2006 年股东大会 · 上午场

Welcome

WARREN BUFFETTGood morning. I'm Warren; he's Charlie. There's one thing I should probably clear up first because I know it's puzzling you. In the movie, he always gets the girl. Now, that's hard to figure out, isn't it? But I've — Charlie — but I finally understand what the — what's happening. It's something called the "Anna Nicole Smith Rule." That's when choosing between two old rich guys, pick the older one. (Laughter) Now, in a few minutes we're going to open this up to your questions. We have a number of zones, and we'll just proceed around zone by zone. But before we do that, there are a few people I would like to thank, and then there's a couple of short announcements I'd like to make. First of all, if can we get the spotlight up there on Andy Heyward, Andy does that cartoon for us every year. He travels around. He gets the voices in there. Andy, where are you? (Applause) He comes up with the ideas. Andy is the — runs DiC Entertainment. DiC is the one I've told you about in the past that produced "Liberty's Kids," which I think is probably the best way not only for youngsters to learn American history, but for people my age as well. I mean, it's a terrific series of young kids — a couple of young ones in the time of the American Revolution. And I watched several of those episodes, and I'd forgotten a lot of American history since I was in school. It's just a really — it's a wonderful series. It appeared on PBS over time. And if you're looking to learn American history or have your children or grandchildren learn it, you couldn't do better. And in the months ahead, he's working on the — what do we call it? — it's the "Secret Millionaires Club." But it's going to be a program that's designed to teach young people some of the very basic lessons of — about money. How to avoid getting into trouble with it, how to use it effectively, and what your attitude should be toward it. So, we're looking forward to getting that out early next year. I'll guarantee you that it will be a terrific program for teaching children and your grandchildren something about the subject of money. I also want to thank Bob Iger. Bob is up there. Bob runs Disney. He's doing a terrific job, and — (Applause) I thought we could originally entice the "Desperate Housewives" into appearing simply by the chance to appear with Charlie. But after we made that appeal, we then went to Bob Iger and said, "See what you can do for us, Bob." So thank you, Bob. Also in that section, I'd like to have a special introduction for the man that first taught Charlie and me something about the value of franchises and the advisability of buying great businesses instead of cheap businesses. Prior to the purchase of See's Candies in 1972, I intended to look primarily at financial measures in buying businesses and buying things that were cheap in relation to book value, and we always tried to get a lot of tangible assets in relation to our money. But we found out that the intangible assets, if properly nourished and if properly identified, you can make a whole lot more money with than buying a lot of tangible assets cheap. And in 1972 — early in '72, Charlie and I went to See's Candy, which had been in the hands of the See family for many decades, and we bought it. And, of course, Charlie and I didn't know a thing about making candy — we were pretty good at eating it — and we needed someone to run the place. We met a young fellow there. It was clear to both of us that he was the ideal person to run See's Candy, and in just a few minutes we made a deal with him that's lasted a lifetime. And if Chuck Huggins and his wife, Donna, would stand up, I'd love to have you give them a real well-deserved round of applause. (Applause) As you notice, my daughter Susie produced that movie. She does every year. She works hard on it, and we don't pay her anything, although she does remind me occasionally when I'm out at Borsheims that she worked very hard on the movie — (Laughter) — and I'll see her there on Sunday. And, Suz, if you would take a bow, please. (Applause) And the impresario of this event, I just turn it over to her every year and forget about it. But she puts on this show. She brings all the exhibitors in. She arranges everything. She moves into the hotel across the street a few days ahead of time, or a week ahead of time, and makes sure everything hums. And Charlie and I just come down on the day of the meeting and take a bow. And that's Kelly Muchmore-Broz. Kelly, are you here? Where's Kelly? There she is. Give her a big hand. (Applause) We wouldn't be having this without her.

Berkshire directors introduced

WARREN BUFFETTNow I'd like to introduce our directors. We're going to get to the business meeting at 3:15. We do the Q&A first, and we get to that later on. But for those of you who won't be around — and a lot of people tend to leave at lunchtime — I'd like to introduce the various directors. You've met Charlie and myself. If you'll just stand individually, we can withhold the applause, if any, until the end. (Laughter) That way that embarrassing applause meter that we had on the Omaha Idol Show will not cause anyone distress. Howard Buffett — Howie — Malcolm Chace, Bill Gates, David Gottesman, Charlotte Guyman, Don Keough, Tom Murphy, Ron Olson, and Walter Scott, Jr. It’s a terrific group of directors. (Applause) I know of — I literally know of no directors of any large, publicly-owned companies that have, universally, as significant a percentage of their net worth in the company, purchased in the open market, as that group. Do you, Charlie?

CHARLIE MUNGERNone.

WARREN BUFFETTNone. OK. (Laughter) That may be all you hear from him, folks — (Laughter) — so kind of savor a little bit.

Jamie Lee Curtis

WARREN BUFFETTI also would particularly like to thank Jamie Lee Curtis, even though she came up with the wrong guy at the end. Jamie cooperated on this. We're going to have, as a thank you — Jamie is very interested in the Park Century School. One of her sons goes to that school. It's for gifted, but learning-challenged students. They're having an auction tonight, but it will continue subsequently. And Bill Gates and I have autographed a Monopoly set, and we will personally inscribe it to whoever the winner of that auction is. So if you want to go to eBay and check that out, we promise that we will not similarly autograph anything else. So I hope that Jamie Lee and the school have a big success on that.

Berkshire's Q1 earnings

WARREN BUFFETTWe have two announcements, one relatively unimportant but, nevertheless, pleasant, and that is that we released our earnings yesterday after the close. And I think we can put those up on the screen. Having any luck on that? Did we withdraw those earnings, Marc? Oh, they still have another six hours of audit or so. And, as you can see, we don't pay any attention to realized gains or losses. We had some gains this year; we had some losses in the first quarter of last year. So — but that's meaningless in the short term. Over time, obviously, it makes a difference. But the — you know, we do not pick anything to buy or sell in any given quarter or any given year in the way of securities based on the effect it will have on our income account for that period. It's totally immaterial. In fact, we'd rather sell things that we have a loss in, just from a tax standpoint. If we have some high-tax cost stocks and some low-tax cost stock, we'll sell the high one and record the loss because we would get a better tax result that way for the short term. So we ignore that. But if you look at the operating earnings, you'll see that in those main divisions that I take in the annual report — I show our four major businesses and then investment income is aside of it — things worked out pretty well in the first quarter for all of them. I would caution you that, in our insurance underwriting, our worst quarter would normally be expected to be our third quarter. You're not going to have hurricanes in this hemisphere in the first quarter. The real exposure — the worst exposure — is in the third quarter, and then there's a lesser exposure in the fourth quarter. We write a lot of catastrophe insurance business. Earthquakes, as far as we know, don't have any particular seasonal aspect to them, but hurricanes definitely do. And the interesting thing is that under standard accounting, if we write a hurricane policy for the calendar year 2006 and we receive a million dollars of premium, we would earn a quarter of a million in the first quarter and a quarter of a million in the second quarter and so on. We would earn a pro rata throughout the year. And that, in our view, actually is not proper accounting, but it's required accounting. The real exposure to loss is primarily in the third quarter. So you can't take our insurance underwriting results in any way for a rather benign quarter, like the first quarter, and extrapolate them for the year. But, nevertheless, it was a very good year — a very good quarter. GEICO had excellent growth, I believe that our — well, I'm almost certain that our growth in the first quarter was better than any of our main competitors, and, actually, by — probably by some margin — the underwriting was very good. Our reinsurance underwriting was very good. Gen Re had a good quarter. Our smaller companies had a good quarter. So things, generally, have been working very well in all four sectors. And that's nice, but that's not terribly important. I mean, five years from now, nobody will remember whether the first quarter or the second quarter was good at Berkshire Hathaway.

Acquisition of "really extraordinary" ISCAR

WARREN BUFFETTBut what did happen, and which we announced last night — which was very important — the acquisition of a large, extremely well-managed, profitable, really extraordinary company called ISCAR. And up until October of last year, I knew nothing of ISCAR. I did not know about their extraordinary management. But I got a letter, and I got a letter from Eitan Wertheimer, and — maybe a page and a half, page and a quarter — and he told me something about this business. And sometimes character and talents sort of just jump off the page at me, and this was one of those letters, and it came from Israel. And I expressed an interest, after reading this letter, in getting together with Eitan. And not long thereafter, I met not only Eitan, but his CEO and president, a remarkable man named Jacob Harpaz; Danny Goldman, the CFO. And we met in Omaha. They subsequently met Charlie. And this all came to fruition yesterday when we signed a contract. Now we have — well, before I go on to this, maybe Charlie would like to say a word or two about ISCAR. He's the — hard as it is for you to believe, he is not only — he's as enthusiastic about this as I am. Now, have you ever seen that before, I'd ask you? Charlie likes this one extraordinarily well. Charlie?

CHARLIE MUNGERWell, this is a company that, from very modest beginnings, grows to be the best company in its field in the world. It's not yet the biggest, but that leaves them something to do. The average quality of the people in this company is not only extraordinary, it's off the chart. And the beauty of this, as you look at the two of us, is they're all young. No, this is a real quality enterprise, and these people know how to do some things that we don't know how to do. A lot. So, of course we're enthusiastic about the company. I'm always enthusiastic when I get to deal with some of the best people in the world. I would like if we could get the spotlight down there. They're right down here in front. I would like, individually, three managers to stand up. And then Eitan is going to talk to us a bit, and then we have a — I think we've got it arranged so that we can have a short movie that will tell you something about ISCAR. But, first of all, if Eitan Wertheimer would stand up and we can get the spotlight on him? Over there. OK. Eitan, let me introduce the other two, and then can we have you speak to the group? Jacob Harpaz is the president and the CEO. (Applause) Take a good look at these people because they're going to make you — they're going to do very, very well for you. And Danny Goldman. Danny, would you stand up? (Applause) Thank you. And if you'll give the microphone to Eitan, I think Eitan would like to talk to the group just a bit.

EITAN WERTHEIMERGood morning, everybody. It's Omaha. It's spring. The fields are green. The days get longer. And we bring a big family into a new home. I'm standing here before you representing 5,869 people, not only the people, but the families, their past and their future. It took us three years to look what to do next. We are successful. We still have a lot of mistakes ahead of us to do. Until we found one day somebody came to us and asked, "Have you heard about Berkshire Hathaway and Mr. Buffett?" We said, "Yes, we heard, but we never thought about it." And when we started studying about the company, we understood that this is the right combination for us, a family company with a strong culture and a culture we’d love to keep, a young group of people that will love to work, maybe not for very long, but not less than 20, 25 years from today. And we decided, let's try it. And we had a very interesting lesson from Warren, we had a very interesting lesson from Charlie, and we survived both of them. (Laughter) I'm very happy that I represent here, not only the people that make the products and go to the customers, I also in a way represent the big family of customers that make — manufacture things. They make cars go faster and safer. They'll make airplanes fly. They will make the mold to make the bottles for the Coca-Cola. They'll make a washing machine. They'll make the tools to make a carpet. They'll make many things. And many times the people that manufacture are a little bit in the shade. And I'm very proud to stand as a manufacturing guy, and say I'm standing for all of them, all our customers, which I must thank them every morning, not only for buying, but also for trying new ideas that we bring and working very hard to stay competitive. Whoever will stay competitive will be there long-term. And this is also our goal. Here is Mr. Harpaz, Jacob. In reality, my job is not to disturb. He, in a very gentle way, fired me ten years ago. He performed and did better things than I could do, and it didn't make sense that I'll disturb him; so I went on to do other things. We've been in the company only 34 years, and the real job is done by Jacob and many, many other people. I'm sure that you have seen the film “In 80 Days Around the World.” And we prepared for you, “In 61 Companies Around the World.” And I hope you enjoy it. We definitely have to fulfill a lot of expectations. We definitely have to work very hard to make everybody very proud that we joined the family, also our people and for sure everybody in this room. So let's hope we'll all be successful, and let's look into the future. And I'm looking forward to come every spring, to Omaha, where the fields are green and the days get longer. Thank you. (Applause)

ON TAPE, ANNOUNCERIMC presents "Better Solutions for a Better World." In 1889, the appearance of the first automobiles brought with it the need for sophisticated solutions in metal processing. Such were the beginnings of a new company, launched by engineers in the U.S.: Ingersoll. In the decades to follow, another plant was set up in Germany. Since its creation, Ingersoll has established strong ties with industry, which has placed it firmly in a leadership position. For over a century, time after time, Ingersoll has proved that the best solutions begin with the best engineers. In 1999, Ingersoll joined the IMC Group and discovered that the sky is not the limit but only the starting point. Meantime, at the turn of the 20th century, another metal processing plant was established on the other side of the world in South Korea: TaeguTec. In joining the IMC Group in 1997, TaeguTec reinforced its position as the main supplier of cutting tools for industry in the Far East. Today TaeguTec has achieved unparalleled success, penetrating new markets, streamlining production process, and showing that precise global thinking can cancel distances. In the middle of the 20th century, in the north of Israel, Stef Wertheimer had predicted, from his little shack in Nahariya, the global need for more advanced cutting tools. "The new world demands better solutions," said Wertheimer, and established ISCAR. In a relatively short time, ISCAR has become the second largest cutting tool manufacturer in the world, a leader in the area of metal removal. ISCAR has revolutionized every aspect of machining. Its mission: to apply innovation, quality, and automation on the highest technological level. Among ISCAR's groundbreaking achievements are the revolution in cutoff applications; development of SELF-GRIP in the '70s; the pioneering triumphs in milling; the HELIMILL in the '80s; the CHAMDRILL; the revolution in drilling in the '90s and tangential positive milling; the innovative TANGMILL. These innovations and more have reinforced ISCAR's position as the world's leader in development of cutting tools. The combination of Ingersoll, TaeguTec, and ISCAR has given rise to the IMC Group, taking the best of all worlds and creating the world's best tools. Today's rapidly advancing world demands that we constantly elevate standards, apply ourselves more and more to provide ever-smarter and precise solutions, pushes us to advance to improve ourselves, to lead.

ON TAPE, EITAN WERTHEIMERYou have to be a full line supplier. To be a global company means to be local in many countries, in many places around the world."

ON TAPE, ANNOUNCEROther IMC Group companies: IT.TE.DI Italy, designers and manufacturers of PCD diamond tools for high-precision aluminum machining in the automotive and aerospace industry; UOP Italy, producers of high-quality solid carbide and high-speed steel standard tools and special tailor-made designs for applications in the aerospace and dye and mold industries; Outiltec France, expert creative solutions in extra-long gun drills for deep drilling and applications that require unique geometries; Unitac Japan, deep-drilling BTA-style tools with brazed and indexable heads; And Wertec Italy, design and manufacturer of unique counterboring tools for deep and complicated boring applications.

ON TAPE, JACOB HARPAZIf you look outside and you see some cars over there, be aware that in each car at least one part is manufactured by one of the IMC companies, for sure.

ON TAPE, ANNOUNCERAutomotive.

ON TAPE, EITAN WERTHEIMERBefore you have a product line, the geography spread, the people that understand the language, you cannot start thinking, “May I try or may I not try to become automotive supplier?”

ON TAPE, ANNOUNCERWe at IMC have made the automotive industry the foremost objective for all the factories of the group. All the Ingersoll vessels connect to contribute massively to the work of the automotive industry in North America. At the same time, on the other side of the globe, TaeguTec cutting tools joins the momentum of the rapidly-developing Japanese and Korean automotive industries. The alliance between ISCAR's developments and the IMC Group has led to comprehensive solutions, which contribute to the efficiency of global automotive production and pave the way for production cost savings.

ON TAPE, JACOB HARPAZWe're not only selling tools, we are selling technology. We are selling the customer a better way to make profit. And we believe, by giving a solution, it can increase its productivity. And the bottom line for the productivity, making more profit for his company.

ON TAPE, ANNOUNCERHeavy industry. The power of IMC comes clearly to the fore in heavy industry. The unique combination of the three main manufacturing plants creates new opportunities. The geographic location of Ingersoll and TaeguTec has led the companies to develop specific heavy industry specialization. The innovative geometries developed by ISCAR, together with the design and production of tools made to conform to the special requirements of this industry, places IMC at the forefront of this important industry. Aerospace. The blend and precision and inventiveness ought to go far. If you want to reach far and high, you must be on top of the game in technology, in understanding materials, (inaudible). The aerospace industry demands machining solutions for exotic and difficult-to-process materials, proficiency in lightweight materials, such as aluminum, and the ability to machine parts that require massive processing capabilities. The grouping of the three plants and the profound understanding of cutting materials and complex cutting geometries, along with the expertise and building large-size tools, make IMC the strategic partner for the aerospace industry. General engineering. All this vast engineering experience accumulated in every field, in every industry, and in every corner of the world, has paved the way for the development of new, groundbreaking tools, which streamline production processes, shorten machining time, and reduce costs for every customer in the world of general engineering.

ON TAPE, JACOB HARPAZAfter releasing the product into the market, we put another team — our own team — and they’ll now compete against the release of the product.

ON TAPE, EITAN WERTHEIMERIn exhibitions, we are recognized as a very, very innovative company. Many times the sentence is, “Let's go there because they must have something new. They always have something new.” That's a big compliment, and innovation will make the difference.

ON TAPE, STEF WERTHEIMERI believe that, in a way, industry is an art in itself. It's art. It's creation. You create something.

ON TAPE, ANNOUNCERYou can see it immediately upon entering an IMC branch or factory. The house of IMC is, first and foremost, a home for employees and customers as one. Years of experience have taught us that this is a vital element for success.

ON TAPE, EITAN WERTHEIMERMany companies have buildings and machines and a lot of real estate, but it's only people that have a chance to make any difference.

ON TAPE, JACOB HARPAZI believe with the ambition of the people, with the hard work of the people, we are going to reach the position of being number 1.

ON TAPE, ANNOUNCERThe world demands better solutions. That is why we're here. IMC. (Applause)

WARREN BUFFETTThis is an important acquisition, as we paid $4 billion for 80 percent of the company. The family remains in partnership with us. They retained 20 percent. It's the first business we've purchased that is based outside the United States. We have others that have operations there. I think you'll look back on this in five or ten years as being a very significant event in Berkshire's history. And it's interesting. In this world, in which many businesses get auctioned off, figures get dressed up before they sell them and leveraged up and so on, we continue to hear from people periodically who consider their business as too important to auction. And we've never really bought one at auction — have we, Charlie — that I can remember?

CHARLIE MUNGERI can't remember one either.

WARREN BUFFETTYeah. So there's a benefit in that. Because, in effect, the people that pass through that filter of caring enough about their business that they don't simply put it up like a piece of meat at an auction are also the people, in our view, that make the best managers and make the best partners over time. There is something going on in their brain that says this business is so important, and the people that are here are so important, and the customers we take care of are so important, that we actually care about the home in which these businesses reside. And I think that filter works very much to our benefit. We've bought a number of businesses in the last 15 or 18 months where people have felt that way, and I think the crowning one here is ISCAR. So, I welcome our new friends from Israel. I'm going to go over there and visit in September to see if there are any more girls out there like you, see if we can drum up a little more business.

Questions and answers

WARREN BUFFETTAnd with that, let's go on to the question period. And we will do this until noon, at which time we'll break for 45 minutes or so and come back, and then we'll continue until about 3 o'clock. Then we'll break for about 15 minutes, have the formal business meeting from 3:15 to 3:16. (Laughter) And then at 4 o'clock, Charlie and I are meeting with all of the people who came from outside of North America. This year we had about 550 requests for tickets from countries outside of North America, as opposed to about 380 last year. So we're looking forward to meeting all of you that have come a long way to attend this meeting.

We can "easily handle" Social Security

WARREN BUFFETTNow, we've got a dozen zones in here, and we'll start off with zone number 1.

AUDIENCE MEMBERYeah. My name is Edward Jannig (PH) from Denver, Colorado. First, I want to thank Charlie and Peter Kaufman for their wonderful book. I think Benjamin Franklin would be very proud. My question is, last year when asked about Social Security, you said that a country as rich as the U.S. should take care of their old people. This year I read Pete Peterson's book, "Running on Empty," and I was wondering, from the standpoint that is the greatest benefit to society, where should you draw the line on entitlement spending? And I was wondering if you gentlemen disagree on the subject at all.

WARREN BUFFETTNow, you always have the question in every society — whether it's formalized or not — you have the question of how you take care of the old and the young. You know, you have people in their productive years turning out goods and services, and you have people that are too young to participate in the turning out of those goods and services but that, nevertheless, need them, and you have people that are old in the same position. And starting in 1935, I believe, we statutorily formalized that idea. We'd always felt that way about the young, that school should be there for them when they couldn't pay for them themselves, and that the society owed a duty to both classes. But in 1935, we took up the idea that the government would provide this base limit. Now, I think there's some merit to the argument that the 65 became outmoded as longevity improved. And that is now being changed, to some degree, and I think there's probably some more change needed. But this country has an output of almost $40,000 of GDP per person. And some people, like Charlie and myself, are very lucky to be wired in a way that in a market system we get enormously wealthy. And other people are not so wired, and they come out and they, in a market system, do not necessarily do so well, and they're fairly lucky if they provide for themselves during their working years and they do not have the ability to earn at a rate that takes care of them in later years. And society has taken that on. Our country can easily handle the Social Security question. I mean, it — and it's kind of astounding to me that a government that is quite happy to run a 3- or $400 billion deficit now worries a lot about the fact they're going to have a $100 billion deficit or something in Social Security 30 years from now. I mean, there's a little bit of irony in that. (Applause) It is true that, if we maintain the present age brackets, that eventually you have one person in the older years for every two that are producing in the younger years. But we produce more every year as we go along. And there will always be a struggle in a representative society, in a democratic society, between how you divide up that pie. But we have a huge pie. We have a growing pie. And we can very easily take care of people, in a manner at least as well as we take care of them now, in the future from that growing pie without the people in their productive years not — also having a gain in their standard of living.

CHARLIE MUNGERYeah. I think the world of Pete Peterson, but I don't come to the same conclusion. Of course, if we didn't tinker with Social Security, it would eventually run low on funds. But if the country is going to grow at 2 or 3 percent per annum for decades ahead, it's child's play to take a little larger share of the pie and divert it to the people who are older. It would be crazy, I think, to think you would always freeze the share of money going to the old at exactly the same sum no matter how rich you got. It's a perfectly reasonable thing to do to pay a little more in the future to support what I regard as one of the most successful programs in the history of our country. Social Security has a low overhead and does a world of good. It's a very reasonable promise to make, and I wish my own party would wise up a little on how little an issue it is. (Applause)

WARREN BUFFETTThis is what happens when you ask a couple of guys our age how you feel about treating older people. (Laughter) Incidentally, the — currently — and everybody likes to talk about the unified budget — you didn't hear talk about the unified budget 30 years ago on the national level. But the unified budget means that the Social Security surplus now gets counted toward reducing the overall budget. So they're very happy at present to take the Social Security surplus and trumpet the number that is after that. But then when they start talking about a Social Security deficit out 20 or 30 years, they tend to get — they want to separate that off and get very panicky about it. So I think there's a lot of hypocrisy in the argument.

Different businesses, different compensation

WARREN BUFFETTLet's go to number 2.

AUDIENCE MEMBERGood morning. My name is Phil Rafton (PH), shareholder from Orinda, California. My question for you: How would you design a compensation system in a very cyclical industry that can swing from boom to bust? You want to tie compensation to results in some way, but this can lead to huge swings in pay. And, for example, today in booming industries, like energy and mining, profits are large as a result of the boom in the industry and not necessarily the results of management skill. Conversely, when the industry is down, profits are low due to no fault of management. So, again, my question: How do you design a compensation package to best reward management performance?

WARREN BUFFETTYeah. That's a terrific question. Because if you're running a copper company now with copper at 3.50 a pound, you can coin money even if you happen to be the village idiot, you know. And, similarly, when copper was 80 or 90 cents a pound, which has been most of our adult lifetime, in that general — there were fairly sparse times in mining much of the time. And we design compensation systems at Berkshire. We have dozens and dozens of companies. Some of them are capital-intensive. Some of them are cyclical. Some of them don't require much capital. Some of them are terrific businesses if no one runs them. Some of them are very difficult businesses, even if the best of management comes. And we have a wide variety of compensation systems. You're wise when you say, "How do you design one for that kind of a situation?" Because so often people come in with, sort of, standardized systems or whatever the highest system they see is, and then apply it to their own benefits. Most people, if left to select their own compensation systems, will come up with the appropriate, from their standpoint, comparable arrangement. If we owned a copper mining company in its entirety, we would measure it, probably, more by cost of production than we would by whether copper was selling for $2.00 a pound or a dollar a pound. I mean, they — the management has control — depending on the kind of ore bodies and everything — but they certainly have control over operating conditions. They do not have control over market prices. And we would have something, I think, that would not fluctuate a lot in a business like that, the bonus available, but it would probably tie to what we thought was under the control of the individual who's managing the business. That's what we try to measure. We try to understand the industry in which they operate, and we try to understand the things that the manager can have an impact on, and how well they're doing in that. We measure, at GEICO, for example, we measure by two unit measures: one is growth — unit growth — and one is the profitability of seasoned business. New business costs money. We want new business; so we don't charge that against the manager or the 20,000 other employees who share in it. We do not want to pay for anything that is not under their control. We do not want to pay for the wrong things. And I would say, in a cyclical business, that you — you know, if oil is $70 a barrel, I don't think any particular management deserves credit for it. In fact, they all sort of deny that they've got anything to do with it when they get called before Congress. But I would not give them credit for the fact that oil is $70 a barrel or $40 a barrel. I would give them credit for low finding costs for — over time. I mean, what you really want to do, if you have a producing oil company, is you want a management that, over a five- or ten-year period, discovers and develops oil at lower-than-average unit cost. There‘s been a huge difference in performance in that among even the major companies, and I would pay the people that did that well. I would pay them very well, because they're creating wealth for me. And I would not pay the guy a lot of money that simply is cashing in on $70 oil and that really has got a terrible record in finding it at reasonable prices. Charlie?

CHARLIE MUNGERYeah. It's easy to have a fair compensation system like we have at Berkshire. And a lot of other publicly-traded corporations also have fair compensation systems, but about half of them have grossly unfair systems in which the top people get paid too much. We know how to fix Berkshire, but our ability to influence the half of American industry where the compensation systems are unfair has so far been about zero.

WARREN BUFFETTYeah. One thing you may find interesting, we have — I don't know — 68 operating companies. We probably have — I probably have responsibility for the compensation system of, perhaps, 40 managers or thereabouts, because some of them have businesses grouped under them. I can't think — again, I can't think of anyone we have lost over a 40-year period because of differences in views on compensation. I also — we've never had a compensation consultant come into Berkshire. They may have had them at the subsidiaries, but they're smart enough not to tell me. (Laughter) They — it's never happened. I mean, we do not — and we do not have lots of meetings. We don't spend a lot of time on it. It is not rocket science. It's made more complicated than it needs to be, more confusing than it needs to be, because having a system that is complicated and confusing serves the needs of some who want to get paid a whole lot more than their worth. And the system won't change because it's working to the advantage of the people that have their hand on the switch, the people that pick the human relations consultants and pick the people who are on the comp committee. I was put on one comp committee, and Charlie can tell you what happened. (Laughter) He was there.

CHARLIE MUNGERYeah. We were the biggest shareholder at Solomon. Two of us were on the board, and Warren was on the comp committee. And in that frenzy of envy, which characterizes compensation in investment banking, Warren remonstrated, softly, I thought, towards a slightly more rational result, and he was outvoted.

WARREN BUFFETTCharlie used the term "envy" rather than "greed," which is interesting, because that's been our experience, is that envy is probably a bigger motivation, in terms of people wanting to be in that top quartile, or whatever it may be, than greed. It's a very interesting phenomenon that you can hand somebody a $2 million bonus, and they're fine until they find out that the person next to them got 2-million-1, and then they’re sick for the next year. (Laughter) Charlie has pointed out — you know, of the seven deadly sins — that envy is kind of the silliest because you don't feel better. You know, I mean, if you get envious of somebody, you feel worse the whole time. Now, you know, gluttony — you know, I've had some of my best times while being gluttonous. (Laughter) There's a real upside to gluttony. (Laughter) We won't get into lust. (Laughter) But I've heard that there are upsides to that, occasionally. But envy, you know, all you do is sit around and make yourself sick and can't get to sleep. But that's — it's part of the human psyche, and you see it big time and you get this irony. The SEC wants even more transparency on pay, which I think, you know, basically is a good idea except for the fact that it becomes a shopping list for every other CEO when they see that somebody is getting their haircuts paid for by the company. They decide that they, too, need their haircuts paid for by the company, and they suddenly become big tippers.

Our managers are "trained" by our culture

WARREN BUFFETTLet's move on to number 3.

AUDIENCE MEMBERGreetings to all of you from the Midwest of Europe. I'm Norman Wintrop (PH) from Bonn, Germany. Thank you very much for writing your shareholder letter in such a way that we feel treated as partners. Warren, in the shareholder letter, you ended with your thoughts on managing Berkshire Hathaway in the future. May I ask you, how do you train your successors? What do you tell them? How do you summarize to them what is important to you? And how, if you are able to do so, how would you measure whether or not they have lived up to your expectations?

WARREN BUFFETTWell, that's a good question. And, I think, actually, in reading that letter — you know, that's part of the — part of the reason it's written — is to convey, not only to our partners, our shareholders, but also to our managers and anybody else in the public, you know, what Berkshire is all about. This meeting, you know, in terms of what we do is intended to give a personality and a character to Berkshire. And we don't say it's better than anybody else's, necessarily, but we do think it's us. And we think — we want managers to join us who believe in the sort of operation we have, a partnership with shareholders, a lifetime commitment to the businesses. We want those people to join us. We want what they see after they join us to underscore the values we have. So everything we do we hope is consistent with what most people would call a "culture" at Berkshire. So the written word, what they see, what they hear, what they observe. And that is training in itself. It's the same sort of training you get as a child. I mean, you — when you are in the home and you're learning something every day by the behavior of these terribly important people, these big people that are around you. And a home has a culture. A business has a culture. To some extent, a country can have a culture. And we try to do everything that's consistent with that. We try to do nothing that is inconsistent with that. And, believe me, if you're a bright Berkshire manager — and they are bright — you know, they buy into it to start with, they see that it works, you know, and it doesn't require formal lessons or mentoring or anything of the sort. I mean, if you talk to our Berkshire managers, you would find that they think consistently with how, in effect, Charlie and I think. There are plenty of people that don't, and they don't join us. I mean, you know, we hear all the time from people — I've got one coming in a little while, actually, that, you know, nothing is going to come of it because this guy — I mean, his brain processes things different than mine does. And I'm kind of interested in learning about his business, so we'll get together, but it wouldn't fit. You know, it would just not — it would be a mismatch. And the nice thing about it is our culture is so well-defined that there aren't many mistakes, in terms of people entering it or behaving in a way inconsistent with it. So I think that — I don't think there's any formal training necessary. I mention in the annual report the fact that, if I die tonight, there are three obvious candidates to take my place. Now, the board knows which one of them they would agree on tonight. Might be different three years from now, but any of those three would not miss a beat in terms of stepping into the culture that I hope we have here, because it's theirs too. Charlie?

CHARLIE MUNGERWell, you know, if Warren has kept the faith until he's 75 years old in maintaining a certain kind of culture and a certain way of thinking, do you really think he's going to blow the job of passing the faith on? What could be more important, in terms of his duties in life? You all have something — (Applause) You all have something more important to do than worry about the fact that the candle is going to go out at Berkshire just because some people die. This is a place where the faith is going to go on for a long time. Of course, at headquarters, we aren't training executives. We find them. And they're not hard to find. You know, if a mountain stands up like Everest, you don't have to be genius to recognize that it's a high mountain. (Laughter)

Irrational pricing of closed-end funds

WARREN BUFFETTOK. Number 4?

AUDIENCE MEMBERMy name is Yuen Gunn (PH), and I'm from Whitehaven in England. Actually, the last time I was this nervous asking a question, I'd just presented my wife with an engagement ring from Borsheims. (Laughter)

WARREN BUFFETTWell, I hope you get nervous again. (Laughter)

AUDIENCE MEMBERMy question for you is, with the enthusiasm at the moment for emerging markets, many closed-end funds which contain emerging market stocks are trading at significant premiums to their net asset values, even when open-ended funds can be used to acquire similar portfolios of stocks for the net asset values. This doesn't seem very rational to me. Why do these premiums persist, and do you agree that it's irrational?

WARREN BUFFETTYeah. I would say it would tend to be. I don't know anything about the specifics that you're referring to on emerging market funds. I haven't looked at the size of the premiums. But, history would certainly show that most closed-end funds — just about all closed-end funds — eventually go to discounts. I actually worked — well, I'll skip that analogy. But the — overwhelmingly, closed-end funds have gone to discounts. You know, initially, if they're sold with a 6 percent commission, of course, the initial people are getting 94 cents of net asset value by paying the dollar, but I know I — if I saw two — if I had an interest in buying into emerging markets through other people's management and I could buy an open-end fund at X, or an asset value, and I had to pay 120 percent of X for some closed-end fund, you'd have to convince me very strongly that the management of the closed-end fund was better. So I think you're right. I don't — again, I don't know the — if the premium is a few percent, it doesn't really make much difference. But occasionally, Charlie and I have witnessed in the past closed-end funds that have sold even at 30 or 40 percent premiums over asset value. Overseas Securities was a tiny fund that used to do that for years and baffled everybody. But eventually they will come back down to earth. Charlie?

CHARLIE MUNGERI've got nothing to add. (Laughter)

WARREN BUFFETTHe's hitting his stride now. (Laughter)

Corporate boards should think like owners

WARREN BUFFETTNumber 5?

AUDIENCE MEMBERWarren and Charlie, I want to thank you for putting a once obscure Midwestern city on the map last year with your acquisition of Pete Liegl's company, Forest River. I'm Frank Martin (PH) from Elkhart, Indiana, the RV capital of the world. I also want to thank —

WARREN BUFFETTGlad to have you here, Frank. Frank has just brought out a book, incidentally, that's a history of some of his annual letters. It's a good book, and I recommend you get it.

AUDIENCE MEMBERThank you, Warren. I also want to thank you for your influence over Robin Williams and other Hollywood stars. Those of you who have seen the movie "RV" realize that Warren will go to no ends to promote the products of the companies he acquires. (Laughter)

WARREN BUFFETTA few people have already noticed that, actually, Frank. (Laughter)

AUDIENCE MEMBEROn a more serious note, there's a small but growing trend in American business governance to move from plurality voting for directors to majority voting, long the standard in Great Britain. What do you see as the upside and downside of majority voting, as it relates to raising the standard of ethics in the corporate boardroom?

WARREN BUFFETTCharlie, you want to take a swing at that?

CHARLIE MUNGERI don't think it’ll have any effect at all on ethics in the corporate boardroom. There get to be fashions in the governance subject. I think that the troubles in American corporations are not going to be fixed by something like that. All these reforms have to be considered in the light of the kind of people that are likely to be activist in using new powers, and that crowd is a mixed crowd, to put it gently.

WARREN BUFFETTThe question in the boardroom is to what extent — and you have to understand, it's partly a business situation; it's partly a social situation. The question is to what extent do the people that are participating there think like owners, and whether they know enough about business so that even if they're trying to think like owners, that their decisions will be any good. And Charlie and I have been on boards of companies with dual voting. Berkshire has that, although it's so minor that it doesn't really make any difference. But we've been on other boards. I have never really seen any difference in behavior based on the nature of the votes that got them into the boardroom. But there's an enormous difference — I think you'd be blown away if you watched boardrooms over the years — there's just an enormous difference in terms of, really, the business savvy of the people in the room, the degree to which they are thinking like owners as they go along. And I've seen no — I don't know that dual voting or the lack of dual voting really is going to have very much to do with that. The key — I've mentioned it in the past — there's all these fashions, as Charlie says, in corporate governance. But the job of the board is to get the right CEO, to prevent that CEO from overreaching. Because sometimes you have some people that are very able, but they still want to take it all for themselves. But if they take nothing and they're the wrong CEO, they're still a disaster. So low pay itself is not the criteria. So you want the right CEO. You do not want them overreaching. And then I think the board needs to exercise independent judgment on important acquisitions, because I think CEOs — even smart CEOs — are motivated, frequently, in acquisitions by other than rational reasons. And in those three areas, you know, American directors have — I don't think they've given a tremendous account of themselves in recent years, whether at dual system places or otherwise. The only cure to better corporate governance, in my view, is that the very large shareholders start really zeroing in on whether those questions I just mentioned are being addressed properly. If they go on to all these peripheral issues, you know, they have a lot of fun and they get in the papers. You know, they have little checklists and they can issue grades and all that. It isn't going to do anything in terms of making American business work any better. But if the eight or ten largest shareholder groups, if the really large institutional investors say, you know, "This compensation plan doesn't make any sense and we're not voting for the directors, and here's why we're not voting for the directors," you'd get change. But so far, they've been unwilling to do that. It takes the big shareholders. It's not going to be done by any coalition of small shareholders or people sticking things on ballots. But the big shareholders of this country, you know, basically they — some of them farmed out their voting, even. I was amazed to find that out, that a number of very large institutional investors have actually just turned their voting process over to somebody else. They don't want to think like owners. And, you know, they bear — we all bear — the penalty for that.

Tech is still in the "too hard" pile

WARREN BUFFETTNumber 6?

AUDIENCE MEMBERHello. My name is Andy Pollen (PH) from Adrian, Michigan. Thank you, once again, for having me to Omaha. My question is for Warren, but, Charlie, please add your thoughts as well. Warren, I've heard you say many times that you don't understand technology and that you rely on Bill for that, and that's fine. And I see from this year's movie that you're learning, so that's good.

WARREN BUFFETTSlowly.

AUDIENCE MEMBERI'm also curious to hear what you've learned so far about the other information technology companies, such as IBM, Sun Microsystems, Oracle, Dell, EMC, and Intel.

WARREN BUFFETTI know — what I've learned is I know enough not — to know that I don't know enough to make an investment decision. The — Charlie and I have circles of competence that extend to evaluating a number of types of businesses, and there are a whole lot of businesses that we won't be able to evaluate. Some of them, I don't think — I think very few people can evaluate. I mean, you get outside of — you just get into businesses that — where the future is so likely to be different than the present that maybe there's a few people that have great insights on it, but we sure don't. We are best at the businesses where we can come to a judgment that they're going to look a good bit like they do now five years from now, ten years from now. They'll be bigger. They'll be doing different things, but the fundamentals will be the same. ISCAR will be a bigger company five years from now. It may be a much bigger company, and we may get a chance to do interesting acquisitions. But what you saw there, the fundamentals, won't change. The way the people think won't change. I can name a number of businesses that are bound to change dramatically. I mean, when you think of how much the telecom business, for example, has changed over the last 15 or 20 years, it's startling. Even with hindsight, it's a little hard to figure out, you know, who was going to make all the money and so on. There's just — there's just games that are too tough. Charlie says, you know, “We've got three boxes at the company: in, out, and too hard.” (Laughter) And a lot of things end up in the "too hard" pile, and it doesn't bother us. You know, we don't have to be able to do everything well. If you go to the Olympics, you know, if you run the hundred meter well, you don't have to throw the shotput. You know, some other guy can throw the shotput and you'll still get a gold ribbon, you know, if you run the hundred meter fast enough. So, we try to stay within the circle of competence. Tom Watson, Sr. — I think it was Senior — yeah, Tom Watson, Sr. — many years ago said, "I'm no genius, but I'm smart in spots, and I stay around those spots." Well, that was pretty damn smart, you know. And we have found a lot of our managers who don't think, you know, they can solve every problem in the world, but they run their businesses extraordinarily well. You do not want to — Frank Martin mentioned Forest River. You do not want to go and compete with Pete Liegl and his business. He's going to kill you. He's very, very, very good. But he doesn't come around and try and tell us how to run the insurance business, because that's not his game. We look for people that are very good at things they understand. And we don't get any inferiority complex at all about the fact that — well, I — you mentioned Intel, I believe. I was virtually there at the birth of Intel because I was on the board of Grinnell, and Bob Noyce was the chairman of the board of Grinnell. And we bought — at Grinnell — we bought $300,000 worth of their original debentures. And, you know, I knew Bob was always a very, very smart guy, but I wouldn't have had the faintest idea how to evaluate the future of Intel then, and I really don't have it now, you know. And I think they probably had a few surprises themselves in the last few years with AMD and what's been happening in their business. But what that's going to look like in five years, I don't have any idea. And I'm not so sure, if you're in the industry, you'd know exactly what it was going to look like in five years. Some businesses just are very, very hard to predict. Charlie?

CHARLIE MUNGERYeah. One of the foreign correspondents last year, after looking at us carefully, said, in effect, "You guys don't seem smart enough to do so much better than other people as you're doing." (Laughter)

WARREN BUFFETTWere they looking at me or you, Charlie?

CHARLIE MUNGERBoth. (Laughter) "Have you got an explanation?" And we said, "We know the edge of our competency better than most people do." It's a very useful thing to know the edge of your competency. And I always say it's not a competency if you don't know the edge of it.

WARREN BUFFETTI'll have to think about that a little bit. (Laughter) Bill will explain it to me later.

Too many tax breaks for the rich

WARREN BUFFETTArea 7, please.

AUDIENCE MEMBERI am John Bailey (PH) from Boston, Massachusetts. I wanted to ask, Warren and Charlie, if you could consider three hypothetical securities for a long-term investment. The first would be, like, a share in median family income for the United States. The background there that, in real terms, median family income has been stagnant for approximately 30 years. The second security would be a share in all corporate income in the United States. The background there that corporate income has been taking an ever larger slice of GDP for several years. And, finally, a bit more abstract, a share in all capital assets in the United States, and I would like to include all intangible capital assets, if possible. So would any of these be of interest for a long-term holding, perhaps 20 years or so? And, if not, why not?

WARREN BUFFETTWell, I think I'd rather buy ISCAR. (Laughter) The corporate profits, as you point out, have been close to their highs, except for a very few years post- World War II, as a percentage of GDP. It's hard to imagine being much larger. It's interesting. While corporate profits is reported — you take S&Ps, percentage of book, percentage of sales, put on the line, they're all on the high end. Corporate income taxes, really, are not that high relative to the total revenues of the country. So you can see that there's been a little disconnect there in some manner. But median family income is something that Charlie and I have never even considered. We're not shooting for that. It is certainly true that, in the last five to ten years, that the disparity in income has widened significantly and that the tax breaks for the wealthy have been extraordinary. I've pointed out in the past that most of the members of the Forbes 400, myself included, pay a lower percentage of their income to the U.S. government, counting Social Security taxes, than does the receptionist that works in their office. That was not true 30 years ago, and I don't think it's something that should be true in a rich society, but it has happened. And I just computed my 2005 return. In 2004 — and I have no tax shelters. I don't have a tax adviser. I just do things, and at the end of the year I add it all up. In 2004, my rate was the lowest of the 15 or 16 people in the office, and in 2005, my rate was even lower. And that's courtesy of the U.S. government. It's not courtesy of a lot of tax write-offs or anything of the sort. And I think that's — I think it's crazy, and I don't think the American people understand it very well. And I think that if they did understand it, they should, and would, be quite unhappy about it. So I think that — I think that the lower incomes, median — and the medium — people making medium amounts of income, have not shared in the prosperity of the last decade or so in a way that's all proportional to the way the wealthy participate in it. The last point you mentioned was too esoteric for me, so I'll pass it over to Charlie.

CHARLIE MUNGERYeah. The main figure that matters to all of us, including the people at the median, is how does GDP per capita grow? And those figures have been very good. And so, I wouldn't get too wild on the subject of median income. It isn't like we're all permanently in some status from nobody moving from status A to status B. There's a huge flux, both up and down. And what's really important is that the pie keep growing at a decent clip. All that said, I think that Warren is right, that some of those tax changes were a little crazy. I mean, they caused more envy than we needed. But I don't think it's all that important.

WARREN BUFFETTYeah. We might think it was more important if we were working at the median income, Charlie. (Laughter)

Munger: Ethanol is "stupid"

WARREN BUFFETTLet's go to Number 8.

AUDIENCE MEMBERGood morning. I'm Diane Ryan (PH) from Kansas City. My question is, what is your opinion on the economics of ethanol and as — just as a fuel additive? And, as a potential investor, should I be looking at that industry?

WARREN BUFFETTWell, I don't know enough to answer the latter part. I know we don't — Charlie and I would not know enough to evaluate ethanol projects. We've been approached on them. And, of course, they're quite popular now. But in terms of figuring out what an ethanol plant is going to be earning on capital five or ten years from now, it's far easier for us to figure out whether people will be drinking Coca-Cola, or even eating See's Candy, which I highly recommend. (Laughter) So, you know, it will depend on government policy. It will depend on a lot of variables that we're not particularly good at predicting. It's easy to raise money for it now. I mean, it's a popular item. You know, it's hot. And our general experience is that we don't look at things very much that are hot at any given time. I know nothing about the — you know, the biochemistry or anything of the sort. I have a son who was a head of the ethanol board in Nebraska. And if I notice that he suddenly starts getting richer than I am, you know, I will suspect that I should start looking at ethanol very hard. But so far, I haven't seen tangible evidence of that. There's no question ethanol usage is going to grow. I mean, that we will see. Generally speaking, ag processing — agriculture processing — businesses have not earned high returns on capital. I mean, if you look at Cargill, you look at ADM, you look at the big processers, that has not been a great business. Ethanol could prove an exception, but I'm not sure how you gain a significant competitive advantage over time, you know, with any given ethanol plant. And if you get too many of them around, you know, it will not be a good thing when you're turning out a commodity. Charlie?

CHARLIE MUNGERWell, my attitude is even more hostile than Warren's. I have just enough glimmers of thermodynamics left in me to suspect that it takes more fossil fuel energy to create ethanol than you can get out of the ethanol you've created. If so, that's a very stupid way to try and solve an energy problem. (Applause)

WARREN BUFFETTWell, considering my family situation, I would say I have friends who like ethanol, and I have friends who don't like ethanol. And I want my position to be perfectly clear: I'm for my friends. (Laughter)

Watch out for speculative commodity bubbles

WARREN BUFFETTLet's go to number 9.

AUDIENCE MEMBERHello. My name is Johann Freudenberg (PH) from Hanover, Germany. Do you think we are in a commodity bubble? Thank you.

WARREN BUFFETTWell, certainly — not in agriculture commodities, they haven't done anything, if you're talking about wheat or corn or soybeans or something. But if you get into the metals, oil, there's been a terrific move. The most extreme, probably, has been copper, I would say. Oil, if you go back a few years to when it was $10 a barrel — it's been more extreme than copper — but you were undoubtedly — it's like most trends. At the beginning, it's driven by fundamentals, and at some point, speculation takes over. The very fact that — the fundamentals cause something that people looked at for years without getting excited about. Fundamentals change the picture in some way. Copper does get a little short, you know, or people get a little worried about currency and, maybe, gold goes up or whatever it may be. But, you know, it's that old story of what the wise man does in the beginning, the fool does in the end. And with any asset class that has a big move, that's based initially on fundamentals, is going to attract speculative participation at some point, and that speculative participation can become dominant as time goes by. And, you know, famous case always being tulip bulbs. I mean, tulips may have been more attractive than dandelions or something, so people paid a little more money for them. But once a price history develops that causes people to start looking at an asset that they never looked at before and to get envious of the fact that their neighbor made a lot of money without any apparent effort because he saw this early and so on, that takes over. And my guess is that we're seeing some of that in the commodity area. And, of course, I think we've seen some of it in the housing area, too. How far it goes, you never know. I mean, it just — some things go on to just unbelievable heights, and then, you know, silver went back and that was manipulation, to some extent, but it got up to $50 an ounce very briefly back in the early '80s. But the eyes of the world that never looked at silver when it was $1.60 or — or $1.30 back in the '60s, you know, everybody in the world was looking at it. And some were shorting and some were buying, but it becomes a speculative football. And my guess is that an awful lot of the activity in something like copper now is speculative on both sides of the market. If — you know, if it goes to $5 a pound, who knows? But it — you are looking at a market that is responding more to speculative forces now than to fundamental forces, in my view. Charlie?

CHARLIE MUNGERWell, I think we've demonstrated how little we know about commodity prices by our very skillful operations in silver.

WARREN BUFFETTI think you can change that from "our" to — it's mine, actually. I bought it very early. I sold it very early. Other than that, everything I did was perfect. (Laughter) We managed to minimize things there with great efficiency, or I managed to. Charlie didn't have anything to do with that. I was the silver king there for a while. We did make a few dollars on it. But we're not good at the game of, when it gets into the speculative area, figuring out how far a speculative boom will go. If the fundamentals are attractive, we think we're getting a lot for our money, buying equities or whatever it may be, we'll make some money. We will — we may not make as much money — remotely as much money — as somebody who is, you know, plays out the last 30 days or 30 weeks of a real wild orgy. I mean, these things, they tend to be the wildest toward the end. But that gets back to the question, you know, of Cinderella at the ball. I mean, you know, you're there. You're having a wonderful time. The punch bowl is flowing and the dance partners are getting prettier all the time. And you know at midnight, it's going to turn to pumpkins and mice. And, you know, you look around the room and you think, "Just one more dance, one more good-looking guy,” you know, “one more glass of champagne." And you think you're going to get out of there at midnight, and, of course, everybody else thinks they're going to get out of there at midnight, too. And in the end, it does turn to pumpkins and mice. And in this game, as I've said — you know, Adam Smith said it many years ago — a fellow named Jerry Goodman wrote under the pseudonym of Adam Smith — says the problem with that particular dance for Cinderella is that there are no clocks on the wall. You know, and in the markets — if you're talking copper now, if you're talking Internet stocks in 1999, if you're talking uranium stocks in the 1950s — there are no clocks on the wall. And the party does get to be more fun, you know, minute after minute, hour after hour, and then it does turn to pumpkins and mice.

"Brazil would not be off limits"

WARREN BUFFETTNumber 10?

AUDIENCE MEMBERMy name is Luisa Loredo (PH). I'm a student at University of Kansas, and I'm originally from Brasilia, Brazil. My question is for both Mr. Buffett and Mr. Munger. The stock market in South America has been growing quickly in the last few years. What do you think about investment opportunities in South America, given the political environment and underlying risks?

WARREN BUFFETTYeah. We would — our problem in many markets is that we have to put a lot of money to work to move the needle at Berkshire. We've got a market value of 135 billion or something like that. So we are looking to put out hundreds and hundreds of millions of dollars at a minimum when we look at marketable securities. And that really narrows the field in terms of countries or in terms of businesses within those countries. But, you know, we made an investment about three years ago in PetroChina. Now, PetroChina is one — probably one of the — well, it is one of the five largest oil companies in the world — and, yet, we were only able to — even there — to get 400 and some million dollars into it, which fortunately is worth a couple of billion now. But here it's a country the size of China, largest company in that country, and even there we only got 400-and-some million dollars in, although we would have liked to have gotten more. But we weren't afraid to go into China. We wanted to get paid more for going into China, and we did, because we don't know the game as well there. We would feel the same way in Brazil. I mean, we — a great beer company down there that a friend of mine ran, and, you know, we should have been in that. We knew he was a great manager, and he was going to do a great job with it. So, Brazil would not be off limits at all, but we'd have to be able to get a lot of money into a business we understood at an attractive price. We would want it to be cheaper than if it were in the United States. We wouldn't understand the tax laws as well, the nuances of governance, a whole bunch of things. But after allowing for that, at a price, we would do it. We're unlikely to put a lot of money into — Brazil is a big country, but we're unlikely to put a lot of money into really small economies because we can't get enough money into them. Charlie?

CHARLIE MUNGERNo more.

Outlook for Clayton and manufactured homes

WARREN BUFFETTNumber 11?

AUDIENCE MEMBERMy name is Jeff Bingham (PH). I'm from Chicago, Illinois. I have a question regarding the manufactured housing industry. What is your outlook on demand for the industry? And, correspondingly, in your opinion, will lending increase in a meaningful way over the next few years? And are the homes priced attractively relative to competitive products, like stick-built housing and apartments, in the face of continued site rent increases at the community level and, in some cases, lenders requiring shorter maturities on mortgages?

WARREN BUFFETTIt's been kind of an interesting history on manufactured housing. If you go back — you have to go back 30 or 40 years — 40 years, I think, almost, to have — find volume as low as it's been in the last couple of years. And the houses are better than — by far better — than they were then. There have been years when 20 percent of the housing — the new housing product in the United States — was manufactured housing. One out of every five. Last year, leaving out FEMA demand, you know, we were bumping along for the third year, I believe, just a tiny bit over the 130,000 level, you know, which is like 6 or 7 percent — probably 7 percent — of new housing starts. So, the percentage of the total new housing stock that has been manufactured housing in recent years has really been very low, while the houses are better — considerably better — quality than in the earlier years. You can look at the house. We've got two houses out there on the exhibition floor, around $45 a square foot. You know, that's good value. There's a lot of resistance, through local zoning laws and that sort of thing by the local builders, to the influx of manufactured housing. We've made progress on that in some areas. We're actually developing subdivisions in that business. The houses were mis-sold four or five years ago in huge quantity because you had manufactured housing retailers selling the properties, getting any kind of a down payment, taking the loans — selling to people that shouldn't be buying them — taking the loans, securitizing them, so somebody in some insurance company someplace lost significant sums of money. So you had, really, an abuse of credit in the field. And there's a hangover from that, and it's taken a long time for that hangover to work its way through. I think Clayton Homes, which we own, has done a terrific job in both the financing — they should be financed on shorter terms, incidentally. I'm — if you put them on owned land, that's one thing, but financing them for 30 years, in my view, was a mistake. But the terms got very lax for a while, and, you know, we're bearing the consequences of that now. But I think the market will get bigger, but I do not think it will get bigger this year. I see a year that, counting some FEMA demand and some hurricane-induced demand, maybe 150,000 units, 145,000 units. And by industry standards, that's down a lot. Now, the number of plants is down a lot and the number of retailers are down a lot. Clayton's position is very strong. And their record is so much better than anybody in the industry that you have to look very hard to find number two. Charlie?

CHARLIE MUNGERYeah. You asked about stick-built housing and how competitive it was. That's been one of the troubles of the manufactured housing game is that the stick-built housing has gotten so efficient. But there the system is aided greatly by Berkshire's subsidiary MiTek. So — and stick-built housing is amazingly efficient when it's done in big quantity with systems like MiTek provides. And if it weren't for that, there would be a lot more manufactured housing. Personally, I think manufactured housing is going to get a lot better and take a lot more of the market. It may take a considerable period, but that is so logical that I think it will eventually happen.

WARREN BUFFETTYeah. Somewhere down the road, you would expect 200,000-plus units for the industry. But I don't think you'll see it in the next year or two. The industry has to think through — and they have, they've made a lot of progress on this — but they have to think through what's the logical way of financing these things, and what's the way to make sure that the person who buys it really has an asset that's in excess of their loan value five and ten years down the road. And, really, very little consideration was given to that five years ago. It was just a question of put together the papers, sell it on Wall Street, and let somebody else worry about it later on. Clayton did a way better job than other companies in that respect, but those were the industry conditions that existed then. But I think Clayton will be — Clayton could easily be — the largest homebuilder in the United States in future years because we will be a big part of an industry that, as Charlie says, should be doing more volume.

CHARLIE MUNGERI also think that some of the sin that was in the manufactured housing finance a few years ago has shifted into the finance of the stick-built houses. There is a lot of ridiculous credit being extended in America in the housing field. And it had a horrible aftermath in the manufactured housing sector, and my guess is there will be some trouble in the stick-built sector in due course.

WARREN BUFFETTWell, dumb lending always has its consequences and usually on a big scale, but you don't see it for quite a while. So, therefore, it's like a disease that doesn't manifest itself for, you know, a few weeks. And you can have an epidemic of something like that, and by the time you know you have an epidemic, you're very well into it. Well, that's what happens in dumb financing. And you had that — you periodically — you certainly had it in commercial financing in the '80s, and you had the RTC and the savings and loan crisis and all of that because, literally, one dumb project was put up after another. A developer will develop anything he can borrow the money against. It's that simple. And when the lending institutions pour the money out for something, it will get built. And that happened in manufacturing housing. It happened in commercial real estate in the '80s. I think it's happened in conventional housing here in recent years. And if you look at the 10-Qs that are getting filed for the first quarter of some lending institutions, and 10-Ks that were last year, and you look at the balances increasing on loans for interest that's accrued but was not paid because people had adjustable mortgages, but they're only adjustable so far, but the lending institutions are taking in the income as if it were paid, you'll see some very interesting statistics.

CHARLIE MUNGERYes. And some of this dumb lending is being facilitated by contemptible accounting. The accounting profession has not stopped compromising its way into terrible behavior.

WARREN BUFFETTOur auditing bill just went up.

No interest in investing in Russia

WARREN BUFFETTNumber 12? (Laughter)

AUDIENCE MEMBERMy name is Elliott Samuels (PH). I'm from New York City. Thanks to high energy prices and other factors, Russia has been one of the best performing markets recently. The country's financial condition has stabilized since the 1990s. A fledging middle class is taking shape as personal incomes grow. And there are also risks — political, legal — risks to minority investors. But there are also potentially great values among second tier companies there. I was wondering, what needs to happen in Russia for you to invest there, whether for Berkshire or for yourself, and what kind of companies would interest you there?

WARREN BUFFETTSounds like you may own a few Russian stocks yourself. The — I would — as you know, in 1998, Walter Wriston said sovereign governments don't default. In 1998, in Russia, at least, he was proven wrong. And Charlie and I were — inherited a business at Salomon that was in the oil business big time-out in the — in Siberia. And there came a time when — we got to dig the holes. We sent the money in. And as long as we were drilling, we were welcome. And then when we wanted to start taking the oil out, after our money had been used to drill the holes, they weren't quite as friendly. In fact, it was really kind of extreme what took place with us. So, having had a few experiences like that, it might take us quite a while before we wanted to sink a lot of money into Russia. It may be different now, but I don't think it's any certainty. I had breakfast in Sun Valley three years ago this July, I believe it was, with [Mikhail] Khodorkovsky, and we had a translator there. And he talked to me about whether — he was thinking about listing Yukos on the New York Stock Exchange, but he said, you know, it would require registering with the SEC or something, and he wasn't sure whether that would be too dangerous. Well, I don't think he listed it there, but he went back to Russia, and he's been in jail now for — well, just about ever since. And Yukos was put into bankruptcy with tax claims, and, you know, it — I don't — I just think it's a little hard to develop a lot of confidence that the world has changed permanently there in terms of its attitude toward capital, and particularly toward outside capital. Charlie, what are your thoughts?

CHARLIE MUNGERYeah. The situation reminds me a little of POLY Petroleum, which, years ago, was much traded in Los Angeles. The saying always was, "If they ever do find any oil, that old man will steal it." And I'm afraid we have some of that problem in many of the countries in which we're seeking for oil.

WARREN BUFFETTDidn't we really have the livelihood of our guys threatened over there, Charlie? I think we sent in some people to get out the equipment, and they said if we sent in the people to get out the equipment, not only would the equipment not get out, but the people wouldn't get out. So we understood the situation. That was not that long ago.

CHARLIE MUNGERNo.

Hottest real estate markets are cooling off

WARREN BUFFETTNumber 1 again.

AUDIENCE MEMBERI'm Lori Gold (PH) from San Francisco, California. My question is, what are your thoughts about the residential real estate market in the U.S., where it's headed? And how is California different, if so?

WARREN BUFFETTWell, Charlie is our California expert. We've managed one time to develop a great piece of property in California. We spent about 20 years or so developing it, Charlie, or —

CHARLIE MUNGERYes. And we got our money back with interest.

WARREN BUFFETTBarely. (Laughter)

CHARLIE MUNGERBarely, yeah.

WARREN BUFFETTWe finished it at just the wrong time. We — the land value that we nurtured — that was a terrific piece of land. Charlie lives there. And I don't think it's an exaggeration to say we spent 20 years —

CHARLIE MUNGERNo.

WARREN BUFFETT— working on developing the land. And the land value, which, in effect, we cashed out for, what, 5 or $6 million, now would have an — the implicit land value — would be what?

CHARLIE MUNGERMaybe a hundred million dollars.

WARREN BUFFETTYeah. But we finished it at the wrong time. So, you know, it's a wonderful — the climate is wonderful. Everything is wonderful about this property. It's just that, from time to time, even in great localities — you've seen it happen in New York a couple of times, you know, in the last 30 years, where the swing in property values has just been huge. And what we see in our residential brokerage business — and we're in, I don't know how many different states — is we see a slowdown every place. Now, we see it most dramatically in some of the — what have been the hottest markets. In the markets where you're going to — in my view — you're likely to see the greatest fall-off and where you've had the biggest bubble are the ones — they tend to be the high-end market, and they tend to be ones where people have bought for investment or speculation, rather than use. People will pay $300,000 for a house and mortgage it for 270,000, and if the value goes to 250, if they have a job and everything, they won't move out. I mean, you don't lose a lot of money even though the market value on a given day is less than the loan value when families stay together and employment is present and all that. But when you have investment-type holdings, speculation-type holdings, when you, in effect, have had the day traders, you know, of the Internet move into the day trading of condos, then you — then you get — then you get a market that can move in a big way. First it sort of stops, and then it kind of reopens. Real estate is different than stocks. If you own a hundred shares of General Motors, it's going to trade on Monday and that's what it's worth and you can't kid yourself about it. But if you own real estate, you know, there's a great tendency to think about the one that sold down the street a few months ago. And there's a great tendency to think, you know, you only need one buyer who hasn't gotten the word that things have slowed down and you'll make your sale. I can tell you that in Dade and Broward County, for example, in Florida, where the average condo is about 500,000, if you go back to December of 2004, there were less than 9,000 condos listed for sale, and I think 2,900 of them sold in the month so you were — turnover one every three months, less than that. Now, the listings are up to 30,000, and the sales are down to under 2,000 a month. Well, 30,000 is $15 billion worth of properties. And you are — very likely, you can get real discontinuities in a market like that, where all of a sudden people realize that the whole supply-demand situation has changed. So I think we've had a bubble, to some degree, and it's very hard to measure that degree until after it's all over. But I would be surprised if there aren't some significant downward adjustments from the peak, particularly in the higher-end properties.

CHARLIE MUNGERYeah. The man is right that the bubbles came in Manhattan and in certain places in California. In Omaha, housing prices are quite reasonable. So it's — the country is not all the same, at all.

Attendance estimate and Furniture Mart sales

WARREN BUFFETTWe just got an estimate of the attendance at 24,000, which was about what it looked like from the tickets we had gotten. I thank you all for coming, on that note. (Applause) Even better, the Furniture Mart, which had sales in 1997 of 5-and-a-fraction million, 2003 sales of 17 million, sales last year of 27 million, is up so far 2 1/2 million, with the best yet to come. So we're — I would say we're likely to do over 30 million at the Furniture Mart. And that, incidentally, is about equal to a normal monthly volume for the store. So you're doing your part. Thank you. (Applause)

Don't like excess cash, but we hate dumb deals

WARREN BUFFETTNumber 2? But you can do more. (Laughter)

AUDIENCE MEMBERGood morning. My name is John Norwood (PH) from Des Moines, Iowa. I have a two-year rule for my closet. If I don't wear a particular pair of pants or a shirt within two years, I give it away to Goodwill so that someone else can put it to better use. With 40 billion in cash, I'm wondering whether Berkshire Hathaway should have a similar closet rule for deployment of surplus shareholder cash.

WARREN BUFFETTIt won't go to Goodwill, I promise you that. (Laughter)

AUDIENCE MEMBERThank you. And wouldn't it be better if you had a smaller budget and fewer gifts you needed to — you and Charlie needed to shop for? Wouldn't you have more time for the beach and a better chance of hitting some home runs?

WARREN BUFFETTYeah. I don't think we'll hit any home runs, under any circumstances. But the — you might consider a normal level of cash at Berkshire as being about 10 billion, although we — you know, there could be circumstances where we'd go below that. But because of the catastrophe insurance business we're in and all of that, we do not — you know, we do not scrape the bottom of the barrel, but we don't need anything like 40 billion. I think you'll see in the 10-Q that we have — I think it was about 37 billion at the end of March — double check that — and I'm not counting the cash and the finance business — yeah, 37-something — and we're spending 4 billion on ISCAR. We've spent — we're spending some money on some other things as well. But we would be happier — much happier — if we had 10 billion of cash and all the balance in things that we liked very much. And we work toward that end at all times. But there is nothing even about the way businesses come to us. We've got one idea at present, low probability, but that would take — could take — as much as 15 billion or close to 15 billion of cash. And whether it comes to fruition or not, who knows, but we do work on them. And, what we care more — we don't like having excess cash around. We like even less doing dumb deals because we do them forever. I mean, if we make a dumb deal, it just sits there. We don't resell it three months later by having an IPO of it or something of the sort. So you're right to say that we should be very uncomfortable about the fact that we've got the cash. But it's also important that we not be so uncomfortable that we go out and do something just to be doing something. I would say it's likely, but far from certain, that three years from now we have significantly less cash and, I hope, significantly more earning power. But the goal of that cash is to be translated into permanent earning power over time. Like I say, with the 4 billion that we've just committed on ISCAR, you know, we love having that 4 billion employed there instead of sitting around in short-term securities. And that's our job. Charlie and I don't do anything else, except appear in movies and that sort of thing. But the — you know, you're right to keep jabbing us on that because — but we jab ourselves. You know, we — neither one of us is — basically likes cash. We always want to have adequate cash and we always will have adequate cash. And we are the biggest player in the world in cat insurance, and people come to us because they know we're going to run a place that's very strong financially. But it doesn't have to be as liquid as we are now. We spent 5 billion — well, we didn't spend that much. At the Berkshire level, we spent about 3 1/2 billion on PacifiCorp. You know, we contracted (inaudible) earlier, but we will get more chances, I think, in that field, but you never can tell when they'll come. So come back next year, and I hope we have less cash. OK. We'll go to 13 now. OK. Charlie, would you like to add anything on that?

CHARLIE MUNGERYeah. I think you may get some perspective on what bothers you if you go back to the annual report of Berkshire ten years ago and then compare that report with the last one. Despite the great difficulties of deploying cash, we managed to put an awful lot of wonderful stuff into Berkshire in the last ten years. So, we aren't altogether gloomy about that process continuing. (Applause)

Should have sold Coca-Cola at "silly" price

WARREN BUFFETTI neglected to go to the adjacent room, which has a number of people in it as well. So I'm going to go to No. 13 now, which will come from the ballroom.

AUDIENCE MEMBERThis is Phil McCaw (PH) from Connecticut. I wonder — it's been some time since you've commented on Coca-Cola. And now that you're off the board, I wonder if you feel free to comment on it?

WARREN BUFFETTYeah. Well, I won't make particularly different comments than from when I was on the board. But Coca-Cola is a fabulous company. Coca-Cola will sell over 21 billion cases of various products — more Coke than anything else — around the world this year, and it goes up every year. It's interesting. The stock in, what, 1997 or '98, whenever it was, sold over $80 a share when the earnings were — I don't remember whether they were $1.50 a share, or something like that — and the earnings then were not as good quality as the earnings are now when, you know, they were $2.17 or something like that. And every year the — you know, they have — they account for a little greater share of the liquids consumed by people in the world. They make fabulous returns on invested capital. You know, it's a business that has — exclude the bottling part of it — has 5 or 6 billion of tangible assets and makes a similar amount. So, there are not lots of big businesses in the world that earn 100 percent pretax on tangible assets. And it will be a great business, and it's been a great business. The stock got to what, in retrospect, clearly was a ridiculous level, but you can't hold the present management, Neville Isdell, responsible for that. And he — you know, if the company sells 4 or 5 percent more units this year than last year, and the population of the world goes up 2 percent, it just means that more people are putting that particular source of liquid down their throats than the year before, and that's been going on ever since 1886. So it strikes us as a really wonderful business that sold at a very silly price some years back. And you can definitely fault me for not selling the stock. I always thought it was a wonderful business, but clearly, at 50 times earnings, it was a silly price on the stock. So we like it. We'll own it ten years from now, in my view. Charlie?

CHARLIE MUNGERNo more.

WARREN BUFFETTThis peanut brittle gets caught occasionally, but it's worth it. It's worth it, definitely.

CHARLIE MUNGERWhy don't you share with me?

WARREN BUFFETTWhat? Oh, you want some, huh? Get your own box next time. (Laughter)

Reinsurance rate variations

WARREN BUFFETTNow, do you want us to go to 14 or not? Yes. OK. Number 14.

AUDIENCE MEMBERMy name is John Gosh (PH) from Key West. Have insurance rates hardened as much as you anticipated, and have you seen a significant flight to quality in the last few years?

WARREN BUFFETTYeah. I think you're probably asking more about reinsurance rates. Actually, in auto insurance, you can figure it out. Our policies are up more than our premium volume. So the average premium in auto insurance, which, after all, is close to 40 percent of the whole market for insurance — the average premium in auto insurance is actually down a little bit. But in reinsurance, in which we are a big player, you will — there's great variances. If you take insurance for marine risks in the Gulf Coast — drilling rigs and offshore platforms and that sort of thing — those prices are up very dramatically, but they should be. I think in the last couple of years, there's been, like, 2 1/2 billion of premium in the Gulf Coast and 15 billion in losses. So if you paid out 15 billion and took in 2 1/2 billion, the more astute of you would figure that you needed a little more money for that particular risk. We have been, historically — at least in recent years — the largest writer of cat — catastrophe — mega catastrophe insurance in world, and I think we will be this year. In fact, I'm almost sure we will be this year. Our mix has changed some. Prices are up a lot, but what we don't know is whether exposures are up even more. We don't know whether the experience of the last two years, we'll say, with hurricanes in this hemisphere, is more to be relied upon than the experience of the last hundred years. You can take the hundred-year experience and it tells you one thing, and you can take the last couple years and it tells you something else. And which is more meaningful? We don't know the answer to that. We do know that it would be kind of silly to assume that the 100-year experience is the relevant criteria when conditions — we know certain atmospheric conditions have changed. We know water temperature’s changed. But we do not know all of the variables that are into the propensity of hurricanes to occur and the degree to how intense they may be if they do occur. We don't know the answer to that. We don't think anybody else knows the answer to it, either. So we are getting more money for hurricane insurance. We're getting appreciably more money. If the last two years are the relevant years, we're not getting enough. If the last hundred years are the relevant years, we're getting plenty. And we will know more as time unfolds. The really scary possibility is that variables are changing in some way so that the change is continuous and that what we've seen the last two years is not a worst-case example at all. And, of course, you get into chaos-type theory with some of these variables where the outcome is not a linear relationship to the input, and you can dream up some pretty scary scenarios on this. I don't know whether they're true and nobody knows. We are willing to write certain areas, certain coverages, because we believe the prices are adequate, and we can sustain the losses. We're willing to lose many billions of dollars in a given catastrophe if we think we've been paid appropriately for it. But it is not like figuring out the odds on flipping coins or rolling dice or something like that. You are dealing with changing variables, and you — the worst thing you could have would be a 100-year history book in making those judgments. The third quarter, we will have a lot of exposure for wind. We don't have as much exposure now — well, we may. I'd say we're getting there. But we don't have as much — certainly as much as we had a couple of years ago. Prices — question about prices hardening. Prices are getting — are hardening — in that particular area. And if they get to what the — where we really feel they're appropriate — you know, we might take on a fair — we will take on — a fair amount more risk. If they don't get there, even though they're higher than last year, we won't write — you know, we're not interested in writing it, because it's a dangerous business. And we don't believe in modelers at all. I read all this stuff about modeling. I wrote about that a few years ago. It's silly. You know, the modelers don't know a thing, in my view, about what's going to happen. And we get paid for making guesses on it. If, over a lifetime, the guesses are decent, we will know that, you know, we were doing the right thing. But if this year goes by and nothing happens, we still don't know whether we were right on the prices. Because if you get a 25 percent rate for something and it doesn't happen in a year, that does not mean that you didn't need 40 percent or 50 percent. It just means that if you do it enough times, you will find out whether, overall, your judgments are any good. It's still a business we like. We bring a lot to the party. Everybody knows we can pay. You get into the question of creditworthiness. If there is some super, super catastrophe — and I regard, sort of, the outer limits of that being a $250 billion insured loss — for reference, Katrina was a — presently estimated — was about a $60 billion loss. So, if something comes along that's four times Katrina, which could happen, you know, we can pay, and we can comfortably pay. We would probably have about 4 percent of that, maybe 10 billion. A very large percent of the industry would be in very, very serious trouble. So, we can play bigger than others, and we can survive better than others if something bad comes along. And we will see, over a five- or ten-year period, how we do. You can't judge it by any one year. Charlie?

CHARLIE MUNGERThe record of the past, if you average it out, has been quite respectable. And why shouldn't we use our capital strength to get into volatile stuff that makes other people frightened?

NetJets losses and retroactive policies

WARREN BUFFETTDo we go back to number — to here? One more. Number 15?

AUDIENCE MEMBERHello?

WARREN BUFFETTYeah.

AUDIENCE MEMBERI'm Marc Rabinov from Melbourne, Australia. I had a two-part question on the 2005 annual report. Firstly, NetJets is a substantial part of our operations. Unfortunately, its value is obscured by losses in recent years, and I can't estimate its value from the report. I was hoping you might be able to help me on that. The second thing, how do I value the Berkshire Hathaway reinsurance group in light of the deferred charges on retroactive policies? Thank you.

WARREN BUFFETTThe second question, that — about the — we have an item that's about $2 billion on the asset side. I think I'm addressing the question of deferred charges on retroactive policies. That reflects the fact that those retroactive policies, where we insure — we reinsure, in effect — the losses that somebody has already incurred, although they may not know how much they've incurred, and we have limits on these. But we set up a factor that, essentially, recognizes the fact that we will have that money for a considerable period of time. We set up an asset, and that gets amortized over the length of time we have that asset. That number, which I think has gotten as high as 3 billion over the years, since we haven't done any of those — any big contracts recently, is down around 2 billion. There's nothing magic about that. It means that we're going to amortize that 2 billion over the lifetime of the use of the funds, and we think we'll make money, net, during that time. But we misguessed on one a couple years ago and took a $100 million charge, for example, in the first quarter of — I think it was the year before last. The other question was about NetJets, wasn't it, Charlie?

CHARLIE MUNGERYeah.

WARREN BUFFETTAnd I didn't get it all. I love the Australian accent of our gecko, but I didn't pick up the exact nuances of what you asked. But my guess is you asked about the earnings and operation of NetJets. And NetJets has grown rapidly, and so far, our expenses have grown faster than our revenue. We've got the top service in the world. We've got, really, the only worldwide service. We have a very strong position, particularly in larger airplanes. But I'd have to tell you that I did not anticipate — I thought we would have economies of scale, to some degree, and so far you can almost argue that we've had diseconomies of scale. And our expenses, particularly last year, you know, basically got out of hand. And there are various reasons I could give you for that. All I can tell you is, it's being addressed. Rich Santulli, who runs that operation, you could not have a better operator. He loves NetJets. He works at it 16 hours a day. He's — there's nobody in the world I would have run that except for Rich. I think it's an important service. It's tough to make money with airplanes. They're capital-intensive. We've had fuel do what it has, although that's a pass-through to people, but it still affects the business. And I would — I had expected we would be profitable last year, and as I put in the annual report, I was dead wrong. I think we will be profitable before long, but you should take my prediction there with — probably with — a certain amount of skepticism until it actually happens because I, like I say, I've been wrong. We've got a good business in that almost anybody looking for a large plane on a fractional jet program comes to us. We are able to get full price for our service. But there were a variety of inefficiencies last year which added up to a lot of dollars. And you know, you're entitled to hold me accountable for the fact that we paid a lot of money for the business many years ago, and we haven't earned any money since. And we've got a much bigger business now, probably five times or so the size of the business we bought. That may be some solace to — I looked at Raytheon's figures the other day. They lost a lot of money, and they have the second largest operation. They sell their — they sell airplanes too, so they may not feel it the way I do. But if I had to bet one way or the other, I would bet we will be making money before long, but I've lost that bet in the past. Charlie?

CHARLIE MUNGERYeah. The product integrity is so extreme between flight safety and NetJets. The pilots are subjected to real oxygen withdrawal in the course of the safety training so they will recognize the subtle sensation that you get, and not everybody does that. It's an expensive, difficult thing to do. In place after place after place, that system is very obsessive about product integrity, and it's my guess that that obsession, in due course, will be rewarded.

Why Buffett bought, and sold, silver

WARREN BUFFETTOK. We'll go to Number 3.

AUDIENCE MEMBERDear Warren and Charlie, I'm Oliver Couchet (PH) from Frankfurt in Germany. Here's a question to the Silver King: Some commodity investors give you as a reference as one of the largest owner of physical silver. Could you please clarify what kind of exposure you or Berkshire currently have in silver? And, further, could you please help us to understand how you determine the value of a noninterest-bearing precious metal?

WARREN BUFFETTDo you have any silver on you, Charlie? We had a lot of silver at one time, but we don't have it now. The original decision — my decision — was that the production of silver and the reclamation of silver — I don't remember the numbers exactly now — but they were running, perhaps, 100 million ounces or thereabouts, less than the consumption. And, now, a lot of consumption has gone down in photography, but that's where the reclamation was, too, so that those tended more to balance each other out. I haven't looked at the figures for the last year or so, but silver was out of balance. Now, on the other hand, there were enormous quantities of silver aboveground, and there were huge quantities of silver that could possibly be removed from other uses, perhaps, you know, in jewelry and all kinds of things, that could conceivably add to supply as they did in the early 1980s when the Hunt Brothers thing took place. But, overall, silver was being produced and reclaimed at a lesser rate than it was being consumed. And added to that was the fact that there are relatively few pure silver mines. Silver is largely produced as a by-product of copper and lead and zinc, and so that it was not easy to bring on added production. So, all of that added up to the fact that I thought that silver would get tight at some point. And, as I said, I was very — I was early in that conclusion, and I was early in selling. So we have no silver now, and we did not make much money on it. And you're right that it doesn't earn anything. So you sit with it. It's not like sitting with a stock where, in most cases, earnings are piling up for you. You have to hope that it — you have to hope that a commodity moves in price, because it is not producing anything as it sits there looking at you. And that's one of the drawbacks of commodities. Charlie?

CHARLIE MUNGERWe didn't get where we are by owning noninterest-bearing commodities. I don't think it's a big issue around here.

WARREN BUFFETTWe actually owned oil at one time too, didn't we? But we didn't make much money on it. We made a little money.

CHARLIE MUNGERNo. You made quite a bit out of oil.

WARREN BUFFETTYeah.

CHARLIE MUNGERBut, you know, it's a good habit to trumpet your failures and be quiet about your successes. (Laughter)

WARREN BUFFETTYeah. We have more to trumpet than we have to be quiet about. (Laughter)

"We don't play big trends"

WARREN BUFFETTHow about number 4?

AUDIENCE MEMBERGood morning. My name is Bill Gurn (PH). I've traveled from the United Kingdom. And I would like to ask if you think it's a good investment strategy to invest in regions of high resources per capita? In particular, I should like to ask if you think that the analysis per capita should lead to higher growth for businesses in that region, plus the bonus of a relative exchange rate growth? Thank you.

WARREN BUFFETTI'm not sure about the per capita part, Charlie.

CHARLIE MUNGERMy understanding is he was talking about investing in a region with high resources per capita. I think he means natural resources.

WARREN BUFFETTYeah. Are you thinking of places like Canada or something of the sort where the —

AUDIENCE MEMBERI can clarify. Yes, high natural resources, but also good infrastructure. Thank you.

WARREN BUFFETTAnd whether there would be relative currency strength in those as well and —

CHARLIE MUNGERNo. Whether it's a good area for us to be operating in.

WARREN BUFFETTWell, that would be a little macro for us. We really just zero in on, you know, whether people will keep eating candy and whether we can charge a little more for it next year. We don't play big trends. You know, we don't think about demographic trends or anything of the sort. We think about our own age as getting older. But other — big trends, they just don't mean that much. There's too much money to be made from year to year to think about things that take decades to manifest themselves. So I can't recall of a decision we've ever made on a purchase of a business or a stock or a junk bond or a currency or anything else based on a macro.

CHARLIE MUNGERNot only that, we've recently failed to profit much from one of the biggest commodity booms in history.

WARREN BUFFETTYeah.

CHARLIE MUNGERAnd we'll probably continue to fail in the same way. (Laughter)

WARREN BUFFETTBut we'll search for new ways to fail. I mean, we're not trying to limit ourselves. (Laughter) It's probably true, incidentally, in a country like Canada, where you've got, probably, millions of barrels of oil of — millions of barrels a day — of oil production coming on and where there's, you know, relatively few people and where there's already a surplus. When they're running a significant current account surplus, that — you know, it's not strange that their currency should be strong relative to a country like ours where we're running a huge current account deficit and we don't have that same natural — the gain in natural exports coming on that they do. But that — there's so many more important factors that are going to hit us immediately that that's what we really think about day-to-day.

Nuclear threat is "ultimate problem of mankind"

WARREN BUFFETTNumber 5?

AUDIENCE MEMBERGood morning. My name is Glen Strong (PH). I'm from Canton, Ohio. I'm an optimistic person, and I'm sure it would be more enjoyable to discuss the Chicago Cubs' march to the World Series.

WARREN BUFFETTYou are optimistic. (Laughter) But everybody has a bad century now and then, as somebody said about the Cubs. (Laughter)

AUDIENCE MEMBERHowever — (Laughter) — I have an information deficit on a certain topic that I hope you can fix. Please gaze into your crystal ball. As an investor, I want to know how to address the risk of nuclear terrorism in the United States. Consider a scenario where terrorists have detonated a nuclear device in a major U.S. city. I know there would be a terrible cost in human lives. Gentlemen, what would happen to our economy? How would it respond? How resilient would it be? Thank you.

WARREN BUFFETTWell, it would certainly depend on the extent of it. But, if you're asking how to profit from that, there's probably some dealer that will sell you mortality derivatives. But I'm not sure that's what we would be thinking about then. No. I agree with you. I couldn't agree with you more about that being the ultimate problem of mankind, not necessarily a terrorist-type usage, but a state-sponsored usage of weapons of mass destruction. And it will happen someday. The extent to which it will happen, where it will happen, who knows. But we've always had evil people. We've always had people who wish evil on others. And, you know, thousands of years ago, if you were psychotic or a religious fanatic or a malcontent and you wished evil on your neighbor, you picked up a rock and threw it at them, and that was about the damage you could do. But we went on to bows and arrows and cannons and a few things. But since 1945, it's — the potential for inflicting enormous harm on incredible numbers of people has increased, you know, at a geometric pace. So it is the problem of mankind. It may happen here. It may happen someplace else. People say it's a — sometimes they say, "Well, you know, if we'd solve poverty, we'd solve this." Well, I will just remind you that nuclear weapons have only been used twice, and those were by the richest country in the world, the United States, in 1945. So, people will justify their use under some circumstances, if they feel threatened. They will justify them for religious reasons. They will do all kinds of crazy things. And the — what holds it in check is the degree to which the lack of knowledge of how to do it is controlled, and the degree to which the materials are controlled, and which the deliverability is circumscribed. And we're losing ground on all of those fronts. The knowledge is more widespread. The possibility of getting your hands on materials — you know, the Dr. Khans [Pakistani nuclear scientist] of the world and so on, has increased. And it will be a — it's a real problem, but we won't be thinking about what Berkshire did that day in the stock market. And I don't know how money attacks that. I mean, I've always saw that as the top priority, I think should be the top priority for philanthropy, in my particular case. But it's a difficult — it's a very difficult — it's a worst-case problem. You know, you have 6 billion people in the world, and you have a certain percentage of them who are, one way or another, a little crazy, or very crazy, and some of whom in that craziness would manifest itself by trying to do great harm to a lot of people. And it's — only one of them has to succeed. I don't know how many we've intercepted over the years. I'm sure we've intercepted a lot of incipient ones. But it is a worst-case problem, and one will succeed at some point. And it may be state-sponsored; it may be terrorists. But, you know, Berkshire is better set to survive than anybody else, but it won't make much difference. Charlie?

CHARLIE MUNGERWell, I think that the chances we'll have another 60 or 70 years with no nuclear devices used on purpose is pretty close to zero. So, I think you're right to worry about it, but I don't, myself, think there's much that any of us can do about it, except be as sensible as we can and take the consequences as they come.

WARREN BUFFETTThe only thing you can do about it — but you only have one vote — is to elect leaders who are terribly conscious of the product — problem — and who devote a significant part, you know, of their thought and energy into minimizing it. You can't eliminate it. You know, the genie is out of the bottle. And you would like to have the leading — the leaders — of the major countries of the world regarding it as their primary — as a primary — focus. Actually, in the 2004 campaign, I think that both candidates said it was the major problem of our time. But, you know, they probably suffer from the same feeling that I do, that it's very hard to address.

A Berkshire stock buyback won't be a secret

WARREN BUFFETTNumber 6?

AUDIENCE MEMBERHello, Mr. Buffett, Mr. Munger. My name is William Schooler (PH), and I'm a shareholder visiting from Spicewood, Texas. I would like to thank you both for being so generous to the public with your ideas. Last year, I read “Poor Charlie's Almanack” and came across a passage on share repurchases. It reads, quote: "When Berkshire has gotten cheap, we've found other even cheaper stocks to buy. I'd always prefer this. It's no fun to have the company so lacking in repute that we can make money for some shareholders by buying out others," end quote. Last year, you bought stock in some great businesses trading at fair prices, such as Walmart and Budweiser, but did not attempt to buy our own shares. Would shareholders be correct to infer from this decision that you both felt Walmart and Budweiser were trading at a deeper discount to their intrinsic values than Berkshire was? And would it be possible to buy as much Berkshire in the open market as you did Walmart without running up the share price?

WARREN BUFFETTMost of the time, we would not be able to buy an amount that would be material, in terms of increasing the value of the remaining Berkshire shares. But that doesn't mean it would never happen. But it — if you look at the trading volume on Berkshire — and, [CFO] Marc [Hamburg], you might put that up, if we can, in a second — we probably have less opportunity than most companies if our stock is selling — should be selling — below intrinsic value to have anything meaningful happen. We would also have — if we regarded some other company as worth X, a good business, and we could buy it at 90 percent of X, we might be doing that now, whereas we wouldn't have done it many years ago. But we might require a somewhat greater margin, in terms of buying Berkshire shares, simply because our view on that might be less — we probably have more knowledge on it, but we might be less objective than on some other things. We think that when we buy — if we were to buy in Berkshire shares — and, if you remember, four or five years ago I announced we would if the price stayed the same — that the case ought to really be compelling, and if it's compelling, we ought to do it. It was compelling at that time. But simply the act of writing about it — you know, a little bit of a Heisenberg principle — the act of writing about it, in effect, eliminated the opportunity to do it, which is fine. Because we do not — we are not looking to make money off of buying from shareholders at a depressed price. On the other hand, if the price is sufficiently depressed, we will announce again that we intend to do it, and then we'll see whether we actually get a chance to do it. Charlie?

CHARLIE MUNGERYeah. The whole climate in the country is different now. It used to be that almost every company that bought in shares was buying them in at an obvious bargain price. Now I think a lot of share buying is designed to, sort of, prop the stock price. In other words, it's not bargain-seeking. It's more like Sam Insull.

WARREN BUFFETTYeah. Forty years ago, 30 years ago, it was a very fertile field for making money to look at companies that were aggressively buying in their shares, the most extreme case probably being Teledyne. But those people were buying overwhelmingly — Gurdon Wattles was doing it at the companies he controlled — those people were motivated simply by the fact they wanted to buy the stock below what it was really worth and — significantly below — and you could make money with that group, and we did a little of that at the time. I would say in recent years, that motivation has been swamped by people who either think it's fashionable to buy in shares, or by people who really like the idea of trying to prop their stock up somewhat. And the SEC has certain rules, in terms of the way you conduct your repurchases to prevent daily, sort of, propping up. But I think there's a lot of motivation that our stock has got to be cheaper than other people's stock, and we've got a wonderful company, and we're just going to buy the stock come hell or high water, and that is not the way we would go about repurchasing shares. We've got — well, we had up there, I think — some figures that showed the turnover of Berkshire shares compared — in a year — compared with a few others I picked out. I think Berkshire has the lowest turnover, by some margin, of any major company in the United States. And I put Walmart up there because the Walton family owns about the same — in fact, they own more — of Walmart than I do of Berkshire. So, this is not a function of simply the fact that we've got concentrated holdings with the Buffett family. This is a reflection of the fact that we've got a really unusual shareholder body in that they think of themselves as owners and not as people who are moving around with little pieces of paper every week or month. We have the most — in my view — we have the most what I would call honest-to-God ownership attitude among our 400,000 or so shareholders of any company — of any big traded company — in the United States. People buy Berkshire to own it, and hold it, and that's reflected in our turnover. That does mean if, for some reason, the stock gets cheap — real cheap — that we would not be able to buy a lot of stock in. But we don't want — we are not looking to buy out our partners at a discount. If it sells there and we tell them we're going to buy it, we'll buy it. But that's not a way that we're trying to make money. Charlie, any more?

CHARLIE MUNGERNo. I've said my piece.

Advice to young investment professionals

WARREN BUFFETTNumber 7?

AUDIENCE MEMBERGood morning. My name is David Saber (PH), shareholder from Minneapolis, Minnesota. Looking for some advice you might give the young professionals here. I could be classified as one of those helpers you describe in your annual report. In fact, most of my friends are helpers, and some could be classified as super helpers. Most would love to step out and explore some of their more innovative ideas, innovative business models, strategies, and things of that nature. But the risk of giving up a significant salary, health insurance, flights, other ridiculous corporate perks some of us young professionals earn. What advice would you have for us in pursuing those dreams?

WARREN BUFFETTCharlie, what do you think?

CHARLIE MUNGERWell, there's certainly a lot more helpers in the economy than there used to be, and the ones that come here tend to be the very best of the helper class. So, I don't think you should judge the helper class by those you meet here. We get the best of them. And as to what the young helpers ought to do so that they'll eventually be like Warren Buffett, I would say the best thing you can do is reduce your expectations. (Laughter and applause)

WARREN BUFFETTI think I've heard that before. Well, you know, as I wrote about — and I — trying to tweak the system a little bit — but it is an interesting business in that the activities of the professionals are self-neutralizing. And if you're going to — if your wife is going to have a baby — you're going to be better off if you call an obstetrician, probably, than if you do it yourself. You know, and if your plumbing pipes are clogged or something, you're probably better off calling a plumber. Most professions have value added to them above what the laymen can accomplish themselves. In aggregate, the investment profession does not do that. So you have a huge group of people making — I put the estimate as $140 billion a year — that, in aggregate, are, and can, only accomplish what somebody can do, you know, in ten minutes a year by themselves. And it's hard to think of another business like that, Charlie.

CHARLIE MUNGERI can't think of any.

WARREN BUFFETTNo. But it's become a bigger and bigger business. And, as I've pointed out in the report, the main thing that's been learned is that the more you charge, at least temporarily, the more money you bring in, that people have this idea that price equals value. It's useful to get into a business like that. Sometimes, if I'm talking to the people at a business school and I ask them what the — what a great — to name me a great business — and, of course, one of the great businesses is a business school because, basically, the more you charge, the more your prestige is, to some extent. And people think that a business school that charges 50,000 a year tuition is going to be better than one that charges 10,000 a year of tuition. So there's some of that that — well, there's a lot of that that's gotten into the investment field recently, and you now have large — certain large — portions of investment management that are charging fees that, in aggregate, cannot work out for investors. Now, obviously some do, you know. But you cannot be paying people 2 percent and 20 percent where they get up it in the good years, and they fold their partnerships and start another one if they have a bad year and that sort of thing. You can't have that coming out of an economy that's only going to produce, we'll say, you know, 7 percent or something like that a year for investors, and have people net better off. It isn't going to work. And then the question that you will have is, "How do I pick out the few exceptions?" And everyone that calls upon you to sell you this will tell you that they are an exception. And, I am willing to bet a significant sum of money, we'll put it up, to anybody who wants to name ten partnerships that are $500 million or more of management and pit those, after fees, against the S&P over a ten-year period. It — you know, it gets away from the survivorship bias and all that kind of a thing. And it isn't going to happen. But a few will do well. They're bound to do well. And, actually, I think I do know how to pick a few that will do well. I mean, I did it in the past. When I wound up my own partnership in 1969, I told people to go to either Bill Ruane or Sandy Gottesman, and that would have been a very good decision, whichever place they went. So, if you know enough about the person, know enough how they've done it in the past, know enough about their personality, honesty, and a whole bunch of things, I think that occasionally you can make a very intelligent choice in picking an investment manager. But I don't think you can do it if you're sitting running a pension fund in some state and you have 50 people calling on you. You're going to go with the ones that are the best salespeople and not the ones that are the best investors. Charlie?

CHARLIE MUNGERYeah. On that state pension fund investment subject, I think it ought to be a crime to entertain, in any way, a state pension fund official, and I think it ought to be a crime, if you are a state pension fund official, to accept the entertainment. It's not a pretty scene, a lot of investment management, in America now. And, human nature being what it is and the amounts of money being what they are, I don't think much is going to be improved.

Break for lunch

WARREN BUFFETTWell, we wanted to leave you in a good mood for lunch. So — (laughter) — we will break now, and we'll come back in about 45 minutes or so. And those of you who are in the other rooms, by then the crowd thins, for some explainable reason, and you can all join us here in the main room. And we'll be back in about 45 minutes.