2004 年股东大会 · 上午场

Welcome

WARREN BUFFETT(Applause) Thank you. Good morning. Some of you may have noticed a stunt man was used in that [video shown before the meeting]. (Laughter) Arnold [Schwarzenegger] just couldn't handle some of those scenes. (Laughter) Before we get started, I'd especially like to thank Andy Heyward, who's here today and if we can — I don't know whether we can find him out in the crowd, it's a little hard to see from up here. But Andy runs DiC Productions. He does that cartoon for us and let's give him a big hand. (Applause) Andy has produced a really extraordinary series telling the story of the beginning of this country called “Liberty's Kids.” It's been on public broadcasting the last couple of years. It's great for kids but it's great for adults, too. I've watched a number of sessions myself. And this summer, in July, it will go on sale at Walmart, a very special celebration. And for those of you who want to pick out something good for your children or your grandchildren, I can't think of a better series to have them watching. And thanks again Andy. And thanks also to Kelly Muchemore who puts this whole production on. (Applause) This is Kelly's show. She, along with that dog Dudley, who you saw in the movie — Dudley is a regular at Berkshire Hathaway. We don't count him in the 15.8 [employees at headquarters], but she, along with Dudley, handle everything. I don't even give a thought to what's going to happen here, as might become evident during the meeting. (Laughter) She is responsible for putting up that whole exhibition arrangement and really the whole thing. So, Kelly, I don't know where you are exactly, but in any event, thank you very much. (Applause)

Formal business meeting begins

WARREN BUFFETTNow, we'll go through the business part of the meeting. And it may take a little longer than usual, but please be patient. And I'd like to start out by calling the meeting to order. I'm Warren Buffett, chairman of the board of Berkshire Hathaway, and I welcome you to this meeting. This hyperkinetic fellow next to me is Charlie Munger — (laughter) — the vice chairman. And we will have a good time, and I hope you do, too. We work together because he can hear and I can see. I mean, it's — (laughter) — there are times where we can’t remember each other's name, but we have a lot of fun together. Now, any shareholder who wishes to speak regarding the shareholder proposal expected to be presented by Human Life International, or any other matters germane to the shareholder's meeting, should now go to microphone zone 1, which is in section 121 over on my right. Or section 2, which is at section 221, I believe that's higher up on my right. And — let me see if I have that right. Yeah, or go to section 7, which is — or section 105 — which is microphone 7 on my left. Or to section 205, which is microphone 8. If you'll go to — if you're going to want to talk about anything concerning the business of the meeting, not the questions afterwards, but just that relates to the matters germane to the meeting, please go there now, because I'm not going to be able to spot people in a crowd this size. And when it comes time to do the business, we're going to ask anybody that cares to speak up on the business to be at those microphones. And that will be in just a couple of minutes. Now after adjournment of the business meeting, I'll respond to questions that you may have that relate to the businesses of Berkshire but that don't call for any action at the meeting. We had some complaints after last year that some people were asking six or seven-part questions. At least, that's the reason I'm giving that we're eliminating those. The bigger reason is Charlie and I can't remember the first part by the time you get to the fifth part. (Laughter) So, we are asking you to ask only one question. And don't try to get too clever about working three or four into a single question. And that will give more people a chance to get their questions asked. Only one question at a time and we will go around from microphone to microphone and get as many in as we can. Now, we're going to do this until noon and then we'll take a break for lunch and we'll come back about one and we'll continue until 3:30. And anything goes on the questions. We'll answer almost anything, except questions about what we may be buying or selling. You're free, of course, to wander around, go over and buy things. You know, we have a lot of things for sale over there. It's — as I've pointed out in the past, it's better form to leave while Charlie is speaking than when I'm speaking, but you can — (laughter) — use your own judgment on that. Now, I do want to remind you that any audio or video recording of this meeting is prohibited. That if anybody's seen recording the proceedings, we will have to ask you to leave. So, if you see anybody doing that, we would appreciate it if you would just inform one of the staff personnel around. Because there's certain copyrighted material that we use and people, like Judge Judy, give us permission to use a segment like that. But it's not intended to be used in any commercial way. So, we do ask that no recording take place.

Directors introduced

WARREN BUFFETTNow, I'll first introduce the Berkshire Hathaway directors that are present, in addition to myself and Charlie. Now, I'll ask the directors to stand as their names are read and ask that you withhold applause, if any — (laughter) — until all are introduced. We have — I don't know whether we have anybody here from CalPERS, but they can register their own views as we go along. (Laughter) And it is difficult to see from here, so if you'll just stand as I mention your name and remain standing until the end, when we will see whether you get any applause. Susan T. Buffett. Howard G. Buffett. Malcolm G. Chace. David S. Gottesman — Sandy had a conflict today. There's a bat mitzvah, I believe, for a granddaughter, so he's coming in tomorrow for our director's meeting on Monday. Charlotte Guyman. Donald R. Keough. Thomas S. Murphy. Ronald L. Olson, and Walter Scott Jr. And now you can go crazy. (Applause)

Four questions for the auditors

WARREN BUFFETTAlso with us today are partners in the firm of Deloitte & Touche, our auditors. They are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire. In that regard, I wish to report that at Berkshire's audit committee meeting held on March 2nd, 2004, Deloitte & Touche responded to the four questions I suggested be asked to the independent accountants by all audit committees. And we're going to put these up in just a second. With respect to Berkshire, the questions and the auditors' responses will be shown on the following slides. And I might mention that I really do think these questions should be asked of all auditors, at least annually, perhaps even quarterly. And I really think that, if such a procedure had been followed over the years — don't eat them all Charlie. (Laughter) If such procedures had been followed over the years, there would have been a lot less trouble in corporate America. I mean, for many years, particularly in the '90s, I think there was a weakening, frankly, in auditor vigilance. And the trick, as I've said, is really to have the auditors more worried about the audit committee than they are worried about the management. And it's quite natural when they're, essentially, hired by the management and when they see the management regularly and they only see the audit committee infrequently, that it's tempting to listen a little bit more to management than the audit committee. But these questions, if asked, in my view — and if the answers are put on the record — I think it would have a very helpful effect on behavior. Because once on the record, it means the auditors — it means they're on the line. And I've been on a lot of boards of directors and I've seen, in retrospect, things go by that I wish had been called to my attention by the auditors. So we have these four questions. And if we'll put up the first one — and I'd like to explain one item. Do we have those up? Yeah. You can read the question and these are the responses, as we go along, that the auditors have given to these questions. Now you'll notice on the first one that there is one item that — and incidentally, we owe a shareholder, who I think is going to speak later — it was his suggestion that we actually present these at the meeting. And I think it's a good suggestion. And I think if more companies did it, it would be a good idea. So I thank him for the suggestion. The major item, which is not material, as auditors define it, but the major item in which we disagree and use a method which I will explain further — actually, it's been changed — but concerns the purchase of life insurance policies, or the reinsurance of people who are purchasing life insurance policies, their so-called viatical settlements. And we have had a business, of sorts, in that. And it's likely to even be a larger business in the future. And what takes place there is that somebody, usually elderly, has a life insurance policy and they'd rather have the money themselves than have their heirs get it later on. So, they want to cash out early. And as you know, a life insurance policy typically has a cash surrender value. And sometimes those cash surrender values are quite low in relation to the actuarial value of the policy. So sometimes those people wish to sell a policy. We had a case the other day where a 79-year-old woman had an insurance policy amounting to some $75 million. I've never met her, but she must be quite a woman, but — (Laughter) The cash surrender value of that policy was $2 million. Clearly, for even a 79-year-old in the best of health, that was an inadequate sum for her to receive. But yet she wished to have the cash herself rather than eventually die and leave it to her heirs. So, we paid — or we actually reinsured a transaction where somebody else did it, and we took only 50 percent of it, but I'm going to use a hundred percent figures. We reinsured — we bought that policy for $10 million. And under accounting rules — GAAP accounting — we — it is recommended that we write that policy down immediately to the cash surrender value of 2 million. Well obviously, we think it's worth 10 million or we wouldn't have paid 10 million for it today. But the rules, as they become more clear, say write it down immediately. I happen to think that rule is wrong. But last year, at the end of the year, there had been a total of $73 million applicable to such policies that reflected our purchase price as opposed to the cash surrender value. In the first quarter of 2004, our activity has stepped up in this field some — the people we reinsure have stepped up their activities, so we get our 50 percent. And that amounts to — it's going to amount in the first quarter to about 30 million. So, we have adopted — even though we think it's in incorrect — we have adopted the GAAP accounting. And you will see in the first quarter report of Berkshire the charge for the 73 million of last year plus the 30 million in the first quarter this year. And that gets charged, believe it or not, to realized capital gains. And so, by buying these policies for X on one day and immediately writing them down substantially, that becomes a realized capital loss on our book. Now later on, we expect to get a perfectly satisfactory return from these policies. But that is the main item that is referred to in the auditor's answer on question one. Now, if we'll go to number 2. You have time to read that. I like the idea of this question being asked. I've read many reports where the footnotes are such that even if I reread them several times, I still don't know what's happened. And we try to write everything in plain English at Berkshire, and we try to explain things within the body of the letter that might give people the wrong impression if they simply looked at the figures, or that they might not be able to discern. Because Berkshire's gotten so large that we — there are all kinds of things that are lumped together in the consolidated statements, that I think it's more helpful if we look at separately. We're going to work at — annually — at trying to disaggregate numbers and information in a way that makes it most useful without turning out something as long as the World Book. Third item is very simple. And the fourth item relates to something that became very prevalent in corporate America in the 1990s, which was moving around numbers from one quarter to another or moving them for one year to another. And I have seen a lot of that. It's deceptive. I like the statement that the two fellows at Google made the other day where they essentially said that if numbers are lumpy or peculiar when they get to them, they're going to be lumpy or peculiar when they get to the public. And if there's some reason that requires explanation as to why they're lumpy, that the management should explain them. But the one thing they shouldn't do is start playing games from quarter to quarter or year to year in terms of moving numbers around. And that became very fashionable. I hope it's on the way to being moderated and we will continue to — each year, we will give you these questions at the meeting and we will report on the auditor's answers.

Election of directors

WARREN BUFFETTMr. Forrest Krutter is secretary of Berkshire. He will make a written record of the proceedings. Miss Becki Amick has been appointed inspector of elections at the meeting. She will certify to the count of votes cast in the election for directors. The named proxy holders for this meeting are Walter Scott Jr. and Marc D. Hamburg. Does the secretary have a report of the number of Berkshire shares outstanding, entitled to vote, and represented at the meeting?

FORREST KRUTTERYes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 3rd, 2004, being the record date for this meeting, there were 1,278,436 shares of Class A Berkshire Hathaway common stock outstanding with each share entitled to one vote on motions considered at the meeting, and 7,766,293 shares of Class B Berkshire Hathaway common stock outstanding, with each share entitled to 1/200th of one vote on motions considered at the meeting. Of that number, 1,121,231 Class A shares and 6,473,904 Class B shares are represented at this meeting by proxies returned through Thursday evening, April 29th.

WARREN BUFFETTThank you. That number represents a quorum and we will therefore directly proceed with the meeting. First order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott, who will place a motion before the meeting.

WALTER SCOTTI move that the reading of the minutes of the last meeting of shareholders be dispensed with and the minutes be approved.

WARREN BUFFETTDo I hear a second?

VOICESeconded.

WARREN BUFFETTTMotion has been moved and seconded. Are there any comments or questions? We will vote on this motion by voice vote. All those in favor say "aye."

VOICESAye.

WARREN BUFFETTOpposed? Motion's carried. First item of business at this meeting is to elect directors. If a shareholder is present who wishes to withdraw a proxy previously sent in and vote in person on the election of directors, he and she may do so. Also, if any shareholder that is present has not turned in a proxy and desires a ballot in order to vote in person, you may do so. If you wish to do this, please identify yourself to meeting officials in the aisles who will furnish a ballot to you. Would those persons desiring ballots please identify themselves so that we may distribute them? And I now recognize Mr. Walter Scott to place a motion before the meeting with a respect to election of directions.

WALTER SCOTTI move that Warren E. Buffett, Charles T. Munger, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chace, David S. Gottesman, Charlotte Guyman, Donald R. Keough, Thomas S. Murphy, Ronald L. Olson, and Walter Scott Jr. be elected directors.

WARREN BUFFETTIs there a second? It's been moved and seconded that Warren E. Buffett, Charles T. Munger, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chace, David S. Gottesman, Charlotte Guyman, Donald R. Keough, Thomas S. Murphy, Ronald L. Olson, and Walter Scott Jr. be elected as directors. Are there any other nominations? Is there any discussion? Is there anybody that is at the microphones that would —

AUDIENCE MEMBERYes. Paul Tomasik, Thornton in Illinois. I like the idea of inside directors. I think they're necessary. However, I think we should have the best available. In particular, I'd like you to consider the CEOs of the Berkshire subsidiaries. If you compare their qualifications to Susan Buffett's and Howard Buffett's, I think you'll find that the CEOs have superior qualifications, particularly, business savvy and the ability to stand up to a forceful CEO. I'd like to point out that we'll hear how many of these CEOs are independently wealthy and could easily say, "Take this job and shove it." So this is why I am withholding my votes for the directors. Thank you.

WARREN BUFFETTThank you. Charlie, do you have any thoughts on that?

CHARLIE MUNGERI think we should go on to the next item. (Laughter and applause).

WARREN BUFFETTThe nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the election of directors and allow the ballots to be delivered to the inspector of election. Would the proxy holders please also submit to the inspectors of elections a ballot on the election of directors voting the proxies in accordance with the instructions they have received. Miss Amick, when you are ready, you may give your report.

BECKI AMICKMy report is ready. The ballot of the proxy holders, in response to proxies that were received through last Thursday evening, cast not less than 1,123,189 votes for each nominee. That number far exceeds a majority of the number of the total votes related to all Class A and Class B shares outstanding. The certification required by the Delaware law of the precise count of the votes, including the additional votes to be cast by the proxy holders in response to the proxies delivered at this meeting, as well as any cast in person at this meeting, will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETTThank you, Miss Amick. Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase, David S. Gottesman, Charlotte Guyman, Donald R. Keough, Thomas S. Murphy, Charles T. Munger, Ronald L. Olson, and Walter Scott, Jr. have been elected as directors.

Proposal to publish political contributions

WARREN BUFFETTThe next item is business is a proposal put forth by Berkshire shareholder Human Life International, the owner of one Class B share. Human Life International's motion is set forth in the proxy statement and provides that the company be required to publish annually a detailed statement of each contribution made by the company and its subsidiaries in various political causes. The directors have recommended the shareholders vote against the proposal. We will now open the floor to recognize the appointed representative of Human Life International to present their proposal. Is someone here to present that?

TOM STROBHARYes, Mr. Buffett. My name is Tom Strobhar and I do represent Human Life International. And I'm here to present the shareholder resolution regarding political contributions. But before I do, I'd like to give you a little background. Some of you may remember, two years ago, there was a resolution asking the company to end its charitable giving program. The resolution said corporate charitable contributions should help, not hinder, the company and suggested certain contributions, especially those related to abortion and population control, were doing just that. This proposal was soundly defeated by the shareholders, receiving less than 3 percent of the vote. Oddly enough, a little over one year later, Mr. Buffett, in his wisdom, did terminate this program citing the adverse impact his philanthropic interests were having on the livelihoods of some employees at the Pampered Chefs division. At the time of the resolution, we first learned that Mr. Buffett and Mr. Munger were directing their money to their personal foundations rather than more recognized public charities. While previous chairman's letters extolled the high participation levels among eligible shareholders, no mention was made that Mr. Buffett, who accounted for 31 percent of the equity of the company, was giving away almost 55 percent of the charitable gifts. Why all of you B shareholders, who probably comprise a majority of the people in this audience, were excluded from giving, and whose vote on this proposal was dramatically diluted down to 1/200th of the value of an A share — which obviously is not quite democratic. I refer you to the 1983 Chairman's Letter. In addressing why he wouldn't split the stock, Mr. Buffett describes something he calls "shareholder eugenics." Mr. Buffett laments how it's impossible to screen entering members of the shareholder "club" for quotes, "intellectual capacity, emotional stability, moral sensibility, or acceptable dress." Splitting the stock and lowering the price of admission to the club — Class B shareholders take note — "would attract an entering class of buyers inferior to the existing class" and "downgrade the quality of our present shareholder group," end quote. All told, Mr. Buffett gave to his private foundation almost $100 million, much of it other shareholders' money. This money, in turn, was devoted almost exclusively to population control seeking to lessen the number of people at a time when Western nations, especially those in Europe and Japan, face economic calamity from a baby bust. How do charitable contributions relate to political contributions? It wasn't until there was a resolution on charitable contributions that we received some disclosure. So too, with the resolution I'm about to present, did we find out the company gave a very modest $200,000 to various political candidates or causes. While the charitable contributions may have been too much, the political contributions may be too little. Not necessarily from the company, but from other shareholders. If there are politicians or causes in which there is legitimate business interest in supporting, why not give the shareholders the opportunity to help them also? By publishing the list, the word goes out to our thousands of shareholders who may wish to do the same with their own money. It costs little to publish, provides for transparency, checks any personal abuse, and sets an example to the rest of corporate America. It also provides an opportunity for all the members of our shareholder club, even B shareholders, to get involved and help this company and help their investment. And with that, I'd like to read the actual resolution, which I'm required to do. "Within one month, after approval by the shareholders of this proposal, management shall publish in The Buffalo News a detailed statement of each contribution made by the company or of any of its subsidiaries, either directly or indirectly, within preceding fiscal year, in the respect of any political campaign, political party, referendum or citizen's imitative, or attempts to influence legislation, specifying the date and amount of each contribution and the person or organization to whom the contribution was made. "Subsequent to this initial disclosure, management shall cause like data to be included in each succeeding report to the shareholders. If no such disbursements were made, to have the facts so noted in the annual report." This proposal, if adopted, will require the management to advise its shareholders how many corporate dollars are being spent for political purposes, and to specify what politicians or political causes the management seeks to promote with these funds. Political contributions are made with the dollars that belong to the shareholders of the group and they are entitled to know where their dollars are being spent. A vote for this proposal is a vote for full disclosure. Thank you.

WARREN BUFFETTIs there anyone else that would care to speak on the motion? Charlie, do you have any comment?

CHARLIE MUNGERWell, I preferred our old charitable giving program to the way most corporations do it in America — (applause) — where the controlling officers decide. However, it's a dead horse. It's gone and there's no point beating on the corpse. (Laughter)

WARREN BUFFETTThe dead horse will now speak. (Laughter) I just want to add one point, because it a little different than occurs at many other corporations. To my knowledge or memory, I don't believe Charlie and I have ever asked any employee or any vendor to Berkshire — any employee of Berkshire or a vendor to Berkshire — for either political contributions or charitable contributions. There's been no — there's been no use of our positions to, in effect, extract money for our own personal causes, either in the charitable area or the political area. Is that correct, Charlie?

CHARLIE MUNGERYeah, but we don't deserve too much credit for not asking other people for charitable contributions. (Buffett laughs) Think what the reciprocity implications would be.

WARREN BUFFETTYeah. (Laughter) But it's a fairly common activity. So here we are. We'll — if any shareholder's voting in person, they should now mark their ballots in the — on the motion and allow the ballots to be delivered to the inspector of elections. Would the proxy holders please also submit to the inspector of elections a ballot on the proposal, voting of proxies in accordance with the instructions they have received? Miss Amick, when you are ready, you may give your report.

BECKI AMICKMy report is ready. The ballet of the proxy holders, in response to proxies that were received through last Thursday evening, cast 27,287.605 votes for the motion and 936,045.815 votes against the motion. As the number of votes against the motion exceeds a majority of the number of votes related to all Class A and Class B shares outstanding, the motion has failed. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETTThank you, Miss Amick. The proposal fails.

Shareholder proposal to "tell us the rules" on motions

WARREN BUFFETTDoes anyone have any further business to come before this meeting before we adjourn? If so —

AUDIENCE MEMBERYes.

WARREN BUFFETT—they should approach microphone 1 to be recognized. I believe we have someone.

AUDIENCE MEMBERYes. Paul Tomasik, Thornton in Illinois. I have a proposal to put written rules for this meeting, the formal part, on the web, in order that this meeting can be conducted fairly and with good faith. Would you like a little more comment?

WARREN BUFFETTNo.

CHARLIE MUNGERNo.

WARREN BUFFETTThe faster you can make it, the better. But go to it. (Applause)

AUDIENCE MEMBERWell, that's it —

WARREN BUFFETTThat's it.

AUDIENCE MEMBER— on that one.

WARREN BUFFETTOK. (To person sitting next to him) Is that a motion?

WARREN BUFFETTWell, do you want to — would you place all — if you have more motions, would you place them, or is that it?

AUDIENCE MEMBERNo, certainly. The other three motions are to put the bylaws and the articles of incorporation up on the website, to write it into the bylaws how shareholders should present motions, and the fourth, to write it into the bylaws how shareholders can make director nominations. To sum up, what these motions ask for is just tell us the rules. We'll follow them. That's it. Thank you.

WARREN BUFFETTOK, thank you. I actually think you came up with a very good suggestion on the audit committee report, which we've incorporated. I don't really think this would add much, but if there are any shareholders voting in person, they should now mark their ballots in the motion — on the motion — and allow the ballots to be delivered to the inspector of elections. Would the proxy holders please also submit to the inspector of elections a ballot on the proposal, voting the proxies in accordance with the instructions they've received. Miss Amick, when you are ready, you may give your report.

BECKI AMICKMy report is ready. The ballot of the proxy holders cast 1,153,600.52 votes against the motion. As the number of votes against the motion exceeds a majority of the number of votes related to all Class A and Class B shares outstanding, the motion has failed. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETTThank, Miss Amick. The proposal fails. I now recognize Mr. Walter Scott to place a motion before the meeting.

WALTER SCOTTI move the meeting be adjourned.

WARREN BUFFETTIs there a second?

VOICEI second.

WARREN BUFFETTA motion to adjourn has been made and seconded. We will vote by voice. Is there any discussion? If not, all in favor say "aye."

VOICESAye.

WARREN BUFFETTAll opposed say "no." The meeting's adjourned. OK, now we're — (Applause)

Rebuttal of calls for Buffett to leave Coca-Cola's board

WARREN BUFFETTNow we're going to move into the questions and answers, at least questions. And just ask one as we spelled out before. And we will start with microphone 1, which is in section, what, 121 on my right. And we'll keep moving 1 through 12 until we get till noon. Microphone 1.

AUDIENCE MEMBERJonathan Mills (PH) from London, England. I wondered if you could comment on the views of those people who have stated that, because of so-called conflicts of interest, you should leave the board of Coca-Cola and whether you had any intention of doing so.

WARREN BUFFETTThat we should do what with the board?

AUDIENCE MEMBERLeave the board. That you personally should leave the board of Coke.

WARREN BUFFETTI would say that whoever suggested that should do 500 sit-ups. (Laughter) Actually, Charlie and I — certainly I have — well, I'll Charlie speak for himself — we like the idea and we've encouraged the idea of shareholders behaving like owners. I mean, shareholders have too often behaved like sheep in this country and they got shorn, in many cases. And big institutional shareholders have sat on the sidelines while some things that might possibly have been corrected, had they gotten active, took place. So we have — we actually applaud the idea of shareholders behaving like owners. The question is whether they, you know, can behave like intelligent owners. And I think that in the last year or two, as they've sort of woken up, they've searched for checklists of one sort or another to determine whether directors are appropriate in a given company or not. And frankly, checklists are no substitute for thinking. The real job of the directors is to come up with the right CEO for a company and prevent him or her for overreaching. If they do that job well, the rest takes care of itself. And you have to think some to determine whether that's taking place. You can't solve it by just running down a little checklist. I think it was Bertrand Russell who said, "Most men would rather die than think. Many do." (Laughter) And I think we've seen a little bit of what he was thinking about in some of the voting. I think it's absolutely silly, frankly, if Berkshire Hathaway owns 200 million shares of Coca-Cola, $10 billion worth, to not be able — it's a little silly not to think that the interest that Berkshire Hathaway has in selling some hours of training at FlightSafety would cause me to do something counter to the interests of the shareholders, when we have $10 billion riding on that side of the table. I mean, it's almost absurd, and somebody doesn't understand proportionality at all when they come to that sort of conclusion. I also think it's absolutely foolish if — just to use Coca-Cola as an example. I think the directors of Coca-Cola haven't even looked, but I think we probably received something like $100,000 a year. And if we were to go out into the welfare line and pick somebody out who has no income and say, "We'd like you to become a director," and that person would get $100,000 a year, which would be their entire income, and to say that person would be independent — you know, while they would be 100 percent dependent on their income — that person would be independent. Whereas Berkshire Hathaway, or myself representing Berkshire Hathaway with 10 billion of stock — and receiving the same $100,000 a year — is not regarded as independent. So I encourage — I encourage institutional shareholders to — and large owners — to behave like owners. But I also encourage them to really think logically, as owners should think, in determining what causes they take on and how they vote. Charlie? (Applause)

CHARLIE MUNGERYeah, I think that they, corporate America, needs a fair amount of reform. But the cause of reform is hurt, not helped, when an activist makes an idiotic suggestion — (laughter) — like the one that — (applause) — having Warren Buffett on the board of the Coca-Cola Company is contrary to the interest of the Coca-Cola Company. Nutty activities do not help the cause for which the person speaks.

WARREN BUFFETTIt's a little bit like having a slicing machine in an orchard where you're gathering together apples but you're also picking up a lot of rocks in the process and sticks and stones. So you have a slicing machine with a conveyer belt. And the slicing machine is programmed so that every time something is red and round comes down the line, it slices and comes down, but it doesn't come down on the rocks and everything and ruin the blades. And, of course, that's fine until a red balloon comes down the line and then you get a big pop and the machine has followed its little guidelines but it's not slicing apples anymore. And I think — I just — actually, institutions are coming new to really thinking about how they behave as owners. And you would hope that, in the evolutionary nature of learning — that not too many years distance — distant — they would actually think about what's good for the shareholders of the company.

Surviving inflation

WARREN BUFFETTLet's go to microphone number 2, please.

AUDIENCE MEMBERMr. Buffett, Mr. Munger, good morning. My name is Zachys Sarris (PH) and I am from Athens, Greece. There is a widespread perception that we're heading towards an inflationary environment. What advice would you give to investors who need to preserve their capital and their purchasing power in such an environment?

WARREN BUFFETTThe best thing is to have a lot of earning power of your own. If you're the best brain surgeon in town, or even the best lawyer in town, you will retain purchasing power, in terms of your income, no matter what happens, you know, whether people are using seashells for money, or whatever as time goes by. In the investment world, it's tougher. But Charlie and I think the best answer is to own fine businesses that will be able to price in inflationary terms and will not have huge capital investment that is required to handle the larger dollar volume of sales. Some years ago, I used See's Candy in our — in the annual report — as an example of the kind of business that, more or less, can handle an inflationary world and maintain investment and value, no matter what happens to the currency. Unfortunately, most businesses will not come out well in real terms during inflation. Their earnings may go up a fair amount over time, but they're compelled to put more and more dollars into the business just to stay in the same place. You know, the worst kind of a business is one that's — makes you put more money on the table all the time and doesn't give you greater earnings. So you really want a business that can have pricing that reflects inflation and does not have very much capital investment that reflects inflation. But inflation is the enemy of the investor, in terms of real returns. As you know, there are, in this country as well as a half a dozen other countries, there are what they call "inflation protected bonds" — we call them TIPS in the United States — where the income is adjusted — or, the principle amount is adjusted — to inflation. And that's not a bad investment for people that have worries about inflation heating up. And I think, incidentally, we're starting to see it heat up in this country. Charlie?

CHARLIE MUNGERYeah, most people are going to get a very small real return from investment after considering inflation and taxes. I think that's an iron law of the world and if, for a brief period, some of us do better than that, we ought to be very thankful. One of the great defenses to being worried about inflation is not having a lot of silly needs in your life. In other words, if you haven't created a lot of artificial demand to drown in consumer goods, why, you have a considerable defense against the vicissitudes of life.

WARREN BUFFETTCharlie, we're selling consumer goods in the other room. (Laughter) It's OK to talk that way at home, but — (Laughter)

CHARLIE MUNGERIt doesn't do any good there. (Laughter)

WARREN BUFFETTI know the feeling. (Laughter)

Reluctance to hold special meetings for analysts

WARREN BUFFETTLet's go to microphone 3.

AUDIENCE MEMBERGood morning, gentleman. My name is Larry Coats, from Durham, North Carolina. Mr. Buffett, after last year's meeting, my longtime friend and business partner George Brumley [III] sent you a letter addressing several issues. Having participated in the preparation of that letter and on his behalf, I thank you for your response.

WARREN BUFFETTThank you.

AUDIENCE MEMBERIn such, you suggested that many of those issues would be appropriately addressed in this forum. In his honor, I'd ask you to address just one of those, and that is the ultimate generational transfer of Berkshire away from its current base of long-term, self-selected, and well-informed shareholders, and the potential of instituting a series of analyst meetings to address the relative lack of interest in, and ownership, and understanding of, Berkshire by institutional shareholders and investors. Thank you and good morning.

WARREN BUFFETTWell, thank you. I mean, George was a wonderful man. A great analyst and a friend. I have some problem with having meetings with subgroups of investors, such as institutional investors. If we had something like that, I think we would want it to be open to everybody. And, you know, that gets to be quite a production. But I can understand, you know, why A) you'd like to see our managers and hear what they have to say about their businesses. We try to convey a lot about the businesses in the report, but — Charlie, do you have any thoughts on that?

CHARLIE MUNGERI don't think it fits our temperament at all well. Many corporations have a huge amount of effort spent in talking to groups of analysts. One of Berkshire's strengths has been that we don't spend time in that way. That's a very time-consuming process. And it does give some shareholders some advantage over others. We try and be more egalitarian in events like this and the way we write the annual report, et cetera.

WARREN BUFFETTYeah, we really like the group of shareholders we have. I mean, we're not about enticing new people into it. But I know your point also is that the present shareholders could better understand Berkshire if they would listen to Bob Shaw talk about Shaw Carpet or Rich Santulli talk about NetJets. And the truth is, it is fun to listen to those people. But one of the things we promise managers when they join up with us, too, is they that they don't have to listen to bankers, they don't have listen to investment analysts. They just get to run their businesses. They can devote a hundred percent of their time to it. And people like that, and they're more productive because of it. I mean, we really place no impediments in the way of our managers doing what they do best and what they like to do best, which is run their businesses. And frankly, a number of them have expressed to me that they're very happy because they existed in a different mode before. And in that mode, they would spend maybe 25 percent of their time on activities that they didn't enjoy and they didn't feel were very productive. So we want to get across the information about our businesses to you. And believe me, when I write the report and Charlie looks at it, we say to ourselves, "Are we telling you what we would want to know about if our positions were reversed, if we were on the receiving end?" And we really try to put in the report everything that's germane to evaluation. Now, if you have a market cap of 130 billion, you know, it's really not too important to get keen insights into some business that's making a relative small amount of money. But anything that counts — and really, you have to look at them in aggregates — we want to get across to you. So, you know, it's — I'm very respectful of your suggestion. It's conceivable to do it. The Washington Post has a shareholder day, because their annual meeting is turned into a farce often because it's largely dominated by people who are complaining about this story or that story. But the shareholder day is very useful and they do have their managers there and talk about it. But I really think if we spend six hours here answering your questions about the business and we do a half-way decent job of writing the annual report, we should get across the essential information. And we're really not trying to get across — we're not trying to talk to an audience that is trying to get some special insight into what next quarter or next year is going to look like. We're really looking for owners who join us in what we regard as kind of a lifelong investment. And I would say that certainly analysts, like your group, have exactly the same objective we do and want to understand the business that way. But my experience, you know, in talking to hundreds of them, is that there are relatively few that are actually thinking about, "What do we buy and put away forever?" Like, we'd buy a farm or an apartment house or something. So we'll consider it, but I don't want to make any promises.

Compensation plans: specific to the business, simple, and generous

WARREN BUFFETTGo to number 4, please.

AUDIENCE MEMBERGood morning, gentleman. My name is Matt Sauer and I'm from Durham, North Carolina. Regarding compensation, you have commented along the lines of people willing to bet big on their (inaudible) usually have a lot of bet on. A MidAmerican regulatory filing indicated some attractive prospective compensation possibilities for its senior executive team, subject, of course, to meeting profitability milestones. Perhaps you might provide some details on the thought process that went into crafting that compensation structure, and in doing so, use this specific example as a reminder about Berkshire's compensation philosophy, related to pay for performance versus the more popular approaches. If it's easier to figure out and administer, better for owners, and can still attract talented people, why don't more companies adopt such practices?

WARREN BUFFETTYeah, we — you could make a lot of money working for Berkshire. Not if you're chairman or vice chairman, but there's a chance to make a lot of money. But it will relate to performance. No one is going to make lots of money at Berkshire for average performance. And you mentioned the MidAmerican situation. We've got some extraordinary management at MidAmerican. And it's — in terms of how that compensation arrangement was worked out, I was thinking one day about what would be appropriate for the two individuals who are key to the success of MidAmerican. And I took a yellow pad and I spent about three minutes sketching out a proposal. And I went to Walter Scott, who is our partner in the business and now actually heads the comp committee. And I said, "Walter this is an idea I have, what do you think of it?" And he looked at it and he said, "It looks fine to me." And we talked to the two managers about it and actually, as we presented it, we had it so that something over 50 percent went to the CEO, Dave Sokol and something under 50 percent went to the number two man, Greg Abel, who's enormously well named. And when we gave it to David, he said, "Let's just" — he said, "I like it fine, but let's make it 50/50." That's the extent of it. As you have commented, that's wildly different than the approach at companies. I mean, most companies go through very elaborate procedures in working out executive compensation. I don't think that Charlie and I have spent ever, maybe five minutes, on thinking about any. We have an arrangement at See's Candy with Chuck Huggins. We worked it out in 1972. It's still in force now. John Holland took over Fruit of the Loom a couple of years ago. I met with him for a couple of minutes, suggested something, takes up a paragraph or two. And that's what we'll have with John the rest of his life. It's not highly complex. You have to understand the businesses. There is no one formula we could use at Berkshire that would fit across our businesses, that's asinine. You don't want them complicated. We don't have anything that goes on for pages and pages. It's not needed. It establishes a relationship between us and the manager that's not good. So all of our stuff is very, very simple. At GEICO we have two variables and they're what count, you know. So we make — from Tony Nicely on down, we have everybody participating based on that. We worked that out whenever we took over at GEICO and it's worked fine since and it'll keep working. But we do not bring in compensation consultants. We don't have a human relations department. We don't have — at the headquarters, as you could see, we don't have any human relations department. We don't have a legal department. We don't have a public relations department. We don't have an investor relations department. We don't have those things because they make life way more complicated and everybody gets a vested interest in going to conferences and calling on other consultants and it takes on a life of its own. In the typical large corporation, there's a comp committee. And, as I pointed out in the past, they don't put Dobermans on the comp committees, usually. They — they look for Chihuahuas that have been sedated and — (Laughter) I've been on 19 boards. They put me on one committee once, and I was chairman and I got outvoted. Do you remember that, Charlie? (Laughs)

CHARLIE MUNGERI certainly do.

WARREN BUFFETTYeah. The —

CHARLIE MUNGERBy two very fine guys.

WARREN BUFFETTYeah, terrific guys, actually. And they — you know, the nature of it is that now, particularly with Sarbanes-Oxley, there's lot of committee meetings. The directors meetings are filled up with process. And you have on one side of the table, some people that usually are spending an hour or two and getting presented with a bunch of material by the human relations department and some outside consultants. And I've never seen the head of a human relations department or a consultant come in and say, "This bozo you've got is only worth about half what you've been paying him." This just isn't going to happen. So it's, you know — it's a situation where the intensity of interest on both sides is seldom equal. The directors are often dealing with something my friend Tom Murphy in the past has called, "play money," and the CEO is dealing with something very dear to his heart. So you've got to expect a situation like that to get gamed over time. Not over time, promptly, actually. And there is some change in that that's taking place. But it's not being — in large part, it's not being led by CEOs and it's difficult for directors to do — to get a lot done. They get handed a sheet of paper that shows them comparables elsewhere, and everybody thinks their CEO is in the top 25 percent or something. And so there's a ratcheting effect that takes place. And now stock options are coming out of favor, so restricted stock comes in. But the idea is to keep the pie very large for CEOs. And if I needed the money, I'd probably be doing the same thing. Charlie?

CHARLIE MUNGERWell, I would rather throw a viper down my shirtfront than hire a compensation consultant. (Laughter and applause)

WARREN BUFFETTTell me which kind of consultants you actually like, Charlie? (Laughter) He's not going to answer that.

We don't think about investing "categories"

WARREN BUFFETTWe'll go to number 5. (Laughter)

AUDIENCE MEMBERWarren and Charlie, good morning. My name is Mo Spence from Waterloo, Nebraska. Years ago, you listed the four or five investment vehicles you considered appropriate for Berkshire, including, I believe, common stocks, long-term debt, and arbitrage opportunities. In light of your comments in this year's annual report, I was wondering if you could review that list, in order of preference, and specifically comment on them, including the current environment for arbitrage.

WARREN BUFFETTYeah. Well, the items you name — and you could break that down by high-grade bonds, you know, versus junk bonds. The items you mention are all alternatives. You know, Charlie and I sit around and think about what's the best thing to do with Berkshire's money. It's a fairly simple proposition. And we have a number of things that we feel competent to make judgments on, and we have a number of things that we're not competent to make judgments on. So we narrow — we hope to narrow the field to investments that we think we can understand. And there are a reasonable number of those, although there are a lot that we can't understand. Anything I would say today, you know, can change tomorrow. We don't think about the categories by themselves. Now, in a period like summer to mid-fall of 2002, when junk bonds became very attractive, we bought a lot of them. But we didn't make some great decision to buy junk bonds, we just started seeing things, individual items, that started screaming at us, you know, "buy, buy, buy." And then that came to an end. And so we don't go to the office in the morning thinking what category — how do we prioritize our categories. You know, we have an open mind and whatever we see that day that overcomes, or that crosses the threshold to where we take money out of short-term cash and move into it. It could be arbitrage — it's unlikely to be arbitrage now, because that's a game that, to play on a scale that would have a meaningful effect at Berkshire, is hard to do. I mean, take very big deals, and it's something we've done successfully in the past. We've made a lot of money over the years in arbitrage and quite consistently sometimes in the past. But we don't — Charlie and I do not have a checklist that we talk about every day, or every month, or every year, in terms of prioritizing categories. We just hope — I hope he gets a good idea, he hopes I get a good idea. And when we get one, we move in a big way. They have to be big now and that's a limiting factor in terms of what's available for us. As you know, if you read the annual report, you know, we took a significant position in currencies. We're buying viatical settlements, in terms of the transaction I mentioned a little earlier. We're open to anything we can understand. Charlie?

CHARLIE MUNGERYeah, you really asked us to determine an order of precedency among two or three activities we don't have much interest in at the moment. And that's not something we spend a lot of time at. In other words, we have all this cash because we don't much like any of those fields at the moment. And spending all the time thinking about orders of precedency among things you clearly are not going to do is pretty fruitless for us.

WARREN BUFFETTYeah, I thought I had a slide here but I don't. But it — when we were buying junk bonds in the summer to fall of 2002, we were literally buying securities — and we limited it to the kind of junk bonds we can understand, which is far from the whole universe — but we were literally buying things on a 30, 35, 40 percent yield to maturity basis. Now, we buy those with a mental attitude of buying common stocks. Interestingly enough, within 12 months, some of those same securities that were yielding 30 or 35 percent went to prices where they yielded only 6 percent. I mean, that is truly remarkable when you think about that happening in a country that was not in the throes of depression or anything. I mean, prices do amazing things in securities markets. And when they do something that strikes us as amazing in our direction, you know, we will act. But we do not know today what we're going to be doing tomorrow. We have — you know, we have some things — a few things we may be doing. They're likely — It's likely we're doing them tomorrow, but there's — we don't hold any committee meetings on this. And there's, you know, this business where somebody says, "You should have 50 percent of your money in bonds and 35 percent, you know, in equities, and 15 —." We don't go through anything like that. I mean, we regard that as nonsense. Any further thoughts, Charlie? No further thoughts, evidently. (Laughter)

"Very dangerous to project out high growth rates"

WARREN BUFFETTMicrophone 6.

AUDIENCE MEMBERGood morning, gentleman. My name is Tony Ado (PH) and I come from New Jersey. Mr. Buffett, my question is on business valuation and growth. In one of your letters, you mentioned the discounting formula on earnings divided by the difference between the discount and the growth rate. But if the growth rate is larger than the discount rate and if we use this formula, then we get a negative number. And one way around this — let's call it method A — is to have two growth stages, one with a high growth and the second stage with a low growth. And the second way, method B, would be to estimate how much the earnings is on the third year for the company and then multiply this by the average price-to-earning ratio to get the price in the tenth year. I don't know if you use the method A or method B, but if not, I would like to ask, Mr. Buffett, how do you estimate how much a company is worth if the growth rate is larger than the discount rate?

WARREN BUFFETTWell, you put your finger on an interesting mathematical relationship. Because if you're using a present value discount formula and you put in a growth rate that is higher than the discount rate, as you have postulated, the answer, of course, will be infinity. And there are a lot of managements around who like to think their stocks are worth infinity, but we — (laughs) — haven't found one yet. That precise subject was covered in a paper called "The St. Petersburg Paradox" by a fellow named [David] Durand probably 30 years ago. And somewhere, we probably have a copy at our office. My guess, if you go to Google and you put in the name Durand and you put in St. Petersburg, you may be able to call up that article, although they aren't necessarily terrific on old articles. So if you'd like it, we would — if you'll let somebody know in our office, we'll look around a little and see if we can find that. It gets very dangerous to project out high growth rates because you get into this paradox. If you say the growth rate of a company is going to be 9 percent between now and judgment day and you use a 7 percent discount rate, it goes off, you know, you get into infinity. And that's where people get in a lot of trouble. The idea of projecting out extremely high growth rates for very long periods of time has caused investors to lose, you know, very, very large sums of money. There aren't many companies — just take a look at the Fortune 500, go back 50 years — they're commemorating that — and look at the companies that were there and how many have really maintained rates much above 10 percent. It's not an easy hurdle. And when you get up to 15, you know, you're in the atmosphere and rarified atmosphere. So that's — there's a real danger in projecting out high growth rates. And Charlie and I will very seldom — virtually never — get up into high digits. You can lose a lot of money doing that. You may miss an opportunity some time, but I haven't seen people who have been consistently successful doing that. And you do run into this paradox you mentioned. Charlie?

CHARLIE MUNGERWell, you're obviously right, when you get a mathematical result that is infinity, to back off and realize that can't happen. And, of course, what people do is they project that the growth rate will reduce and, indeed, eventually stop. And then you get more realistic numbers. What else could anyone do?

NYSE specialist system has "worked pretty well"

WARREN BUFFETTOK, we'll go to microphone 7. I believe that's over here.

AUDIENCE MEMBERYes, My name is Jack Oneil (PH). I'm from New Brighton, Minnesota. Thank you for the opportunity to ask questions here and for the opportunity to learn from you and Charlie. I had a two-part question and I'm striking the first part, which dealt with my concern over how long the country can continue with this ballooning national debt. My second — my question then is, what is your opinion of the need for specialists on the New York Stock Exchange? Thank you.

WARREN BUFFETTCharlie, you want to tackle that one? (Laughs)

CHARLIE MUNGERWell, thank you, Warren. (Laughter) Generally speaking, I think the specialist system has worked pretty well over the years. There may have been a few troubles lately, but averaged out, it's worked pretty well for a long time. And I'm not all that horrified that some people who stand there all day make a fair amount of money.

WARREN BUFFETTCharlie actually had a specialist firm, you should know that. That's why I turned the question over to him, despite his snide remark. (Laughter) How long were you and Jack [Wheeler] the specialists in General Motors on the Pacific Coast Stock Exchange?

CHARLIE MUNGERAbout 13 years.

WARREN BUFFETTYeah —

CHARLIE MUNGERYeah.

WARREN BUFFETTYou're looking at an experienced specialist.

Buffett predicts "big problems" from derivatives

WARREN BUFFETTLet's go to number 8.

AUDIENCE MEMBERGood morning, gentleman. I'm Neil Steinhoff from Phoenix, Arizona. Thanks for the tips on TIPS. Also thanks for the information in the newsletter — your annual letter — about the books. I particularly enjoyed “Bull!” by Maggie Mahar, I think it was. I'm concerned about the future for a number of different reasons, in America. The debt, both accumulated by the government and personally, the stock buybacks, which are benefiting the top five executives, continues. The insanity of derivatives and the overpriced market with a P/E, which is also insane. Any comments?

WARREN BUFFETTWell, which one do you want us to comment on? You only get one question. (Laughter)

AUDIENCE MEMBERDerivatives.

WARREN BUFFETTDerivatives. Well, Charlie and I have expressed ourselves on derivatives. You know, we don't think the probability, in any given year, is necessarily very high, that derivatives will either lead to or greatly accentuate some financial trauma. But we think it's there. And I think it's fascinating to look at something like Freddie Mac, where you had an institution that perhaps even hundreds of financial analysts were looking at — certainly many, many dozens of financial analysts were looking at. You had an oversight office. You had a creature that was created by Congress, presumably with committees that would be interested in their activities. You had on the board two of the smartest and highest-grade people that you could have, in terms of fixed income markets, in Marty Leibowitz and Henry Kaufman, and you had a bunch of other very good directors, too. And, with an auditor present, they managed to misstate earnings by some $6 billion in a fairly short period of time. Now, all of that wasn't accounted for by derivatives, but a very large portion of it — 6 billion, that, you know, that is real money even — well, in any place. A large part of that was facilitated by activities and derivative instruments. Now you can look at the Freddie Mac annual report for 2000, whatever it is, '2 or 2001. And you can read the footnotes and you can read the auditor's certificate. And you can look at bunch of high-class, very smart directors. And you can be comforted by the fact that dozens of people in Wall Street, who are paid just to follow relatively few stocks, were studying this, and that they had conference calls all of the time. And in the end, what happened? It was 6 billion. It probably could have been 12 billion if they'd wanted. A lot of mischief can happen with derivatives. And as we've pointed out, Charlie and I have seen it happen. When there's a derivative transaction, particularly a complicated one — the plain vanilla ones, probably people will not get in big trouble on — but when you have a complicated derivative transaction, and the trader at investment house A is on one side and a trader on investment house B is on the other side, and they record a transaction — which has to be a zero-sum game between the two of them — and both put on the books a profit that day — I've never seen one where they both put on a loss that day — it lends itself to mischief. And the scale is absolutely huge and getting larger all the time. And I will tell you that I know the managements of some of the companies that have big derivative activities, and they do not have their minds around what is happening. We didn't have our mind around what was happening at Gen Re Securities. We couldn't. We tried to get our mind around it. We couldn't do it. And that was far from, you know, the most extensive or complicated derivative operation around. We had the same experience at Salomon. But whatever the figures were at Salomon, they would be a great multiple today. And there was a Sunday in 1991 when we were preparing — or we had the lawyers preparing — bankruptcy papers at Salomon. And if the Treasury hadn't reversed itself, we would have found a judge some place in Manhattan. He probably would have been watching baseball, eating popcorn. And we would’ve walked up to his door and said, "You know, here is a situation with Salomon. There's these 1.2 trillion of derivative contracts that the guy on the other side thinks is good and they're not going to be any good," and a lot of other things, and, you know, "It's your baby." A lot of things correlate in the securities world that people don't expect to correlate. And there are people following similar strategies all over the world, as happened when Long-Term Capital had its problems. And the world — the financial world — operates on a hair trigger, to some extent. People want to jump the gun and move just ahead of the other fellow. And when you get huge amounts of transactions, which many people only vaguely understand, you are creating a potential huge problem that may come about because of some other exogenous event that triggers defaults on a huge scale. And that can be very disruptive to financial markets. So we think they're dangerous as used in society. We use them ourselves, incidentally. You know, we get them collaterized. We've made money off of them. But I would predict that sometime, in the next 10 years, that you will have some very big problems that will either be caused by, or accentuated in a big way, by people's activities in derivatives. Charlie?

CHARLIE MUNGERYeah, I think part of the trouble in — you were talking about — came because people didn't think enough about the consequences of the consequences. That's a common error. You start trying to hedge against interest rate changes, which is a very complicated thing to do when you've got a mortgage portfolio where people have options to pay the mortgages off early. And then, under the accounting conventions, the hedges started making the quarterly results lumpy instead of nice and regular, the way all the institutional analysts like them. So then they gave us another bunch of derivatives to smooth out the returns. Well, now you've morphed into lying. Well, it's complicated enough to start with. But when you add lying to the process, it's a Mad Hatter's Tea-Party. And yet, this happens with eminent directors of vast financial sophistication sitting on the board. It shows that the sophistication won't save you. Somebody has to have the common sense to say, "We're just not going there." It's too tough.

WARREN BUFFETTCharlie was on the audit committee at Salomon and changed it into, you know, six and seven hours meetings. I think you found mismarks that were in the tens of millions of dollars on a single contract with a place with many — you know, tens of thousands of contracts. Isn't that correct?

CHARLIE MUNGERI think it's fair to say that it was bonkers and that the accountants sold out.

WARREN BUFFETTUh-huh. (Laughter) It's interesting stuff. You might — if you feel in kind of a nasty mood, you might go to a shareholders meeting of some company that has very large positions in derivatives and grill the CEO a little bit about some of the more esoteric transactions. They get very, very complicated. They get mind-boggling, in terms of trying to figure out the consequences. And the one thing you can be sure of is that the trader that puts them on will certainly want to mark them at a profit, either immediately or within a year or two, because he gets his bonus too often based on the figures for that year, and will be done in 20 years, because some of these are very long-dated. Will be gone — when the consequences fall to the firm. Anytime you have incentives, with people who are quite smart, to mismark things, you're going to get mismarks, or temptations to take on risk in an inappropriate manner. Originally with derivatives, the argument was made that it would disperse risk. That, you know, the Coca-Cola Company faced foreign exchange risk, or some bank faced, you know, interest rate risk. And the theory was that you would use these derivatives to spread risk around the system. And indeed, there are many people that make that argument now. I would say that that may work in that manner a great percentage of the time. But the time that counts is when the system has intensified risk and placed enormous credit risk on very, very few institutions. Believe me, the Coca-Cola Company is in a better position to accept foreign exchange or interest rate risk in a year than some derivatives dealer who has tons of positions on. And I think, actually, there is much more risk in the system because of derivatives than the proponents of derivatives would say has been dispersed because of the activities.

Bill Gates as next Berkshire chairman?

WARREN BUFFETTMicrophone 9, please?

AUDIENCE MEMBERGood morning. Robert Piton (PH) from Chicago, Illinois. Thank you very much for your countless insights about investing, and life, for that matter. My question has to do with Bill Gates. You've gone on record stating that Bill Gates is the smartest person you've probably met in your life. Charlie, sorry to break it to you.

WARREN BUFFETTNo, and I haven't said that quite — but you're close. (Laughs)

AUDIENCE MEMBERI'm close. And you've also mentioned that he can do your job, but you probably could not do his.

WARREN BUFFETTThat's entirely correct.

AUDIENCE MEMBEROK. So that being the case, given his aptitude, his accomplishments, his ability to keep great people together within Microsoft, would you consider having him become the future chairman of Berkshire in one of two ways. Either a merger — and if a merger doesn't make sense because it's a technology company and you don't understand it, so you don't want anything to do with Microsoft. With the second being he resign his post as chairman of Microsoft in order to keep the masterpiece that you've assembled together, as well as keep these very talented managers of all the Berkshire Hathaway companies together, with a leader that you so respect because of his accomplishments and aptitude.

WARREN BUFFETTDid Bill put you up to this? (Laughter)

AUDIENCE MEMBERHe did not.

WARREN BUFFETTNo, I know that. You know, it's not a crazy suggestion, but we've got a better answer. Bill could do my job very well. And I could not do his job. But we also have at least four people within the Berkshire organization that, in many respects, could do my job better than I do. And probably in one or two respects, they might not be as good at certain parts of it. But they would be terrific successors. We're more blessed in that situation than we've ever been in the history of Berkshire. If you go back 15 years, we did not have four. And as we add businesses, it's not inconceivable that more potential future leaders come with those businesses. So we're well-equipped. And we would — we will — barring something terribly unusual — we will have a leader that succeeds me that comes from within Berkshire and has been around for a long time. One advantage of that — and this would not be necessarily a disadvantage if it were Bill — but one advantage to that is that we really like the culture at Berkshire. And having someone that has operated in that culture for a number of years, I think, is a plus. Plus, you know, we've seen how they work and we know their pluses and minuses. We are very well-equipped now. And Bill, I think — to the extent that he spends less time at Microsoft and he will probably be — you know, the Gates foundation will take up, perhaps, more of his time — I don't really think he is looking for my job, although he may salivate at the pay level that's available. (Laughter) Charlie?

CHARLIE MUNGERI've got nothing to add.

Reading list for improving investment knowledge

WARREN BUFFETTOK, we'll go to number 10.

AUDIENCE MEMBERMy name is Oliver Graussa (PH) and I'm Vienna, Austria. I have studied economics and I've read about 40 books about investing and want to be such a successful investor as you have been. Mr. Buffett and Mr. Munger, when both of you were younger and had much less capital for investing, how many — which publications were the best to get a few excellent investment ideas to be so successful? And how many hours per week, on average, did you spend with reading about companies? Thank you.

WARREN BUFFETTWell, when we were younger, we spent — probably Charlie, compared to now, spent a lot more time — I spent a fair amount more time — looking at companies. But we would — if we were doing it over again, we would do it over again pretty much the same way. We would look at everything in sight that we thought we could understand. And it — the world hasn't changed in that respect. There may be some more people doing it, but there are a lot more companies to look at now. And we would — we would read everything in sight about the businesses and the industries we thought we could understand. We would look for things that jumped out at us as being very cheap in relation to the value. And we would have one enormous advantage because we would be working with far less capital, which means the universe of potential ideas would be far greater. But there's no — there's nothing different, in my view, about analyzing securities now than there was 50 years ago. Charlie?

CHARLIE MUNGERYeah, we read a lot and we thought a lot. I don't know anybody who is wise who doesn't read a lot. On the other hand, that alone won't do it. You have to have a temperament, really, which grabs the correct ideas and does something with those ideas. And I think most people who read a lot don't have the necessary temperament, and they grab the ideas or they're simply confused by the mass of material. And, of course, that won't work.

WARREN BUFFETTYeah, there's probably something — Phil Carret used to talk about having a "money mind," and I would call it a "business mind." And, you know, there are people that are better with, you know, identical IQs, that are better adapted for one than the other. And the temperament is all important. I mean, if you can't control yourself, no matter what the intellect you bring to the process, you know, you're going to have disasters. And Charlie and have seen one after another that — It's not a business that requires extraordinary intellect. It does require extraordinary discipline. That shouldn't be so difficult. But as I look around the world sometimes, apparently it is quite difficult. I mean, the whole world went a little mad a few years back in terms of investments. And you say to yourself, "How could that happen? Don't they learn anything for the earlier ones?" But, you know, what we learn from history is that people don't learn from history. And you certainly see that in financial markets all the time. Incidentally, you mentioned books. Charlie, you didn't recommend any books this year?

CHARLIE MUNGERWell, one book I really like I couldn't buy because it's published only in England. But it'll get here in due course. And that's called “Deep Simplicity” by John Gribbin. It's a perfectly marvelous book. And of course, that's a great title: “Deep Simplicity.” That's what we're all looking for.

WARREN BUFFETTI've been reading “A Short History of Nearly Everything.” It's very impressive to — you know, to read about people pondering how to figure out the weight of the Earth or something in the 18th century. And you would think that minds that would do that would do very well in financial matters. But, you know, if you remember, Isaac Newton spent a significant part of his life trying to turn lead into gold. And he might have made a good stockbroker. (Laughter) But it didn't do much for him financially. Charlie knows more about Isaac than I do, so —

CHARLIE MUNGERWell, and he lost an enormous —

WARREN BUFFETTYeah, in the bubble —

CHARLIE MUNGER—chunk of his net worth in the South Sea Bubble. So he invested in an absolute crooked mania. And here was the smartest man in the world. So just IQ points alone won't do it.

Admiration for Treasury's crack down on tax shelters

WARREN BUFFETTMicrophone 11, please.

AUDIENCE MEMBERMy name is Martin Wiegand from Bethesda, Maryland. Thank you for hosting this wonderful, educational, and fun weekend. We —

WARREN BUFFETTWell, thanks for coming —

AUDIENCE MEMBER—appreciate it.

WARREN BUFFETT—Martin, yeah. (Applause)

AUDIENCE MEMBERIn this year's annual report, you defended Berkshire's tax payment record against criticism from certain newspaper columnists and Assistant Secretary [for Tax Policy at the U.S. Treasury] Pamela Olson. Compared to other large corporations, particularly insurance companies, does Berkshire pay its fair share so we can our Berkshire Activewear with the American flag on it with pride?

WARREN BUFFETTIncidentally, Pamela Olson is here today. I don't know whether she can stand up. But I owe her an apology. She's done a great job as a public servant and I teased her a little bit in the annual report. But she actually has worked actively at the Treasury in cracking down on tax shelters and some things that Charlie and I think shouldn't exist. So Pamela has my admiration. And, like I say, if she's here and can stand up, we'll give her hand. (Applause). Some of the tax shelter proposals — I met with her yesterday — and she told me of some things that I've sort of seen myself. But some of the things that have been done and, in some cases, sponsored by the most prominent auditing firms, you know, are absolutely disgusting, and are the reason why, in my view at least, the middle class probably pays a lot more than they should be in terms of raising the total funds that are needed to sustain the government. Berkshire, as we noted in the report, is a heavy contributor to the Treasury. As I mentioned, if only 540 entities in the country paid what we pay in income tax, no one else would have to pay anything, no Social Security, no nothing. We have not — I mean, we may own tax-exempt bonds. We own dividends, which receive a dividend receive credit. But we pay on a very, very high percentage of our income — including capital gains — we pay at the full 34 percent corporate rate. So go out and buy the Fruit of the Loom underwear with the flag on it, you're entitled to wear it. (Laughs) Charlie?

CHARLIE MUNGERI've got nothing to add. But you understate the evil that crept into our leading accounts — accounting firms — when they started selling these fraudulent tax shelters in exchange for contingent fees. One of them actually explained to me that they were an ethical seller of fraudulent tax shelters. (Laughter) He said, "The other firms just sold these to anybody. And we just sold them to our 20 most important clients so they were more likely to stay secret."

WARREN BUFFETTYeah. And of course, the lawyers would write the opinions so that, if they did get caught with these things that they hoped that no one even picked up because they were so obscure, convoluted, the lawyers wrote the opinions so that the — they could walk — you know, when the IRS came around, they could wave that letter and say, "Well, gee, we're sorry we made a mistake, but we did it on the advice of counsel and therefore you shouldn't assess fraud penalties or anything." I mean, they would — we don't want to leave the lawyers out of this, Charlie. (Laughs) We had people come to our office. Not the auditing firm that we use, I want to make that clear. But we had people come to our office from the top auditing firms with these propositions which they said we had to sign away a given percentage of the amount we saved. And then they would give us these proprietary methods, you know, which would usually involve about 20 off-shore trusts and partnerships around the world and all kinds of things. Many of — part of the design being to have so many entities involved so that the numbers that popped up here or there on the return, that no agent could figure out what the totality of the transaction was. You know, it's — those are — the people who don't pay taxes because of that, increase the taxes of the people in this room. So we — I applaud Pamela for her efforts on that and a lot more are needed.

"If you're innumerate, you're going to be a klutz"

WARREN BUFFETTWe will go to number 12, please.

AUDIENCE MEMBERGood morning. My name is Johann Freudenberg (PH) from Germany. Mr. Munger, you said in a speech that scientific reality is often only revealed by math, as if math, it's a language of God. Could you elaborate on that, and especially tell us the reason why math often reflects reality? Thank you.

CHARLIE MUNGERIt's just the way it is. (Laughter) If you — it's as though God made the world so that only people fluent in math could understand it. I think you can handle an ordinary human activity pretty well. But if you want to understand, say, science, you can't do it without math. That's just the way it is. And in business, if you're innumerate, you're going to be a klutz.

WARREN BUFFETTKeep talking, I'm chewing. (Laughter) We'll go back — go ahead.

CHARLIE MUNGERThe good thing about business is you don't have to know any high math.

WARREN BUFFETTIt may be a disadvantage to know high math, Charlie.

CHARLIE MUNGERYes, I think it is. Because you look for opportunities to use this marvelous, complicated tool. And by and large, that doesn't work nearly as well as just using the simple math.

WARREN BUFFETTYeah. When my mother sang me songs about compound interest, there really wasn't any need to go further. (Laughter)

Buffett's $10 billion Walmart mistake

WARREN BUFFETTLet's go back to number 1.

AUDIENCE MEMBERMy name is David Farlow (PH) from Minnesota, Minneapolis. Thank you, Warren and Charlie. A few minutes ago you mentioned the importance of learning from history. What have you learned from the investments you did not make over the last few years that you now regret refraining from?

WARREN BUFFETTWell, the mistakes we made, and we made them — some of them big time — are of two kinds. One is when we didn't invest at all in something that we understood that was cheap, maybe because we weren't even working hard enough at looking at the whole list, or because, for one reason or another, we just didn't — we didn't take action. And the second was starting in on something that could have been a very large investment and not maximizing it. Charlie is a huge believer in the idea that you don't sit around sucking your thumb when you can — when something comes along that should be done that you pour into it. And that's generally what we've tried to do. But there have been times — and it's usually happened when I've started buying something at X and it went up to X plus an eighth or some intolerable amount like that — and I quit or waited for it to come back. And we've missed, in some cases, billions of dollars of profit because of the fact that I'd gotten anchored, in effect, to some initial price when I could have paid more subsequently and it really was inconsequential.

CHARLIE MUNGERDo you have anything worse to confess than Walmart?

WARREN BUFFETTNo, Walmart — I cost us about — it's up to 10 billion now. (Laughter) I cost us about 10 billion. I set out to buy 100 million shares of Walmart, pre-split, at about 23. And Charlie said it didn't sound like the worst idea ever came up with, which is — from him, I mean, it was just ungodly praise. (Laughter) And then, you know, we bought a little and then it moved up a little bit. And I thought, "Well, you know, maybe it will come back" or what — Who knows what I thought? I mean, you know, only my psychiatrist can tell me. And that thumb sucking, reluctance to pay a little more — the current cost is in the area of 10 billion. And there have been other examples, too. And there will probably be more examples in the future, unfortunately. But that is — that's — on the other hand, it doesn't bother us. I mean, you know, it's maybe instructional to talk about it just a little and I'm glad to respond to the question. But in the end, we're going to make a lot of mistakes at Berkshire. And we've made them in the past, we'll make them in the future. You know, if every shot you hit in golf was a hole-in-one, it wouldn't be — you know, the game would soon lose interest. So you have to hit a few in the woods occasionally just to make it a little more interesting. We'll try not to do that too often. But those will be the kind of mistakes we make. We probably won't make the kind of mistakes — although we have — we made one with Dexter Shoe — but we probably won't make the kind that cost us a ton of money. They'll be much more of omission than commission, I think, you'll find in the future. Charlie, you want to add any more?

CHARLIE MUNGERYeah. At least we are constantly thinking about the past occasions when we blew opportunities. Since those don't hit financial reports, the opportunities you had but didn't accept, most people don't bother thinking about them very much. At least that is a mistake we don't make. We rub our own noses in our mistakes in blowing opportunities, as we just did.

Very hard to find a good, honest stock advisor

WARREN BUFFETTOK, number 2.

AUDIENCE MEMBERWarren and Charlie, my name is Peter Brotchie from Beverly, Massachusetts. And I would like to thank you both for helping me become a better businessman and a better investor. Perhaps more importantly, you have created, by example, a kind of true north on the moral compass for me to steer by. While the education has been fantastic, I have found that the demands of owning a successful business and having a large family do not leave time to apply the research stance I have become so wonderfully accustomed to by being a member of this cult. Please imagine, for a moment, that you are 30 years younger, and have only —

WARREN BUFFETTI like him.

AUDIENCE MEMBER— a few holes left in your investment punch card. If you were in my situation, to the extent that you would diversify your holdings beyond Berkshire Hathaway, given this environment, how would you choose the investment managers? Or as Charlie has just discussed when addressing foundations, would you hunt for two more great companies to invest in via common stocks?

WARREN BUFFETTCharlie, why don't you take a swing at that?

CHARLIE MUNGERWell, of course you're hunting, that's part of the fun of life. And — but I would say that the chief lesson would be that you're unlikely to find very many in a whole lifetime. And when you find one in which you really have thought it out and have confidence, for God's sakes, don't do it in a niggardly fashion. The idea that very smart people with investment skills should have hugely diversified portfolios is madness. It's a very conventional madness. And it's taught in all the business schools. But they're wrong. (Applause)

WARREN BUFFETTThe question of finding other advisers is a tough one. I mean, when I wound up my partnership in 19 — at the end of 1969 — and I had all these partners that had counted on me and I was going to mail them back a lot of money, you know, I felt an obligation to at least suggest some alternatives for them. And I recommended two people who I knew were exceptionally good and exceptionally honest. We put one of them on the board not long ago and reaffirmed it today — Sandy Gottesman. The other one was Bill Ruane. Now, I'd been around the investment world for a long time at that point, and those were the two I knew, but they were more or less contemporaries of mine. And I'd gotten to know them over the years and I'd seen them for a long time. So I not only knew their results, but I knew how they'd accomplished their results, which is terribly important. I don't know that generation of managers now. But the fact that, with the number of people I knew, that I could only come up with two, at a time when I was very active, says something about the difficulties of finding managers. The one thing I can almost guarantee to you is that the promotional types going around to solicit the institutional investors are very unlikely to meet any long-term tests of ability, and sometimes, integrity. It's not an easy job spotting an investor. I think it's probably easier, depending on the amount of time — you know, you mention having children and a business and the amount of time you can spend on. Every now and then you do — if you're conscious of the investment world and you have some kind of sort of grounding knowledge about what's going on, and you can see something, you know, as we did in junk bonds a couple of years ago, or as we did with all kinds of things, some years back, when stocks were cheaper. You will occasionally see something that you should load up on. And, as Charlie says, that's what you really have to do. I mean, some of the people in this room loaded up on Berkshire many years ago. And the truth was, they didn't need diversification, you know. I loaded up on it. Charlie did. And you'll see opportunities occasionally but you're not going to see them every day or every week. If you think you're going to see an opportunity every week, you're going to lose a lot of money because people will come around and tell you that they've got them, and they may not be quite as flagrant as that fellow we had in the movie — (laughs) — but they're a version of them. Charlie?

CHARLIE MUNGERThe business of selecting investment managers was recently shown to be even harder than I had previously thought it was. A significant fraction of the institutional investment managers who run the nation's mutual funds actually accepted propositions to take bribes for betraying their own shareholders. It was as if a man came to you and said, "I have a wonderful proposition. Why don't I kill your mother and we'll split the insurance money?" And it was that ridiculous. And yet, a significant number of the people said, "Gee, I would like some insurance money." And they just went right ahead.

WARREN BUFFETTAnd they were already rich beforehand.

CHARLIE MUNGERYes. And they've destroyed themselves, many of them, by making this insane decision. And I think many of them will probably think the outcome is unjust.

WARREN BUFFETTAnd the —

CHARLIE MUNGERI mean the downfall they've had.

WARREN BUFFETTAnd the interesting thing about it, of course, is that here is a huge industry that — where the people who weren't doing it have a great interest in having that reputation of the industry not get stained. And a number of them had to know what was going on. I mean, this was — I don’t — it's hard for me to imagine that people at most large mutual funds, even the ones that didn't — that are mutual fund management companies — even the ones that weren't engaging in the activities mentioned weren't aware of it. I mean, you just — if you're in an industry like that, you're going to hear what's going on. And the Investment Company Institute was busy patting itself on the back, you know, at one meeting after another and becoming very cozy with legislators. And there wasn't one thing done until a whistleblower when to [New York State Attorney General] Eliot Spitzer and he got active in a very strong way with a very limited staff. And he uncovered, and put on the front pages, what was taking place. But the industry itself, with hundreds and hundreds and hundreds of people that most have known what was going on — and it went on for a long time. Never said a word. It’s — you know, it makes you wonder a little bit.

Asset allocation models are "pure nonsense"

WARREN BUFFETTNumber 3?

AUDIENCE MEMBERHi, I'm Bob Klein (PH) from Los Angeles. You've touched on the issue of asset allocation — capital allocation — in response to previous questions. But I wonder if you could elaborate from a risk management perspective. Wall Street and financial planning firms charge a lot of money for their asset allocation models, say, 50 percent stocks, 40 percent bonds, et cetera. I know you take a more opportunistic approach to building your portfolio and managing risk, as you mentioned by — as you illustrated — by your junk bond example. And so I just want you to hammer out how you use price and value as a tool of risk management and asset allocation as opposed to coming at it with a pre-conceived idea of how much should be allocated to each asset class.

WARREN BUFFETTYeah, we think the best way to minimize risk is to think. (Laughter) And the idea that you have — you know, you say, "I've got 60 percent in stocks and 40 percent in bonds," and then have a big announcement, now we're moving it to 65/35, as some strategists or whatever they call them in Wall Street do. I mean, that has to be pure nonsense. I mean, 60/40 or 65/30 — it just doesn't make any sense. What you ought to do is have — your default position is always short-term instruments. And whenever you see anything intelligent to do, you should do it. And you shouldn't be trying to match up with some goal like that. I found it entertaining — I was just reading yesterday in an article, I think it was, about the two fellows at Google and all of the problems they're going to have because they're each going to get a few billion dollars. I mean, it was — I want to send a sympathy card. I almost went down to Hallmark store because this article went on — they've got this terrible problem and that terrible problem and they're going to need lawyers, and they're going to need financial — they don't need anybody. Those guys are smarter than the people that are coming to them. And they do not have a big problem, and they are very capable of thinking it through themselves. The people that have the problem are the people who want to sell their services to them and are going to have to convince them that they have a problem. But so much of what you see when you talk about asset allocation — it's just merchandising. It's a way to make you think that if you don't know how to determine whether it should be 60/40 or 65/35, that you need these people. And you don't need them at all in investing. Most of the professionals that tell you that you're going to get in great trouble unless you listen to them and sign up for their services, you know, they're good at selling, but — It's what my brother-in-law — former brother-in-law — that worked at the stockyards used to say was that people would bring in cattle or something. And I'd say to him, you know, "How do get the farmer to employ you to sell to Swift or Armour or Cudahy instead of the guy right next to you. I mean, you know, a cow is a cow and Armour's going to buy it the same way." And he gave me this disgusted look and he said, "Warren, it's not how you sell them, it's how you tell them." Well, there's a lot of that in Wall Street. Charlie?

CHARLIE MUNGERYeah, people have always had this craving to know the future. You know, the king used to hire the magician or the forecaster and he'd look in sheep guts or something for an answer as to how to handle the next war. And so there's always been a market for people who purported to know the future based on their expertise. And there's a lot of that still going on. It's just as crazy as when the king was hiring the forecaster who looked at the sheep guts. And people have an economic incentive to sell some nostrum. It can be sold over and over and over again. The really interesting figures are when you combine the underperformance of the market, say, by the mutual fund industry, which is probably a couple of points per annum. And that understates it. Now, if you take all of the investors in the mutual funds who are constantly whipsawing from one fund to another by a bunch of brokers who want commissions, now you take a sub-normal performance and it goes on another three or four percentages points due to the shuffling of the mutual fund investments. So the poor guy in the general public is getting a terrible result from contacting the experts. And these guys are hitting the Scout troop and the Community Chest drive and are locally reputable people. I think it's disgusting. It's much better to make a living by being part of system that delivers value to the people who are buying the product. But nobody refrains from creating gambling casinos or something, on my theory. If it'll work to make money, why, we tend to do it in this country.

Workers' compensation insurance fraud

WARREN BUFFETTMicrophone 4.

AUDIENCE MEMBERGood morning Mr. Buffett and Mr. Munger. My name is Steven West and I am a framed art manufacturer in Morganton, North Carolina. I feel especially tied to Berkshire Hathaway as I am both a vendor to Nebraska Furniture Mart, Star Furniture, and RC Willey, and also a customer of Larson Jewel. My question relates to workers’ compensation fraud being committed by workers’ compensation carriers on manufacturers such as myself, a scandal which I believe is far greater than the scandals that have been mentioned heretofore at this meeting. As an example, in 1998, when I was trying to figure out why my experience mods were going way out of whack, I received a loss run and I believe, mistakenly, also a check run from my insurance carrier. It was shocking. Four losses for $152,000 they claimed to the state of North Carolina actually amounted to less than $6,000. And one claim, which they claim they spent $70,072 on, they actually only spent $86.88. Now naturally, this threw my company into the high-risk pool. It's cost me hundreds of thousands of dollars. And my question is, are they trying to pull the same stunt on Berkshire Hathaway companies, especially in labor intensive operations, such as Dairy Queen. Because I have not, in the intervening years, been able to get one single copy of a negotiated check out of these insurance company. They will not give it up, even under subpoena, and their behavior is entirely consistent with criminal fraud. Now, my question relating to the Berkshire Hathaway problems — or companies — is, are your managers attuned to this and are they receiving the actual copies of the negotiated checks that the insurance companies claim that they're spending to settle workers’ compensation injury cases? Thank you.

WARREN BUFFETTYup. Well, I would say that there's plenty of fraud in various aspects of insurance. In auto insurance, for example, I mean, obviously, we have fraud units, but I know you're directing your question more to the insurance carriers than actually what takes place with policy holders and doctors and lawyers and various other parties. But we find that for every dollar we spend on fraud prevention or detection, I think we get back well over $10. In the comp field, workers comp, you know — we have lost more money in workers' compensation insurance, I would guess — I may be wrong on this, but I would guess than just about any line. Not necessarily as a percentage of premiums, but in terms of aggregate dollars. It's been a very tough period. So from the standpoint of — we have one small workers' compensation direct operation in California called Cypress. And then Gen Re had — has written a lot of workers' comp reinsurance and it's been a bit of a blood bath. The rates have not covered the losses. And I would say that there is a fair amount of fraud that enters into the losses we've experienced, or at least the industry's experienced, particularly at the direct level. But I — in terms of your dispute with an insurance company, I don't know what company that would be, but I would say that most — many companies that have been in the workers' compensation business, particularly in California in recent years, wish they hadn't been in the business. I mean, they have not been making a lot of money off of defrauding policy holders that I know about. But Charlie, do you have anything to say on that?

CHARLIE MUNGERWell, the experience may be related. If a company gets into a lot of trouble from fraud practiced on it by lawyers, doctors, and claimants, and its own affairs are disrupted by fear and agony, that company is likely to start behaving badly with its own policy holders in order to lay the troubles off on somebody. I think that's just human nature. But I don't think the main fraud in workman's comp is by the carriers against the small businessmen. It's by the claimants, the attorneys, and the doctors, against the whole system. (Applause)

WARREN BUFFETTThat really would be our experience. As a sidelight, I noticed you were from Morganton, North Carolina. We have a business there, Carolina Shoe. We make work boots. And I give a talk at University of North Carolina some time ago. In fact, I think they have a tape of it still. And afterwards — I had mentioned in the talk that we had this business in Morganton. And one of students came up to me afterwards. And there were a number of them, and I shook his hand and, making idle conversation, I said, "Where are you from?" And he said, "I'm from Morganton." And I said, "Oh," I said, "Do you know Carolina Shoe?" And he thought a second, he said, "I don't know her, but I think I know her family." (Laughter) Never forgotten that fellow.

Utility law repeal would help MidAmerican, but no bonanza

WARREN BUFFETTNumber 5.

AUDIENCE MEMBERGood morning. Andrew Sole from New York City. I just want to preface my question by saying that I have a deep admiration and affection for both of you men. And in that spirit, I had got a Golden Retriever puppy a few months ago, and he's been proudly named "Munger."

WARREN BUFFETTIs he housebroken? (Laughter)

AUDIENCE MEMBERAnd Charlie, you'd be very proud. He's just like you. I bring him to Central Park and hundreds of women flock over to pet him.

CHARLIE MUNGERReally?

WARREN BUFFETTHe's well-named. He's well named. (Laughter)

AUDIENCE MEMBERThat's serious, but this is also serious. My question has to do with the Public Utility Holdings Company Act, which obviously affects MidAmerica's businesses. You've spoken that, if it were repealed, you'd be able to commit billions of dollars into the energy infrastructure for the country. And despite the fact that there was a massive blackout in this country over the last summer, the act has not been repealed. And I'm curious as to what effect it might have if PUHCA wasn't repealed for MidAmerica.

WARREN BUFFETTYeah. The Public Utility Holding Company Act was passed in 1935. It was a reaction, and a justified reaction, to some real wild antics that had taken place in the '20s in the public utility field that were most dramatic in the case of Sam Insull, but occurred with a lot of other companies, Associated Gas and Electric and various other companies. And there was pyramiding of the utility capital structure. And there were a lot of things that were wrong that were addressed in that act. And in our view, that act is long outmoded. And I think that — I mean, the SEC, which has responsibility for administering it, I think there's a lot of feeling there that it's long been unneeded. And I think that there've been various energy bills that have included the repeal of it. But there was no energy bill passed in the last year. So we live with the Public Utility Holding Company Act. And it does restrict what we do. It's an interesting question, though, if it were repealed, whether that necessarily would open up lots of opportunities. Because if it were repealed, it's quite conceivable that a number of other companies would also be competing with us, in terms of possibly buying utilities that might have been difficult for us to acquire, or for them to acquire, back when the law was in existence. So I don't want you to think that, if it gets repealed, that Berkshire Hathaway is necessarily worth a lot more money. But I do think it should be — I mean, I think it's logical. It's — there are lots of — there's plenty of appropriate regulation in the public utility field and there are advantages to having strong companies like Berkshire Hathaway pouring money — energy requires enormous sums of money. And to the extent we can use capital advantageously in that business, we're ready to do it. And it should not be impeded by the act. If I had to bet, that act will probably go off the books at some time. But it doesn't seem to be, you know, in the immediate future. It will not necessarily mean we get a lot richer. Charlie?

CHARLIE MUNGERYeah, but if we had a wonderful opportunity in the field now, we would find a way to do it. Probably through MidAmerican, right?

WARREN BUFFETTWell, we'd find a way to do it. Yeah. There's been nothing that's been presented to us that we couldn't get done so far. Now it might involve a more awkward structure, but we have not — you know, there's been nothing that we wish we could have done and when we got to the finish line, or a yard from the finish line, we said, "Well, we can't do this because of the Public Utility Holding Company Act." Now, there might have been other things presented if that act hadn't been on the books. But it will be no bonanza for us at all if it goes away. It may make life simpler on some very large transaction.

Berkshire real estate business will grow

WARREN BUFFETTNumber 7? I'm sorry, number 6. I skipped 6. Number 6.

AUDIENCE MEMBERGood morning. My name is Andy Lewis Charles from Miami. I think I speak for everyone when I wish both of you gentleman continued health. I would wish you continued wealth, but I think you have that covered.

WARREN BUFFETTWe could use more. (Laughter) Of each.

AUDIENCE MEMBERSpeaking of MidAmerican Energy, a unit company underneath it, HomeServices, I see as a great opportunity. I would love to see and hear your thoughts about the future growth potential for it, especially against large consolidators like Cendant Corporation. Thank you.

WARREN BUFFETTYeah, HomeServices will grow. HomeServices, as you know, owns a number — I can't recall how many, but probably in the area of 15 or 16 maybe — controls a number of local real estate firms. And they retain all of their local identity. In that way, it's somewhat akin to the whole Berkshire Hathaway model, where we leave our subsidiary companies quite autonomous and they operate as if they were — the managers operate as if they own them themselves. Well, HomeServices is somewhat along the same line in that we have no national identity, where Cendant works under a couple of big names. We've acquired one company in North Carolina here in the last month or 6 weeks, Prudential of North Carolina. And we will end up — unquestionably, in my view — we'll end up buying either a few or a whole lot of additional companies over the next 10 years. We will — we've got great management. We like the business. We hear about opportunities from time to time. Last year, you know, we participated in roughly $50 billion of transactions. And I think — I'm really vague on this one, but — I better not give you a percentage of the national total that is, but it's a very small percentage. It's a lot of transactions, a couple hundred-thousand transactions. We're very big in Southern California, for example. We're very big in Minnesota. We're very big in Iowa. Very big right here in Omaha and in Lincoln. But there's an awful lot of places where we aren't at all. We like to buy leading firms as we go around. And we sometimes like to buy more than one in a community. It's a good business. It's a very cyclical business. Right now, it's very good. We will go through periods in the next five years. I'm sure we'll go through a period where it's very slow. But we'll keep buying. We'll buy when business is slow, we'll buy when business is good, depending on the price of the institution and the kind of business we're buying. I don't know how big it can become. It will become bigger than it is now. Relative to Berkshire's total market value, it may not be that — a huge factor. But it's conceivable as we buy more operations, we'll find other things to do with them, too. I mean, the purchase of a home is a big deal to people. You know, often they're buying furniture at the same time and maybe we can make a suggestion or two. Charlie?

CHARLIE MUNGERI've got nothing to add about that business.

Charity program reluctantly dropped after anti-abortion boycott

WARREN BUFFETTNumber 7.

AUDIENCE MEMBERGood morning. I'm Jim Hayes (PH) from Alexandria, Virginia. I hate to beat a dead horse, but I really like the charitable plan. Suppose you brought it back and then personally opted out and then we floated you a bonus equal to what you might otherwise be entitled. Would you consider that?

WARREN BUFFETTAre you talking about renewing the shareholder-designated contribution program?

CHARLIE MUNGERYeah.

AUDIENCE MEMBERYes. And then personally opting out, and then we could have a shareholders’ vote to grant you an option bonus or some kind of tax-advantaged bonus.

WARREN BUFFETTYeah, I think that might get a little complicated. Additionally, I wasn't the only one giving money at all, nor was Charlie, to organizations, primarily pro-choice organizations, in fact over — I don't know of any other than pro-choice organizations — that the people that were causing harm to the Pampered Chef representatives. We had dozens and dozens, maybe even hundreds, giving money on both sides of the issue. I mean, if you looked at one class — well, the largest classification of gifts went to churches. Probably the largest classification in that, I'm (inaudible) positive, were Catholic churches. And we had people giving money to everything in the world, which is exactly the way we wanted it. I mean, whatever — it's the shareholders' money. So even if you had the two of us opt out, we would have organizations that would get violent about the fact that some money was going to pro-choice organizations. And rather than take it out on us, whom they can't hurt, they've taken it out on some very innocent people. And neither Charlie nor I like the idea of somebody — you know, some woman that's developed a living, you know, in Dubuque, Iowa or in Casper, Wyoming, having her livelihood destroyed because of what we're doing. So reluctantly, we gave up the practice. I mean, we — actually, I received a letter one time from somebody — some organization was monitoring — said they didn't give — they didn't care if we were giving $10 million to pro-life organizations and $1 to pro-choice organizations, they were still going to boycott our people. Well, boycotts don't bother me. We had some of that right along, always on a small scale. But — because they can't — they basically can't hurt us in any significant way. But they can hurt individuals very badly and we're not going to have something around Berkshire that's hurting a bunch of people that have devoted their lives to working with us. So we reluctantly gave it up. Charlie?

CHARLIE MUNGERWell, as I said, it's a dead horse and I miss it, too.

Buffett family and Berkshire managers will protect the company

WARREN BUFFETTNumber 8, please.

AUDIENCE MEMBERGood morning. I'm Jay Leiber (PH) from Houston, Texas. Mr. Buffett, since I'm older than you and maybe even as old, or older, than Charlie, I feel like I can ask this question. And I'll ask it as delicately as possible. When the time comes that you, I, and Charlie have gone to that big stock market in the sky, I understand that you planned — or at least, I have read — that you plan to give the bulk of your Berkshire Hathaway stock to your charitable foundation, along with your 30 percent of the votes of the company. If this is correct — and if it's not correct, this question is moot — but if so, what assurance do the Berkshire Hathaway shareholders have that the company will continue to be run as honestly and straightforward as it is now, such as only 15.8 employees or so at headquarters and no —

WARREN BUFFETTYeah, the —

AUDIENCE MEMBER— huge salaries or other ridiculous giveaways to dilute and weaken the equity of the shareholders at that time.

WARREN BUFFETTWell, for a short while there'll only be 14.8, actually. (Laughter) But it's a good question — a very good question. Since you're older than I, apparently, I hope we don't go at the same time. The — There's one slight twist to the estate plans we have. If I die first, all of my Berkshire goes to my wife. And if we died simultaneously, it would all go to the foundation. But all of the stock will end up in the foundation. In fact, if I died first, she might put my stock in the foundation before her death, but that would be up to her. But it will end up in the foundation — all of the stock. As you mention, it has 30-odd percent of the votes, although under the tax law, once it's in the foundation, within five years, it would have to either convert to be some of it — it would have to get down to 20 percent of the vote. That's required under foundation law. In terms of how it would be run in the future, I think it has a far better chance than any company — any major company I know in the country — of maintaining the culture, because it has — it will have people running it who have grown up in the culture. Earlier, it was — the criticism was made about my wife and my son being on the board, but they are guardians of the culture. They are not there to profit themselves, they are there to profit as the shareholders profit, but also to keep the company in the same way as previously. One great example of that, of course, has been at Walmart where, when Sam Walton died, a not too dissimilar amount of stock was left among the family. And essentially the Walton family has, in my opinion, done a magnificent job, not only of selecting successors to run the place, but having successors who, if anything, reinforced the culture of Walmart. And it's been an enormously successful arrangement. The Waltons are there, in case anything goes wrong, to make a change if needed, but they're not there to run the business. And that's exactly the pattern that we hope to have at Berkshire. And I think we have it. I think I — you know, I can't give you a hundred percent guarantee, but I would far rather bet on the integrity of the family that succeeds me, plus the managers that succeed me, at Berkshire remaining true than I would any other company in — for a long, long time — any other company I can think of. Charlie?

CHARLIE MUNGERWell, I would have a reason to fret about this subject, just as you would. And I, of course, have known the members of the Buffett family that would be here after Warren is gone for decades. Don't worry about it. You should be so lucky. (Laughter and applause)

WARREN BUFFETTIt's a question we don't wish to have an instant answer for, though, however. (Laughter)

Profits as GDP percentage won't be moved by technology

WARREN BUFFETTNumber 9, please.

AUDIENCE MEMBERGood morning. James Easterlin (PH) from Durham, North Carolina. My question — statement is, you have often written in reference to average corporate profitability remaining fairly consistent in the long run, such that return on equities are in the 12 percent range for U.S. companies, and after-tax profits as a percentage of GDP is sticky in the 4 to 6 1/2 percent range. And the question is, given the advances in technology that brought the inventory-to-sales ratios down to historic lows, given the widespread adoption of the EVA principles by companies, might you think that might change over time?

WARREN BUFFETTYeah, I don't think any of the factors that you mentioned will act to move corporate profitability out of the range that has historically existed. It's going to bob around, obviously, some, but I certainly don't think EVA will do a thing for American corporations in terms of making them receive a greater share of GDP in profits. Technology, that's just as likely to reduce profits as to increase profits. I mean, as the economic machine of the United States works better and better over time, the main beneficiaries are going to be consumers. If you took whoever you think is the best business manager in the United States and you put a clone of that person in charge of each one of the Fortune 500, the profits of the Fortune 500 would not necessarily go up, because there's this competitive nature to capitalism where the improvement you get one day, your competitor gets the next day. And it very much tends to work to the benefit of consumers but not to increase overall profitability. We see that in the industries we're in. Every — we were in the textile business for a long time and various new products — various new machinery — would come along and it would promise to deliver a 40 percent internal rate of return and get rid of 43 employees or something like that. And, you know, we just did one after another of those, and when we got all through we didn't make any money, because the other guy was doing the same thing. And I liken it to everybody at a parade — you know, a huge crowd watching it and somebody stands up on tiptoes and, you know, 10 seconds later, everybody in the crowd is up on tiptoes and they're not seeing any better and their legs hurt. Well, that was the textile business. And there's an awful lot of self-neutralizing things in capitalism. So I don't really expect any of the factors you named, or any other factors that I can think of, that will move profits up as a percentage of GDP. And indeed, I think that if you're looking at GDP as being the national pie and profits being what investors get out of it, and the rest belonging to people who are out there working for a living every day, I don't think the relative — the proportions — are inappropriate. Charlie?

CHARLIE MUNGERI've got nothing to add to that.

Method for estimating a company’s future growth and establishing a margin of safety

WARREN BUFFETTNumber 10.

AUDIENCE MEMBERGood morning. I'm Marc Rabinov from Melbourne, Australia. Mr. Buffett and Mr. Munger, I'd like to ask you, when you assess a business and derive its intrinsic value, how do you estimate the future growth of the business, and how do you decide what margin of safety to use? Thank you.

WARREN BUFFETTIt was the future growth and what, Charlie?

CHARLIE MUNGERWell — I have difficulty understanding that question fully. He's talking about how do we combine our estimates of future growth with our passion for having a margin of safety. Surely, you can handle that. (Laughter)

WARREN BUFFETTWell, I can certainly handle it as well as you can. (Laughter) Every time he laterals them off to me, you know, he calls those audibles. (Laughter) You calculate — I think you take all of the variables and calculate them reasonably conservatively. But you don't try and put too much windage in at every level. And then when you get all through, you apply the margin of safety. So I would say, don't focus too much on taking it on each variable in terms of the discount rate and the growth rate and so on. But try to be as realistic as you can on those numbers, but with any errors being on the conservative side. And then when you get all through, you apply the margin of safety. Ben Graham had a very simple formula he used for just the most obvious situations, which was to take working capital — net working capital — and try and buy it at a third off working capital. And overall, that worked for him. But that method sort of ran out of steam when the sub-working capital stocks disappeared. But it's the same thing we do in insurance. I mean, if we're trying to figure out what we should charge for, we'll just say, the chances of a 6.0 earthquake in California, well, we know that in the last century, I think that there have been 26 or so 6.0 or greater quakes in California. And let's forget about whether they occur in remote areas, let's just say we were writing a policy that paid off on a 6.0 or greater quake in California, regardless of whether it occurred in a desert and did no damage or anything. Well, we would look at the history and we'd say, "Well, there've been 26 in the last century." And we would probably assume a little higher number in the next century, that'd just be our nature. But we wouldn't assume 50. If we did, we wouldn't write any business. So we would — we might assume a little higher. I would, if I was pricing it myself, I'd probably say, "Well, I'll assume there are going to be 30, or maybe 32, or something like that." Then when I get all through, I'll want to price the — I'll want to put a premium on it that now puts in a margin of safety. In other words, if I figured the proper rate for 32 is a million dollars, I would probably want to charge something more than a million dollars to build in that margin of safety. But I don't want to hit it at — I want to be conservative at all the levels and then I want to have that significant margin of safety at the end. And I guess that, as I understand the question, that'd be my answer. And Charlie, do you want to add to that?

CHARLIE MUNGERYeah, that book, “Deep Simplicity,” that I recommended to you says that you can predict out of those 26 earthquakes how the size will be likely to be allocated. In other words, there's a standard power law that will tell you the likelihood of earthquakes of varying sizes. And of course the big earthquakes are way less likely than the small ones. So you count the math and you know the applicable power law and you guess as to how much damage is going to — it's not that difficult.

WARREN BUFFETTIt becomes more difficult if somebody said they really want protect against a 9.0 or something like that. You know, is it one in 300 years? Is it one in a thousand years? You know, when you get really off the data points. But that is not what you're looking at in investments. You don't want to look at the things that are that — you don't want to come up with the companies where you make the assumptions that get that extreme. And you don't have to, that's the beauty about investments. You only have to look at the ones that you feel capable of evaluating and you skip all rest.

No single formula for regulatory impact on businesses

WARREN BUFFETTNumber 11?

AUDIENCE MEMBERGood afternoon. It's James Tarkenton of Durham, North Carolina. Current examples, including discussion of media ownership rules, FCC regulation of the telecom industry, and proposed oversight changes for mortgage giants Fannie Mae and Freddie Mac are all examples of the legislative, regulatory, and lobbying process as an influence in shaping and reshaping economic moats. We would be interested in your comments on these and other examples of how competitive advantages are shaped by government. In general, how do you incorporate the impact of regulation on the size and ferocity of economic moats for various businesses?

WARREN BUFFETTWell, that varies enormously by the business. I mean, there're some businesses that we think that it's not a very big factor, and there's other businesses we're in — the energy business, the insurance business — where regulatory change could have a huge impact. You know, we don't have any one-size-fits-all type arrangement. We just try to think intelligently about any business we're in. And if it's — when we bought GEICO in 1995, or bought that last half of it or whichever year it was, the question, you know, whether the regulatory climate would change in some major way, you nationalize auto-insurance — well, all of those things go through our mind and we evaluate them. But there is no — there's no formula. You know, if we're — if we're in furniture retailing, you know, that is not something we're going to worry about. We're going to worry about plenty of things, in terms of competition, but there are different variables that apply with different intensity to each business we're in. And it's up to Charlie and me to try and think about any of the variables that might hit those businesses, and to weigh them appropriately, and to crank that into our evaluation. Charlie?

CHARLIE MUNGERI think it would be fair to say that in our early days, we tended to overestimate the difficulties from regulation. We refrained from buying television station stocks for a long, long time because it seemed like such a peculiar asset when anybody could just ask to have your license jerked away from you each year and they could ask a government agency to do it. And — but it turned out, the way the system evolved, that almost never happened.

WARREN BUFFETTYeah, Tom Murphy figured that one out before we did. (Laughs)

CHARLIE MUNGERYeah, and we had it — we were slow on the learning curve. Murphy was way better at it than we were.

Buy Berkshire or low-cost index fund?

WARREN BUFFETTMicrophone 12, please.

AUDIENCE MEMBERHello, gentleman. My name is Vivian Pine and I'm from Tarzana, California. And my question is, for a new investor buying stocks today, would you recommend that they buy a low-cost S&P index fund or Berkshire Hathaway, and why?

WARREN BUFFETTWell, we never recommend buying or selling Berkshire. But I would say that, among the various propositions offered you, a very low-cost index fund where you don't put all your money in at one time. I mean, if you accumulate a low-cost index fund over 10 years with fairly regular sums, I think you will probably do better than 90 percent of the people around you that take up investing at a similar time. Charlie?

CHARLIE MUNGERI would agree with that, totally. It's awkward for us sitting here at these annual meetings where we have a sampling of some of the most honorable and skillful stockbrokers around who've done a wonderful job for their own clients and families. But the stockbroking fraternity, in toto, can be guaranteed to do so poorly that the index fund is a better option.

Leverage can prevent you from playing out a winning hand

WARREN BUFFETTWe'll go to number 1 again.

AUDIENCE MEMBERJohn Bailey from Boston. As of last week, my house is almost totally covered with Benjamin Moore now. (Laughter) But more seriously, you spent a fair amount of time talking about the low-probability transformative events. I recall a discussion on the probability of a nuclear event not occurring in any given year for, say, 50 years, at which point it begins to look like, over the time period, it's pretty darn likely and therefore the expected value is a pretty big negative. There are some other things that could be happening that somebody might expect. For instance, perhaps there is, in fact, a ceiling on consumer debt coverage ratios. If they quit falling, there — that could be a big change. If you even listen to the United States Geological Survey, they're now saying that sometime in the next 50 years, there could be a fall in the production of oil. And so, I'd like you to address how you conceive of the portfolio of businesses in the context of these possible transformative events, especially given that over this same time period of maybe the next 50 years, at some point, you're not going to be able to personally revise the portfolio.

WARREN BUFFETTYeah, I think it's a fair statement that over the next 50 years at some point, Charlie and I will not personally be able to — (laughs) — participate in portfolio revisions. The — Well, you're quite correct that people tend to underestimate low-probability events when they haven't happened recently and overestimate them when they have happened recently. That is the nature of the human animal. You know, Noah ran into that some years back. But he looked pretty good after 40 days. The — What you mention on the nuclear question, it's a matter — you can do the math easily. What you don't know is whether you're using the right assumptions. But it — For example, if there is a 10 percent chance in any given year of a major nuclear event, the chance that you'll get through 50 years without it happening, if the 10 percent is correct, is a half of 1 percent. I mean, 99 1/2 percent of the time a 10 percent event per year will catch up with you in 50 years. If you can reduce that to 1 percent, there's a 60 percent chance you get through the next 50 years without it happening. That's a good argument for trying to reduce the chances of it happening. In terms of our businesses, I think Charlie and I are — I mean, we think about low-probability events. In fact, in insurance, we probably think about low-probability events more than most people who have been insurance executives throughout their years. It's just our nature to think about that sort of thing. But I would say, if you talk about transforming events, or really talk about major events that could have huge consequences that are low probability, they're more likely to be in the financial arena than in the natural phenomena arena. But we'll think about them in both cases. But we do spend a lot of time thinking about things that can go wrong in a very big and very unexpected way. And financial markets are — they have vulnerabilities to that, you know, we try to think of and we try to build in ways to protect us against it and perhaps even build in some capabilities where we think we might profit in a huge way from it. Charlie?

CHARLIE MUNGERYeah, that temporary collapse in the junk bonds, where they got down, many of them, to 35 and 40 percent yields, that's a strange thing. And to have all those things pop back — you know, quadrupling in a short time. There was absolute chaos at the bottom tick of that. And that isn't as much chaos as you could have. And of course, it can happen in common stocks instead of junk bonds. So I think if you're talking about the next 50 years, we all have to conduct ourselves so that we — it won't be all that awful if a real financial crunch of some kind could come along. Either inflationary or a typical deflationary crunch of the time [kind] that people used to have a great many decades ago.

WARREN BUFFETTProbably the most dramatic way in which we are — give evidence of our — of your worries, is we just don't believe in a lot of leverage. I mean, you could have thought junk bonds were wonderful at 15 percent because they eventually did go to 6 percent, you would have made a lot of money. But if you owed a lot of money against them in between, you know, you wouldn't have been around for the party at the end. So we believe almost anything can happen in financial markets. And the only way smart people can get clobbered, really, is through leverage. If you can hold them, you have no real problems. So we have a great aversion to leverage and we would predict that a very high percentage of the smart people operating in Wall Street, at one time or another, are likely to get clobbered through the use of leverage. It's the one thing that forces you — it's the one thing that ends — or can prevent you from playing out your hand. And all of the hands we enter into look pretty good to us. But you do have to be able to play them out. And the fascinating thing to me is that — just take the junk bond situation. In 2002, you had people with terrific IQ — tens of thousands of them operating in Wall Street. You had the — money was available. They all had a desire to make money. And then you see these extraordinary things happen in markets and you say to yourself, you know, can these be the same individuals that two years later or two years earlier were buying these things at prices that were double or triple or quadruple what they sunk to in between? And did they all go on vacation? You know, did they lose their ability to raise money? No, the money was — you know, Wall Street was awash in money, and it was awash in talent, and yet you get these absolutely extraordinary swings. I mean, it doesn't happen with apartment houses in Omaha or, you know, with McDonald's franchises or farms or something. But it's just astounding what can happen in the marketable securities department. And the big thing you want to do is, at a minimum, you want to protect yourself against that sort of insanity wiping you out. And better yet, you want to be prepared to take advantage of it when I happens. Now it's about noon, so we will come back and begin at microphone 2 about, say, a quarter of one.