily debt-financed purchase will bring as against an equity-type
purchase, it gets to be tougher. There’s just no question about it. And it’ll
stay that way.
Giving Weschler and Combs more to manage wouldn’t
help them – 2017 Meeting
AUDIENCE: Warren. Since Todd Combs and Ted Weschler joined
Berkshire, the market cap of the company has doubled, and cash on hand is
now nearly a hundred billion dollars. It doesn’t look like Todd and Ted have
been allocated new capital on the same relative basis. Why?
BUFFETT: Well, actually, I would say they have been. I think we
started out with two billion. That could be wrong, but my memory was two
billion with Todd when he came with us. And so, there have been
substantial additions. And, of course, their own capital has grown just
because in a sense, they retain their own earnings. So yeah, they are
managing a proportion of Berkshire’s capital — also measured by
marketable securities — I think they’re managing a proportion that’s pretty
similar, maybe even a little higher than when each one of them entered. And
Ted entered a year or two after Todd.
You know, I think they would agree that it’s tougher to run 10 billion
than it is to run one or two billion. I mean, your expectable returns go down
as you get into larger sums. But the decision to bring them on has been
terrific. I mean, they’ve done a good job of managing marketable securities.
They made more money than I would’ve made with that same, what is now
20 billion, but originally was two billion. And they’ve been a terrific help in
a variety of ways beyond just money management.
And they’re smart. They have money minds. They are good, specifically,
at investment management. But they’re absolutely first-class human beings.
And they really fit at Berkshire. Charlie gets credit for Todd. He met
Charlie first. And I’ll claim credit for Ted. And I think we both feel very
good about the decisions. Charlie?
MUNGER: After all, it came up that way. And that is not the normal
way headquarters employees think. It’s a pretense that everybody takes on,
but the reality is different. And these people really, deeply think like
shareholders. And they’re young, and smart, and constructive. So we’re all
very lucky to have them around.
 BUFFETT: Yeah. Their mindset is a hundred percent, “What can I do
for Berkshire,” not, “What can Berkshire do for me?” And, believe me, you
can spot that over time with people. And on top of that, you know, they’re
very talented. But, you know, it’s hard to find people young, ambitious,
very smart, that don’t put themselves first. And every experience we’ve
had, they did not put themselves first. They put Berkshire first. And believe
me, I can spot it when people are extreme in one direction or another.
Maybe I’m not so good around the middle, but you couldn’t have two better
people in those positions.
But you say, “Well, why don’t you give them another 30 billion each or
something?” I don’t think that would improve their lives or their
performance. They may be handling more as they go along, but the truth is,
I’ve got more assigned to me than I can handle at the present time, as
proven by the fact that we’ve got this 90 billion-plus around. I think there
are reasonable prospects for using it. But if you told me I had to put it to
work today, I would not like the prospect.
“If I died tonight, I think the stock would go up
tomorrow.” – 2017 Meeting
AUDIENCE: Mr. Buffett, we all hope you win the record as mankind’s
oldest living person. But at some point, you and/or Charlie will go, and
Berkshire stock may then come under selling pressure.
My question is, if Berkshire stock falls to a price where share repurchase
is attractive, can we count on the board and top management to repurchase
shares?
I ask this question both because of past comments you have made about
not wanting to take advantage of shareholders and because some of the
passages in the owner’s manual lead me to believe this might be an instance
when the board does not choose to repurchase shares.
Can you clarify what course of action we might expect about
repurchases in the circumstances I have outlined?
BUFFETT: Yeah. Well, as far as I’m concerned, they’re not taking
advantage of shareholders if they buy the stock when it’s undervalued.
That’s the only way they should buy it. But in doing so — there were a few
cases back when Charlie and I were much younger — where there were
very aggressive repurchases — or the equivalent of repurchases — by
people. And the repurchases, incidentally, made a lot more sense than they
do now. But they were done by people who either — for various techniques
— tried to depress the shares.
And if you’re trying to encourage your partners to sell out at a depressed
price by various techniques, including misinformation, I think that’s
reprehensible. But our board wouldn’t be doing that. I’ll take exception to
the first part of it, but I’ll still answer the second. I think the stock is more
likely to go up. If I died tonight, I think the stock would go up tomorrow.
And there’d be speculation about break ups and all that sort of thing. So, it
would be a good Wall Street story that, you know, this guy that’s obstructed
breaking up something that — where some of the parts might sell for more
than the whole. They wouldn’t necessarily but might sell for — temporarily
— for more than the whole. And it would happen. So I would bet in that
direction.
But if, for some reason, it went down to a level that’s attractive, I don’t
think the board is doing anything in the least that’s reprehensible by buying
in the stock at that point. No false information, no nothing. It should — And
their buying means that the seller would get a somewhat better price than if
they weren’t buying. And the continuing stockholders would benefit. So I
think it’s obvious what they would do. And I would think it’s obvious that
it’s pro-shareholder to do it. And I think they would engage in pro-
shareholder acts as far as the eye can see. I mean, we’ve got that sort of
board.
I’d “much rather make money for Berkshire than for
myself” – 2016 Meeting
AUDIENCE: In December, 2015, you filed a personal 13-G evidencing
a roughly 8 percent ownership position in the real estate investment trust
Seritage Growth Properties, which to my knowledge is not paralleled as a
Berkshire investment.
Alternatively, in September, 2015, Warren filed a personal 13-G
evidencing ownership in Phillips 66, which is paralleled as a Berkshire
investment.
My question is, how do you decide when making a personal investment
for your own account versus an investment for Berkshire? I understand
market cap and ownership sizing are the likely factors, but does it still not
behoove him to invest for the shareholder’s benefit in a company like
Seritage that might have significant upside, and where are you putting your
personal money to work?
BUFFETT: Right. I do not own a share, or never have owned, a share of
Phillips 66, so I’m not sure where that person — what he’s referring to. It
may be that there’s some way when the form is filled out that — that
because I’m CEO of Berkshire that on some line it imputes ownership to
me or something.
The answer is I’ve never owned a share of Phillips. And Seritage is a
real estate investment trust that had a total market value of under $2 billion
when I bought it. And my situation is that I have about 1 percent of my net
worth outside of Berkshire and 99 percent in it, and I can’t be doing things
that Berkshire does. So a Seritage, with a $2 billion market cap, is not really
something that is of a Berkshire size. Plus we’ve never owned a real estate
investment trust to my knowledge, or my memory, in Berkshire at all.
So, I could buy that and not have any worry about a conflict with
Berkshire. As a practical matter, you know, my best ideas are off-limits for
me because they go to Berkshire, if they’re sizable enough to have a
significance to Berkshire. We will not be making investments — unless it’s
something very odd — we will not be making investments in companies
with a total market cap of a couple billion while we’re our present size.
But every now and then I see something that’s sub-size for Berkshire
that I’ll put that 1 percent of my net worth in, and the rest of the stuff is off-
limits, basically, unless Berkshire’s all done buying something or — I
mean, I own some wells that I bought a long, long time ago, and Berkshire
was not interested. I mean, we bought enough or something at the time, or
maybe we didn’t have money for investment. But I try to stay away from
anything that could conflict with Berkshire. And if I’d been buying Phillips,
when Berkshire was buying Phillips, or immediately — or prior — or
subsequently, there could be a case where it’d be OK when — we might
have hit some limit. But the answer is I didn’t buy any, and I’ve never
owned any. Charlie?
MUNGER: Well, part of being in a position like that we occupy, is you
really don’t want conflict of interest or even the appearance of it. And it’s
been 50 or 60 years, when have we embarrassed Berkshire by some of our
side-gunning? Both of us have practically nothing of significance, in the
total picture, outside of Berkshire. I’ve got some Costco stock, because I’m
director of Costco. Berkshire’s got some Costco stock. There are two or
three little overlaps like that, but basically Berkshire shareholders have
more to worry about than some conflict that Warren and I are going to give
it. We’re not going to do it.
BUFFETT: It may sound a little crazy, and it’s only because I can afford
to say this, but I would much rather make money for Berkshire than for
myself. I mean, it isn’t going to make any difference to me anyway. I’ve got
all the money I could possibly need, and way more, and on balance, my
personality — everything’s more wound up in how Berkshire does than I
am myself, because I’m going to give it all away. So, I know my end result
is zero, and I don’t want Berkshire’s end result to be zero. So I’m on
Berkshire’s side.
Berkshire’s culture “runs deep” – 2015 Meeting
AUDIENCE: Dear Warren, dear Charlie. I’m Lawrence from Germany,
and in my home country, you two are regarded as role models for integrity.
And at Berkshire, its culture is its most important competitive edge. Hence,
my question: how can we, as outside investors, judge the state of
Berkshire’s culture long after you depart from the company?
BUFFETT: Well, I think it’s fair that you do, you know, come with a
questioning mind to the culture, post-me and Charlie, but I don’t think you
should be surprised, but I think you will be very pleased with the outcome.
I think Berkshire’s culture runs as deep as any large company could be
in the world. It’s interesting you’re from Germany, because just three or
four days ago, we closed on a transaction with a woman named Mrs. Louis,
in Germany. And she and her husband had built a business.
Over 35 years, they’d spent developing this business of retail shops,
dealing with motorcycle owners, and lovingly, had built this business. Her
husband died a couple years ago. And Mrs. Louis, in Germany — it came
about in sort of a roundabout way — but she wanted to sell to Berkshire
Hathaway. And, you know, that would not have been the case 30 or 40
years ago. So it’s a vital part of Berkshire to have a clearly defined, deeply
embedded culture that pervades the parent company, the subsidiary
companies. It’s even reflected in our shareholders. And, you know, when
you have 97 percent of the shareholders vote and say we don’t want a
dividend, I don’t think there’s another company like that in the world.
So we have a — our directors sign on for it and, there again, we behave
consistently. Instead of having a bunch of directors who are — love to be a
director because they’d like to get $2- or $300,000 a year for showing up
four times a year, we have directors who look at it as a great opportunity for
stewardship, and who want their ownership, and have their ownership,
represented by buying stock in the market, exactly like you do.
So we try to make clear and define that culture in every way possible,
and it’s gotten reinforced over the years to an extreme degree. People who
join us believe in it; people who shun us don’t believe in it, so it’s self-
reinforcing. And I think it’s a virtual certainty to continue and to become
even stronger, because once Charlie and I aren’t around, it will be so clear
that it’s not the force of personality, but it’s institutionalized that, you know,
nobody will doubt that it will really continue for decades and decades and
decades to come. Charlie?
MUNGER: Well, as I said in the annual report, I think Berkshire is
going to do fine after we’re gone. In fact, it will do a lot better, in dollars.
But, percentage-wise, it will never gain at the rate we did in the early years,
and that’s all right. There’s worse tragedies in life than having Berkshire’s
assets and have the growth rates slow a little.
BUFFETT: I should say culture is everything at Berkshire. And if you
run into a terrible culture, it’s — you know, the Salomon thing was up there
on the screen, and it would be hard to turn Salomon into a Berkshire. I don’t
think we could have done it.
It’s just a different world. And that doesn’t mean that Berkshire is a
monastery, by any means, but it does mean that — I can guarantee you that
Charlie and I, and a great, great many of our managers, are more concerned
— and Carrie Sova who put this meeting together and everything — they
are more concerned about getting a good job done for Berkshire than what
they get out of it themselves. And, you know, it’s great to work around
people like that.
Building culture and values at Berkshire – 2015
Meeting
AUDIENCE: I wanted to follow up on the questions that have been
asked about culture and stewardship at Berkshire Hathaway, because I’m
currently in year five of helping build a firm called Matarin Capital
Management, and we discuss values and culture quite a bit. And so I’d like
some tips from you about what characteristics you thought about 45 years
ago when you were building the culture and values at Berkshire Hathaway.
 BUFFETT: Yeah, well I think culture has to come from the top, it has to
be consistent, it has to be part of written communications, it has to be lived,
and it has to be rewarded when followed, and punished when not. And then
it takes a very, very long time to really become solid.
And obviously, it’s much easier to do it if you inherit a culture you like,
and it’s easier in smaller firms, I think. I can think of a lot of companies —
very big companies — in this country, and I don’t think if Charlie and I
were around them for ten years we’d be able to accomplish much of
anything. So you know, it is a grain of sand type of thing. And people just
like your child, you know, sees what you do rather than what you say, it’s
the same thing in a business, that people see how those above them behave
and they move in that direction. They don’t all move that way.
We’ve got 340,000 people now working for Berkshire, and I will
guarantee you that there’s, you know, some number —a dozen, maybe 50,
maybe 100 —that are doing something today that they shouldn’t be doing.
And what you have to do is when you find out about it, you have to do
something about it. I didn’t like, for example, making 30-year mortgages at
Clayton five years ago. And I said, “We’re not going to make 30-year
mortgages, you know, unless they’re government guaranteed.” And when
we bought Kirby, there was some sales practices we didn’t like, and we
particularly didn’t like them with older people. So we put in a golden age
policy where, if you’re over 65 and you bought a Kirby and for any reason
you didn’t like it, any time up to a year, you could send it and get all of your
money back. And I encouraged people to write me if they had a problem on
anything like that.
So it takes a lot of time, and you know, at GEICO we’re going to you
know, we’re going to settle millions and millions and millions of claims.
And I will guarantee you that when two people are in an auto accident, they
don’t agree 100 percent of the time on whose fault it was, so they may go
away and be unhappy for a time. But we work all the time at trying to
behave with other people as if our positions were reversed. That’s what
Charlie’s always advised in all our activities, and we’ve tried to follow it.
And we’re certainly far from perfect at it, but if you keep working at it, it
does get results.
Berkshire isn’t “too big to fail”- 2015 Meeting
 AUDIENCE: If government regulators deem Berkshire Hathaway’s
reinsurance business too big to fail, how would government regulation of
the reinsurance business affect Berkshire Hathaway?
BUFFETT: Yeah. The question — there’s two, essentially, regulatory
aspects to it. One is there’s the European — and I hope I’m describing this
right — I may be wrong, a little bit, on some technicality — there’s a
European group that is looking at insurers, generally, and has designated, I
believe, nine or so insurance companies as — I’m not sure what they call
them — but they deserve special attention, I’ll put it that way. There’s a
technical name for it.
The one that’s more relevant in the United States is the Financial
Stability Oversight Committee, I believe they call it, which designates so-
called SIFIs, systemically important financial institutions. And large banks
are in that category. And then the question is, what non-banks are in it? And
they designated General Electric, and Prudential, and recently,
Metropolitan, and Metropolitan is fighting the designation. The question is
whether — question isn’t just whether you’re large. I mean, Exxon Mobil is
large, Apple is large, Walmart’s large, and nobody thinks about them as
SIFIs.
The definition on a non-bank SIFI would be 85 percent of revenues
coming from financial matters, and we don’t come remotely close on that. I
mean, we’re 20 percent or thereabouts. But the real question is whether
problems that Berkshire might encounter could destabilize the financial
system in the country. And we have not been approached. Nobody’s ever
called me. They spent a year with Metropolitan, even before they
designated them. So there’s — we have no reason, in logic, or in terms of
what we’ve heard, to think that Berkshire would be designated as a SIFI. I
mean, during the last time of trouble, we were about the only party that was
supplying help to the financial system, and we will always conduct
ourselves in a way where the problems of others can’t hurt us in any
significant way.
And I think we’re almost unique, among financial institutions, in the
layers of safety that we’ve built into our system, in terms of both cash, and
operating methods, and everything else. So, it’s a moot question. The law
exists. We haven’t been approached about it as far as I know. Apparently it
takes a year or so, even if they approach you while they listen to your
presentation and look at your facts. And I do not think Berkshire Hathaway
comes within miles of qualifying as a SIFI. Charlie?
MUNGER: I think that’s true. But I think that, generally speaking, there
is still too much risk in a lot of high finance. And the idea that Dodd-Frank
has removed it all permanently is nonsense. And people like hanging onto
it. You know, trading derivatives, as a principle, if you’re shrewd, is a lot
like running a bucket shop in the ’20s or a gambling parlor in the current
era. And you have a gambling parlor that you have a proprietary edge in,
and you say it’s sharing risk, and helping the economy, and so forth. That’s
mostly nonsense. The people are doing it because they like making money
with their gambling parlor, and they like favorable labels instead of
unfavorable labels. So, I think there’s still danger in the financial system.
And I also think our competitors don’t like it that they deserve regulation
and we don’t. And I think there’s danger in that too.
BUFFETT: Yeah. I haven’t read much about it, but my understanding is
that Dodd-Frank actually weakens the power of the Fed, and to some extent
the Treasury, too, to take the kind of actions they took in 2008, primarily.
And those powers were needed to keep our system, in my view, from really
going into utter chaos. The ability to say, and have people believe you when
you say it, that whatever needs to be done, will be done, has resided in the
Federal Reserve and with the Central Bank — the European Central Bank.
And the fact that people believed when Hank Paulson said that the
money market funds are going to be guaranteed, that stopped a run on 3 1/2
trillion of money market funds that had lost 175 billion in deposits in the
first three days, there, back in September of one week. If that — if people
hadn’t believed that, you would have seen that 175 billion turn into a trillion
very quickly. I mean, the system would have gone down.
So when you have a panic, you have to have someone, somewhere, who
can say and be believed, and be correctly believed, that he or she will do
whatever it takes. And you saw what happened in Europe when Draghi
finally said that, and you saw what happened in the United States when
Bernanke and Paulson, more or less together, said it. And if you don’t have
that, panics will accelerate like you cannot believe.
You know, in the old days, the only way you could stop a run on a bank
was, basically, for somebody to come and pile up gold. I mean, they used to
race it to the branches that were having a problem. I remember reading the
history of the Bank of America on that, and how they would put out runs
before the Federal Reserve existed, and the only thing that stopped it was to
pile up gold. I mean, if the CEO of the bank came out and said, you know,
our Basel II ratio is 11.4 percent, the line would just lengthen. It would not
get the job done. Gold got the job done.
Bernanke and Paulson got the job done, but the only way they got it
done was saying, “We’re guaranteeing new commercial paper. We’re
guaranteeing that the money market funds won’t break the bank. You know,
we’re going to do whatever’s necessary.” I think Dodd-Frank weakens that,
and I think that’s a terrible thing to weaken.
Unlikely that one person will run both investments and
operations – 2015 Meeting
AUDIENCE: Warren, you have up to this point said that Berkshire in
the future will have a chief executive officer and one or more chief
investment officers. You haven’t explicitly said that a chief investment
officer cannot be the CEO, but that has, for me at least, been implied.
Berkshire has been successfully managed for 50 years by a chairman and
vice chairman whose principal experience was in allocating capital amongst
a number of businesses and industries with which they were familiar and
whose attributes they could compare.
Since capital allocation is the key skill needed for a company structured
the way Berkshire is, why couldn’t the company’s principal decision maker
in the future also be someone who is experienced in choosing among
different reinvestment options, with perhaps a second outstanding person
expert in operations acting as chief operating officer, albeit a route of the
hands-off one, given Berkshire’s extreme decentralization?
BUFFETT: That’s a very good question. It’s not inconceivable. It’s very
unlikely, Jonny, that a chief investment officer has a — will have — or
should have — a significant array of skills that would be useful, also, for a
chief executive officer.
But I would say, also, that I would not want to vote to put somebody
whose sole experience had been investments in charge of an operation like
Berkshire, who had not had any, also, significant operating experience. I’ve
said that I’m a better investment manager because I’ve been an operating
manager, and I’m a better operating manager because I’ve been the
investment manager. But I’ve learned a lot through operations that I
wouldn’t have learned if I’d stayed in investments all my life. I would not
have been equipped to run it. I learned a lot of things about operations by
being in operations. So if you had somebody that had the dual experience
and was very good at investments, but had a lot of experience in operations,
that would be conceivable. Otherwise, I wouldn’t vote that way. Charlie?
MUNGER: Well, every year at Berkshire, as now constituted, the
owned and controlled businesses get more and more important, and the
measurable securities are relatively less important. So, I think it would be
crazy not to go with the tide to some extent. And we need more — we need
expertise beyond that of a typical portfolio analyst.
BUFFETT: Yeah. But the CEO should have some real understanding of
investments and investment alternatives and all that. I’ve seen a lot of
businesses run by people that really don’t understand the math of investing
or capital allocation very well. So having a dual background is useful, but
actually our operating managers know — some of them know — a lot about
investing.
Could activists take control after Buffett? – 2015
Meeting
AUDIENCE: Charlie, question about activism. Activism continues to
grow and, as Charlie stated at the 2014 annual meeting, he sees it getting
worse instead of getting better. So the question is, we hope that Charlie and
Warren will both be around forever, but, unfortunately, there will be a time
when they’re no longer here to manage the store.
If Warren is giving away his shares to charity over a ten-year period
through his estate plan, and activists become increasingly more powerful,
how will Berkshire defend itself from activists in the near and far future?
And would you consider it a failure if Berkshire were broken up in the
future and shareholders received a significant premium? And for you to
consider it success, what would the premium need to be?
BUFFETT: Well, if it’s run right, there won’t be a premium in breaking
it up. It may look like it. I mean, people will say there’s subsidiary A that
would sell at 20 times earnings and the whole place would sell, like, at 15.
But the whole place won’t sell at 15 if you spin off the one at 20. I mean, it
— I laid out in the annual report — there are a lot of benefits to Berkshire,
in terms of having the companies in the same corporate tax return.
So I think it’s unlikely that, on any long-term basis or intermediate-term
basis, that the value of the parts will be greater than the value of the whole.
The best defense against activism is performance. But lately, there’s been so
much money pouring into activist funds, because it’s been easy to raise
money for that — I mean, it’s been a successful way of handling money for
the last few years, and institutional money then starts flowing into it, and
the consultants recommend it, and all of that sort of thing.
And so, I would say that much of what I see as activism now, people are
really reaching, in terms of the kind of companies that they’re talking about
and the claims of what they can do and that sort of thing. I think the biggest
— you know, if you’re talking about my shares getting dispensed over 10
years after my estate is settled, and the voting power they have, and I think,
by the time that gets to be a reality, I think the market value of Berkshire is
likely to be so great that even if all the activists gathered together, they
wouldn’t be able to do very much about it. Berkshire is likely to really be a
very, very large organization 10 or 20 years from now.
MUNGER: Besides, the Buffett super-voting power is going to last a
long time.
BUFFETT: Last a long time, yeah. I’ve got these friends that call me —
other companies and they’ve got an activist, and they’re worried about it. I
just tell them to send them over to Berkshire. We’ll welcome them. We’d
love to have them buy our stock because they’re not going to get anyplace.
And that’s going to be the situation for a long, long time. We should be a
place where people can dump their activists. Charlie?
MUNGER: Well, the thing that I find interesting is, in the old days
when many stocks sold for way less than they were worth, in terms of
intrinsic value, it was very rare to find an American corporation buying the
stock in.
Now, in many cases, the activists are urging corporations to buy the
stock in heavily, even though it’s selling for more than it’s worth. This is
not a constructive activity, and it’s not a desirable change, and it’s not a
very responsible activity for the activists.
BUFFETT: There’s been more stupid stuff written on such a simple
activity as stock repurchase. Both stupid stuff written and stupid stuff done.
I mean, it’s a very simple decision, in my view, as to whether you
repurchase your shares. You know, you repurchase them if you’re taking
care of the needs of the business and your stock is selling for less than it’s
intrinsically worth. I don’t see how anything could be more simple. If you
had a partnership and the partner wanted to sell out to you at 120 percent of
what the business is worth, you’d say forget it. And if he’d want to sell out
to you for 80 percent of what it’s worth, you’d take it. It’s not complicated.
But there’s so many other motivations that entered into people’s minds
about deciding whether to repurchase shares or not. It’s gotten to be a very
contorted and kind of silly discussion in many cases. And Charlie is right. If
you look at the history of share repurchases, you know, it falls off like crazy
when stocks are cheap and it tends to goes up dramatically when stocks get
fully priced. But it’s not what we’ll do at Berkshire. At Berkshire, you
know, we will presently — you know, we would love to buy it by the bushel
basket at 120 percent of book, because we know it’s worth a lot more than
that. We don’t know how much more, but we know it’s worth a lot more.
And we don’t get a chance to do that very often.
But if we do get a chance, we’ll do it, big time. But we won’t buy it in at
200 percent of book, because it isn’t worth it. You know, it’s not a
complicated question, but people that — I’ve been around a lot of
managements that announce they’re going to buy X worth and then they
buy it regardless of price. And a lot of times the price makes sense. But if it
doesn’t, they don’t seem to stop, and nobody tries to — seems to want to
stop them.
 Berkshire underperforms when stock market is strong –
2014 Meeting
AUDIENCE: You’ve stated several times in the past that if
management, you, wasn’t capable of delivering a better return than the
index, than management wasn’t doing the job. Then you said that the
yardstick should be any five-year period. You’ve just missed your five-year
period comparison. How come you didn’t tackle the issue in your annual
shareholder letter? Are you changing the yardstick, and what’s next?
BUFFETT: No, we’re not changing the yardstick. But I would point out
that we said, actually, in the 2012 report — and it’s in the upper half of the
first page — we pointed out how we do worse in very strong years and
better in poor years. And I said then, “If the market continues to advance in
2013, our streak of five-year wins will end.” I didn’t say it might end, or
could end, or anything. It was obvious that if you have five strong years in a
row, we will not beat the S&P. And that will be true in the future, for sure.
And of course, last year was — I think there were two years in the last
40 or so that the market was up more than it was last year. So, despite the
things mentioned about President Obama, the stock market seems to have
done quite well. We will underperform in very strong up years. We’ll
probably, more or less, match in moderate up years. We’ll do better than
average in even years or down years.
And I have said, and I’ll continue to say, and it’s been true that over any
cycle, we will — I think we will overperform. But there’s no guarantee on
that. But it was clearly said — like I say, on the first page of the 2012 report
— that if the market went up, we would have a five-year streak of
underperformance. And that’s exactly what happened. Charlie?
MUNGER: Well, we should remember that Warren’s standard talks
about net worth of Berkshire increasing, after full corporate taxes, at
roughly 35 percent. And the indexes aren’t paying any taxes. And so,
Warren has set a ridiculously tough standard and has so far met it over a
long period of time. In the last couple of years, the net worth of Berkshire,
after full corporation income taxes, went up, what, 60?
Why sellers trust Berkshire with the companies they’ve
built – 2014 Meeting
 AUDIENCE: Berkshire is known to buy into whole companies for
many, many years. But earlier in your careers, that was not known. And
typically, acquisitions of other companies is very disruptive. Employees
fear losing their jobs as a redundancy. And managers really have to think
twice and be diligent about it. So my question is, what do you do to gain the
trust of founders or owners of the companies you have bought out in the
past?
BUFFETT: Well, we’ve kept our word to them. And now we have to be
very careful about what we promise, because we can’t promise, for
example, never to have a layoff in a business we buy, because who knows
what the world holds. But we can promise that we won’t sell their business,
for example, if it turns out to be disappointing, as long as it doesn’t run into
the prospect of continuing losses or having significant labor problems.
But we are keeping certain businesses that you would not get a passing
grade at business school on if you wrote down our reasons for keeping
them. But the reason is, we made a promise. And we put that — we not
only make the promise, we put it in the back of the annual report now —
we’ve done it for 30 years or so — where we list the economic principles.
And we put it there because we believe it. But we put it there, also, so that
the managers who sell us their— the owners who sell us their business —
know they can count on it.
And if we behave differently, you know, the word would get around.
And it should get around. So, we can make promises. We can’t make
promises we’ll never change employment. We can’t even make a promise
that we’ll keep a business forever. But we can promise what we do promise,
which is that if it turns out to be somewhat disappointing on earnings, but
does not promise, sort of, unending losses, or if we have labor problems, we
can keep that promise. And we have kept that promise. We’ve only had to
get rid of a few businesses, including our original textile business. We
promise the managers, you know, that they are going to continue to run
their businesses. And believe me, if we didn’t do it, the word would get
around on that very quickly. But we’ve been doing it now for 49 years. And
we’ve put ourselves in a class that is hard for other people to compete with,
if that’s important to the seller of a business.
A private equity firm is going to be totally unimpressed by what’s in the
back of our annual report. They don’t care. And that’s — there’s nothing
wrong with that. That’s their business. But for somebody that’s built up
their company over 20 or 30 or 40 years — and maybe their father or
grandfather built it up even before that — some of those people care about
where their businesses go. They’re very rich, they’ve accomplished all
kinds of things in life. And they don’t want to build up something which
somebody else tears apart very quickly believe they handing it over to a few
MBAs who want to show their stuff.
So, we do have a unique — close to a unique — asset at Berkshire. And
as long as we behave properly, we will maintain that asset. And really, no
one else will have much luck in competing with us. But it doesn’t solve all
problems, and frankly, it’s the way we want to operate anyway. So we’re
comfortable with it. The sellers that do come to us that care about their
businesses are comfortable with it. And I think it’ll continue to work well.
Why Berkshire maintains $20B cash cushion – 2014
Meeting
AUDIENCE: As you know, Berkshire’s cash balances are an issue for
some investors. Especially with excess cash being in the 25 to $30 billion
range the last couple of years, and Berkshire having a more difficult time
than it’s had historically reinvesting capital as quickly as it comes in.
Although Berkshire did provide $3.5 billion of the $3.6 billion of cash that
was used to acquire NV Energy last year, with MidAmerican funding the
remainder with debt, was there something that kept Berkshire from
providing all of the capital for the acquisition, perhaps via inter-company
debt?
And on a separate note, can you provide with us some insight into the
decision to allow MidAmerican to retain all of its earnings, while
Burlington Northern, which spent $3 billion on capital expenditures last
year and is on pace to spend $5 billion this year, continues to pay a
distribution to Berkshire, all while it takes on additional debt to help fund
capital spending?
BUFFETT: Yeah. MidAmerican, now renamed Berkshire Hathaway
Energy — we’ll call it BH Energy — will have multiple opportunities, I
hope, and we’ve seen two of them in the last 12 months, to buy other
businesses. And, as you noted, we spent a substantial amount of money on
NV Energy and two days ago we agreed to buy transmission lines in
Alberta. So, we will — we hope we will — and so far we’ve been able to
— come up with really large businesses to buy at BH Energy. That will not
— at BNSF, we will spend a lot of money to have the best railroad possible.
But we’re not going to be buying other businesses. So, we distribute
substantial money out of BNSF and we will continue to do so because it’ll
earn substantial money. And it can easily handle the debt that it has and will
incur. Whereas, at Berkshire Hathaway Energy, we have pretty much the
appropriate level of debt at both the subsidiary and the parent company
level. So as we buy things, we need not only the retained earnings that we
have, but occasionally we need some money from the shareholders. And
there are three shareholders of BH Energy. Berkshire owns 90 percent and
then Greg and Walter Scott have the balance. And so, if we make a large
acquisition and we need a little more equity, we will have a pro rata
subscription, which the other two shareholders are welcome to participate
in. But if they don’t — if they decided not to, it wouldn’t hurt them. They’d
still have an improvement in the value of their shares. So those two
companies are quite different that way.
I hope that more possible deals for Berkshire Hathaway Energy come
along. And I think they will. So we may invest many, many, many billions
there. We will invest billions at the railroad, but it’ll all be to improve the
railroad. It won’t be to buy additional businesses. So far this year, if you
think about it, counting yesterday — now, two of these deals started last
year — but we’ve spent 5 billion on acquisitions, roughly. And, of course,
in the first quarter, we spent another 2.8 billion on property, plant, and
equipment. But we are finding — we are finding things to do that tend to
sop up the cash.
We always will have $20 billion around Berkshire. We will never be
dependent on the kindness of strangers. It didn’t work that well for Blanche
DuBois, either. But in any event, the — we don’t count on bank lines. You
know, we don’t count on — we don’t count on anything. There will be
some time in the next 100 years, and it may be tomorrow and it may be 100
years from now, and nobody knows, you know, where we cannot depend on
anybody else to keep our own strength and to maintain our operations.
And we spent too long building Berkshire to have that one moment
destroy us. I mean, we lent money, as you probably know, to Harley-
Davidson at 15 percent. And we lent it at a time when short term rates were
probably a half a percent. Well, Harley-Davidson is a fine company — but
it, like Goldman Sachs and General Electric and a bunch of other
companies —we lent money to Tiffany’s — they — you know, they needed
— when you need cash, you know, it’s the thing — it’s the only thing —
you need. And it’s because other people aren’t coming up with it.
I’ve always said that, you know, cash is — available cash or credit — is
a lot like oxygen: that you don’t notice it — the lack of it — 99.9 percent of
the time. But if it’s absent, it’s the only thing you notice. And we don’t want
to be in that position. So we will keep 20 billion. We will never go to sleep
at night worrying about any event that’s taken place that could hurt our
ability to keep playing our game. And above 20 billion, we’ll try to find
ways to invest it intelligently. And so far, we’ve generally done it. I mean,
right — you know, we always had something above that. But, you know,
we’ve spent a fair amount of money so far this year. We’ll probably spend
more later in the year. So, so far, I feel we could get the cash out at
reasonable returns. We never feel a compulsion to use it though, just
because it’s there. Charlie?
MUNGER: I think we’re very lucky to have these businesses that can
employ a lot of new capital at very respectable rates. And if — earlier in the
history of Berkshire, we didn’t have such automatic opportunities. And now
that we’re so affluent, we really are way better off having these
opportunities. It’s a blessing. I mean, who would want to get rid of
MidAmerican and the Burlington Northern Railroad? Nobody in his right
mind. I mean, we love the opportunity to invest more capital intelligently in
a world where short-term interest rates are half a percent, or lower.
BUFFETT: And we love the opportunity to go in with 3G at Heinz and
employ significant capital. We’ll get the chances to use capital. Eventually,
you know, compound interest will catch up with us. And it’s certainly
dampened things. But it hasn’t delivered its final blow yet.
How Berkshire benefits from being a conglomerate –
2014 Meeting
AUDIENCE: You’ve been looking for a credentialed bear to ask
questions at this meeting. I’m not it. In fact, selling short on Berkshire
would be quite silly. However, in the long term, Berkshire has a business
model of owning over 70 non- financial, unrelated businesses — bricks and
chocolate, for example — which is a model that has almost universally not
worked well in the past 100 years of American business.
 The model has worked well for you two, Mr. Buffett and Mr. Munger,
who are uniquely talented. But the question is, the probabilities do not seem
likely to be favorable that their successors will be able to have it continue to
work nearly as well.
BUFFETT: OK. Actually, it’s interesting. The model has worked well
for America. I mean, if you look at all these disparate businesses in
America, they’ve done extraordinarily well over time. So if you want to
look at the Dow Jones average as one entity — now, it was a changing
group of companies over a 100-year period — but, you know, any business
unit that goes from 67 — or 66 — to 11,497 while paying you out a fair
amount of money every year, actually is a model that’s worked pretty well.
But it hasn’t been, of course, under one management. But owning a
group of good businesses is not a terrible business plan. A good many of the
conglomerates were put together to perform financial magic of one sort or
another. They were based upon — you know, if you go back to the Litton
Industries and the Gulf and Westerns and just — you could name them by
the hundreds. They were really put together — Ling-Temp — LTV, and —
on the idea of serial issuance of stock, where you issued stock that was
selling at 20 times earnings to buy businesses that were at ten times
earnings.
And it was the idea that somehow you could fool people into
continuously riding along on this chain letter scheme, without the primary
thought being given to what you were actually building in the management.
I think our business plan makes nothing but great sense, to own a great
group, a group of great businesses, diversified, outstanding managers,
conservatively capitalized. And with one enormous advantage, which
people don’t really understand. I mean, capitalism is about, in an important
way, it’s about the allocation of capital. And we have a system at Berkshire
where we can allocate capital without tax consequences. So we can move
businesses from See’s Candy, to generate surplus capital, to other areas. It
doesn’t hurt See’s in the process, and we can move it, as the textbooks say,
to places where capital can be usefully employed, like wind farms or
whatever it may be.
So you know, there’s nobody else really better situated to do that than
Berkshire Hathaway, and it makes perfectly good sense. But it has to be
applied with business-like principles, rather than with stock promotion
principles. And I would say a great many of the conglomerates have had, as
their underlying premise, stock promotion. You know, you saw what
happened with Tyco or — the serial acquirers were usually interested in
issuing a lot of stock.
I think if you had to look at one of the primary indicators of what sort of
species you’re viewing, you would see if they’re issuing stock continuously,
one way or another, they’ve probably got a chain letter game going on. And
that does come to a bad end. I think our method of acquiring for cash, and
acquiring good businesses, and building many, many sources of growing
earning power, I think, is a terrific model. Charlie?
MUNGER: Well, I think there’re a couple of differences between us
and the people who are generally thought to have failed at a conglomerate
model. One is we have an alternative when there’s nothing to buy in the
way of companies. We’ve got more securities to buy in the insurance
company portfolios. And that’s an option which most of the other
conglomerates didn’t have.
Number two, they were hell bent to buy something or other quite
regularly. And we don’t feel any compulsion to buy. We’re willing to just sit
until something makes sense. We’re quite different. We’re a lot more like
the Mellon brothers than we are like Gulf and Western. And the Mellon
brothers did very, very well for what, 50, 60, 70 years. And they were
willing to own minority interest, they were willing to grow companies, they
were a lot like us. And so I don’t think we’re a standard conglomerate. And
I think we’re likely to continue to do very well, sort of like if the Mellon
brothers had just kept young forever.
Berkshire lagging the S&P 500 – 2013 Meeting
AUDIENCE: Warren, you measure Berkshire’s corporate performance
based on growth and book value per share. The table on page 103 of the
annual report shows book value per share has grown at less than an average
12 percent a year for 9 of the last 11 5-year periods, yet in your last annual
letter, you state, quote, “The S&P 500 earns considerably more than 12
percent on net worth,” and then you say, “That seems reasonable for
Berkshire also.”
Why do you say that, given the past record showing that Berkshire has
not been earning that much, or is it that you expect to earn that much,
recognizing that it is not assured in the future?
 BUFFETT: It certainly is not assured in the future. And the last ten or
so years have not been the best for business, generally. But if the stock
market continues to behave in 2013 as it has so far, this will be the first
five-year period where the gain in book value per share has fallen short of
the market performance, including dividends, of the Standard & Poor’s.
And that won’t be a happy day, but it won’t be — it won’t totally
discourage us because it will be a period where the market has gone up in
every one of the five years.
And as we’ve regularly pointed out, we’re likely to be better in down
years as we did in 2008, for example, which is the year that gets dropped
this year. We’re likely to do better in down years, relatively, than we do in
up years. Charlie, how do you feel about the prospects of — I should point
out, incidentally, that we use book value because it’s a calculable figure,
and it does serve as a reasonable proxy of the year-to-year change in the
intrinsic value of Berkshire. If we could really give you a figure for intrinsic
value, and back it up, that would be the important figure.
As I pointed out, if we gain a million policyholders at GEICO, that
actually adds a billion-and-a-half to intrinsic value, and it doesn’t add a
dime to book value. So, there’s a significant gap, which is why we’re
willing to buy in stock at 120 percent of book value — a significant gap
between the two. But book value is a useful tracking device.
I should point out also — I did this in the annual report in respect to
Marmon — when we buy the ISCAR stock, which we pay about 2 billion
for, the day we buy it, we mark it down in terms of our book value by
roughly a billion dollars. So a billion dollars comes off our book value for
making a purchase which we regard as quite satisfactory. And so there are
these distortions that occur. But in the end, we have to do better for you
than you would do in an index fund. And if we don’t, we aren’t earning our
pay. And I think we’ll do that in the future, but I don’t think we’ll do it
every year, and we’ve proven that in the last few years. Charlie?
MUNGER: Well, I confidently expect that Berkshire’s going to do quite
well over the long term. I don’t pay much attention to whether it’s five
years or three years or — I think we have momentums in place that are
going to do OK. Of course, we won’t do as well in the future, in terms of
annual gain averaged out, because our past returns were almost
unbelievable. So, we’re slowing down, but I think it’ll still be very pleasant.
 Preserving Berkshire’s culture after Buffett – 2013
Meeting
AUDIENCE: When you think about Berkshire in the decade after
you’re gone, my question is what worries you the most? I know nothing
keeps you up at night, but what are your big worries and, you know, what
can go wrong?
BUFFETT: Well, it’s a good question. It’s one we think about all the
time. And that’s why the culture is all important, the businesses we own are
all important, because those trains will keep running and people will keep
calling GEICO the day after I die. There’s no question about that. And the
key is preserving the culture and having a successor as CEO that will have
more brains, more energy, and more passion for it, even than I have. And
it’s the number one subject that our board considers at every meeting, and
we’re solidly in agreement as to whom that individual should be. And I
think the culture has just become intensified year after year after year. And I
think Charlie would agree with that.
I mean, we always knew what we were about when we first got involved
with Berkshire, but making sure that everybody that joined us, that the
owners, the shareholders, directors, managers, everybody that bought into
this what I think very special culture. That took time, and I think it’s really
one of a kind now, and I think that it will remain one of a kind. I think that
anything that came in — any foreign-type behavior would be cast out
because people have self-selected into this group, into the company, and it
would be rejected like a foreign tissue if we got the wrong sort of person in
there.
We have a board that is especially devoted to Berkshire. We don’t hold
them by paying them huge amounts, it may be noted. And we have people
who have brought their companies to Berkshire because they want to be
part of it, as did ISCAR. So, I think that whoever succeeds me — and it will
be a lot of newspaper stories and people — after six months, there will be a
story that says, you know, it isn’t the same thing. It will be the same thing.
You can count on that.
As Berkshire grows, it’s paying more for bigger
acquisitions – 2013 Meeting
AUDIENCE: In the past, Berkshire has purchased cheap or wholesale.
For example, GEICO, MidAmerican, your initial purchase of Coca-Cola.
And, arguably, your company has shifted to becoming a buyer of pricier and
more mature businesses, for example, IBM, Burlington Northern, Heinz,
and Lubrizol. These were all done at prices, sales, earnings, book value
multiples, well above your prior acquisitions and after the stock prices rose.
Many of the recent buys might be great additions to Berkshire’s portfolio of
companies; however, the relatively high prices paid for these investments
could potentially result in a lower return on invested capital.
You used to hunt gazelles. Now you’re hunting elephants. As Berkshire
gets bigger, it’s harder to move the needle. To me, the recent buys look like
preparation for your legacy, creating a more mature, slower-growing
enterprise. Is Berkshire morphing into a stock that has become to resemble
an index fund and that, perhaps, is more appropriate for widows and
orphans, rather than past investors who sought out differentiated and
superior compounded growth?
BUFFETT: Yeah. There’s no question that we cannot do as well as we
did in the past, and size is a factor. Actually, the — it depends on the nature
of markets, too. We might — there will be times when we’ll run into bad
markets, and sometimes there our size can even be an advantage. It may
well have been in 2008.
But I would take exception to the fact that we paid fancier prices in
some cases than, say — in GEICO, I think we paid 20 times earnings and a
fairly-sized — good-sized — multiple of book value. So we have paid up
— partly at Charlie’s urging — we’ve paid up for good businesses more
than we would have 30 or 40 years ago. But it’s tougher as we get bigger, I
we’ve always known that would be the case. But even with some
diminution from returns of the past, they still can be satisfactory and we are
willing — there’s companies we should of bought 30 or 40 years ago that
looked higher priced then, but we now realize that paying up for an
extraordinary business is not a mistake. Charlie, what would you say?
MUNGER: Well, we’ve said over and over again to this group that we
can’t do as well in percentage terms per annum in the future as we did in
our early days. But I think I can make the short seller’s argument even
better than he did, and I’ll try and do that. If you look at the oil companies
that got really big in the past history of the world, the record is not all that
good.
If you stop to think about it, Rockefeller’s Standard Oil is practically the
only one, after it got monstrous, continued to do monstrously well. So,
when we think we’re going to do pretty well in spite of getting very big,
we’re telling you we think we’ll do a little better than the giants of the past.
We think we’ve got a better system. We don’t have a better system than
riding up oil, you know, but we have a better system than most other
people.
BUFFETT: Yeah. In terms of the acquisitions we’ve made in the last
five years, I think we feel pretty good about those and, obviously, including
the Heinz. We are buying some very good businesses. We actually, as we
pointed out, we own eight different businesses that would each be on the
Fortune 500 list if it was a separate company, and then in a few months,
we’ll own half of another one, so we’ll have eight-and-a-half, in effect.
Well, you haven’t convinced me yet to sell the stock, Doug, but keep
working.
 Too many subsidiaries for Buffett’s successor to
manage? – 2013 Meeting
AUDIENCE: Thanks, Warren. You probably have a couple of dozen
direct reports from the multitude of noninsurance businesses that Berkshire
owns, and this arrangement seems to work wonderfully for you. But I
wonder if this could potentially pose a challenge to your successors.
Adding smaller units like Oriental Trading and the newspaper group,
even if they are economically sound transactions individually, could
arguably add to the unwieldiness of the organization.
How do you weigh the benefits of adding earnings with the risk of
leaving a less-focused and harder-to-manage company for even highly
capable successors?
BUFFETT: Yeah. I think my successor will probably organize things a
little differently on that, Jonathan, but not dramatically so. And we’ll
certainly never leave the principle of our CEOs running their businesses in
virtually all important ways except, perhaps — except for capital allocation.
But, I actually have delegated a few units to an assistant of mine, and my
guess is that my successor will modestly organize things in a somewhat
different way. I’ve grown up with these companies and with the people and
everything, and so it’s a lot easier for me to communicate with dozens of
managers, sometimes very infrequently, because they don’t need it. It just
— sometimes it’s their own preference to some degree. And somebody
coming in fresh would want, obviously, to be — to understand very well —
and that person will understand, in fact, understands now — very well, the
major units.
But you’re right, when you get down to units that we have, you know,
some businesses that make, you know, only 5 or $10 million a year or
something like that. And my guess is that it gets rearranged a little bit, but
that won’t really make any difference. I mean, the real money is made by
the big businesses. It will continue to be made by the big businesses, and
the insurance business, and a little change in reporting arrangements, maybe
one more person at headquarters if they go crazy, will really take care of
things. Charlie?
MUNGER: Well, I think, of course, it would be unwieldy to have so
many businesses, a lot of them small, if we were trying to run them through
an imperial headquarters that dominated all the details. But our system is
totally different. If your system is decentralization, almost to the point of
abdication, what difference does it make how many subsidiaries you have?
BUFFETT: Yeah. It’s working pretty well now. It’ll work pretty well
afterwards, too. But my successor is not going to do things identically. It’d
be a mistake. But the culture will remain unchanged. And the preeminence
of the managers of the operating units will remain unchanged, and then
every now and then something comes along and a change needs to be made.
Sometimes it’s through death or disability, or sometimes a mistake is made.
But, in the end, we’re now trying to acquire companies that are at least at
the $75 million pretax level.
Incidentally, the best acquisitions certainly from my standpoint makes it
easier — is the one — is these bolt-ons that I talked about in the annual
report, in which we did, I think, 2-and-a-half billion worth of last year,
because they fall under the purview of managers that we’ve got terrific
confidence in and they add really nothing to what happens at headquarters.
And, of course, the best bolt-ons out of all are when we do buy a — buy out
— a minority interest.
When we buy $2 billion worth more of ISCAR, or a billion-and-a-half
more of Marmon, with another billion-and-a-half to come in the next year,
you know, that’s adding earning power without it, you know, posing any
more work. Those are the ultimate in bolt-on acquisitions, getting more of a
good thing. Charlie, any more on that, or—?
MUNGER: Well, if you stop to think about it, if it were all that difficult,
what we’re doing now would be impossible, and it isn’t.
BUFFETT: I’ll have to think about that a little.
MUNGER: Well, think if 20 years ago they said to you, can you make
something this size with a staff of ten or something in a little office in
Omaha? People would’ve thought that’s ridiculous. But it’s happened, and
it works.
Berkshire’s edge for acquisitions – 2013 Meeting
AUDIENCE: Warren, both you and Charlie have described over the
years how you have built Berkshire Hathaway to be sustainable for the long
term. I am having difficulty explaining to my 13-year-old daughter, and
frankly, to many adults, also, in easy to understand terms, Berkshire’s
business model and long-term sustainable, competitive advantage.
 Can you give all of us, and particularly my daughter, Katie, who is here
today, the Peter Lynch two-minute monologue explaining the business of
Berkshire Hathaway and its merits as a long-time investment for future
decades?
MUNGER: All right. I’ll try that. We’ve always tried to stay sane, and
other people, a lot of them, like to go crazy. That’s a competitive advantage.
Number two: as we’ve gotten bigger, we’ve used this sort of golden rule
that we want to treat the subsidiaries the way we would want to be treated if
we were in the subsidiaries. And that, again, is a very rare attitude in
corporate America, and it causes people to come to us who don’t want to
come to anybody else. That is a long-term competitive advantage.
We’ve tried to be a good partner to people who come to us and need a
partner with more money. That is a competitive advantage. And so, we are
leaving behind a field that’s very competitive and getting into a place where
we’re more unusual. This was a very good idea. I wish we had done it on
purpose.
BUFFETT: A few years ago, a person who’s in this audience, I believe,
came to me and he was in his 60s, and he said that for about a year, he’d
been thinking about selling his business. And the reason he had been
thinking about it was not because he wanted to retire. We’re not — we very
seldom buy businesses from people who want to retire. He didn’t want to
retire at all. He loved what he was doing. But he’d had an experience in
buying a business a few years earlier from a family where he had known the
fellow that built it, the fellow had died, and then just everything bad started
happening in the family and the business and the employees, everything
else.
So he really wanted to put to bed the question of what happened with his
business. It wasn’t that he really cared a lot about monetizing it or having
the money. He just wanted to put his mind at ease, that what he had spent
lovingly building up over 30 or 40 years was not going to get destroyed —
or that his family would get destroyed if he died. So he said he thought
about it a year. And he thought about it and he thought, “Well, if I sell it to
one of my competitors” — and they would be a logical buyer, they usually
are. That’s why we have antitrust laws. If he sold it to a competitor, they
would come in and basically they would put their people in charge.
They would have all these ideas about synergy, and synergy would mean
that the people that had helped him build the business over 30 years would
all get sacked and that the acquiring company would come in like Attila the
Hun and be the conquering people, and he just didn’t want to do that to the
people that helped him over the years. And then he thought he could — he
might — sell it to some private equity firm. And he figured that if he sold it
to them, they’d load it up with debt, which he didn’t like, and then they’d
resell it later on. And so he would, again, have lost control and they might
do the same thing that he didn’t want to have happen in the first place, in
terms of selling it to a competitor, or whatever it might be.
So when he came to me, he said, “It really isn’t because you’re so
attractive.” But he said, “You’re the only guy left standing. You know, I
mean, you’re not a competitor, you’re not a private equity firm, and I know
I will get a permanent home with Berkshire and that the people that have
stayed with me over the years will continue to get opportunities and they
will continue to work for me. I’ll keep to get doing what I love doing, and I
won’t have to worry about what will happen if something happens to me
tonight.”
Well, that company has turned out to be a wonderful acquisition for
Berkshire, and our competitive advantage is we had no competitors. And I
think — well, we will see more of that. We’ve seen a lot of that over the
years. We’ll see more of it. Charlie, anything? And I don’t think you
mentioned the fact that developing a shareholder base, too, that’s different
than —we do look at shareholders as partners, and, you know, it’s not
something a public relations firm wrote for us, or anything of the sort. We
want you to get the same result we get, and we try to demonstrate that in
every way we can.
Berkshire is not “too big to fail” – 2013 Meeting
AUDIENCE: Is Berkshire too big to fail? On the same topic, how do
you feel about Dodd-Frank? And now that it’s being implemented, how is it
impacting Berkshire’s insurance businesses and our investments in banks
like Wells Fargo and Goldman Sachs?
BUFFETT: Yeah. I don’t think it’s affecting Berkshire’s insurance
businesses, to my knowledge. I mean to my knowledge, you know, we’ve
never had anything that impinges on our activity arising from a too-big-to-
fail doctrine. The capital ratios for large banks are being established at
somewhat higher levels than smaller banks, and that obviously affects
return on equity. The ratios, as I understand it, for Wells are not as high as
they would be for Citi or J.P. Morgan, but they’re higher than they would be
for a local bank in Omaha. And the higher the capital ratio, the lower the
return on equity will be.
I consider the banking system in the United States to be stronger than,
certainly, any time in the last 25 years. Capital is dramatically higher. A
very significant part of the loans that were troublesome are gone. The loans
that have been put on the last four or five years are far better. The Canadian
banking system is very strong, but compared to Europe, I think our banks
— or compared to our banks of 20 years ago — I think they’re dramatically
stronger than they were then.
I do not worry about the banking system being the cause of the next
bubble. I mean, it will be something else. I mean, we will have bubbles in
capitalism. Capitalism goes to excess, and it’s because of the humans that
operate it. And we will have that again, but usually you don’t get it the
same way as you got it before. I don’t think it will be a housing boom next
time. But, I am — you know, I feel very good about our investment in Wells
Fargo. I feel very good about our investment in U.S. Bank. I feel very good
about our investment in M&T. All of those are very strong banks pursuing,
in my view, sound practices, and they should result — they should be
decent investments, over time.
They won’t earn as high a return on tangible equity, nearly as high a
return as they would have seven or eight years ago, because the rules have
been changed. And they have been changed to provide thicker equities, and
that pulls down return on equity. Charlie has been known to express himself
on this subject, and I’ll give him the floor.
MUNGER: Well, I’m a little less optimistic about the banking system,
long-term, than you are. I would like to see something more extreme, in
terms of limiting bank activities. I do not see why massive derivative books
should be mixed up with insured — deposits that are insured — by the
country.
Howard Buffett’s role after his father isn’t running
Berkshire – 2013 Meeting
AUDIENCE: Someday your son, Howard, will become Berkshire’s
nonexecutive chairman. Berkshire is a very complex business, growing
more complex as the years pass. Howard has never run a diversified
business, nor is he an expert on enterprise risk management. Best as we
know, he hasn’t made material stock investments, nor has he ever been
engaged in taking over a large company. Away from the accident of birth,
how is Howard the most qualified person to take on this role?
BUFFETT: Well, he’s not taking on the role that you described. He is
taking on the role of being nonexecutive chairman in case a mistake is made
in terms of who is picked as a CEO. I don’t — I think the probabilities of a
mistake being made are less than 1 in 100, but they’re not 0 in 100. And
I’ve seen that mistake made in other businesses. So it is not his job to run
the business, to allocate capital, do anything else. If a mistake is made in
picking a CEO, having a nonexecutive chairman who cares enormously
about preserving the culture and taking care of the shareholders of
Berkshire, not running the business at all, it will be far easier to then make
another change. And that — he is there as a protector of the culture, and he
has got an enormous sense of responsibility about that, and he has no
illusions about — at all — about running the business.
He would have no interest in running the business. He won’t get paid for
running the business. He won’t have to think about running the business.
He’ll only have to think about whether the board and himself — but as a
member of the board — but whether the board may need to change the
CEO. And I have seen many times, really many times, over 60-plus years or
— well, probably 55 years as a director — times when a mediocre CEO,
likable, you know, not dishonest, but not the person who should run it,
needs to be changed. And it’s very, very hard to do when that person is in
the chairman’s position.
It’s a bit easier now that you have this procedure where the board meets
at least once a year without the chairman present. That’s a very big
improvement, in my view, in corporate America. Because it — a board is a
social institution, and it is not easy for people to come in, we’ll say, to
Chicago or New York or Los Angeles once every three months, have a few
committee meetings, and maybe have some doubts about whether they’ve
really got the right person running it. They may have a very nice person
running it, but they could do better. But who’s going to make a change?
And that’s the position that the nonexecutive chairman, in this case,
Howard, will be in. And I know of nobody that will feel that responsibility
more in terms of doing that job as it should be done than my son, Howard,
you know.
 MUNGER: Yeah. I think the Mungers are much safer — with Howard
there. You’ve got to remember, the board owns a lot of stock, you know.
We’re thinking about the shareholders. We’re not trying to gum it up for the
shareholders.
BUFFETT: Yeah. After my death, whatever it may be in terms of value
then, but it would be $50 billion worth of stock, will, over a period of time,
go to help people around the world and it makes an enormous difference,
you know, whether the company behind that stock is doing well or not.
And both Charlie and I have seen — we’ve seen some — more than one
example — of where a CEO who might be a six on a scale of 10, and is
perfectly likable and has, perhaps, helped select some of the directors that
sit there, and continues to run the business year after year when somebody
else could do it a whole lot better. And it can be hard to make that — very
hard — to make that change if that person controls the agenda and, you
know, keeps everybody busy when they come into town for a little while.
MUNGER: You can have a CEO that’s nine out of 10 on everything but
with deep flaws, too. It helps to have some objective person with a real
incentive sitting in the position Howard will be in.
BUFFETT: The example I’ve used in the past, I mean, that — you
know, that blessed are the meek for they shall inherit the earth, but after
they inherit the earth, will they stay meek? Well, that could be the problem,
you know, if somebody got named CEO of Berkshire. It could be a position
where people might want to throw their weight around in various ways.
You may have noticed that in the annual report, in terms of our
newspapers, I said, you know, I am not going to be telling them who to
endorse for president. Ten of them endorsed Romney and two endorsed
Obama. I voted for Obama, but I’m not going to change that. But when I
write that sort of thing, I’m trying to box in my successor, to some degree,
too, and we do not want somebody using Berkshire Hathaway as a power
base in the future. We want them to be thinking about the shareholders. It’s
that simple.
MUNGER: Sometimes somebody becomes CEO who has the
characteristic of a once-famous California CEO, and they used to say about
him he’s the only man who could strut sitting down.
Buffett’s successor will also be the “chief risk officer” –
2012 Meeting
 AUDIENCE: Mr. Buffett, you have stated that you believe the CEO of
any large financial organization must be the chief risk officer as well. “So,
at Berkshire, does the leading CEO candidate for successor, as well as the
backup candidates, possess the necessary knowledge, experience, and
temperament to be the Chief Risk Officer?
The related question is about the Goldman Sachs, GE, and Bank of
America deals, all giving Berkshire warrants, that you have negotiated.
Could these specific transactions could have been done with similar terms
without your involvement. If not, what implications would that have for
Berkshire’s future returns?
BUFFETT: Yeah. I do believe that the CEO of any large, particularly
financial-related, company should — it really should apply beyond that, but
certainly with a financially-related company — should be the chief risk
officer. It’s not something to be delegated. In fact, Charlie and I have seen
that function delegated at very major institutions, and the risk committee
would come in and report every week, every month, and they’d report to the
directors, and they’d have a lot of nice figures lined up, and be able to talk
in terms of how many sigmas were involved and everything, and the place
was just ripe for real trouble.
So I am the chief risk officer at Berkshire. It’s up to me to understand
anything that could really hit us in any catastrophic way. My successor will
have the same responsibility, and we would not select anybody for that job
that we did not think had that ability. It’s a very important ability. It ranks
right up there with allocation of capital and selection of managers for the
operating units. It’s not an impossible job. I mean, it — the basic risks could
involve excessive leverage and they — and then the — they could involve
excessive insurance risk.
Now, we have people in charge of our insurance businesses that
themselves worry very much about the risk of their own unit and, therefore,
the person at the top really has to understand whether those three or four
people running the big insurance units are correctly assessing their risks,
and then also has to be able to aggregate and think how they accumulate
over the units. That’s where the real risk is, unless you’re engaging in a lot
of leverage in your financial structure, which isn’t going to happen. Before I
answer the second, Charlie, would you like to comment on that?
MUNGER: Well, not only was this risk decision frequently delegated in
America, but it was delegated to people who were using a very silly way of
judging risk that they’ve been taught in some our leading business schools.
So this is a very serious problem this man is raising. The so-called “Value at
Risk” and the theories that outcomes in financial markets followed a
Gaussian curve, invariably. It was one of the dumbest ideas ever put
forward.
BUFFETT: He’s not kidding, either. We’ve seen it in action. And the
interesting thing is we’ve seen it in action with people that know better, that
have very high IQs, that study lots of mathematics. But it’s so much easier
to work with that curve, because everybody knows the properties of that
curve, and can make calculations to eight decimal places using that curve.
But the only problem is that curve is not applicable to behavior in markets,
and people find that out periodically.
The second question: we’re well equipped, Carol, to answer that
question. We would not have anybody — we’re not going to have an arts
major in charge of Berkshire. The question about negotiated deal, there’s no
question that partly through age, partly through the fact we’ve accumulated
a lot of capital, partly the fact that I know a lot more people than I used to
know, and partly because Berkshire can act with speed and finality that is
really quite rare among large American corporations, we do get a chance,
occasionally, to make large transactions. But that takes a willing party on
the other side.
When we got in touch with Brian Moynihan at the Bank of America last
year, I had dreamt up a deal which I thought made sense for us, and I
thought it made sense for the Bank of America, under the circumstances
that existed. But I’d never talked to Brian Moynihan before in my life. I had
no real connection with the Bank of America. But when I talked to him, he
knew that we meant what we said, so that if I said we would do 5 billion
and — I laid out the terms of the warrants — and I said we’d do it. And he
knew that that was good and that we had the money. And that ability to
commit, and have the other person know your commitment is good for very
large sums and, maybe, complicated instruments, is a big plus. Berkshire
will possess that subsequent to my departure.
I don’t think that every deal that I made would necessarily be makeable
by a successor, but they’ll bring other talents as well. I mean, I can tell you
the successor that the board has agreed on can do a lot of things much,
much better that I can do. So, if you give up a little on negotiated financial
deals, you may gain a great deal, just in terms of somebody that’s more
energetic about going out and making transactions. And those deals have
not been key to Berkshire.
If you look at what we did with General Electric and Goldman Sachs,
for example in those two deals in 2008, I mean, they were OK, but they are
not remotely as important as, you know, maybe buying Coca-Cola stock,
which was done in the market over a period of six or eight months. We
bought IBM over a period of six or eight months last year in the market. We
bought all these businesses on a negotiated basis. So the values in Berkshire
that have been accumulated by some special security transaction are really
just peanuts compared to the values that have been created by buying
businesses like GEICO or ISCAR or BNSF, and the sort.
It’s not a key to Berkshire’s future, but the ingredients that allowed us to
do that will still be available and, to some extent, peculiar to Berkshire, in
terms of sizable deals. If somebody gets a call from most people and they
say, you know, we’ll give you $10 billion tomorrow morning, and we’ll
have the lawyers work on it overnight, and here are the terms and there
won’t be any surprises, they’re inclined to believe it’s a prank call or
something of the sort. But with Berkshire, they believe it can get done.
Charlie?
MUNGER: Yeah, and in addition, a lot of the Berkshire directors are
terrific at risk analysis. Think of the Kiewit Company succeeding, as it has
over decades, in bid construction work on oil well platforms and tunnels
and remote places and so on. That’s not easy to do. Most people fail at that
eventually, and Walter Scott has presided over that bit of risk control all his
life and very routinely. And Sandy Gottesman created one of my favorite
risk control examples. One day he fired an associate, and the man said,
“How can you be firing me when I’m such an important producer?” And
Sandy said, “Yes,” he says. “But I’m a rich old man and you make me
nervous.”
We don’t want Berkshire’s stock to be too high or too
low – 2012 Meeting
AUDIENCE: Since Berkshire will likely need to offer a stock
component for very large acquisitions like Burlington Northern, wouldn’t
Berkshire lower its cash outlay by increasing the price of its stock to near
fair value, perhaps by offering a 2 to 3 percent dividend or a promised
percentage of cash earnings? Might this have the effect of actually lowering
the cash outlay needed for such acquisitions? As 30-year shareholders with
almost $1 billion of exposure, we like this approach.
BUFFETT: Yeah. We would obviously prefer to have our stock sell at
exactly intrinsic business value, even though we don’t know that precise
figure, but Charlie and I would have a range that would not differ too
widely. And if it’s over intrinsic business value, and we could use it as part
of a consideration for buying something else at intrinsic business value, and
then use cash for the balance, you know, we would like that situation. And
that’s very likely to occur in the future. It’s occurred in the past.
Berkshire, without paying a dividend, has sold, probably, at or above
intrinsic value as much of the time in the last 35 or so years as it has below.
I mean, it will bob around. And I do not think a dividend would be a plus,
in terms of having it sell at intrinsic value most of the time. I think it might
be just the opposite. I mean, here we are, we’re willing to pay, you know,
110 cents on the dollar for what’s in there. So the idea of paying out money,
which we think is worth at least 110 cents on the dollar within the place,
and have it turn into 100 cents on the dollar when paid out, just is not very
attractive to us, unless we find we can’t do things in the future that make
sense.
But our goal is to have the stock sell at as close to intrinsic business
value as it can. But with markets — you know, the way markets operate,
most of the time it will be bobbing up or down from that level. And we’ve
seen that now for 40-plus years, and we’ve tried to, at least in a way, point
out what we think is going on. And if it ever — if it — and it will. I mean,
when it trades at intrinsic business value or higher, there may be times when
we will use it. We’d still prefer using cash, though. Cash is our favorite
medium of purchase just because we’re going to generate a lot of it. And we
hate giving out shares. We do not like the idea of trading away part of See’s
Candies or GEICO or ISCAR or BNSF. The idea of leaving you with a
lower percentage interest in those companies because of any acquisition
ambitions of ours is anathema to us. Charlie?
MUNGER: Well, what he suggested is a very conventional approach,
and we think it’s better for the shareholders to do it the way we’re doing it.
BUFFETT: I should point out, I’m in the position — giving away all of
my stock between now and 10 years after my death when my estate is
settled — but I’m giving it away every year. You know, it will do more
good, in terms of its philanthropic consequences, if it’s at a higher price
than lower price. I mean, there’s nobody here that has more of an interest in
the stock selling at what I’ll call a fair value, as opposed to a discount value,
than I do. I know I’m not a seller, but I’m disposing of the stock, and I
would rather have it buy, you know, X quantity of vaccines than 80 percent
of X. So it isn’t like we’ve got some great desire to have the stock sell
cheap. If it does sell cheap, we’ll, you know, we’ll buy it in, but our interest
is really in having it sell at, more or less, the fair value.
And we think if we perform reasonably well, in terms of running the
business, and if we tell the truth about the business, and explain to a
selected group of shareholders who are interested in that aspect of
investing, that over time, it will average that. And that’s happened over the
years, but it doesn’t happen every year. If people get excited enough about
internet stocks, they’re going to forget about Berkshire. When they get
disillusioned with internet stocks then — I’m going back 10 or 12 years on
that. But there have been times when people have gotten very excited about
Berkshire, and there have been times when they’ve gotten very depressed.
Charlie, anything?
 Berkshire lets managers paint their own pictures – 2012
Meeting
AUDIENCE: We spent a lot of time today talking about two out of the
three things you fellows said you spend a lot of time thinking about. One is
allocating capital; one is managing risk. We’ve had just one question related
to motivating your people and tied into executive compensation. So that’s
what I’m interested in learning more about: executive compensation, how
you motivate Berkshire managers, financial versus nonfinancial incentives.
Can you speak more about that?
BUFFETT: Yeah. Well, obviously, Charlie and I have thought a few
times about why do we do what we do when we don’t need the money at
all. And we jump out of bed excited about what we’re going to do every
day, and why is that the case? Well, we get the opportunity to paint our own
painting every day, and we love painting that painting, and it’s a painting
that will never be finished. And you know, if we had somebody over us that
was saying why don’t you use more red paint than blue paint, and we had
all the money in the world, we might tell them what they could do with the
paint brush. But we get to paint our own painting, and ours overlap.
We have more fun doing it together than we would have doing it singly,
because it is more fun to do with people around you that are pleasant and
interesting to be around, and we also like applause. So if that works with us,
we say to ourselves, why shouldn’t it work for a bunch of other people who
have long been doing what they like to do and now, in many cases, have all
the money they possibly need? But still, they may have to sell us their
business for one reason or another connected with family or taxes, who
knows what else?
But they really like what they’ve been doing. That’s part of the reason
they’ve been so good at it. So we give them the paint brush, let them keep
the paint brush, and we don’t go around and tell them to use more red paint
than blue paint or something of the sort. And we applaud and we try to
compensate them fairly, because though they aren’t primarily doing it for
the money in many cases, nobody likes to be taken advantage of. But that
has not been a big problem at Berkshire. We have not had compensation
problems over time.
If you think about it, over 40-odd years, the times when compensation
has been of importance are practically nil. And we’ll just take that we’ve
talked about the investment — the compensation of two investment people.
Those people are making below hedge fund standards, below private equity
standards, and having a less favorable tax treatment. They’ll still make a lot
of money, I mean, huge amounts of money. And I hope that they are having
a good time doing what they’re doing. I think that’s why they’re here.
And I think they’ll enjoy it a lot more over the years than going around
to a bunch of people explaining why they’re worth two and twenty even in
the years that aren’t so good and trying to attract new money when other
people are making bigger promises someplace else. It’s just a different way
to live your life. So we want to have our managers enjoying their lives and
enjoying their business lives. And we get rid of some of the things they
don’t like, a lot of them. I was with a fellow the other day that had come
from England. And he’s got plenty of business problems to work on, and
he’s spending a significant part of his time talking to investors, which does
him no good. I mean, he ought to be talking to customers or, you know,
employees or something, but he — I think a number of managers may have
to spend time talking to lawyers or talking to bankers or talking to investors
and what they really like to do is run their businesses, and we give them the
best opportunity to do that. So I can’t put passion into somebody about their
jobs, but I can certainly create a structure that will take that passion away
from them. And Berkshire is a negative art in that way.
We focus on not messing up something that’s already good, and that’s
my job. And I think the person that follows me will have a very similar job.
But we have a unique — we have a bunch of managers nobody else can hire
and, you know, how many companies of size can you say that about around
the country these days? And I think we will retain that advantage for many,
many decades to come. It works, and people know that it works within the
company. So it’s self-reinforcing, and there’s nothing like getting proof that
what you’ve designed works, to cause you desire to perpetuate it and to
build upon it. Charlie?
MUNGER: Well, and we don’t have any standard formulas like they
have in some big companies where X percent is on diversity and Y percent
is on something else and Z percent is on something else and everybody is
putting all this stuff through a big human resources department. And every
incentive arrangement with a key executive is different from every other, so
we can’t help you with a standard formula. We don’t have one.
 BUFFETT: Our businesses are all so different. It would be crazy to try
and have some master arrangement, you know, that involved return on
capital — there are some businesses that don’t use any capital in our
companies — or operating margins. You know, we could hire consultants in
compensation to come in and they would want to please the people they
were working for and get referred elsewhere. I mean, I will guarantee that
you can go to many corporations, if you’ve got a comp committee, it meets
periodically, and the human relations VP comes in and probably suggests a
compensation consultant to take. And, you know, who does a human
relations VP want to — whose approval do they want? The CEO’s. Whose
approval does the compensation consultant want?
Well, they want to get recommended elsewhere by the CEO and the
human relations VP. So what kind of a system do you get? You get what I
call ratchet, ratchet, and bingo, you know. We’re not going to have any of
that at Berkshire, and like I say it’s worked very well. Now, we’ve had
people make lots of money at Berkshire. I mean, we’ve got numbers in
eight figures, you know, a page-and-a-half or so, I saw it the other day, that
would be at a million dollars and over, and we’ll have more. But it does
relate to logical measures of performance in practically all cases. And the
amount of time we spend on it is just — I am the compensation committee
for 60 or 70 people, and I’m not overworked.
Why Berkshire hasn’t paid a dividend – 2012 Meeting
AUDIENCE: Based on your earlier comments you made this morning,
we understand you will buy back shares to help increase share value. Our
confusion, and appreciate clarification, arises as to why you are unwilling to
distribute a dividend on a sporadic basis when the stock is too expensive to
buy back, and you have the excess cash so that you could do that,
particularly in a low interest rate environment. We look forward to
clarification.
BUFFETT: Yeah. By and large, we feel, perhaps unjustifiably, but so
far justified, that we can create more than a dollar of present value by
investing. Sometimes, if the stock is cheap, we can create more than a
dollar of present value by simply repurchasing shares. But even if that
option isn’t available, we feel that by every dollar we retain, we can —
overall — we can turn that into a greater than a dollar of present value. And
for 47 years, that’s worked. I mean, we have — every dollar retained is
turned into more than a dollar of value.
So, if somebody wanted to create their own income stream out of it, they
were much better off selling a little bit of stock every year than they were
by getting a dividend out of it. They would have more money working per
share in Berkshire if they sold off 2 percent of their holdings than if we
actually paid them out in 2 percent dividends. So the math has been
compelling to this point. Now, the question is whether we can keep doing
that in the future. But so far, at any point in our history, if we had paid out
dividends — and I paid out 10 cents a share back in the 1960s which was a
big mistake, but — we won’t repeat that. If we paid out dividends, our
shareholders, net, would be worth less money than they are by having left it
in, and I think that will continue to be the case, but who knows? Charlie?
MUNGER: Well, I think the dividends will come in due course because
eventually we’ll find it difficult to multiply the rabbits, but we hope that
that evil day is delayed.
Using Berkshire’s stock for acquisitions – 2011 Meeting
AUDIENCE: I want to ask a question about the valuation of your
company. You said, “Price is what you pay and value is what you get. In
your letter to the shareholders this year, each Class A share owns about —
investment about $95,000, and each share commands an earnings of $6,000.
So in my simplistic way of calculation, each share is worth $95,000 of
investment plus the earnings discounted at 7 percent. That’s another about
$90,000. So it adds up to about 185,000. Is that correct? Does that mean the
complexity of your empire is a value trap?
BUFFETT: We give those figures because we think they’re important,
both the investments per share and the operating earnings per share,
excluding earnings that come from the investments, and leaving out
insurance underwriting profits or losses, because we think at worst they’ll
break even, but they do bounce around from year to year. Those figures are
pretax on the operating earnings, so I’m not sure whether you’re applying
your discount factor to pretax or after-tax. But we think they’re important.
And I would expect — well, the operating earnings, you know, are almost
certain to increase. How much, you know, who knows? But that number is
likely to go up. The investments are still about the same as at year-end but
that — they could go up or down based on whether we’re able to buy more
operating businesses.
Our goal is to build both numbers to some extent, but our primary goal
is to build the operating earnings figures. We never — we — if Charlie and
I had to stick a number in an envelope in front of us as to what we thought
the intrinsic value of Berkshire was, well, neither one of us would stick a
figure, we’d stick a range, because it would be ridiculous to come up with a
single specific number, which encompasses not only the businesses we
own, but what we’re going to do with the capital in the future. But even our
ranges would differ modestly, and they might differ tomorrow, in terms of
how I would feel versus today, but not dramatically at all.
I would say this: I think — I certainly — well, you’ve received signals
once or twice when we said we would buy in our stock, we obviously
thought that it was selling below the bottom of a conservative range of
intrinsic value, and we did that once some years ago. And by saying so, of
course, the stock went up, and so we never got any stock bought. So there’s
sort of a self-defeating factor about taking the kind of approach to it that we
do, in terms of really telling people that the only reason we’ll buy in stock
is because we think it’s cheap. That is not standard practice in corporate
America at all. In fact, corporate America, to some extent, buys in their
stock more aggressively when it’s high than when it’s low. But they may
have some equation in their mind that escapes my reasoning power.
But we do not regard Berkshire as overpriced. And I would say that we
had, very recently, we had a very, very large international company that
might well have been interested in doing something with Berkshire, and it’s
a very nice company, but it’s bigger than we can handle unless we would
use a lot of stock. And we won’t use the stock. We just think our
shareholders would come out behind. It would be a wonderful company
and, you know, make a lot of headlines, but in the end our shareholders
would be poorer because our stock is a currency, and unless it’s fully
valued, it’s a big mistake to use it as a currency. Now, we used some in the
Burlington deal, but we used a whole lot more cash, and, in effect, we only
used 30 percent for stock, and it was worth doing, but it was painful. And if
Lubrizol had wanted to do a deal involving stock, we would not have done
it.
I told James Hambrick that right off the bat. So we had absolutely no
interest in buying Lubrizol — we were perfectly willing to give, you know,
close to $9 billion in cash, and in my view, we’re getting our money’s
worth. But we would not have given a significant portion of it in Berkshire
stock, because we would be giving away part of the businesses we already
own, and we like Burlington, and we like See’s Candy. We like ISCAR.
And to give away a portion of those, even to get another very good
business, would not make financial sense for our shareholders. So you can
draw your own deductions about our calculations of intrinsic value from
that statement.
Role of Berkshire’s next chairman – 2011 Meeting
AUDIENCE: You have always put great emphasis on hiring and
retaining managers that not only have exceptional talent but also adhere to
the higher standards of corporate ethics and behavior.
Recent events surrounding Mr. Sokol’s actions have demonstrated that
we were not very far from a situation where someone running Berkshire
Hathaway had great talent, but lacked the other quality that has made
Berkshire the envy of the business world. In some ways, we are relieved
these events happened when you were still at the helm. But coming back to
the succession plan that you have in place, how can you ensure that there
are no more Sokols in the lineup of successional managers that you have. B
BUFFETT: Yeah, he made an assumption there about Sokol being the
next in line, which I’m not sure was warranted. But he certainly was
entitled to think that he was a candidate. And that is, one of the reasons that
I think it’s a good idea if my son, Howard Buffett, who would get paid
nothing, and have no activities in the company, be the chairman after I’m
not around, because you can make a mistake in selecting a CEO.
I mean, I think the odds of us making a mistake are very, very low. And
certainly the candidate that I think is the leading candidate now, I would lay
a lot of money on the fact that he is straight as an arrow. But mistakes can
be made.
You know, the Bible says the meek shall inherit the earth, but the
question is, will they stay meek? The idea of having an independent
chairman, who would be voting a lot of stock — because even at my death,
because of the concentration of A stock and so on, the executors would
have a very significant block of stock — and if some mistake were made, it
would be easier to change if not only a very large block of stock were
available to express an opinion, but also if the chairmanship was not locked
in with the CEO. It’s gotten less tough to change CEOs at companies where
either their moral or their intellectual qualities are found lacking, but it’s
still difficult. If, you know, it’s particularly difficult if they turn out to be a
mediocre CEO. If the person is really bad, you know, people will rise up
sometimes and — particularly if they have meetings without the CEO
present. But it’s not an easy job to displace a sitting CEO who also holds
the chairman’s position and controls the agenda and all of that.
So I think an independent chairman, particularly one that represents a
very large block of stock, and has no designs himself on taking over the
place, is a safety measure for the possibility, however remote, that the
wrong decision is made. But I will tell you that the directors at Berkshire
will be thinking every bit as much about the quality of the person as a
human being as they will be thinking about their managerial skills, because
it’s vital that you have somebody at Berkshire, in my view, that is running
the place that really cares more about Berkshire than he does about himself,
in terms of advancement. And I think we have multiple candidates that
fulfill that. And the idea of an independent chairmanship is a — is, you
know, part of the belt and suspenders. Charlie?
MUNGER: Well, you know, your idea about the Buffett family has a
precedent. The Rockefellers left the management of Standard Oil many,
many decades ago, and they — but they did intervene once, and that was to
throw out, what was it, the head of Standard of Indiana, and it was on moral
grounds. So that sort of thing can happen and you have put another string in
our bow.
Where Berkshire’s short-term cash goes – 2011 Meeting
AUDIENCE: This question is about Berkshire’s cash. Where is that
money held? All in Treasury bills or notes? If so, what will happen in June
when the biggest buyer, the Fed, quits buying? Where is all that money on
the sidelines? Is it under the mattress we saw two years ago?
I don’t see how any significant amount of money can be in banks that
aren’t paying interest, corporate bonds that are risky and not paying much
interest, or government bonds that seem less and less sound as each day
passes.
BUFFETT: Well, he’s certainly right that all of the choices are lousy for
short-term money now, but we don’t play around with short-term money. So
we did not own commercial paper in 2008 before problems occurred. We
did not own money market funds. When I say we didn’t own them, maybe
small amounts at various subsidiaries, but in terms of the big money, which
we run out of Berkshire, we basically keep it in Treasurys. And we get paid
virtually nothing now for it, and that’s irritating, but the last thing in the
world we would do at Berkshire is to try and get 5 or 10 or 20 or 30 basis
points more by going into some other things with our short-term money.
It is a parking place. It’s an unattractive parking place, but it’s a parking
place where we know we’ll get our car back when we want it. You know, in
September of 2008, we had committed for some time to put $6.5 billion in
Wrigley when the Mars/Wrigley deal occurred, and we certainly didn’t
contemplate at the time we made that commitment, which was probably in
the summer, that the events would take place like they did in September and
— but we had the money.
I knew I had to show up with 6 1/2 billion dollars — I think it was on
October 6 — and, you know, I had to show up. I couldn’t show up with a
money market fund or some commercial paper or anything of the sort. I had
to show up with cash. And the only thing I feel — virtually the only thing I
feel good about, in terms of having large amounts of ready cash is Treasury
bills, and that’s where we’ve got — if you look at our March 31st
statement, I think you’ll see 38 billion, and overwhelmingly that will be in
Treasurys. Charlie?
MUNGER: Well, of course, I’ve watched a lot of people struggle who
thought it was their duty in life to get an extra 10 basis points on the short-
term money. I think it’s really stupid to try and maximize returns on short-
term money if you’re in an opportunist game the way we are, where we
want to suddenly deploy money. Some of those pipelines we bought, they
came for sale on Saturday, and we had to close on Monday or something?
Why fool around with some dubious instrument when we had sudden needs
for money like that?
BUFFETT: We bought one pipeline where the seller was worried about
going bankrupt the following week. And there’s a Hart-Scott-Rodino
clearance required through the FTC, and they needed the money right away,
and we — I wrote a letter, as I remember, to the FTC, and I said that we
will do whatever you tell us to do later on. You can look at this all you
want. We’ll give you all the data you want. And if you tell us, you know, to
unwind the deal, whatever you tell us, we will do. But these guys need the
money, and so we closed it earlier.
 And our ability to come up with cash when people need it and when the
rest of the world is petrified for some reason, has enabled several deals to
get done. We don’t know whether that could happen tomorrow. I mean, if
Ben Bernanke runs off to South America with Paris Hilton or something —
I mean, who knows what will happen. And we want to be able, at that
moment, to have our check clear. So, we figure we never know what
tomorrow will bring, although it won’t bring that, I want to — leave that off
the transcribed part of the report. But when somebody comes to us and they
say, we need a deal right now, we can do it, and they know we can do it, and
it can be big. It just has to be attractive.
How Berkshire gets loyal shareholders – 2010 Meeting
AUDIENCE: Berkshire has, in my opinion, the best and most loyal
shareholders of any publicly-traded company or mutual fund. How do you
attract and retain a shareholder base, particularly when many of the same
behavioral tendencies that produce mispriced securities also produce fleet-
footed shareholders?
BUFFETT: Yeah, the interesting thing about marketable securities is
that, basically, anybody can buy them. You might elect to join somebody in
buying a McDonald’s franchise or a farm, or apartment house, or
something, but if you’re running a public company, you know, you can have
anybody from, you know, Osama Bin Laden, you know, to the Pope as your
shareholder. I mean, they elected — you don’t elect them, they elect you.
Now, if you want a shareholder body that is going to be in sync with
you, it’s important — in my view — it’s important that you let them know
exactly what sort of institution you plan to run. And we’ve got the annual
reports, we’ve got television interviews, we’ve got various ways of
conveying to people what kind of a place Berkshire is. And to some, that
says, “Come in,” and to others it says, “Stay out.” Phil Fisher wrote a great
book on investing back in the very early 1960s and he described the
situation this way. He said, “Look it, you can have a restaurant and it can
say ‘French food’ and if you have French food inside, you know, people are
going — you’re going to get a satisfied and returning clientele. And you
can have another one that says hamburgers.
But what you can’t do is have hamburgers on the outside on the marquee
and deliver French food inside.” And so many companies sort of try and
promise everything to everybody. Their investor relations department tells
them that any shareholder they can get interested, you know, they want. We
want people who think the way we do. And we think, on balance, we won’t
disappoint them too much. But if we get a bunch of people who think that
the earnings next quarter are going to be up 10 percent for some reason, and
that’s the reason they own the stock, we’re going to have a lot of
disappointed people.
And our goal in life is not to spend our time associating with people who
are going to be disappointed with us. It’s our fault if we give out the wrong
advertisement. So we try to advertise what we are, and then we try to
deliver on that. And I do think we have the best group of shareholders in the
world, you know, among large publicly-traded companies. And I think it’s
because we’ve got people that basically look into buying a business,
becoming our partners over the years, and they know we’ll treat them like
partners. And they, in turn, give us a lot of comfort in having a stable
shareholder base and a good feeling about just running the whole place.
Charlie?
MUNGER: Well, what happened here is, to some extent, an accident.
Warren and I started out investing money for our families and friends, and
the people who trusted us when we were young and unknown, of course, we
developed a strong affection for. And we morphed into controlling public
companies from that base, and so we tend to regard our shareholders,
including the new ones, as family. And that’s not put on, that’s the way we
regard you.
Other people can’t do that because they morphed into their situation in a
different way. And if you were a CEO and dealt with the average
institutional investor, who is interested in having his portfolio management
look good the next six months, you’d find it hard to love your shareholders.
They’re sort of a hostile force that are putting unreasonable expectations on
you. And so I don’t think Warren and I deserve such wonderful credit for
the fact that we have better relations with our shareholders. We came up in
a totally different way. Now, we did have enough sense, when we saw that
it was such a good thing and so satisfying, that we stayed with it. But
weren’t we — we got into this by accident, didn’t we?
BUFFETT: Yeah, we got in by accident, and we also were blessed with
the fact that we did not have an investor relations department that wanted us
to go out and pump up.
MUNGER: But that was on purpose.
 BUFFETT: Yeah, yeah. I have seen them in operation at dozens of
companies, I’ve been involved in one way or another. And it is really
ridiculous, the idea that you go out and try and cater to the expectations of
people that are expecting you to do things you can’t do by operations, but
maybe you can do by accounting for a short period of time. It leads to the
worst behavior. And in the end, somebody’s going to own all your shares,
you know.
There’s no way that shares remain empty, you know, in the shareholder
list. So why not get a bunch of people who are going to stick with you who
are in sync? And the way they’re going to be in sync is if you told them
rather accurately what you expect, how you expect to do it, and tell them
when you make mistakes, all of that.
MUNGER: But we probably shouldn’t be as critical of people who
came up a different way dealing with a different shareholder face. It’s not at
all clear that we wouldn’t have ended up somewhat the same way if we’d
had the same manner of rising.
Big question for Berkshire’s future – 2010 Meeting
AUDIENCE: Thank you, Warren and Charlie, for improving the Q&A
session last year. Along those lines, are there important questions that you
were surprised that you don’t get asked about Berkshire’s financials or
businesses? And if so, what is the question you would ask yourself if the
roles were reversed?
BUFFETT: Well Andrew, first of all, I will say we got a lot of
compliments on changing the format. It worked, and that’s why we’re
continuing it. So it’s worked very well. And that applause is for you, not for
me, and you deserve it. It really has improved the quality of questions, in
terms of having it Berkshire-related and having a system of weeding them
out without us being the ones that do the weeding out. Now, I’ve given
Charlie time to think about what the answer to that question is going to be,
so I’m going to turn it over to him.
MUNGER: Well, I don’t have a lot of comment about things that should
be done differently at Berkshire. I think it is quite interesting that we got
into BYD, because BYD is surfing along on the developing edge of new
technology, and that has not — we have always bragged about avoiding
that. Isn’t that a fair statement?
BUFFETT: That’s fair.
 MUNGER: And yet here we are. I think it’s because we’ve shown some
capability for learning. And I think the BYD investment is going to work
out very well. And I think it’ll work out very well in a way that gives great
pleasure to all of us shareholders, because I think they’re going to help
solve some significant problems of the world. And, that place is — you
know, I spoke with pride of Kiewit. They tried harder, they were more self-
disciplined.
That’s the way I feel about BYD. And it’s a pleasure to associate with
such people, and in my life those are the people with whom I’ve achieved
the most. So as far as I’m concerned, we found our own kind, except
they’re better. And we may do more of that. And we wouldn’t have felt
confident enough to go into venture capital, typically with just a bright
young man with an idea, no matter how brilliant.
BUFFETT: Not me.
MUNGER: No, I wouldn’t either. But BYD had won its spurs in life by
the time we found it. They had accomplished things that struck me as
almost impossible to do, and yet they’d done them. And so I don’t think
that’s the last unusual thing that Berkshire will do, and the last one that will
work. And I think the Burlington Northern acquisition — when we did it,
we knew it would be better for their shareholders than it was for ours,
because, after all, they were getting into Berkshire. But we also thought it
was good for our shareholders. And why should we care that it was better
for theirs, if it was satisfactory for us? And I think that will happen again,
too.
That’s our kind of a culture. You know, Middle Western, and constantly
improving the place. And with MidAmerican and Burlington, we’re getting
a fair amount of engineering into Berkshire, which of course, I like. And so
I hope you people are comfortable with the way things are going, because I
think they’ll keep going in the same direction.
BUFFETT: Yeah. I think they will keep going in the same direction.
But to answer your question on that, Andrew, I would probably ask the
question, you know, “Can you keep using all of the capital you generate,
effectively, for a very long time?” And the answer, I think, to that is that
even — we will see more things and we will do some more of this. There
comes a point where the numbers get big enough that it gets extraordinarily
hard to do things that add value. I mean, if you just play out the numbers,
you could see where in 10 or 15 years, not only the capital that’s already
accumulated, but the generation of capital in everything, would make it
very hard to do things that are, essentially, creating more than a dollar of
value per dollar invested.
A portion of the money may be able to be used that way, and likely
would be used in the kind of businesses we’re in. There comes a point
where the numbers get too big. And actually, our history is a curve that
approaches that point all the time. It’s turned out to be that now I think we
can go a lot further than I would have thought 30 years ago. I mean, it’s just
— it’s developed that way. And partly that’s because we see things that I
never would have thought we would have seen 30 years ago. But there is a
limit. And there will come a time when we cannot intelligent — in my view
— there will come a time when we cannot intelligently use 100 percent of
the capital that we develop internally. And then we’ll do something that’s
— whatever is in the most interest — best interest — of the shareholders
will be done at that point.
MUNGER: I think we will get into Berkshire, on the investment side —
probably starting sooner than many of you expect — people who have some
promise of being, well, if not as good as Warren, a decent approximation.
And in some cases with abilities that Warren lacks. In other words, it won’t
be all negative. And so I’m really quite optimistic. I can see — the reason I
think we will succeed at that is because Warren never looks twice at
anybody who isn’t a little eccentric, which, of course, is what you’re
looking at when you look up here.
 Berkshire Managers
Terrific insurance operations are even better with Ajit
Jain – 2016 Meeting
AUDIENCE: If Ajit Jain were to retire, or God forbid, be promoted,
what would be the impact on the insurance operations, both with regards to
underwriting profit as well as the development of float?
BUFFETT: Well, nobody could possibly replace Ajit. I mean, you can’t
come close. But we have a terrific operation in insurance. We really do,
outside of Ajit, and it’s terrific-squared with Ajit. There are things only he
can do. But there are a lot of things that are institutionalized, a lot of things
in our insurance business, where we’ve got extraordinarily able
management, too.
So Ajit, for example, bought a company that nobody here has heard of,
probably, called Guard Insurance a few years ago, based in worker’s comp,
primarily. It’s based in Wilkes-Barre, Pennsylvania. And it’s expanding like
crazy in Wilkes-Barre. And it — it’s been a gem. And Ajit oversees it, but
we’ve got a terrific person running it. And we bought Medical Protective
some years ago. Tim Kenesey runs that. Ajit oversees it, but Tim Kenesey
can run a terrific insurance company, with or without Ajit. But he’s smart
enough to realize that, if you got somebody like Ajit that’s willing to
oversee it to a degree, that’s great. But Tim is a great insurance manager all
by himself, and Medical Protective has been a wonderful business for us.
Most people don’t know we own it. The company goes back into the 19th
century, actually.
We’ve got a lot of good operations. If you look at that section of the
annual report called “Other” — insurance company, I mean that is — in
aggregate, that is a wonderful insurance company. There’s very few like it.
GEICO is a terrific company. So, Ajit has made more money for Berkshire
than I have, probably. But we’ve still got what I would consider the world’s
best property-casualty insurance operation, even without him. And with
him, you know, it — nobody, I don’t think anybody comes close. Charlie?
MUNGER: Well, a few years ago, California made a little change in its
workmen’s compensation law, and Ajit saw instantly that it would cause the
underwriting results to change drastically. And he went from a tiny percent
of the market, to 10 percent of the market, which is big, and he just grasped
a couple billion dollars, at least, out of the air, like it was snapping his
fingers. And when it got tough, he pulled back. We don’t have a lot of
people like Ajit. It’s hard to just snap your fingers and grab a couple billion
dollars out of the air.
BUFFETT: Well, actually, the California Workers’ Comp, Guard has
moved into that. I — we have got a lot of terrific insurance managers. I
mean, I don’t know of a better collection any place. And Ajit has found
some of those. I’ve gotten lucky a few times. I mean, Tom Nerney at U.S.
Liability, that goes back, what, 15, 16 years. He has a terrific operation. It’s
not huge, but it is so well-managed. And people don’t even know we own
these things. But if you look at that last line — and now we’ve added Peter
Eastwood with Berkshire Hathaway Specialty. And these are really good
businesses, I got to tell you.
When you can produce underwriting prowess, and on top of that just
hand more float — we don’t have many businesses like that. Those are
great businesses. We’ve got a hundred — you know, whatever it is — a
hundred billion-plus of money that we get to earn on, while at the same
time, overall, you know, on balance, we’re likely to make some additional
money for holding it. And if you can get somebody to hand you $104
billion and pay you to hold it while you get to invest and get the proceeds,
it’s a good business.
Now, most people don’t do well at it. And, you know, the problem is that
what I just described tempts lots of people to get into it. And recently,
people have gotten into it, really, just for the investment management. It’s a
way to earn money offshore. And we don’t do that, but it can be done for
small companies with investment managers. So there’s a lot of competition
in it. But we have some fundamental advantages, plus we have — in certain
areas — plus we have absolutely terrific managers to maximize those
advantages. And we’re going to make the most of it.
Our culture will endure for “many, many decades” –
2016 Meeting
AUDIENCE: My question is: you have said before that your role will
be divided into parts for your succession, one of which will be the
responsibility of maintaining culture by having [son] Howard [Buffett] as
non-executive chairman. What is the plan for how Berkshire will maintain
its culture when Howard no longer fills the role, and what should
shareholders watch for to make sure that the culture is being properly
maintained decades from now when I am your age?
BUFFETT: Yeah. Well, that’s a question we’ve obviously given a lot of
thought to, and although I hope that Howard is made chairman just for the
reason that if a mistake is made in selecting a successor, it’s easier to correct
it if you have a non-executive chairman. But that’s a very, very — I mean,
that’s a 1-in-100 or 1-maybe-in-500 probability, but there’s no sense
ignoring it totally. It’s not a key factor. The main — by far, the main factor
in keeping Berkshire’s culture is that you have a board and you’ll have
successor board members. You have managers and you’ll have successor
managers. And you have shareholders that clearly recognize the special
nature of the culture, that have embraced the culture. When they sold their
businesses to us, they wanted to join that culture. It’s a — it thrusts out
people that really aren’t in tune with it, and there are very few of them. And
it embraces those who enjoy and appreciate it, and I think, to some extent,
we don’t have a lot of competition on it. So it becomes very identifiable,
and it works.
So I think the chances of us going off the rails in terms of culture are
really very, very, very slight, regardless of whether there’s a non-executive
chairman or not. But that’s just a small added protection. So I think that the
main problem that Berkshire will have will be size, and I’ve always — I
thought that when I was managing money, when I first started managing
money. Size is the enemy of performance to a significant degree. But I do
think that the culture of Berkshire adds significantly to the value of the
individual components viewed individually. And I don’t see any evidence
that there’d be any board member, any managers, or anything that would —
could in any way really move away from what we have now for many,
many decades. Charlie?
MUNGER: I’m even more optimistic than you are. I really think the
culture is going to surprise everybody — how well it lasts — and how well
they do. They’re going to wonder why they ever made any fuss over us in
the first place. It’s going to work very well.
BUFFETT: We’ve got so many good ingredients in place just in terms
of the businesses and people already here, you know, that — at the
companies.
 Another thing that’s interesting is how little turnover we get in it, too. So
the number of managers that have been needed, that we’ve had to replace in
the last ten years, are very few. You know, without a retirement age, and I
tend to bring that up at every meeting to reinforce the idea, but without a
retirement age and with people working because they love their jobs — and
they like the money as well — but their primary motive is that they really
like accomplishing what they do in their jobs.
And that means that we get long tenure out of our managers. So the
turnover is low, the directors are not here for the money, and so we have
great tenure among the directors, and I would argue that’s a huge plus. It’s
going to go on a very long time.
Diversity isn’t a factor in choosing Berkshire directors –
2016 Meeting
AUDIENCE: About two dozen men and women work with you,
Warren, at our corporate office. I see from last year the quality of the
picture has been improved in the annual report, so congratulations on that.
However, looking at it, there is something that comes to anyone’s
attention and is the lack of diversity among the staff. A 2015 analysis by
Calvert Investments found that Coca-Cola was one of the best companies
for workplace diversity while Berkshire Hathaway was one of the worst.
You’ve explicitly stated that you do not consider diversity when hiring
for leadership roles and board members. Does that need to change? Are we
missing any investment opportunities as a result? And do you consider
diversity, however defined, of company leadership and staff when analyzing
the value of a company that you may want to purchase?
BUFFETT: No. We will select board members, and we lay it out. And
we’ve done so for years, and I think we’ve been much more explicit than
most companies. We are looking for people who are business savvy,
shareholder oriented, and have a special interest in Berkshire. And we
found people like that. And as a result, I think we’ve got the best board that
we could have. They’re not in it — they’re clearly not in it for the money.
I get called by consulting firms who have been told to get candidates for
directors for other companies, and by the questions they ask, it’s clear
they’ve got something other than the three questions we ask, in terms of
directors, in mind. They really want somebody whose name will reflect
credit on the institution, which means a big name. You know, and one
organization recently, the one that did the blood samples with small pricks,
got — they got some very big names on their board. Theranos.
I mean the names are great, but we’re not interested in people that want
to be on the board because they want to make 2- or $300,000 a year, you
know, for 10 percent of their time. And we’re not interested in the ones who
— for whom it’s a prestige item and who want to go and check boxes or
that sort of thing. So I think we’ve got — we will continue to apply that
test: business savvy, shareholder oriented, and with a strong personal
interest in Berkshire.
And every share of Berkshire that our shareholders own, they bought
just like everybody else in this room. They haven’t gotten them on an
option or they haven’t — I’ve been on boards where they’ve given me
stock, you know, and they — I get it for breathing, basically. Half a dozen
places that are — maybe three or four that I was on the board of. We want
our shareholders to walk in the shoes — I mean, our directors to walk in the
shoes of shareholders. We want them to care a lot about the business, and
we want them to be smart enough so that they know enough about business
that they know what they should get involved in and what they shouldn’t
get involved in.
The people in the office — I’m hoping that when we take the Christmas
picture again this year, they’re exactly the same 25 that were there last year,
even though we might have added 30,000 employees elsewhere and maybe
10 billion of sales or something like that. It’s a remarkable group of people,
and they — I mean, just take this meeting. Virtually every one of the 25,
our CFO, my assistant, whoever, they’ve been doing job after job connected
with making this meeting a success and a pleasant outing for our
shareholders. It’s a cooperative effort.
The idea that you would have some department called Annual Meeting
Department and, you know, you’d have a person in charge of it and she’d
— or he — would have an assistant and then they would go to various
conferences about holding annual meetings and build up — and then they’d
hire consultants to come in and help them on the meeting. We just don’t
operate that way. It’s a place where everybody helps each other, but —
Part of what makes my job is extraordinarily easy, but the people around
me really make it easy. And part of the reason it’s easy is because we don’t
have any committees. Maybe we have some committee I don’t know about,
but I’ve never been invited to any committees, I’ll put it that way, at
Berkshire. And we may have a PowerPoint someplace, I haven’t seen it,
and I wouldn’t know how to use it anyway. The — we just don’t do — we
don’t have make-work activities. And we might go a to a baseball game
together or something like that, but it — I’ve seen the other kind of
operation and I like ours better, I’ll put it that way. Charlie?
MUNGER: Well, years ago I did some work for the Roman Catholic
Archbishop of Los Angeles, and my senior partner pompously said, you
know, you don’t need to hire us to do this. There’s plenty of good Catholic
tax lawyers. And the archbishop looked at him like he was an idiot and said,
“Mr. Peeler,” he says,” last year I had some very serious surgery, and I did
not look around for the leading Catholic surgeon.” That’s the way I feel
about board members.
Praise for portfolio managers Ted Weschler and Todd
Combs – 2016 Meeting
AUDIENCE: Todd and Ted now have been at Berkshire for several
years. What have been their biggest hits, and failures, specifically? And
what have they learned from Charlie and Warren, and what are the biggest
differences between you and them?
BUFFETT: Well, I’ll answer the last part, the easiest. I am trying to
think of very big deals that we can do something in, in investments, or in
business, preferably just in operating businesses. I mean, they still are —
their primary job is working on — each has a $9 billion portfolio, and one
of them has, I don’t know, perhaps seven or eight positions, and the other
one has maybe thirteen or fourteen, but they have a very similar approach to
investing.
They’ve both been enormously helpful in doing several things, including
important things, for which they don’t get paid a dime, and which they’re
just as happy working on as they are when they’re working on things that
do pay off for them financially. They’re perfect cultural fits for Berkshire.
They’re smart at what they do. And, you know, they’re a big addition to
Berkshire. Charlie?
MUNGER: Again, I’ve got nothing to add.
BUFFETT: Did I cover the whole thing, Andrew, or was there one —a
part I missed there?
ANDREW ROSS SORKIN: Biggest hits and failures. I think they
specifically wanted to know, in terms of investments, and trying to
understand the way you think perhaps — I think the question was more — I
think — the implication was, the way they think and the way you think, are
there differences?
BUFFETT: Yeah. I would say they have a bigger universe to work with,
because they can look at ideas in which they can put 500 million, and I’m
looking — I’m trying to think of ways to put, you know, sums into billions.
But they certainly — have more extensive knowledge of certain industries
and activities in business that have developed in the last ten or fifteen years.
They’d be smarter on that than I am. But their approach to investing, I
mean, they’re looking for businesses that they understand and that are going
to — and through the stocks of those businesses — that they can buy at a
sensible price and that they think will be earning significantly more money
five or ten years from now. So it’s very similar to what I’m thinking about,
except I’d probably add another zero to it.
MUNGER: And we don’t want to talk about specific hits and failures.
BUFFETT: No. OK. Gregg. Yeah, we will never get into disclosing — I
mean, we file reports every 90 days that show what Berkshire does in
marketable securities, but we don’t identify — I may identify whether it’s
mine or theirs, but we don’t get into identifying what they do individually.
Weschler and Combs are good investors and good
people – 2015 Meeting
AUDIENCE: My question is regarding Ted Weschler. Can you please
share your views regarding his investment philosophy, his investment
process, and the qualities that he brings to Berkshire?
BUFFETT: Yeah. Well, both Ted and Todd, the two investment
managers, aside from myself, at Berkshire, are very, very smart about
businesses and investments. I mean, they understand the reality of business
operations. They understand what makes for competitive strength, and all of
the things that you’d learn in business school or learn through investing.
And on top of that, they have qualities of character which are terribly
important to me and Charlie.
We have seen dozens and dozens and dozens of investment managers
with great records over the years. We used to drop in and see some of those
guys, you know, that were running — I’m talking back in the 1960s and
’70s. And when I gave up my partnership, I knew probably 20 people with
great records from the previous six or eight years, but I picked Bill Ruane to
handle the funds of my partners going forward. And he set up a fund called
Sequoia Fund, and 10,000 put in that fund has become over $4 million now.
Well, Bill was a terrific investment manager, but he was a terrific human
being. And we really want people where they do more than their share,
where they don’t claim credit for things they don’t do, where they — you
know, they — just every aspect of their personality is such that you want to
be around them, and you want to hand responsibility over to them.
And Ted and Todd fit that bill, and there’s plenty of investment
managers in Wall Street with great records that don’t fit that bill, in our
view. So that’s about all I can tell you. Charlie met — he met Todd first. I
met Ted first. And we both — when we talked about them, we talked about
their record and the kind of stocks they owned, but we talked a whole lot
more about what kind of people they were and we haven’t been
disappointed. Charlie?
MUNGER: Yeah, I think the whole thing is working pretty well. And I
think those people will be constructive around Berkshire for reasons apart
from their expertise in handling securities. In fact, they already are.
BUFFETT: They already very are.
MUNGER: Oh. They’re — they’ve just — each one has helped buy a
business recently.
BUFFETT: Yeah. And they will help oversee it, too, the businesses.
They’re smart about business, and they know just exact — they know the
right touch to apply in terms of how much they get involved. I mean, Todd
worked on Charter Brokerage. He worked on an acquisition we made from
Phillips. Ted just worked on this operation over in Germany, went over
there a couple of times. And he’s just smart. You know, he’s got good sense.
He knows how to deal with people. You know, if a deal is to be made, he’ll
get it made. And we — Charlie and I run into more dysfunctional people
with 160 IQs, probably, than anybody alive. But Salomon gave us a head
start on that, as a matter of fact. Wouldn’t you say that —?
MUNGER: We’ve specialized in it.
BUFFETT: We’ve seen a group of people whose IQs far surpassed
those of people at Berkshire, and we’ve seen them self-destruct to make
money they didn’t need, when they were already rich. You know, I mean,
see, that’s madness. But a lot of people are just incapable of functioning
well day after day, even though they’re capable of brilliance from time to
time. And we’re looking — we’ve got very solid people in Ted and Todd.
They’re very bright and they identify with Berkshire and not with
themselves, and that’s a — it’s a huge factor over time. Any more, Charlie,
on that?
Praise for portfolio managers Todd Combs and Ted
Weschler – 2014 Meeting
AUDIENCE: Since Berkshire started to transfer some of the
responsibility for the company’s investment portfolio over to Todd Combs
and Ted Weschler, the two men have gone from managing around $3 billion
each in early 2012, to managing more than $7 billion each earlier this year.
That said, this still represents less than 10 percent of the equity portion of
your investment portfolio, with big legacy positions in Wells Fargo, Coca-
Cola, American Express, IBM and Proctor & Gamble, overshadowing the
rest of the holdings.
Can you give us an update on how much money each of your lieutenants
is now running and how much you see that growing into over the next five
years? And given that both men have seemingly been involved in things
beyond their roles as portfolio managers the last couple of years, how much
do you expect their roles to expand over time? And on a completely
separate note, at what point can we expect to see Todd and Ted join you and
Charlie up there on stage to talk about their efforts managing Berkshire’s
investment portfolio?
BUFFETT: I got through college answering fewer questions than that.
They are managing about —it’s a little over 7 billion now. We will change
that periodically and it will always be upward. But we don’t change it
month by month. I mean, their portfolios may change in value month by
month. But they will be handling more money in the future than they are
now. I think, to some extent, they, as well as I — you know, I’ve had the
unpleasant experience of handling more and more money as the years go by
— they are seeing that it does get a little more difficult as the sums get
larger.
But it’s still far better to keep moving money over to them and away
from me as time passes. And that’ll continue to be the case. They’re both
terrific additions to Berkshire, beyond their investment skills in that they
know — they each know — a whole lot about business. They know a whole
lot about management. And there are a lot of things that come across the
desk at Berkshire that I get an idea on, but I just don’t feel like carrying out
myself, because they might involve a lot of time, particularly if they get
involved in negotiating small points and that sort of thing. So Ted and Todd
have both, as I mentioned in the report, been very helpful in doing things
beyond their investment management duties that have added a significant
value to Berkshire.
And I think it’s a cinch that that will continue. They want to do it. They
enjoy doing it. They don’t ask for extra compensation, at all, because they
do it. They’re 100 percent attuned to Berkshire. They know how I think.
And if I tell them, you know, “Here’s a deal that I think makes sense if you
can get it done,” they’ll know why it makes sense, and they’ll know how to
get it done, and they’ll spend the time to do it. So it’s been a big, big plus
for Berkshire to bring them onboard. And they’ll be more important factors
as the years go by.
Todd Combs and Ted Weschler’s stock-picking
independence – 2013 Meeting
AUDIENCE: If Todd Combs and Ted Weschler, if they purchase stock
in a company that you have reviewed before and did not believe to be a
good investment, would you share your thoughts with them?
BUFFETT: I would probably not know they were even buying it until,
maybe, a month after they started. I do not — they do not check with me
before they buy something. I gave them each another billion dollars on
March 31st, and I do not know whether they’ve spent the billion or whether
— which stocks they bought or—
Now, I will see it on portfolio sheets. I get them monthly, but they’re in
charge of their investments. They’ve got one or two things that they’re
restricted on, in terms of— things that — for example, if we own a chunk of
American Express, and under the Bank Holding Company law we would
not be able to buy another share. So there’s a couple things like that —
restrictions they have. But otherwise, they have no restrictions on what they
buy. They’ve bought things I wouldn’t buy. You know, I buy things they
wouldn’t buy. That part of the investment process. I do not tell them how
much to diversify. They can put it all in one stock if they want to. They can
put it in 50 stocks, although that’s not my style. They are managing money.
And when I managed money, you know, I wanted to be a free agent. If
he wanted to give me — they could make the decision on whether they
wanted to give me the money, but once they gave me the money, and I had
the responsibility for managing it, I wanted free reign to do what I wanted.
And I did not want to be held responsible for things with my hands tied.
And that’s exactly the position we have with Todd and Ted now. It takes a
lot of — it’s an unusual person that we will give that kind of responsibility
to.
That’s not something that Charlie and I would do lightly at all. But we
thought they deserved the trust when we hired them, and we believe that
more than ever after watching them in action for a time.
 Is Ajit Jain going to run Berkshire after Buffett? – 2013
Meeting
AUDIENCE: OK. At Berkshire, there is a unique dynamic that exists
between your recognition of Ajit’s special skills and Ajit’s special skills.
You comment often about how unique Ajit’s skills are. So just tell us, is Ajit
your successor?) And if not, what happens to Ajit’s businesses without
Ajit?
BUFFETT: Well, they won’t be without Ajit for a long time. And he —
what — he’s remarkable in many ways, but one of the ways he’s
particularly remarkable is that when people start copying something he’s
doing and turning what was maybe quite profitable into something that
becomes something every Tom, Dick, and Harry is doing, he figures out
new ways to do business. And I notice you started with the ‘A’s when you
started on a possible successor with Ajit, and you won’t have any more luck
when you get to the ’B’s. Charlie?
MUNGER: Well, I think the basic answer is that if Ajit ever is not with
us we won’t look as good.
BUFFETT: And that’s true of a number of other managers, too. We
have an extraordinary group of people, in most cases, who do not need the
money that they earn working for us. They may make substantial money.
And they are doing a job for you shareholders and for me and Charlie that
you can almost say we don’t deserve. But they are having — I think they’re
having — a good time running their businesses.
The one thing we do is try and create an atmosphere where they can
enjoy running the businesses rather than spend all their time running back
and forth to headquarters and doing show-and-tell operations and that sort
of thing. And it’s taken a long time, though, too. I mean, we operated
Berkshire for 20 years without Ajit. If he’d come in the office in 1965
instead of 1985, we’d probably own the world. Kind of fun to think about,
isn’t it?
Threats to Berkshire’s culture after Buffett – 2012
Meeting
AUDIENCE: I wanted to get your thoughts on two of my concerns
about a post-Buffett Berkshire. Do you worry that some of your key
operating and investing managers might leave for more lucrative
opportunities once they realize they’re working for one of their peers
instead of a legend? And do you think it’s possible that a large investor or
hedge fund could ever gain enough control of Berkshire to force a change in
the unique culture and structure?
BUFFETT: Yeah. I think that — I would say I virtually know — that
the successor we have in mind will not be the kind that will turn off our
managers because that — the manager in mind is a — successor in mind —
has got the culture as deeply embedded in as I do. They would not — our
managers would not — I don’t think it would be a question of leaving for
more lucrative jobs. I think it would be because they love the kind of
environment in which they exist.
And if that environment didn’t exist, it wouldn’t be a question whether
the alternative was more lucrative. Many of them, a majority, could retire,
wouldn’t need to work at all. They’re only going to work if it’s more fun for
them to work than to do anything else, you know, in the world, because
they’ve got the money to leave, in a great many cases. The conditions —
it’s the same reason I work. I mean, I’m 81, and I am doing what I find the
most enjoyable thing to do in the world, and there are a couple reasons for
that. I get to paint my own painting and, you know, I have a lot of fun,
working with the people I work. And our managers work for the same
reason. They do get to paint their own paintings. And my successor will
understand that just as well as I do. And there would be a lot of people that
might very well manage other companies that, I think if stuck in my
position, would lose a fair number of managers. They just have a different
style. And our managers don’t need that style.
In terms of a takeover, I think that really gets unlikely. The size is a huge
factor. And, even because of the A and B shares, the A shares get converted
to B shares when I give them away. And even 10 years from now, it would
be likely that I would own, or my estate would own, something in the area,
you know, perhaps, of 20 percent of the votes, thereabouts. So the Buffett
family will probably have 10 times the voting power, for a long time, of
anybody else.
So I think it’s extraordinarily unlikely for both those reasons, size and
the concentration that will exist. And the longer we go, the larger we’ll get.
So the — as the voting power aspect goes down, the size aspect goes up. So
I don’t think there will be a takeover of Berkshire. And I really — you do
not need to worry about my successor. You know, in many ways he’ll be
better than I am. He will be totally imbued with the culture. The company is
imbued with the culture. It would reject anything. The board of directors
reflect that culture. It’s everyplace you look around. Berkshire stands for
something different than most companies, and, that’s not going to change.
Charlie?
MUNGER: Well, what I said last night was that the first 200 billion was
hard, and the second 200 billion, with the momentum in place, is likely to
be pretty easy compared to what’s been accomplished in the past. So, I
don’t think it’s going to hell at all. I think the momentums are in place and
the right kind of people are in place and the culture is, by and large, pretty
well loved, I would say, by the people who’ve chosen to be in it. Nobody’s
going to want to change it.
BUFFETT: Yeah, the businesses are in place to take it to 400 billion.
MUNGER: Well, but in addition to that, I think people of the type who
have sold to us when we were the only acceptable buyer, I think will come
to our successors because they will be the only acceptable buyer, at least for
some significant part of what’s done. So I don’t think it’s going to be all that
difficult.
BUFFETT: Don’t make it sound too attractive, Charlie.
How Todd Combs and Ted Weschler are compensated —
and taxed – 2012 Meeting
AUDIENCE: Please tell us more about your experience this past year
with Todd Combs and Ted Weschler. What did they do well, and did they
make any mistakes? And please discuss how you compensate them a bit
more. In an interview, you said that Todd Combs was well compensated for
the performance of his stock picks last year. Should we be worried about a
short-term horizon for compensation? How do you ensure that Todd and
Ted don’t chase high-flying stocks for the sake of compensation?
BUFFETT: Well, we’ve always been more concerned about how our
record is achieved than the precise record itself. And with both Todd and
Ted, Charlie and I were struck by, not only a good record, but intellectual
integrity and qualities of character, a real commitment to Berkshire, a
lifelong-type commitment. And we’ve seen hundreds and hundreds of good
records in our lifetimes; we haven’t seen very many people we want to have
join Berkshire. But these two are perfect, and we pay them each a salary of
a million dollars a year, and we give them 10 percent of the amount by
which their portfolios beat the S&P. So that if they beat the S&P by 10
points, they get one point, for example, and we get nine points.
But we do it on a three-year rolling basis so you don’t get the seesaw
effect. And each one gets paid 80 percent based on their own efforts and 20
percent based on the other person’s, so that they have every incentive to
operate in a collaborative way rather than sit there jealously guarding their
own ideas and hoping the other guy doesn’t do very well.
So it’s the same structure on pay, basically, that we had with Lou
Simpson for 20-some years, except he did not have a partner. To the extent
that they employ people underneath them, that comes out of their
performance record, and it’s worked far better than either Charlie and I had
hoped, and we had pretty high hopes. We had 1 3/4 billion with each of
them at year end, but we’ve added another billion each on March 31, so
they’re running 2 3/4 billion apiece. I don’t look at what they do. I see it
eventually when I look at a GEICO portfolio at the end of the month or
something of the sort.
But they operate through their own brokers. They don’t — I’ve told
them that the only thing I want to know is, if they’re getting into a new
name, I just want to know the name so I’m certain that it isn’t something
that I am familiar with some inside information on, or something, so that
there’s no inadvertent appearance that we would be — or that their purchase
would have been influenced by something that I knew about. That’s never
come up. They can’t — they can’t — if there’s something we would have to
file a 13D on, they would have to check with me.
But basically none of that’s going to happen. Never happened with Lou,
either. They operate in different stocks. They’ve got a much bigger universe
than I have because they’re working with 2 3/4 billion instead of 150
billion, so they can look at a lot more things. And they’ve cheerfully
pitched in for other duties that they don’t really get compensated directly
on, but that are helpful to Berkshire. And they will — they’ll do a great job
for Berkshire when they’re running a whole lot more money than they are
now. Ted only joined us this year. Todd did substantially better than the
S&P last year, so he racked up a big performance gain, a third of which was
paid to him in the first year, but the two years is deferred and he could lose
that back if he were to underperform. So I think we’ve got a good system
and terrific people. Charlie?
 MUNGER: What’s interesting about it is that at least 90 percent of the
investment management business of the United States would starve to death
on our formula. I think — and I think these people will do pretty well with
it. And not only that, they’ll be terrific for the long pull for Berkshire.
They’re the kind of people we like having around headquarters.
BUFFETT: Yeah. I hope they get into that — those 400 taxpayers I
mentioned, but if they do, even under the present haul, they’ll be paying
taxes in the mid-30s. They are doing what they did before which — they
ran hedge funds — but they’re going to work every day thinking about the
same things, and they get taxed at 35 percent-plus. And if they were
running hedge funds, they’d get taxed at 15 percent. And for all of those in
the audience who can reconcile that, there’ll be a free Dilly Bar.
Buffett’s best deal: hiring Ajit Jain – 2011 Meeting
AUDIENCE: Mr. Buffett, you have praised Ajit Jain as a possible
successor. Since he may be in line as our next CEO, can you give us a
concrete example of a policy that he’s written that’s impressed you, and can
you talk a little about the way he thinks since we rarely get an opportunity
to hear from him?”
BUFFETT: Yeah, Ajit is not exactly a publicity hound. I can’t think of
any decision he’s ever made that I think I could have made better. And I’ve
— I’m not privy to all of his transactions anymore. There just — there are
lots of them that are not of huge size or of great interest, but he tells me
about all the interesting things that come along and all the very big things
that come along. And I would say this: you’d be better off voting with him
than with me after listening to any proposition he brings up. He is as
rational a thinker as Charlie is, as anybody I’ve met. He loves what he does.
He’s creative. He’s very creative.
We have moved into one area after another in reinsurance when people
came in copying us in one area of business that we would be operating in.
Ajit comes up with something else. Lately we’ve been much more active in
life reinsurance, but who knows tomorrow brings. I mean, if there happens
to be a huge cat in the third quarter of this year or something of the sort,
that might open up all kinds of opportunities in writing covers when — if
capacity got strained. But who knows what will happen.
All I know is that Ajit’s mind works like a machine, you know, day after
day. And he does love what he does, which is an important part of doing
well at any activity. And I don’t know what his best deal was. I know what
my best deal was, which was hiring him. Charlie?
MUNGER: Yeah. Sir William Osler, who created a model medical
school for the world, used to say that the secret of success in a field is
getting very interested in it. Well, Ajit is real interested in what he does.
Many of you don’t know this, but every Thanksgiving, Ajit flies to London
because they don’t have a Thanksgiving holiday.
BUFFETT: We give him Christmas off, though. Ajit, I say how
invaluable he is, and I’m not exaggerating when we talk about him. He is
— to an extraordinary degree, he thinks of Berkshire first. Ajit, at various
periods when insurance companies became popular for one reason or
another, there was, you know, there was the big thing about Bermuda
companies some few years ago, Ajit could have monetized himself to an
incredible degree. Still could do it.
I mean, people would hand him a significant percentage of any company
being formed with lots of money, so that immediately he could create, I
would guess, in the hundreds of millions of wealth without lifting a finger,
just by somebody putting up, you know, a couple billion dollars and saying
you’ve got 20 percent of it or whatever it may be. I mean, listen, he’s smart.
He knows that, and it doesn’t cross his mind to do anything like that. I
mean, he — we have, in comp — he always thanks me for what I do at the
end of the year, and I feel I’ve left off a zero, you know, when I get all
through.
He’s just a remarkable human being. And we are very, very lucky that, I
think, he has a lot of fun in what he does at Berkshire. He’s got a cadre of
about 30 people that work with him. There’s many more that are settling
claims and doing that sort of thing on runoff business, but it’s — you won’t
find anything like it, in my view, not only in the insurance world, but really
in almost any part of the business world.
What are our worst businesses? Well, generally speaking — and this is
general — I have made certain mistakes in going into smaller businesses
that really never had the potential of becoming big. But I would say overall,
Dexter was our worst business, but I’ve — the Furniture Mart, obviously, is
a terrific operation. But despite being in numerous retailing businesses for
quite a while, we have not created major earning power there.
How Buffett first met Todd Combs – 2011 Meeting
 AUDIENCE: For Mr. Munger, I understand you introduced him to
Berkshire. Could you talk a little bit about that — how that relationship
started, and how we as shareholders, are we going to be able to assess his
progress?
MUNGER: Well, I hate doing this because I may get more letters than I
want, but he sent me a letter. That’s how it happened. It was like Warren’s
letter to the guy at Ralph Schey. And at any rate, I had a meal with him, and
then I called Warren and I said, “I think this is the guy you should talk to.”
We have a very complicated business and very elaborate procedures, as you
can tell.
BUFFETT: And his results will be known over a five-year period or
something. I mean, you cannot judge an investor by what they do in six
months or a year.
MUNGER: Todd has the advantage that he’s been thinking about
financial companies like Berkshire for a great many years. That’s useful for
us to have around.
BUFFETT: And as we put in the annual report, it’s more likely than not,
but not a sure thing, that over time, we have more than one investment
manager. You know, there’s a lot of money at Berkshire to be managed.
And it would not be a bad idea, but we have to find the right people, and the
right people just does not mean a given IQ or a given past record, it means a
lot of things. And if we end up with two or three, you know, that — that’s a
plus. But it’s not — we don’t mandate that sort of a result.
Ajit Jain can’t be replaced – 2010 Meeting
AUDIENCE: You have emphasized many times how important Ajit
Jain is to Berkshire and National Indemnities reinsurance operations. So
I’m wondering whether you expect National Indemnities’ float to continue
to grow or instead to unwind after he retires?
Another way of asking that is whether National Indemnity has
competitive advantages beyond Ajit, or is all of its value, above book value,
tied up in Ajit and the runoff profits from the deals he has already put on the
books?
BUFFETT: His operation has competitive advantages that go beyond
Ajit, but they have been developed by Ajit, and he has maximized them,
and he knows how to use them in a way that’s far better, in my view, than
anyone else in the world could. But they don’t all go away. I mean, he has a
cadre of about 30 people who are schooled in it, you know, in a way that
would make the Jesuits look quite liberal, in terms of what they let their
membership do. You can’t imagine a more disciplined operation than Ajit
has. But Ajit cannot be replaced.
On the other hand — well, I’ll state that absolutely, categorically — it
would be a huge loss to Berkshire if anything happened to Ajit. But it
would not mean that the Berkshire Hathaway reinsurance operation would
not continue to be an extremely special place that would do large deals that
nobody else would do, that could think and act quickly in ways that
virtually no other insurance organization can. We’ve got something very
special in that unit, and then we’ve got the most special of leaders in Ajit.
As to our float, every year I think our float has peaked. I never see how we
can add to it. It’s up to 60 billion-plus now. And we have things like the
Equitas deal that are runoffs.
Every day, in insurance, some of the float runs off, it’s just that we add
additional amounts. And like I say, I was ready to quit, you know, at 20
billion and think, you know, that we’d reached the apex of it. But it’s over
60 billion. Things keep happening. Berkshire has become, in my view, the
premiere insurance organization of the world, and we’ve got — a lot of
good things come from that. I don’t see how, with 60-odd billion of float, I
don’t see how we can increase it significantly unless we would make some
very significant acquisition. And I don’t rule that out, but there’s nothing
imminent on that.
But we will not organically grow the float of Berkshire at a fast clip
from here. It can’t be done. And we may fight to stay even. But we may
come up with something out of the blue. I mean, who would have known
that Equitas was going to come along three years ago? There are various
things that could happen of a positive nature. But when I tell you about the
value that Ajit has added to Berkshire, believe me, if anything, I’ve
understated it.