2014 年股东大会 · 下午场

Record attendance

WARREN BUFFETTOK, let's get ready to proceed. We never get any precise figures, because people come and go from the meeting. But I did know that we sent out about 11,000 more tickets this year than in any other year, and we had all the overflow rooms filled. We're using space in a room over at the Hilton and everything, so clearly this year we have substantial more attendance than any year in the past, and I hope the spending patterns reflect that. (Laughter)

Risk of change to businesses

WARREN BUFFETTSo with that, we'll go to Becky. Assuming she's here.

BECKY QUICKI am, I'm here.

WARREN BUFFETTOK.

BECKY QUICKLet's see, this is a question that comes, and I hope I pronounce your name correctly, Michael. It's Michael — Michael Locheck (PH) and he says, "Energy Future Holdings' likely bankruptcy is a consequence of unexpected and dramatic decline in prices of natural gas prices caused by a revolution in drilling technology. To what extent do you believe other assets held in Berkshire's portfolio, debt, equity, et cetera, may be subject to disruptive technological or other changes that erode business models and barriers to entry?" "For example, changes in consumer behavior and regulation could affect Coca-Cola. Revolution in payment systems could affect American Express, ever-increasing rate of change in technology and competitive landscape could affect IBM, wireless delivery of media content and urbanization could be disruptive to DirecTV. "Could you also comment on whether participation of some sponsors of Energy Future Holdings, which include the very best of private equity, contributed to your decision to invest? Was it the degree of crowd mentality at play, and what lessons are to be learned from the experience?"

WARREN BUFFETTYeah, well. I would be unwilling to share the credit for my decision to invest in Energy Future Holdings with anybody else. I would think that's very unfair of anyone to insinuate that they had anything to do with that decision. That was just a mistake on my part. It was a big — it was a significant mistake, and we will make mistakes in the future. All businesses should constantly be thinking about what can mess up their business model. And with Energy Future Holdings it was a fairly simple assumption that was made that just turned out to be wrong. I mean, the assumption there was that gas prices would stay roughly as high as they were or go higher, and instead they went a whole lot lower. And at that point the whole place toppled. They had a lot of reserve holdings and they had some futures positions which kept them alive for a while. But that was a basic error. We look at all of our businesses as subject to change. A classic case would be GEICO. I mean, GEICO set out in 1936 to operate at low costs and pass on those low costs to the customer through lower prices for something that was a necessity, auto insurance. And they originally did it by mail offerings, U.S. Postal Service, two people who were government employees. That's where the name comes from, GEICO, Government Employees Insurance Company. And they had to adapt over the years, and they adapted first to widening classifications. But they went from the U.S. mail, primarily, to the telephone, and later went to the internet, and onto social media. But in there they stumbled one time, too, as they went to adapt, and they — when they left the government employees classification, at one point they became too aggressive about expanding and they almost — they really did go broke. So there's — change is going on all the time, and it's going on with all of our businesses. And we want managers that are thinking about change, and what can — what's going to be needed for their business model in the future. And we know they're not going look the same five or ten years from now. I mean, BNSF, something as basic as railroads, is looking big at LNG for its locomotives. Everything is going to change. Our businesses generally deal from strength and they're generally not subject to rapid change. But they're all subject to change, and of course, slow change can be much harder to perceive, and can lull you to sleep easier, sometimes than when rapid change is clearly in sight. So I would say, in answer to that question, A) I will make mistakes in the future. I mean, when you — that's guaranteed. We do not make anything like "bet the company" decisions that will ever cause us real anguish. That just doesn't happen at Berkshire. But you're not going to make a lot of decisions without making some significant mistakes. And occasionally they work out very well. Charlie and I, and Sandy Gottesman, in 1966, bought a department store in Baltimore. Now, there's probably nothing dumber than buying a department store in the mid-1960s. There were four department stores on the corner of Howard and Lexington Street in Baltimore in 1966, and none of them are there. And the number one store, Hutzler's, went broke a little later than our store went broke. But fortunately Sandy did a great job of selling it, so the $6 million invested in that department store became worth about $45 billion in Berkshire Hathaway stock as we did other things with the money as we went along. So you do have to be very alert to what is going on in your businesses, and we want our managers to do that. But actually, it's something that Charlie and I, and our directors, are going to think about, as well as our managers. Charlie?

CHARLIE MUNGERYeah, I spoke earlier about the desirability of removing your ignorance piece by piece, and there's another trick, which is scrambling out of your mistakes. And we've been quite good at both, and it's enormously useful. Imagine Berkshire, a textile mill sure to go broke because power costs in New England were about twice as high as they were in TVA country, a sure-to-fail department store, and a trading stamp sure to be forced out of business by change in mode. Out of that comes Berkshire Hathaway. Talk about scrambling out of mistakes, I think of what we might have done if we'd had a better start. (Laughter)

WARREN BUFFETTYeah. The point was driven home to me — my great-grandfather started a grocery store here in Omaha in 1869. And my grandfather was running it in 1929, and he wrote my uncle who was going to be running it with him. And the letter started out, this is in 1929, "The day of the chain store is over." And that is why we ended up with one grocery store, which went out of business in 1969. It — you really have to face facts around you, and the wish being father to the thought was, unfortunately, what overcame my grandfather.

Heinz earning power

WARREN BUFFETTOK, Jay?

JAY GELBThis question is on the Heinz transaction. Berkshire's 50 percent ownership in Heinz is included in Berkshire's results, which can be meaningful to its earnings over time. What is Heinz's current normalized earning power, after the substantial restructuring of the business, and what do you anticipate Heinz could earn within a few years?

WARREN BUFFETTYeah. Well, Heinz will be filing its own 10-Qs. In fact, I guess its first quarter would be — they went to a calendar year now — first quarter would be about due now. So you'll get to see Heinz's figures. And I will say this, that Heinz was actually a very reasonably run food company with about 15 percent pre-tax margins for many years, and that's not an unusual operating margin in the food business. And I would just invite you to look quarter by quarter and maybe next year, too, I think the margins of Heinz will be significantly improved from those historical figures. What Bernardo Hees and his associates have done there is — they've just restructured the business model. And I think that the brands, which are all-important, are as strong as ever. And I think the cost structure is going to be significantly improved without cutting into marketing expenditures. So I think you'll see a significant improvement, but I don't want to name a number on that. You'll find it out soon enough.

Buy companies or stock?

WARREN BUFFETTOK. Station 11.

AUDIENCE MEMBERHi, Mr. Buffett and Mr. Munger. My name is Dev Contessaria (PH) and I'm a fund manager from Philadelphia. You've touched on some of this already today, but I wanted to ask, if you could expand on how you think about comparing investment opportunity. In the past, you haven't been afraid to make a single position a large portion of your portfolio, such as Coca-Cola. So when there is a chance to buy more of your favorite names, as in 2008 and early 2009, how did the case of buying more of companies like Coca-Cola or even a Moody's, which had dropped from 75 to 15, as examples, compare with other things that you actually did? Could Berkshire have achieved its historical returns with a more simple, concentrated portfolio of your favorite names with positive characteristics such as durable competitive advantage, pricing power, strong organic growth, et cetera, versus the larger, more complex collection of businesses which exist today? Thank you.

WARREN BUFFETTYeah. Well, depends which favorite name we might have hit harder back in the 2008 and 2009 period. In the first instance, I spent a considerable part of our cash reserves too early, looking back, too early in the 2009 panic. The bottom of that was reached early in March in 2009, and that bottom was quite a bit lower than September and October of 2008 when we spent 16 or so billion. Now, we were committed to finance Mars for 6.6 billion, and that commitment had been made many months earlier, so we didn't really have much choice in terms of the timing of that. But we did fine on the expenditures we made during that period, but obviously we didn't do as well, remotely as well, as if we'd kept all of the powder dry and then just spent it all at once at the bottom. But we've never really figured out how to do that, and we won't figure out how to do that. So, the timing could have been improved dramatically. On the other hand, as late as the late fall of October of 2009, when the economy was still in the dumps, really in the dumps, you know, we were able to buy BNSF, which will be an enormous part of our future. So, overall we did reasonably well going through that period. But looking back, the most money would have been made just by buying a bundle of stocks. When we were buying Harley Davidson bonds at 15, looking back we should have been buying the stock. But that'll always be the case. Overall, we would love the idea — what really we want to do at our present size and scope, and with the objectives we've got for our shareholders, is we want to buy big businesses with good management at reasonable prices and then try to build them over time. I mean, when we start 2014, we've got a really good group of businesses, some of them very big. Those businesses will earn more over time, and then the — what we're trying to do is add onto them and make sure we don't issue any shares in the process. So it's not a complicated process. And looking back we'll always be able to do it better than we've done it. That's just the nature of things. But I don't — I feel the game is still a very viable one, and will be for some time. It won't be forever, it can't be forever. But it's still got some juice left in it. Charlie?

CHARLIE MUNGERWell, what's happened, of course, is the private businesses that we control have gotten to be a bigger and bigger percentage of the thing. For a great many of the early years we had more in common stocks than the total value of the company. And so we were — it was like a big portfolio of common stocks and a lot of businesses thrown in as extras. And now, of course, the private companies are worth way more than the stocks. And, I would guess that that will continue, wouldn't you Warren?

WARREN BUFFETTSure, it'll continue. And the difference is when we're right about stocks, it shows up in market value and in net worth. When we're right about businesses, it shows up in future earning power, which you can see, but it doesn't jump out at you the same way changes in stock values do. So it's a different sort of buildup of value, and one is somewhat easier to see than the other. But the other is more enduring and does not require going from flower to flower. And they're both fine, but we've moved into phase two. Say that's fair, Charlie?

CHARLIE MUNGERYeah, well, if you're just investing moderate amounts of capital in the middle of some panic, you take the bottom tick, it's a very attractive price. But no significant volume of the shares could have been purchased at that price. And so when we buy these businesses, we can get huge chunks of money into things. And now if we'd wanted to go much heavier into Moody's, we couldn't have bought that much anyway.

WARREN BUFFETTNo, no.

CHARLIE MUNGERYeah, so, we are sort of forced by our own past success, more into these bigger positions represented by the private companies. But really, that's in the advantage of all of us, I think.

WARREN BUFFETTYeah.

CHARLIE MUNGERI love it when we buy transmission lines in Alberta. I don't think anything horrible is going happen to Alberta. And nor do I think transmissions —

WARREN BUFFETTIf it does, we won't know it.

CHARLIE MUNGERYeah, right, right. (Laughter) And — no, I think we've adapted pretty well to changes in our circumstances. And that, again, is part of life. I mean, since change is inevitable, how well you adapt to it is terribly important. And I would say the changes that many of you have watched in Berkshire over the years have been very much in our interest, and then there may be future changes that are just as desirable.

WARREN BUFFETTWe bought a fair amount of Wells Fargo, for example, really over the last few years. And because the economy came back, really, the most money, if you were buying at the bottom, came from buying the banks of lesser quality because they — their weaknesses drove them down even further in price, and they needed a good economy to come back. But they were kind of like a marginal copper producer or something, that you make more money if copper goes up, not if you buy the best copper company but, usually, if you buy the worst one, because it — they have the highest marginal cost, but that gives it the biggest kick on profits. To some extent that's been true, for example, the banks. But we felt 100 percent comfortable buying Wells Fargo, and we might have felt 50 percent comfortable buying some others and so we went where we were comfortable. Looking back, you can say we should have just bought them all. And in fact, bought the ones that had had the worst record going into 2008 or '09, because they had the greatest recovery possible, simply because they'd fallen so far. Andrew?

Technology and GEICO's future

ANDREW ROSS SORKIN— And it has to do with the future as well, and it relates to GEICO. And the questioner asked, "Could you, and perhaps Tony Nicely, please explain how you think about usage-based pricing, tracking drivers electronically and charging premiums accordingly, and how that will affect the auto insurance industry in the U.S. in the next decade, and how these changes impact the moat at GEICO? I'm also sure you've studied the potential impact of self-driving cars on GEICO. Google says it's now five years away. What does this mean to the future of the profit machine that is GEICO, and if the analysis showed a challenging future, would you ever sell?"

WARREN BUFFETTYeah. Well, the answer to the very last question is no. The usage-based pricing is something that's popular with some companies that have done a lot of work on it. Probably the one most identified with it is Progressive doing something called "Snapshot." And there's no question that knowing how customers drive, or policy holders drive, and how they use their cars is a valuable input to assessing the proper premium to people. And insurance is all about comparing the propensity of loss to achieve — or evaluating the propensity of loss to establish the proper premium. And it's very easy to understand in life insurance. I mean, if somebody is 90, they're more likely to die than 20, despite Charlie — situation. (Laughter) Even at 83 they're more likely to die than somebody at 20. The — so you know, that's obvious. Females live longer. That's not quite as obvious but it's been established. So there are various variables in insurance, and you try to assess those variables and set the proper price for the policy holder. If you lived in a state, for example, where the population of the state was one instead of, you know, 100 million, there'd be a whole lot less chance of an accident, you know, than — because of the lack of density of driving and so on. There's all kinds of variables. And through studying usage, by various methods, Progressive being probably the best known on it, they're attempting to look at some variables and hope they get better information about the propensity of that particular driver to — or the likelihood of that particular driver — to be in an accident. And we look at lots of variables, they look at lots of variables. We think we've got a pretty good system, and so far I think that's been proven correct. But we'll continue to look at many variables. I feel very, very, very good about GEICO, GEICO's management, and its ability to evaluate risk. And I think there are plenty of other people that are good at it, but I don't think there's — in my view, there's nobody better at it, in terms of auto insurance, than the GEICO people. So — but we ought to keep asking ourselves, "Can we do it better?" And we do ask ourselves that. Now, when you get to the self-driving car, that is a real threat to the auto insurance industry. I mean, if that proves successful and reduces accidents dramatically, it will be very good for society and it will be very bad for auto insurers. So you know, that can happen. I don't know how to evaluate over how long a period that might take or what percentage of cars might be affected with that. But it certainly could happen and it would not cause us to be thinking for one second about selling GEICO. Charlie?

CHARLIE MUNGERYeah, some of these things happen a lot more slowly than you might think. I went to a program at Harvard, oh, at least 30 years ago, describing how color movies were going come to the house on demand, and they were just around the corner. Well, they've come, but it was 30 years later. I have a feeling that self-driving cars having a huge impact on the market may take quite a while. And so I'm not —

WARREN BUFFETTThat would be my guess, but we could be wrong, you know.

CHARLIE MUNGERYeah, it could be wrong.

WARREN BUFFETTBut — (Laughter)

CHARLIE MUNGERBut —

WARREN BUFFETTBut if we are wrong, we'll be wrong together. (Laughs) It is hard to figure out how it could have a major impact in 10 years, but it may not work at all, who knows? But GEICO will be doing more business, a lot more business, in my view, five years from now than now, and ten years from now. You know, 30 years from now, you're young enough to find out, and I will go away peacefully without knowing. OK. (Laughter)

More international acquisitions?

WARREN BUFFETTGregg.

GREGG WARRENThank you, Warren. You've been pretty explicit about your acquisition criteria over the years, and some years ago, perhaps around the time of the ISCAR deal, you mentioned at one of the annual meetings that a concerted effort was being made to make non-U.S. companies more aware of Berkshire's positive attributes as a preferred acquirer. Yet, despite the higher proportion of large family-owned businesses in places like Europe and the fact that over half of the world's listed market cap currently comes from outside of the U.S., Berkshire has deployed very little capital outside of the U.S. with just ISCAR, and more recently AltaLink, coming to mind. Is the U.S. truly that much more attractive a destination for capital, or is there some other reason why the firm has not deployed serious capital outside of the region?

WARREN BUFFETTYeah, no, we've never turned down a chance to make a significant acquisition outside the United States because of any feeling we'd much rather be doing something in the United States. We just — you know, you mentioned the Alberta deal. But we have not had as much luck getting on the radar screen of owners around the world as we have in the United States. Our best bet, by far, in buying a business is to buy it from the family of a founder or the founder himself or herself. So we've, you know, that's our strong suit, and in the United States I think almost anybody that fits in that category with a business of size thinks of us. And a fair number would prefer us. I don't think that same — I think there's some recognition outside the U.S. Certainly when we heard from ISCAR, that was in 2006, Eitan Wertheimer said, he wrote me a letter, I'd never heard of him before, I'd never heard of the company. And he said the family had thought about it, and we were the only company to which they wanted to sell, and if they didn't sell it to us, they weren't going to sell it. So, there's some awareness. But I've been a little disappointed in that we haven't had better luck outside the country. And we'll keep working at it and see what happens. Incidentally, I just talked to Jacob Harpaz, who does an incredible job of running ISCAR. I talked to him yesterday when I was touring the exhibition hall. They set a new record in April. Now, that won't be the last new record they set. But that may have some slight meaning, in terms of how world business is doing, because they sell, you know, these tiny little cutting tools, and so on, that go into basic industry all over the world. And people don't buy those because they — you know, they're going look pretty in their offices or anything else, they buy them because they're using them up. And, it was a record in April. March had been extremely good, too. So they are seeing strength in the business that certainly would make it hard to believe there's weakness going on throughout the industrial world. ISCAR's been a wonderful company for us. The people have been sensational. The business is extraordinary. It just is — it fits us so well that I just wish I could find a few more like it out there. But this year, aside from the one we announced yesterday, we have not been contacted by any significant ones that made sense. We have heard from people over the last five years, I mean, we've — fair number. But nothing that really makes sense. But we'll keep trying.

Knowing your "circle of competence"

WARREN BUFFETTOK, station 1. We're back at — here we are.

AUDIENCE MEMBERHello, Mr. Buffett, and hello, Mr. Munger. Thank you for being extremely generous with sharing your wisdom. My name is Chander Chawla, and I am visiting from San Francisco. In the past, you have said that people should operate within their circle of competence. My question is, how does one figure out what one's circle of competence is? (Laughter)

WARREN BUFFETTGood question. (Laughs) Some of the people in the audience are identifying with it, I can hear them. The — it's — you know, it is a question of being self-realistic, and that applies outside of business as well. And, I think Charlie and I have been reasonably good at identifying what I would call the perimeter of that circle of competence, but obviously we've gone out of it. I would say that in my own case, I've gone out of it more often in retail than in any other arena. I think it's easy to sort of think you understand retail, and then subsequently find out you don't, as we did with the department store in Baltimore. You could say I was outside of my circle of competence when I bought Berkshire Hathaway, although I bought it, really, to resell as a stock, originally. I probably was out of my circle of competence when I decided that I should go in and buy control of the company. That was a dumb decision — which worked out. The — being realistic in appraising your own talents and shortcomings, I think — I don't know whether that's innate, but some people seem a whole lot better at it than the others. And I certainly know of a number of CEOs that I feel have no idea of where their circle of competence begins and ends. But, we've got a number of managers who I think are just terrific at it. I mean, they really know when they're playing in the game they're going win in, and they don't go outside of that game. The ultimate was Mrs. B, at the Furniture Mart. She told me that she did not want stock, in terms of the Berkshire Hathaway deal. Now, that may sound like it was a bad decision. It was a splendid decision. She did not know anything about stock, but she knew a lot about what to do with cash. She knew real estate, she knew retailing, and she knew exactly what she knew and what she didn't know, and that took her a long, long, long, long way in business life. And that — that ability to know when you're playing the game in which you're going to win, and playing outside of that game, is a huge asset. I can't tell you the best way to develop a great sense of that about yourself. You might get some of your friends that know you well to offer contributions. Charlie's given me a few contributions occasionally, saying, "What the hell do you know about that?" That's one way of putting it, of course. (Laughs) But Charlie, do — can you help him out?

CHARLIE MUNGERWell, I don't think it's as difficult to figure out competence as it may appear to you. If you're five-foot-two, you don't have much of a future in the National Basketball League. And if you're 95 years of age, you probably shouldn't try and act the romantic lead part in Hollywood. (Laughter) And if you weigh 350 pounds, you probably shouldn't try and dance the lead part in the Bolshoi Ballet. And if you can hardly count cards at all, you probably shouldn't try and win chess tournaments playing blindfolded, and so on and so on.

WARREN BUFFETTYou're ruling out everything I want to do. (Laughter)

CHARLIE MUNGERBut competency is a relative concept. And what a lot of us need, including the one speaking, is — what I needed to get ahead was to compete against idiots, and luckily there's a large supply. (Laughter)

WARREN BUFFETTOK, Carol. (Laughter)

Comparing Berkshire's book value to stock index

CAROL LOOMISThis question comes back a little to a question asked earlier about your annual performance standard that you comparison. "Mr. Buffett and Mr. Munger, I think of you as running a rational company. But when I look at your annual comparison of Berkshire's book value per share versus the S&P average, I don't see any rationality in that at all." "What is the logic of comparing a stock market index against the rise in an operating company's book value? And an operating company is predominantly what Berkshire is these days, so why do you annually make this irrational comparison?"

CHARLIE MUNGERLet me answer that one.

WARREN BUFFETTOK. (Laughter)

CHARLIE MUNGERThe answer is you're totally right, and we do that because Warren wants to make it eccentrically difficult for himself. So if you don't understand people who like to wear hair shirts, you'll never figure out why anybody would do such a thing. It's a ridiculous way to make a comparison, but it makes it hard for Warren to look good. And he likes to climb mountains that are difficult. But it's insane, you're right. (Laughter and applause)

WARREN BUFFETTYeah, yeah. Normally when he goes all wishy washy like that, I like to clarify. But I don't think I'll try. (Laughter)

ISCAR and Marmon deal valuations

WARREN BUFFETTOK. Jonathan.

JONATHAN BRANDTThe multiple of pre-tax profit that Berkshire paid for minority interests in Marmon and ISCAR in 2013 were considerably higher than the multiples Berkshire paid for earlier purchases of majority stakes in those two firms. Can you please explain why the valuation formulas changed, why the multiples weren't fixed for future increases in Berkshire's stake, which at least in Marmon's case were always contemplated, and why Berkshire was willing to accept meaningfully lower returns on the more recent purchases, not so many years after the first purchases?

WARREN BUFFETTYeah, well, the multiple with ISCAR was actually determined precisely on the basis of which the original purchase was made. In other words when we made the deal in 2006, we took multiples of earnings and allowed for cash and a few things. But — and then we took that formula and we stuck that in as both a put and call option for the family or Berkshire. They had the put, we had the call. And we stuck that in to govern things for, you know, between now and judgment day, and so that there's no variation from the original formula. We would never — shouldn't say never, but we had — our style would not be ever to call that from the family, even though we had the right to do it. The put and call were at the same price, or at the same — following the same formula. But the family elected to put it to us, but they put it to us exactly on the same basis as what was involved in the original purchase of the 80 percent. The Marmon deal is entirely different. The Marmon deal was an installment sale, and, in effect, to make the deal and buy the originals turned out to be 64 percent, we intended it to be 60 but gave them the option to do more. That was simply an installment sale, and we looked at the consequences of the formulas being applied in the future. The family would not have sold us the 64 percent, which they did on the original piece, unless they had the formula applying to the second and third piece that was embodied in the contract. And we looked at that as a single transaction, knowing that if the business improved we would be paying more money, and as the cash position improved, we'd be paying more money later on. But it was all built into the original deal, so one was one — was at exactly the same price, and one was part of a three-step deal, in effect. Charlie?

CHARLIE MUNGERBut the price went up because the value went up.

WARREN BUFFETTYeah, but it was — and because it was built into —

CHARLIE MUNGERYeah, and we'd agreed to — that that would be — we'd pay value.

WARREN BUFFETTIn both cases, I should say too, both with the Pritzker family at Marmon and with the Wertheimer family at ISCAR, it couldn't have been — they couldn't have behaved better — or the feelings are entirely good, everybody felt good about the transaction. The initial transaction and the subsequent transaction. So it pays to have to have deals in which people feel good when they —

CHARLIE MUNGERNothing that happened there is that — we got just an enormous respect for the intelligence of those two families. The more we looked at those businesses, the smarter and better those families looked. It was just amazing what each family had done, wouldn't you say, Warren?

WARREN BUFFETTRight, right.

CHARLIE MUNGERAbsolutely amazing.

WARREN BUFFETTAnd those were two important acquisitions. I mean, they — you know, they add up to lots of intrinsic value. And there, partly because of some accounting peculiarities, but the carrying value of the businesses is well below what the intrinsic business value is now.

CHARLIE MUNGERAnd by the way, that Union Tank Car that's within Marmon is John D. Rockefeller's old business. The first John D. Rockefeller. It's amazing how some of these good businesses have lasted.

WARREN BUFFETTYeah, well, actually the corporate form it — the original corporation that is Marmon, I'm quite sure, is Rockwood and Company, which I did a cocoa arbitrage with back in 1955 or something, and that's where I met Jay Pritzker. So it — these things wind their way along. It — one thing you learn in life, but also learn particularly in business, is that you're going to meet a lot of people and entities and experiences — in the future that — you may have thought were one shot —one stop shops originally in your life.

How to find what you love and do it

WARREN BUFFETTStation 2.

AUDIENCE MEMBERMr. Bung — this — Mr. Buffett, Mr. Munger, my name is Nicholas Erdenberger. I hail from the beautiful Garden State of New Jersey. And I guess the — (laughs) — I guess the question —

WARREN BUFFETTWithhold your applause, applause. (Laughter)

AUDIENCE MEMBERSo I guess this is a follow up question to the question before. I really connect with the idea of not investing in industries you can't fully understand. Being a young guy who has limited ability to code and who can't build robots, tech is certainly not an industry I fully understand. And yet these days, the concept of entrepreneurship is nearly synonymous with tech amongst people my age. So my question to you, Mr. Buffett, is if you were 23-years-old with entrepreneurial tendencies, what non-tech industry would you start a business in and why?

WARREN BUFFETTI'd probably do just what I did when I was 23. (Laughs) The — you know, I would go in the investment business. And I would look at lots of companies and I would go and talk to lots of people, and I would try to learn from them what I could about different industries. One thing I did when I was 23, if I got interested in the coal business, I would go out and see the CEOs of eight or ten coal companies. And the interesting thing was I never made appointments usually or anything, I just dropped in. But they —they felt a fellow from Omaha who looked like me couldn't be too harmful. So they'd always see me. And I would — I'd ask them a lot of questions, but one question I'd always ask them, two questions at the end, I would ask them if they had to put all of their money into any coal company except their own and go away for ten years and couldn't change it, which one would it be and why? And then I would say, after I got an answer to that, I would say, and if as part of that deal they had to sell short in the equivalent amount of money — in one coal company — which would it be and why? And if I went around and talked to everybody in the coal business about that, I would know more about the coal companies from an economic standpoint than any one of those managers probably would. So, I think there's lots of ways to learn about business. You're not going learn how to start another Facebook or Google that way, but you can — you can learn a lot about the economic characteristics of companies by reading, personal contact. You do have to have — you have to have a real curiosity about it. I mean, you — I don't think you can do it because your mother's telling you to do it, or something of the sort. (Laughs) I think you — it really has to turn you on. And I mean, what could turn you on more than running around asking questions about coal companies? (Laughter) You have to maybe be a little odd, too. But that's what I would do. And I might, in the process of doing that, find some industry that particularly interested me, in my case the insurance industry did, and you might become very well equipped, even perhaps, to start your own insurance company, but perhaps to pick the most logical one to go to work for. If you just keep learning things, something will come along that you'll find extremely useful to do. I mean, it — but you've got to be open to it. Charlie?

CHARLIE MUNGERWell, you might try a version of the trick that Larry Bird used. When he wanted an agent to negotiate his new contract, he asked every agent why he should be selected. And if he was not going be selected, whom the agent would recommend. And since everybody recommended the same number two choice, Larry Bird just hired him and negotiated the best contract in history. There's —

WARREN BUFFETTWell —

CHARLIE MUNGER— there are a lot of tricks that people use.

WARREN BUFFETTWe did the same thing with Solomon, actually. It was a Saturday morning —

CHARLIE MUNGERYeah.

WARREN BUFFETT— when I call —and you were there, Charlie, weren't you? -

CHARLIE MUNGERYes —

WARREN BUFFETT— I wasn't sure. I called in, I don't know whether it was eight or ten of the manager — I had just gotten in there on Friday afternoon, and now it's Saturday morning and we had to open for business Sunday night in Tokyo, and I had to have somebody to run the place. So I called in eight people and I said, you know, "Who besides you would be the ideal person to run this, and why?" One guy told me that there was nobody compared to him. (Laughter) He was gone from the firm within a few months. (Laughter) But — the — it's not a bad system to use. You can really learn a lot just by asking. I mean, it's starting to sound a little bit like a Yogi Berra quote or something, but it is — it is literally true that you — if you talk to enough people about something they know something about, and people like to talk. You know, and — here we are talking ourselves. (Laughs) And you just have to be open to it. And you will find your spot. You may not find it the first day, or the week, or month, but you'll find what fascinates you. I was very lucky because I found what fascinated me when I was seven or eight years of age. But — you know, some people find chess or music, you know, fascinates them when they're four or five. If you're lucky you find it early, and sometimes it takes you longer, but you'll find it.

CHARLIE MUNGERIf it's a very competitive business, and it plainly requires the qualities that you lack, it should probably be avoided. I could — when I was at Caltech I took thermodynamics, and Homer Joe Stewart, who was a genius, taught the course. And it was fairly apparent to me that no amount of time or effort would turn me into a Homer Joe Stewart. He was utterly, impossibly more talented than I could be. Gave up. I immediately said I wasn't going try and be a professor of thermodynamics at Caltech. And I've done that with field after field, and pretty soon there was only one or two left. (Laughter)

WARREN BUFFETTYeah, I had a similar experience in athletics. (Laughter)

Hotel room economics during Berkshire meeting

WARREN BUFFETTOK, Becky.

BECKY QUICKThis question comes from Darren Bordemier (PH). He says, "Warren, you've commented in the press that you are concerned about the hotel price gauging in the Omaha area during the Berkshire meeting weekend." (Applause) Hold your applause, you haven't heard the rest. "Please elaborate further on that position, as it seems to contradict free market capitalism. Shouldn't the law of supply and demand apply in this case?"

WARREN BUFFETTAbsolutely. And so therefore, since we want to increase the demand, the proper thing to do is increase the supply, right? (Laughs) And that's why we have encouraged, for example, Airbnb, to come in and — they supplied some rooms this year. But it's very logical. If you think about most cities, the big events that come to their convention centers and use their hotels, they size themselves in deciding where to go. If you have a relatively small industry, they can pick a moderate-sized city and they can have their convention there, and they don't outstrip the supply of rooms. If you have a very big industry and you're having a convention, you know, you have to go to some place like Vegas or some place that has a lot of rooms because otherwise you do throw the supply-demand out of whack. So, if you have an event, which isn't sized by the people that are scheduling it, can't be sized by the people that are scheduling it, then you can totally outstrip rational supply of rooms. I mean, you know, the great case would be something like the Masters tournament. I mean, Augusta can't size its hotel industry to Augusta, to the Masters, and the Masters isn't going move any place. Well, there — are certain events like that, but there aren't very many. And Omaha cannot size its hotel supply to the Berkshire meeting. It sizes it to the kind of conventions it normally gets and all of that, but the Berkshire meeting has grown beyond what we anticipated. So fortunately, there's developed — and for that reason people started putting in — what really bothered me were the three-day minimums. I mean, it — you know, I think there's something particularly irritating about somebody's coming in for a one-day event to have to buy — have a three-day minimum. And the prices were getting high. Incidentally, the Omaha Hilton right across the street, they — they've been magnificent throughout this, as have many others. But there were a few that were really pushing things, and we didn't want to cut down on the demand. We didn't want to move to Dallas, even though we're opening a store there next year, it would be kind of fun for that. But we're not going move to Dal — I mean, we want — Omaha people love this event, it's an economic boon for Omaha, but — and people get a good impression of Omaha when they come here, generally. So it's — there's a lot of good things about having the meeting in Omaha, and we can't expect anybody to build new hotels to take care of three days a year. So, fortunately, something like Airbnb is sort of a flex supply arrangement that seems to me to make a lot of sense for it. And I think that it will be more developed by next year, and I think that the hotels will do extremely well next year. But I don't think they can push it to the ultimate extreme of a total scarcity product. And we want them to do well, and that's why we've gone where we have. Charlie?

CHARLIE MUNGERNothing to add.

Will GEICO eventually overtake State Farm?

WARREN BUFFETTJay?

JAY GELBThis question is on GEICO. GEICO continues to gain the most market share of the large auto insurers while delivering attractive margins. It also has the largest advertising budget of the auto insurers while maintaining the advantage of being a low-cost operator. My question is, will GEICO, with 10 percent market share currently in auto insurance, eventually overtake State Farm, which currently has 19 percent market share in auto insurance, keeping in mind that State Farm is also a major writer of homeowners insurance coverage?

WARREN BUFFETTYep. Well, that's a good question. Nobody knows the answer to that for sure. But I will tell you this, we passed Allstate this year. And State Farm is a terrific company, I mean, it's one of the great histories — has one of the great company histories in America. It was started by a farmer who had no insurance experience to speak of when he was, I think, in his early 40s. There's a book called "The Farmer from Merna," I think it is, over in Illinois, and you know, he built this incredible business based on a better business model. And that was done around 1920 or so, I believe. And then, of course, GEICO came out with an even better model, but State Farm was huge by that time. Allstate was very, very large. And it's taken us since 1936 to become number two. Now, I have some projections that if I live to be 100, that we should be number one. And I tell GEICO, I'm going do my part. So the rest is up to them. (Laughter) We will gain share, in my view. We will gain share month after month, year after year, as long as we never forget that our job is to take extremely good care of the customer, and as long as we can properly rate risks. We've got some basic advantages that will enable us to do that as long as we take care of those two matters. And Tony Nicely has done a job that belongs in, you know, world's hall of fame, in terms of achieving that objective. The 15 years prior to Tony coming — taking over — roughly 15 years, maybe 14 years — the market share had hovered around 2 percent. And you know, maybe two-one or two-two. And you know, since he took over in 1993, it's gone to ten-plus and it will keep going. But State Farm has got a net worth of probably 70 billion now or there abouts, 60 to 70 billion, and they've got a strong presence in homeowners and they've got a strong agency force. They've got a lot of satisfied customers. So it won't come fast, but I do think it will come. Charlie?

CHARLIE MUNGERWell, GEICO to me is very much like Costco. And one of the reasons it's succeeded is that they really feel a holy duty to have a wonderful product at a very low price. A lot of people talk that game, but very few have it just right down under the body and soul of the company. But GEICO does, and companies like that do tend to grind ahead over time.

WARREN BUFFETTOne thing you'll find about it, I think this is true about Costco, too, it's certainly true about GEICO, is that people don't come and go from there as they — I mean, we have practically no one from the rest of the insurance industry that's come over to GEICO, and they don't leave us. I mean, they really have their own idea about how it should be done, what should be done right. And it becomes very, very reinforced. And, of course, it becomes reinforced by success. Is that true at Costco, Charlie?

CHARLIE MUNGEROh, Costco's unbelievable. And it reminds me very much of GEICO, and I'm not surprised that both companies keep taking share. It's easy to talk the game, but living the game is something else. I mean, it's against the human nature of many entrepreneurial people to try and get the price down and the service quality up all the time. I mean, it's like wearing the ultimate hair shirt and yet it works.

Has Buffett's frugality hurt Berkshire?

WARREN BUFFETTOK, station 3.

AUDIENCE MEMBERMr. Buffett, my name is Neil Patel from Chicago. I greatly admire the way you have lived a frugal personal life even with your considerable wealth. How do you think your frugality has helped Berkshire shareholders over the years? And Charlie, are there any instances where you think that Warren's frugality has hurt Berkshire and shareholders?

WARREN BUFFETTWell, first of all, let's ask who is the more frugal between us. Charlie, who do you think — (Laughs)

CHARLIE MUNGERWell, in personal consumption, Warren is more frugal. (Laughter)

WARREN BUFFETTWould you care to give an example? (Laughs)

CHARLIE MUNGERWarren lives in the same house he bought for a very modest price, what, in 1950-something?

WARREN BUFFETTI bought in 1958, and you moved into yours about 1960, didn't you?

CHARLIE MUNGERYeah, and I paid more. (Laughter)

WARREN BUFFETTBut he designed his own —

CHARLIE MUNGERAbsolutely, I could get —

WARREN BUFFETT— he designed his own house.

CHARLIE MUNGER— he's more frugal.

WARREN BUFFETTHe did not pay an architect, right?

CHARLIE MUNGERI did, I paid an architect $1,900. It was as much as 30 percent of the normal price.

WARREN BUFFETTYeah. Notice how he remembers the details. (Laughter) No, I would — I have everything in life I want. It's a very simple thing. If there's anything that money can buy — there are things money can't buy, but if there's anything money could buy that I wanted, I'd do it this afternoon. I wouldn't have any problem with that at all. I do not think that standard of living equates with cost of living beyond a certain point. I mean, up to a certain point there's no question that it does in — in terms of having good housing, good health, good health service, good food, everything. But — good transportation. But there's a point I think, if anything, you start getting inverse correlation. My life would not be happier, and it'd be worse, if I had six or eight houses or, you know, a whole bunch of different things I could have. It just doesn't correlate. And so I — having everything I have, I mean, you can't have more than that. And that doesn't really make any — it makes a difference up to a point. I mean, you could start thinking a lot differently when you got to X, but when you get to ten-X, or a 100-X, or 1,000-X, it just doesn't make any possible difference. Charlie, can you —?

CHARLIE MUNGERThe frugality, basically, has helped Berkshire. And I look out at this audience and I see a bunch of understated, frugal people, too. We collect you people. (Laughter)

WARREN BUFFETTBut forget about it this weekend. (Laughter and applause) The more you buy the more you save at these prices, folks. (Laughter)

Berkshire doesn't "begrudge" paying taxes

WARREN BUFFETTOK. Andrew.

ANDREW ROSS SORKINThis question comes from Azhar Quader who's in the audience, Queens Court Capital, wants you to know that he's a Columbia B School grad just like you, Warren.

WARREN BUFFETTGood.

ANDREW ROSS SORKINThe question is the following, "Berkshire paid $8.9 billion in taxes in 2013. Pfizer is currently contemplating an acquisition that would allow it to move its technical holding company overseas and thereby save income tax expense and create shareholder value. Is this something you and Charlie would ever consider if it would create value for Berkshire shareholders?"

WARREN BUFFETTI think the answer to that is no. What do you say, Charlie? (Applause)

CHARLIE MUNGERI think it would be — I think it would be crazy to be as prosperous as Berkshire and get our tax to zero while we remain this prosperous. That would not be a legitimate ideal. (Applause)

WARREN BUFFETTYeah. We could not have done Berkshire in any other country except the United States, either. You know, and just look at what we've acquired and everything. America has, in a very, very, very big way helped Charlie and I become very, very, very rich. (Laughs). Charlie?

CHARLIE MUNGERI've got no complaints. And I look around at this group, I see you at breakfast, it's a very happy group of people. I don't think a lot of people are gnashing their teeth that somebody else has a little more.

WARREN BUFFETTBut we don't pay — I don't want to make it holier than thou, this stuff. We don't pay anything beyond that — when we get all through figuring out tax on our 20,000 page-plus return, we just don't — we don't add a tip of 20 percent or 15 percent or anything. (Laughter) And we do certain transactions which are tax driven. We're in low-income housing tax credits, which actually George Bush 41 congratulated me for. So it's bipartisan. We — the wind energy deals we do, the solar deals we do, they are tax driven to — I mean, they won't make economic sense otherwise. So we follow the rules. But we don't begrudge the taxes we pay. We've earned a lot of money while paying U.S. taxes. (Applause)

Try for Mexico's rail freight market?

WARREN BUFFETTOK, Gregg.

GREGG WARRENWarren, Burlington Northern's main competitor in the west, Union Pacific, generates around 10 percent of its revenue from freight moving to and from Mexico. It also owns a 20 percent stake in the large Mexican railroad, Ferromex. Given the expectation for strong auto production growth in Mexico with 30 percent more capacity coming online in the next two years, and the potential for additional near-sourcing manufacturing in Mexico, how attractive do you find the Mexican freight market? And assuming that the answer to that question is positive, would it not be a greater benefit to Burlington Northern to own the smallest Class-I railroad at Kansas City Southern, which generates about half its revenue from its Mexican concession, whether than just receiving cargo from the firm?

WARREN BUFFETTYeah, Union Pacific has a big edge in terms of Mexico. I mean, their route structure is such, I think they cross the border at six different places. Their route structure is far better than ours in relation to Mexico. And Kansas — it's true as you say, that Kansas City Southern has a very significant presence in Mexico. But, in terms of what we can do with our money and what we see as the prospects — there are good prospects there, but there are good prospects elsewhere for traffic, too. So it doesn't make sense for us. But, you know, maybe someday something will, but — the math does not work for Mexico. But we're continuously thinking about Mexico, but we're thinking about lots of other markets, too. There are lots of possibilities for moving more freight on the BNSF over the years. And we won't forget about Mexico, but we won't do anything silly, either. Charlie?

CHARLIE MUNGERI don't have anything to say. You know, it's awfully easy to imagine combinations that just make you rich with sleight of hand. And, of course, the easiest transaction is buying a competitor. But most of that stuff, when you get to a certain size, you can't do. So why spend time even thinking about it? I'm afraid Burlington Northern is going have to get ahead on its own from here on.

WARREN BUFFETTWouldn't worry about that.

CHARLIE MUNGERI'm not worried about it.

Intrinsic value and the Berkshire model

WARREN BUFFETTStation 4.

AUDIENCE MEMBERHi, Warren and Charlie. Dan Hua from Los Angeles. My wife, Cora, and I are thrilled to be here.

WARREN BUFFETTWe're delighted to have you.

AUDIENCE MEMBERThank you. You earlier today discussed intrinsic value, and I'm a big fan of Graham and Fisher, especially "Security Analysis." What differences do you have, if any, for calculating intrinsic value, versus what was said in "Security Analysis?" And for examples, how does management factor into that? You recently mentioned evaluating management is like dating, and recently you said, also, management does matter. My second part is, which company do you fear the most? Why is it that no one else has done what you have done? I mean, Coca-Cola has their Pepsi. Thank you.

WARREN BUFFETTYeah, the — actually Graham didn't get too specific about intrinsic value in terms of precise calculations. But intrinsic value has come to be equated with, and I think quite properly, with what you might call private business value. Now, I'm not sure who was the first one that came up with it, but — well, the first one that came up with it was Aesop, actually. But the intrinsic value of any business, if you could foresee the future perfectly, is the present value of all cash that will be ever distributed for that business between now and judgment day. And we're not perfect at estimating that, obviously. (Laughs) But that's what an investment or a business is all about. You put money in and you take money out. Aesop said, "A bird in the hand is worth two in the bush." Now, he said that around 600 B.C. or something like that, but that hasn't been improved on very much by the business professors now. Now the question is, you know, how sure are you that there are two in the bush, you know? How far away is the bush? There are all kinds of things. What are interest rates? But I mean, Aesop wanted to leave us something to play with over the next couple thousand years, so he didn't spell the whole thing out. But that's what intrinsic value essentially is. And, we don't — Graham would say that, Phil Fisher would say that. Phil Fisher would say that in calculating that, he would want to look a lot harder at the qualitative factors of the business in making that estimate of how many birds were in the bush. Graham would say he would want to see the bush — you know, $2 worth of cash in the bush, you know, and to pay a dollar for it now. One emphasized quantitative factors and one emphasized qualitative factors, but neither one would have disagreed with the math. And I started out very influenced by Graham, so I emphasized quantitative factors. Charlie came along and said I was all wrong, and that he'd learned more in law than I'd learned in financial studies and everything, and that I should think more about qualitative factors, and he was right. And Phil Fisher said the same thing. But that's what intrinsic value is about, you know. if you buy a McDonald's franchise, if you buy General Motors, whatever it may be, the real question is, A) are you going to have to put more cash into after you buy it? But it's really cash in, cash out? When? What discount rate? All the standard stuff. In terms of — if I had a silver bullet, what company would I shoot as being a threat to us? I don't really — I don't see any competitor to Berkshire. I see private equity buying lots of businesses and having an advantage in that they'll leverage up when we won't, and also that presently they can borrow money very cheap and all of that. So I mean, there are always going to be people competing with us to buy businesses. But — which is our main business — main occupation for me and Charlie. But I don't see anybody that's got a model, or trying to build a model, that will essentially go after what we're trying to achieve, which is to buy wonderful businesses from people that care about where their business goes, and who generally want to keep on running them. Charlie?

CHARLIE MUNGERWell, as I've said earlier, I think the Berkshire model as now constructed will have — as said in show business, with legs. It will go a long time, and I think it will be quite creditable. And I think it has enough advantage that it will just keep going a long time. And I think most big businesses don't. If you stop to think about it, all the great big businesses of yesteryear, how few of them have really gotten big and stayed big. Of the really old businesses, only one stayed big and that was Rockefeller's Standard Oil. And so we're getting up into a territory where very few people keep going well. But I think what we'll be more like Standard Oil, than we'll be like ordinary businesses, because I think we will just keep going. We will keep doing what we're already doing, and we'll keep learning from our mistakes. And the people up here are no longer all that important. The momentum's in place, the ethos is in place. It's going to keep going. And to you young people in the audience, I always say, "Don't be too quick to sell the stock."

WARREN BUFFETTWhy don't we get more copycats?

CHARLIE MUNGERIt reminds me of our mutual friend, Ed Davis. He figured out how to do an operation that was so difficult that he operated the bottom of a dark hole with instruments of his own creation. He gave his own shots by Novocain, 87 of them, while he was operating. And it was a better operation. His death rate was 2 percent and everybody else was 20. And the other surgeons came to copy him, and they watched him. And they just said, "Well, I don't think I'll try and copy that." (Laughs) I think it looks just too hard to do. There's — nothing in the American business school teaches people to be like Berkshire.

WARREN BUFFETTEddie Davis is the guy that, in effect, introduced the two of us. He was a famous urologist here in Omaha, and —

CHARLIE MUNGERBut people didn't try and learn his operation. And it doesn't look all that easy. It's very different.

WARREN BUFFETTIt's slow, too.

CHARLIE MUNGERAnd it's slow, it's — yeah, very slow.

WARREN BUFFETTI think the slowness deters more people than anything else.

CHARLIE MUNGERAnd the difficulty with being slow is you're dead before it's finished. (Laughter)

WARREN BUFFETTWell, that's kind of cheerful. (Laughter) Carol, let's come up with something a little — (Laughs)

CAROL LOOMISWell, for a more cheerful subject, mine is inflation. In it — (Laughter)

WARREN BUFFETTOnly compared to Charlie can inflation be cheerful. (Laughter)

Positive and negative effects of inflation

CAROL LOOMISThis comes from Larry Pitkowsky and Keith Trauner at the GoodHaven Fund. "In your 1981 shareholder letter, you discuss returns on equity, interest rates and inflation, and how difficult it was for many companies to function under inflationary conditions. Indeed that Berkshire itself was not immune and would be negatively — could be negatively affected. "Today it seems like every central banker in the world is desperate to create inflation, something that is generally great for debtors, not so great for creditors, and difficult for owners and managers. Should investors and business owners be thinking more about inflation and higher interest rates after 30 years of declines in both? How would Berkshire behave differently if it became apparent that the future was turning inflationary?"

WARREN BUFFETTWell, inflation would hurt us, but it would hurt most businesses. It doesn't — there's certain assets that if highly leveraged, obviously, would benefit from inflation. But, well, it's just — We'll set up an inflationary condition. Let's just assume tonight that drones are sent up over all of the United States and they happen to drop a million dollars in every household. Now, the question is would the country be better off? Every individual would now have — or every family would now have a million dollars that they didn't have the day before. The one thing I can guarantee you is that Berkshire would be worse off at that point, obviously. And obviously, what I've described would be wildly inflationary. The trick in that circumstance is to find out that you've got a million dollars before anybody else finds out that they have, and you'll do very well if you're first. But essentially, you don't create wealth by inflation or by having — you can move it around, but you don't create it by inflation, and you don't — a firm like Berkshire, you know, our earnings per share would go up. The intrinsic value of our business, measured in dollars, would go up. But under lots of inflation, unless we had leveraged those businesses, the value of your investment, in real terms, would go down. Charlie?

CHARLIE MUNGERWell, we had a test of hyperinflation in Weimar Germany, and the people who owned stocks in places like Berkshire got through. And they didn't prosper joyously, but they got through. And everybody else, practically, life insurance policies, bank deposits, you name it, got wiped out. And, of course, if you create so much misery that you get a Hitler, and a World War, and a Holocaust and so forth, it's not a good thing to let things go that far. And so I'm — I don't like this huge confidence that all you have to do is just keep printing money and spending it. I think there's some limit to when that will work, and I am never going forget Weimar Germany. And I don't think any of the rest of us should either. We can handle a little bit of subpar growth for some stretch or other. But it would be quite dangerous to let the whole damn thing blow up because a bunch of crazy politicians were printing money. (Applause)

WARREN BUFFETTIf you own a home, though, with a very large mortgage, and you have incredible inflation that wipes out the mortgage, then you've still got the home. I mean, it's just —

CHARLIE MUNGERIn Weimar, Germany, they gave you the mortgage back at the end. It was very interesting. That's the one thing they did right. (Laughs)

WARREN BUFFETTHe's way ahead of me, folks. (Laughs)

Why companies make "dumb" deals

WARREN BUFFETTJonathan?

JONATHAN BRANDTIn evaluating the after-tax returns Berkshire earns on its acquisitions of non-insurance businesses, whether it be the utilities, the railroad, or the manufacturing service and retailing business, in terms of choosing a benchmark, what would be your best estimate of the returns on acquisitions earned by an aggregate of all American industry, adjusted, of course, to exclude the impact of accounting write-offs and equalizing for leverage?

WARREN BUFFETTThat sounds too tough for me, but go ahead, Charlie. I'll be thinking. (Laughs)

CHARLIE MUNGERWell, let me summarize. I think the sum total of all acquisitions done by American industry will be lousy. It's in the nature of corporations that are prosperous to be talked into dumb deals, and bureaucracy tends to feed on itself and create unnecessary costs. So I think the history of acquisitions is that it's not an enormous way to wealth. Now, it has been for us, but we're very peculiar, and luckily a lot of people don't want to be peculiar in our way.

WARREN BUFFETTYeah, I would — it's really hard to, you know, come up with a useful answer on that. But I certainly —

CHARLIE MUNGERBut you don't have a great deal of optimism, do you?

WARREN BUFFETTWhen we read that a company we don't control is going to make an acquisition, I'm much more inclined to cry than to smile. But on the other hand, we love making acquisitions ourselves, so it's a little hard to get too harsh just because we don't like the other guy's acquisitions. I have been — I have sat in on, probably, hundreds of acquisition discussions conducted by people I didn't control, as a director. And most of them have been bad ideas, but there have been some —

CHARLIE MUNGERSome are mediocre. (Laughter)

WARREN BUFFETTA great case is GEICO. I mean, it's really a great case study because GEICO had this wonderful business prior to going off the tracks in the early 1970s, but it'd been an incredible business and everybody — it was well known in the financial world. And then it went off the tracks in its own business, got back on the tracks. And then in the next — after it got back on the tracks, it made a couple of acquisitions. And they weren't disasters, but they certainly weren't successes, and they tended to take people's — I think they took their eyes off the ball in terms of the potential of GEICO itself. So the accounting costs of those — there were two acquisitions in particular — the accounting costs of those two acquisitions was not — it was poor, but it wasn't disastrous. But if you look to secondary effects, it was huge. I mean, there were a dozen years there or so where all kinds of gains could have been made that weren't. And you don't get those years back. Now, that was probably a net plus for Berkshire, you know, in the end, because we'd bought half of the company then we got to buy the other half later on. If they'd done wonderfully, we probably would have never bought the second half. Now, maybe the first half would have been worth that much more. But it's human nature, to some degree, to, you know, keep wanting — I mean, normally the people who get to be CEOs are not shrinking violets, you know. And they have animal spirits, as Keynes talked about, and they like to do things. And the supporting staff certainly senses that they like to do things. I mean, they often have people in charge of strategy or acquisitions, or all of those things. What do you think those people are going to do? Sit around and suck their thumbs? No, they're going keep coming up with deals. And the investment bankers will be, you know, calling on them daily. So there are all these forces that push toward deals, and if you try to push toward deals, you're going to get a lot of dumb deals. We try very hard, Charlie and I, not to get eager to do a deal. We're just eager to do a deal that makes sense. And that would be a lot harder if we had directors, strategy departments, whatever it might be, all pushing us toward, you know, what have you done in the last three months, or something of the sort. So the setting in which you operate really can be very important. Charlie, anything further?

CHARLIE MUNGERNo, but it's — you know how much more tactful he is.

WARREN BUFFETTYeah, well the comparison isn't tough. (Laughter)

Prosecute individuals or corporations?

WARREN BUFFETTStation 5.

AUDIENCE MEMBERI'm Russell Narig (PH) from Neenah, Wisconsin. The — not another Packer fan. The people in this hall tonight are here because of the invest into your money, in anticipation and hope that you and Charlie would make that investment grow. We recognize that things go wrong and that we might lose money. But never, ever, has it ever crossed our minds that we'd be cheated out of their money. Unfortunately, that — that's not — that's new — I'm sorry, having problems with this microphone. Unfortunately, particularly in the investment banking business, confidence, my confidence, and I'm sure the confidence of many people in this room, are falling. Particularly distressing are reports in the "New York Times" in the last week or so about private meetings in the Justice Department, Securities and Exchange Commission, the Fed, and others, about the need or desire, the requirement, perhaps, to bring criminal charges against some of the largest banks dealing business, for, among other things, knowingly laundering billions of Iranian dollars through our U.S. banks, knowingly laundering billions of drug cartel money through U.S. banks, soliciting on U.S. soil deals which would include tax evasion by moving assets offshore, and even fixing the LIBOR. The problem the Justice Department is having is that they are being told that if they bring criminal charges against those banks, and we can list those banks, they've been in the "New York Times," that those banks would be sorely hurt, may be required to go out of business, and require — and evolve into a new financial crisis of some sort. (Applause)

CHARLIE MUNGERNow, we can't —

AUDIENCE MEMBERMy question — my question, though, to you is do you believe a financial crisis will be — come about as a result of bringing justice to criminal activity on a large scale? Or have we reached a new point where criminal activity in Wall Street is being institutionalized, sort of allowed to happen because they're too big to fail, too big to go to jail, and too big to be regulated, to follow the law?

WARREN BUFFETTCharlie, you're the lawyer, you take it up. (Applause)

CHARLIE MUNGERWell, I think behavior on Wall Street has enormously improved as a result of the trauma we've just been through. And so I think the worst of it is behind us. But you're never going to have perfect behavior when a bunch of human beings live in a miasma of easy money. It's just this is always going happen to some extent, and —

WARREN BUFFETTHow do you feel about the prosecution of individuals versus the prosecution of corporations?

CHARLIE MUNGERWell, I think there's hardly anything that changes behavior more than prosecuting individuals. When they took Boy Scout leaders out of Pittsburgh or wherever it was and put them in the federal penitentiary for fixing steel prices, it really changed behavior of American businessmen. So I do think that a few criminal prosecutions do change behavior a lot. And it looks to me like we'll get a few.

WARREN BUFFETTYeah. I may be biased a little bit by the experience at Salomon, but — I lean way more toward prosecution of individuals than corporations. You know, I literally saw, you know, a bad act, or maybe multiple bad acts, by just a couple of people and negligence in reporting by a couple more, you know, come close — certainly upsetting, hurting, and maybe destroying, you know, possibly thousands and thousands of other people's lives, forgetting about the financial investment. And it is — it did seem to me, and that's — had that experience a couple of other times in what I've seen, that — that it really — it may be easy — it's way easier to prosecute the corporation. The corporation's going write a check, and you know, I mean, it's somebody else's money. And the prosecutor knows he's going get a win, basically, if he goes against the company, whereas he's got a way tougher job going against individuals. The company's going to cave, it's just their calculus is such that it just doesn't make sense to fight if they can write a check, whereas the individual is fighting to stay out of jail. So the prosecutor's got an easy case, or relatively easy case, and probably a headline-grabbing case, if he goes against the corporation. And he has a grinded-out type of thing, which he can very well lose and which really takes a lot of work, against individuals. So — but I still lean very much — toward going against individuals. And —

CHARLIE MUNGERI do, too. That's what I meant when I said when antitrust violations were regarded as forgivable offenses, menial sins, we had a lot of them, and we still have some now that we prosecute people criminally. But we have really changed behavior on price fixing by the individual prosecutions, and we haven't had many of those prosecutions in finance yet. And we probably need some more. Don't you agree with that?

WARREN BUFFETTYeah, it's — absolutely, absolutely. And I will tell you this: we have 300,000-plus people working at Berkshire. Somebody is doing something wrong now, I mean, that — you know, you cannot have a city of 300,000 people and not have somebody behaving badly. And that's the thing — that is the one thing that — I don't worry about us making money, we'll figure out a way to do that. And it may be better or worse than we hope for. But it won't be a disaster, ever. The disaster is if somebody is doing something wrong that, you know, that actually reflects badly on the whole organization. And I know that's, to a degree, out of my hands. I can tell the managers, and they can tell the people that work for them that reputation is more important than anything else. And that's going to have an effect, and I think it's going to have more of an effect than having them — giving them some 200-page manual. But it's not going cure everything. And what we hope is when there is something wrong that we find it out early, and then it's up to us to do something about it. But we will have a problem of some sort, at some time, because it just — you know, 300,000 people are not going to all behave properly every day. It just doesn't happen. But the individual prosecution, and I've written about that a little bit in the annual report in terms of — the way to change behavior is to have the fear, at least among people who may be doing the wrong things, is to have the fear that somehow it's going to come home to them and hit them hard. And if the only fear is that the company's going have to write a big check, you're going to get way less change in behavior than if it'll hit home to the individual. Becky? (Applause)

Effect of major railroad accident on BNSF and Berkshire

BECKY QUICKThis comes from Mark Blakley from Tulsa, Oklahoma. He says there's been a number of railroad accidents in the past year. In January, the Wall Street Journal published an article highlighting the lack of insurance to cover a worst-case accident scenario. "Mr. [Matt] Rose of BNSF was mentioned as wanting to set up an insurance fund funded by the railroads to protect the industry in case of an accident, similar to a fund currently set up by nuclear power companies, but that idea has gained no traction. "How would a worst-case accident scenario impact BNSF and Berkshire Hathaway? And if the industry is lacking insurance for such an event, how can the company protect itself, and what exposure does Berkshire have should a major accident occur?"

WARREN BUFFETTYeah, well we're on both sides of that because Ajit [Jain] has offered the rail industry some very high limits to all the major railroads. But they don't like his price, presumably. And I would say this, the four major railroads really have the financial capacity to pay a huge award if something really terrible happened. The most — you know, I don't know which is the most dangerous — they have what they call hazmat, hazardous materials, and rails have to carry them. You're a common carrier, you're forced to carry them. And the railroads would really prefer they didn't carry them, but they do, they have to. And they probably can't get enough, ever get enough, in the way of payments per carload to really compensate them for the risk involved. But the four major railroads, certainly have the — it might be a very, very significant financial hit to them, but I think they have the capability of, if something really drastic happened, I think they do have the financial capability to handle that size — kind of an award. And if they feel that they don't, they can buy insurance from Ajit, but so far we haven't sold any. The companies have insurance, but they don't like — they're not going talk about the amounts that they have or anything of the sort because that becomes a honey pot sometimes, and it's not advisable to discuss your insurance limits publicly. But I would — it is true, as the writer mentions, that the nuclear risk — the government decided was too big, as they have with terrorism — decided it was too big to be borne by private industry. I don't think the consequences of any conceivable accident — you could probably dream up one — but of any conceivable accident on rails would go beyond the capability of the major railroads to pay. But it could be very, very large, relative to their net worth and relative to their current earnings. Charlie?

CHARLIE MUNGERYeah, the big surprise for everyone, of course, was British Petroleum.

WARREN BUFFETTYeah.

CHARLIE MUNGERNobody in their wildest dreams believed that a major oil company, from an accident in one well, would have a loss in so many tens of billions of dollars. And, of course, that's gotten a lot of attention. I don't know about Warren, but after that happened, I would have less enthusiasm for drilling in the Gulf. It was just such a big loss compared to anything.

WARREN BUFFETTAnd a gain, possible gain.

CHARLIE MUNGERAnd gain — possible gain. And that was a big oil field they tapped into, but it wouldn't remotely pay for this accident. And so — but I — Matt will know, the biggest rail accident in the history of the rails, has it cost $200 million? Is Matt there?

WARREN BUFFETTI don't think — I don't think Norfolk Southern has ever announced what that accident cost. But we are not getting paid enough, I can tell you this, for carrying chlorine or ammonia or something like that. I mean, it — just — you know, to buy appropriate insurance just to cover those kind of products, compared to the revenue, I don't think it ever would make sense. But we're required — they're going move from one place to another one way or another, either by truck or in some manner. And we are a common carrier. But it is not — that's not one that keeps me awake nights from a financial standpoint. The big risk is some form of very effective terrorism or action by a rogue state in terms of nuclear, chemical, biological, or cyber. And, you know, war acts are excluded in insurance policies. But you could have some kind of a terrorist act that would create damages, whether they're liable under insurance contracts is another matter, but could create damages like we have never seen. And there's a, you know, there's obviously a reasonable probability of that happening sometime in the next 50 years, and what that probability is I don't know. But it's not insignificant. Charlie?

CHARLIE MUNGERWell, we saw what one pilot could do recently in this Malaysian airplane. I think we live in a world where there are always going be big events, and I think we're lucky, to some extent, that we have some big corporations that can have elaborate safety programs and that can handle the losses when they occur. I don't think we'd be better off if we had a bunch of little Flivvers going around the airplanes.

Is commercial property-casualty insurance expansion too late?

WARREN BUFFETTJay?

JAY GELB— question is on Berkshire's primary commercial property-casualty insurance business. Berkshire plans to substantially expand the Berkshire Hathaway specialty insurance unit and has also become a major insurer of Lloyd's business through an Aon-brokered facility. Why is Berkshire increasing its presence in commercial property-casualty insurance when pricing has peaked?

WARREN BUFFETTWe — it's the first one that's more important. We entered the commercial insurance field the middle of last year, and we had some wonderful talent that wanted to join us. And we have a great amount of capital, a very, very good reputation, and we think we have the ability to both underwrite more intelligently than most, to keep larger limits than anybody, and to operate at costs significantly below average. So if you put those elements together, and you throw in Ajit Jain overseeing the operation, I think it's a terrific opportunity. And I think you will — and it wouldn't make any difference when we entered it. I mean, we entered it because we had the availability of some terrific people. That was the reason for the timing of it. And we'll have — we've added to that group significantly. Peter Eastwood runs it, and I think we will build a very, very significant commercial insurance operation over time. And I believe that that operation will operate with better underwriting results than the great majority of our competitors. Charlie?

CHARLIE MUNGERWell, I think it's a very logical thing for us to do. And, of course, when something is logical we don't hold back because we think the business cycle might possibly be a little better. It's a long-term play.

WARREN BUFFETTYeah.

CHARLIE MUNGERWe're not going away based on the little short-term troubles.

WARREN BUFFETTNo, it's a forever play. And — when we see a chance to enter a business we like, basically, with outstanding people and with some very fundamental competitive advantages, we're going to play the game and we're going to play the game hard.

Buy a sports team or sports equipment company?

WARREN BUFFETTStation 6?

AUDIENCE MEMBERMy name's Ed Boyle (PH) and I'm from Chicago. My question's for Warren and Charlie. Do you ever have any plans, or would you be interested, in buying a professional sport team —(laughter) — or sports equipment manufacturing company, being that we're — sports is in a global world today? Or is this out of the Berkshire game?

CHARLIE MUNGERWarren's already done it.

WARREN BUFFETTI owned a quarter of a major — a minor-league team, but it's not responsible for my position on the Forbes 400. (Laughter) The answer to your question about buying a sports team is no. In fact, if — Charlie and I — if you read that either one of us is buying a sports team, it may be time to talk about successors. (Laughter) We are — we do — sports equipment has generally not been a very good business, although, you know, obviously Nike's done incredibly well in its overall operation. But — we own Spalding. We own Russell. And you know, Spalding has been around a long, long time. A.G. Spalding, I forget when the hell he was — I think he was trying to take baseball to the rest of the world back in the, I don't know, the 1880s or something like that. But it's — generally speaking, if you look at the people that have made golf equipment, footballs, helmets particularly, baseball gloves, baseballs, it's not been a particularly profitable business. And certain aspects of it, like helmets, you know — the last thing Berkshire should do is own a helmet company. A helmet company should be owned by some guy that owes about a million dollars and doesn't have a dime to his name, because, you know, he is not going to be a target. And we would be the ultimate target. That's the reason — we used to be involved in Pinkerton, but we'd had no interest in — and we got offered the chance to buy the whole place, and the idea of owning a business that provided guards at airports, you know, when anything went wrong, you know, you're going to say that it was the guard's fault. And here's this super-rich corporation around there that is a perfect target. I mean, a guard company at airports, again, should be owned by somebody whose net worth does not get out to two figures. (Laughter) So, you won't see much of us in the sports arena. But Charlie here, are you looking at the Clippers or —? (Laughter) Now I'm worried that he is. No — (Laughter)

CHARLIE MUNGERWhatever Warren thinks about sports teams ownership, I like it less. (Laughter)

Secrecy, Bill Ackman, and activist investors

WARREN BUFFETTOK. Andrew.

ANDREW ROSS SORKINOK, Warren. You have long advocated for transparency and disapproved of greenmailers. Bill Ackman compared his amassing his stake in Allergan in stealth ahead of Valeant's bid to your purchase of Coca-Cola in the 1980s. Is that right? What do you make of the covert tactic Ackman is using from a policy perspective for the markets? And just as important, what do you make of the larger trend of activism in corporate America?

WARREN BUFFETTI hadn't heard that about Coca-Cola. I'm really not sure how that would come about. I mean, we bought stock in the open market, we never used a derivative transaction or any sort in buying it, or anything. I mean, and we certainly haven't taken it over yet. The — so I — I'm not sure — can you elaborate, Andrew?

ANDREW ROSS SORKINI don't have more from the —

WARREN BUFFETTOh yeah.

ANDREW ROSS SORKIN— the question. I believe Bill Ackman went on television at one point, had commented that using his stake, or buying the stake, rather, he did it covertly, and I think he was perhaps suggesting that, I don't know, maybe I will adjust the question. There have been times in the past when you have bought stakes in other companies and used specific rules through the SEC to do so with — to give you some room without disclosing. Maybe, will that adjust the question?

WARREN BUFFETTIt —

ANDREW ROSS SORKINOr you could just go to the activism question.

WARREN BUFFETTYeah, and tell me the activism question again, because we have never used derivatives or anything that would get us around the rules of reporting, I mean, it's that simple. But what's the second part?

ANDREW ROSS SORKINI think that the second part is what do you make of the larger trend of activism in corporate America, given that it's in the news so much today?

WARREN BUFFETTWell, I don't think it'll go away, and I think it scares the hell out of a lot of managers. (Laughs) The — there are cases — certainly cases where corporate management should be changed. I mean, you can't have thousands of corporations without that being the case. I think, generally speaking, that the — you know, the activists, if they get the price of the stock up one way or another, you know, that's going to end their interest in the business, so I don't think they're looking for — often they're not looking for permanent changes for the better in the business. But they're looking for a specific event that will result in a big price change, and — They're certainly attracting more and more money. In other words, the funds flowing to activist hedge funds and so on is — multiply them, sure, by a significant factor, and that means they can play the game on a bigger scale. And anything in Wall Street that looks like it's successful will generate a funds flow that will, you know, go on until it's no longer successful. Charlie?

CHARLIE MUNGERWell, you're right that the activism is causing more of a stir in corporate management than anything has in years. Practically nobody feels immune. When an activist comes into a company, 20 or 30 percent of the stock can change hands rather rapidly, and management that seemed entrenched is — suddenly is threatened. And, of course, that sort of thing causes a lot of anguish. And on the other side, the activists, by and large, are making a fair amount of money. And, of course, in the culture we live in, most people don't care how the money is earned, they just care whether they get it or not. And so that — that just grows like some — I don't know, the beanstalk of Jack. And so I think we have a very significant effect. And some of the stuff — you'll find an activist who is not what you'd want to marry into the family, going after a company you would never buy into. And when that happens, it reminds me of Oscar Wilde's definition of fox hunting. He said, "The pursuit of the uneatable by the unspeakable." (Laughter) And I think we're seeing some of that. It's — I don't think it's good for America, what's happening —

WARREN BUFFETTWhat do you think —

CHARLIE MUNGER— averaged out.

WARREN BUFFETTWhat do you think it'll be three years from now?

CHARLIE MUNGERBigger.

WARREN BUFFETTWow.

CHARLIE MUNGERWell, what's stopping it?

WARREN BUFFETTYeah. If it's bigger three years from now, it'll be a lot bigger. I mean, just the compounding of numbers.

CHARLIE MUNGERIt's really serious.

Buy smaller companies instead of waiting for an "elephant?"

WARREN BUFFETTOK. Gregg. (Laughter)

GREGG WARRENIf Berkshire's size is expected to be an ongoing constraint for growth, does it make more sense for the firm to target a larger collection of smaller companies that are growing faster and can do so for a longer period of time, rather than looking to bag a big elephant that is in all likelihood already reached maturity, leaves the firm to sit on larger-than-normal cash balances for a longer period of time, even if it means paying a higher price for the growth? And if the answer is no, then what is the opportunity cost to Berkshire shareholders for keeping a lot of excess cash on hand until the right deal comes along?

WARREN BUFFETTWell, the answer to the first is one doesn't preclude the other. You know, we'd be delighted to buy some company for 2 or 3 billion that we thought would do very well over time. But that applies to one for 20 or 30 billion. Now, if you get down to buying one for a couple hundred million, that may fit one of our subsidiaries to do that that knows the business. But — we're not passing up anything of any size that can have any real impact on Berkshire. And like I say, our subsidiaries made 25 tuck-ins last year, and they'll keep making more. They'll see things that fit them. But one, you know, one $30 billion deal is ten $3 billion deals, and a hundred $300 million deals. So, in terms of the reality of how we build a lot more earning power into Berkshire, which is what we're trying to do, our main emphasis should be on bigger deals. Charlie?

CHARLIE MUNGERWell, I agree with that. The idea of buying hundreds and hundreds of small businesses —

WARREN BUFFETTNot worth a damn.

CHARLIE MUNGER— not as bolt-ons for what we already have, it would be anathema.

WARREN BUFFETTYeah, there's lots of competition for the small deals. I mean, private equity is going after all kinds of small deals. In fact they just keep selling them to each other to some degree. We don't feel envious when we look at what they're doing, in the least. But that doesn't mean we can't find an occasional small business that fits in and that will do well. It's not going be the future of Berkshire, though. But I want to emphasize one does not preclude the other.

The most intelligent question you've been asked?

WARREN BUFFETTStation 7.

AUDIENCE MEMBERWilly Larsen (PH) from San Francisco. You both mingle with the smartest investors in the country, something that I don't have the opportunity to do. So to my question, what is the most intelligent question you have been asked recently on investing, and what was your answer to that question? (Laughter)

WARREN BUFFETTCharlie, you can go first on that while I think.

CHARLIE MUNGERWell, I've already done that when I answered the young gentleman who said he couldn't understand why Warren compared his — or Berkshire's book value increase to stock market index performance. In other words there are a lot of interesting questions that don't get much attention where there's a lot of irrationality.

WARREN BUFFETTThe question you asked, I get that frequently from the college students that come out. They say, "What's the most intelligent question that you've gotten in the past." And I never come up with a good answer, and I'm not coming up with one today —

CHARLIE MUNGERI don't like the question, do you?

WARREN BUFFETTNo. (Laughter) That's why we changed —

CHARLIE MUNGERI don't think it's quite fair.

WARREN BUFFETTThat's why I let you go first. (Laughter)

CHARLIE MUNGERYeah.

MidAmerican energy return on assets

WARREN BUFFETTOK, now we've hit 54 questions. So now we start going around to the stations in order. All of the journalists of each had six apiece, so we'll go to station 8.

AUDIENCE MEMBERPhilip Case, Manchester, New Hampshire. My question pertains to the MidAmerican Energy segment. On page 64 of our annual report, you provide us with segment data for each business. For the MidAmerican Energy segment, when I take earnings before interest and taxes and add back depreciation expense and subtract capex, the result is negative operating cash flow. When I repeat that exercise for each of the past five years, in its best year the segment generates $308 million of operating cash flow. When I divide that by tangible assets, the result is a return on tangible assets of 0.86 percent. Why are we allocating capital to a business that in its best year generates a return on tangible assets of less than 1 percent?

WARREN BUFFETTYou were doing great until you got to return on tangible assets. The — we love the math that you just described, as long as we are going to get returns on the added capital investment. And we are in businesses, whether it's wind energy in Iowa or whether with PacifiCorp after we bought it, there were lots of opportunities for capital investment. And the energy which we bought, we're looking forward to putting more capital in because as long as we get treated fairly by the regulators in the states that we operate, we will get appropriate returns on that. And the return is not measured by the cash minus the increased capital investment we're making. It's measured by the operating earnings after depreciation. And there will be times in our businesses where no net investment may be required. But we actually prefer the ones where net — in the utility business — where net investment is required because we like the idea of getting more capital out at reasonable returns. Now, the bet we are making is that regulatory authorities will treat us fairly in the future. And we've got every reason to believe that's true in the jurisdictions in which we operate. And one of the reasons we believe it's true is because we've done so much better than, really, the great majority of utilities in delivering electricity at lower rates than are charged by most utilities. We have a situation in Iowa, for example, where there is one stockholder-owned competitive utility, and some other municipal-owned ones, and if you look at our rates, they are significantly below those of our competitors. And in fact, one of our directors has a farm where he buys from two different sources, one being us. And his rate from us is dramatically lower than the one from the cooperative arrangement that exists. So, we have a deserved good reputation with the regulators that we're dealing with. We've improved the operations, including safety, incidentally, dramatically from the conditions that existed before we purchased the utilities. That's why they welcome us when we come to new states. And so if we can put more money into useful projects in those states, we've got every reason to believe we will get returns that are appropriate. But if you compute net cash generated from those, you will see nominal or negative figures for a considerable period as we add to our investment and we make those utilities even more useful for people in those jurisdictions. I think we'll get a fair return. We have somewhat similar situation at the railroad, too. But we're very happy about both of those businesses. Charlie?

CHARLIE MUNGERYeah, if the numbers you recited came from a declining department store, we would just hate it. But when it comes from a growing utility, we like it because we have such confidence that the reinvested money is going to do exceptionally well. It's just that simple.

WARREN BUFFETTYeah. Greg —

CHARLIE MUNGERThey're two different kinds of businesses.

WARREN BUFFETTGreg? Is Greg here? You want to — you might be able to give him a few figures that I don't remember off the top of my head in terms of comparative — how our prices compare, and give him a little more of a flavor on how the utility commissions do regard us and how they treat us fairly.

GREG ABELSure. When you look at our rates across each of the regions, effectively we're generally the low-cost provider, or in the low quartile. Your example, Warren, in Iowa was a great example. The last time we had a rate increase there was 1998. We've just currently had one this past year, so it's the first one in the past 16 years. And we don't see another one in the foreseeable future. And when you create that type of model with our regulators, obviously they're very supportive of the various projects we've introduced. So this past year we introduced a project in Iowa, it's a 1,000 megawatt project, $1.9 billion being incurred. And if you go to the gentleman's comment, yes, we're going put the — we'll deploy that $1.9 billion over the coming two years, but we'll earn 11-and-a-half percent — 11.6 percent return on it. Generally when we look at our utilities, we do pay attention to our capital, we try to keep it very close to our depreciation. That's what we put back into the business. We'll even earn on that capital, but the reality is the lion's share of our capital right now is growth capital. And we earn a very nice return on that.

WARREN BUFFETTGreg, you might comment, just a minute, I think they'd find it interesting, on what's happening in Iowa with the tech companies, simply because of what we're doing in the electric field. Or not simply, but in part because of what we're doing in the field of electricity.

GREG ABELRight. So when you look at the tech companies and the data centers that exist, if you just go across the river, we service Google in Council Bluffs. They've got a site that was initially a relatively small data center. They're looking at taking it to 40 to 50 megawatts, which is a small size of a power plant. But the reality is they're talking about ultimately building that to 1,000 megawatts. And we're seeing that replicated time after time in the state. And it's really due to two things. One, we've got these exceptionally low rates. And then the fact that a significant portion of our energy, as Warren highlighted earlier and I touched on, comes from renewable energy. They want those credits, they want to be associated with a utility that's producing green power.

Education market's future in U.S. and China

WARREN BUFFETTOK. Station 9, please. (Applause)

AUDIENCE MEMBERGood afternoon, Mr. Buffett and Mr. Munger. My name is Gao Ling Yun and I came from Shanghai, China. I focus on the education investment. Today, my co-worker, Yi Nuo Education Company and I have a question. What do you think about the education market in America and China in future? Thank you.

WARREN BUFFETTCharlie?

CHARLIE MUNGERWell, I didn't catch those last two words. In what?

WARREN BUFFETTHe wanted to know what we thought of the education market in U.S. and China, but he didn't —

CHARLIE MUNGERBut in what? He said in some — is it health care?

AUDIENCE MEMBERIn future.

CHARLIE MUNGERIn the future, I see. Well, we certainly are getting the easy questions late in the day. (Laughter)

WARREN BUFFETTYeah. Yeah. (Laughter)

CHARLIE MUNGERI think America —

WARREN BUFFETTWhatever he says, I agree with. (Laughter)

CHARLIE MUNGERI think America made a huge mistake when they allowed the public schools, and many particularly big school systems, to just go to hell. (Applause) And I think the Asian cultures are less likely to do that. So to the extent that Asian cultures are avoiding some of our mistakes, why, I just wish we were more like them.

WARREN BUFFETTOK. (Applause)

Buffett's joke about Munger's hearing

WARREN BUFFETTI probably shouldn't tell you this. When Charlie was having a little trouble there on those last two words — I get a little worried about Charlie, don't know whether I should talk about this, but — (Laughter) I thought maybe he was losing his hearing and I didn't want to confront him with it. I mean, we've been pals for a long time, so I went to the doctor and I said, "Doc, I've got this wonderful partner, but I think maybe his hearing is going on him. "And I want to talk to him about it. I mean, how do you say that to somebody you've known that long? And what should I do?" He says, "Well, you stand across the room, talk to him in normal course of — tone of voice, and let me know what happens." So the next time I was with Charlie, I stood across the room and I said, "Charlie, I think we ought to buy General Motors at 35, do you agree?" Not a flicker. I go halfway across the room. I say, "Charlie, I think we ought to buy General Motors at 35, do you agree?" Nothing. Get right next to him, in his ear, "Charlie, I think we ought to buy General Motors at 35, do you agree?" He said, "For the third time, yes." (Laughter and applause) So speak up, speak up. (Laughs)

Is housing lending reform needed?

WARREN BUFFETTStation 10.

AUDIENCE MEMBERYes, this is — Glen Green (PH) from Chicago. First of all, I want to thank you for allocating capital so well all these years, very much appreciated. The question has to do with housing and housing reform more specifically, and there's clearly legislation in Washington, D.C. right now talking about reforming the GSEs, specifically Fannie and Freddie. Do you think we need housing reform? What would be a reasonable approach to do it, and if private participants were involved, would that make sense for Berkshire given Ajit's actuarial skills and your ability to allocate capital?

WARREN BUFFETTWell, I think that — and Charlie may disagree with me on it, I think that the 30-year fixed-rate mortgage is a terrific boon to home owners. It's not necessarily such a great instrument to own as an investor, but I think it's done a lot for home ownership. May have been abused in some cases, but overall it's done a terrific job for home ownership in the country. Let people get into homes earlier than they might have been able to otherwise, kept costs down to quite a degree. And so I would hope that — and the government guarantee part of it does keep the cost down. Nobody — no private organizations can do it. I mean, home mortgages are an 11 trillion-or-so dollar market, and there's not the insurance capacity, or remotely the insurance capacity, for private industry to do the job, and the rates would be much higher. So I think you keep the government in the picture. Now, the question is how you keep the government in the picture without keeping politics in the picture? And we've found some of the problems with that, in terms of not only Fannie and Freddie being — doing a lot of dumb things on their own, but being prodded into doing some of those things by politicians. And I think there could be a way — I wrote an article 20, or 30 or — probably 30 years ago, an op-ed piece that appeared, I think, in the "Washington Post," when the F-D-I — well, when FSLIC, the savings and loan guarantee operation was essentially falling apart, and suggesting for the FDIC some way to get the private sector into pricing and evaluating the risk, in that case, of banks, but essentially the government being the main insurer. There could be — there could well be a way that that model, and it's being explored now, that model works in terms of home mortgage insurance. I don't think we would likely be a player, because I think that other people would be more optimistic than we would be in setting rates. In the end, the government would have to be the main insurer. You might have a situation where private industry priced 5 percent of it and the government took the other 95 percent and, in turn, even guaranteed the 5 percent by the private industry once the private investors went broke. But I do think it's very important to get housing, the mortgages for homes — to get that a correct national policy. I know it's being worked on. And I think, you know, I think it's very unlikely that Berkshire Hathaway would play any part in it. Charlie, what are your thoughts?

CHARLIE MUNGERWell, when private industry was allowed to take over pretty much the whole field, we got the biggest bunch of thieves and idiots that you can imagine screwing up the whole system and threatening all of us. So I'm not very trustful of private industry in this field. And so, as much as I hate what politicians frequently do, I think the existing system is probably pretty sound. At the moment, Fannie and Freddie are being pretty conservative and they're making almost all the home loans. I think that's OK, and I'm not anxious to go back to where the investment banks were in a big race to the bottom, in terms of creating phony securities.

WARREN BUFFETTYeah, and I think — one question is whether you let Fannie and Freddie just run off as is, and I don't know —

CHARLIE MUNGERInstead of keep doing just what they're doing.

WARREN BUFFETTBut I think — I think you may — I think certainly one of the things that led Fannie and Freddie astray was the desire to serve two masters and increase earnings at double-digit ranges. And to do that, they started doing big portfolio activities. I think if Freddie and Fannie had stuck to insuring mortgages and not become the biggest hedge funds in the country, because they did have this capability of borrowing very cheap, very long, and therefore could get a reasonable — what looked like a reasonable spread on a huge portfolio action. I think that was a big contributing factor to —

CHARLIE MUNGERWell, they became, in effect, private corporations. But they're not anymore, Warren. They're —

WARREN BUFFETTYeah.

CHARLIE MUNGER— and they are at the moment being fairly conservative.

WARREN BUFFETTThere are people who want them to return to being private corporations, though.

CHARLIE MUNGERYeah, but I think that's a mistake because when they really got lousy, it's because the private companies were taking over the whole mortgage market as bad lending drove out good. And Fannie May and Freddie Mac, to hold up their volumes, joined in the rush to laxity and fraud and folly. And so —

WARREN BUFFETTWould you let them have portfolio activities at all?

CHARLIE MUNGERI don't see any need for it.

WARREN BUFFETTYeah, I don't either. And I think that did get them into quite a bit of trouble. And I think those were done in order to keep the earnings per share game going.

CHARLIE MUNGERNo, I think that particular experiment in privatization was a total failure. (Applause)

WARREN BUFFETTOK. Station 11, and —

CHARLIE MUNGERAnd we made a billion dollars out of it, if you remember.

WARREN BUFFETTWell, I wasn't going mention that. (Laughter)

"Fortunate" to partner with 3G and Jorge Paulo Lemann

AUDIENCE MEMBERGood afternoon. Whitney Tilson, shareholder from New York City. I've just started reading "Dream Big," the book recently released about your new Brazilian partners and I'm really enjoying it. Their track records are unbelievable, and as a long-time Berkshire shareholder I'm delighted that you've partnered with them, and hope that Heinz is the first of many elephants that you bag together.

WARREN BUFFETTCan I interrupt you just for one second, Whitney? I appreciate that sentiment, and that book is available in — (Laughter) I should have mentioned it earlier. The book was written in Portuguese and it was a best seller in Brazil for the last year. But it just got translated very, very, very recently and it is available at the Bookworm. So — Whitney, you can go on from there, but I did want to mention it's available.

CHARLIE MUNGERWhy would you assume that all of our shareholders don't read Portuguese? (Laughter)

AUDIENCE MEMBERI'll also mention that it is only available on Amazon via Kindle. The only hard copies in the world in English that I'm aware of are available downstairs, so that will create quite a run on the book, I think.

WARREN BUFFETTWe will raise the price. (Laughter)

AUDIENCE MEMBERSo I have two questions related to this. First, I know you've known these gentlemen probably for a couple decades, and I'd love to hear your observations on what's their secret sauce? It's got to be more than zero-based budgeting, which we all hear about. What are the key things they do that produces such extraordinary returns? And secondly, when I look at some of the biggest, best deals that you've done in recent years, important factors seem to be your longtime personal relationships, for example, with Jorge Paulo Lemann in the Heinz deal, or your brand name. The Warren Buffett stamp of approval mattered a lot to some of the deals you did with, for example, Goldman or GE during the financial crisis. And I just wonder what your thoughts are on whether your successors will have the same opportunities to do wonderful deals like this?

WARREN BUFFETTIt will become the Berkshire brand. I mean, the first year or so people will wonder about it, but the person that follows me will bring the same qualities, including the ability to write a very big check. But other things besides that, and it will be a Berkshire brand that may have started with me, but that will continue. Going on to our Brazilian friends, they're very smart, they're very focused, they're very hardworking and determined. They're never satisfied. And as I said earlier, when you make a deal with them you've made a deal with them. They don't overreach, they don't overpromise. They've got a lot of good qualities. And if you read the book, I think you'll probably learn a lot more about the qualities that made them what they are. But we are very fortunate to be associated with them, and we're very fortunate to be associated with a number of the managers that have joined us, too. We want to be a good partner ourselves because it attracts good partners. And that is a reputation that Berkshire deserves. I mean, Charlie and I do our part toward keeping that reputation intact, but that takes a lot of other people also behaving in a way that causes people to want to join them, causes people to want to trust them. And that will be part of a Berkshire brand. Charlie?

CHARLIE MUNGERYeah, I always say the way to get a good spouse is to deserve one. And the way to get a good part —

WARREN BUFFETTWhat's your second way? (Laughter)

CHARLIE MUNGER— and the other — well, but to get a good partner you deserve a good partner. It's an old-fashioned way of getting ahead. And the interesting about it is it still works in these modern times. Nothing changes, if you just behave yourself correctly, it's amazing how well it works. (Applause)

WARREN BUFFETTYou have any further thoughts on the Brazilians?

CHARLIE MUNGEROn what?

WARREN BUFFETTOn the success of Jorge Paulo and his associates, beyond what I laid out?

CHARLIE MUNGERWell, there — you can't skirt the fact that they're very good at removing unnecessary costs.

WARREN BUFFETTSure.

CHARLIE MUNGERAnd I do not consider that in any way immoral or wrong or something.

WARREN BUFFETTNot in the least.

CHARLIE MUNGERI think removing unnecessary costs is a service to civilization. And I think it should be done with some — what do they call it? Mercy, really.

WARREN BUFFETTSensitivity.

CHARLIE MUNGERYeah, sensitivity. But I don't think it's good for our system to have a lot of make-work and what have you. So —

WARREN BUFFETTIf it was, we'd love government, right?

CHARLIE MUNGERYeah, and so, generally speaking, I think they're an interesting example to all of us.

WARREN BUFFETTYeah, we're learning from them.

CHARLIE MUNGEREverybody is.

WARREN BUFFETTOK —

CHARLIE MUNGERSome reluctantly.

We'll decide what to do with "too much" cash when we get there

WARREN BUFFETTOK. Station 1.

AUDIENCE MEMBERHi, Warren. Hi, Charlie. My name is Walter Chang (PH) and I came from Taiwan for this meeting. Seven years ago, I named my first-born son after you, Warren, so the second one hasn't come yet —

WARREN BUFFETTHow's he — how's he —

AUDIENCE MEMBER— so sorry —

WARREN BUFFETT— how's he — how's he doing?

AUDIENCE MEMBERHe's doing great.

WARREN BUFFETTOK.

AUDIENCE MEMBERSo he says hi. He always says, "Warren Buffalo," so, sorry — (Laugher) — sorry about that.

WARREN BUFFETTI've been called — I've been called worse. (Laughter)

AUDIENCE MEMBERMy question is for both of you. We wish you continued good health, and when both of you break Mrs. B's record of working to 103 years old, that will be 20 years from now. If Warren — or sorry, if Berkshire breaks that record and basically doubles over the next ten years and doubles again, you'll have a market cap of $1.2 trillion. What do you think Berkshire will look like at that time and can you get there sooner? (Laughter)

WARREN BUFFETTWe may have to. Your original hypothesis may not hold up. I do plan on writing about that next year, but there's no question that at some point we will have more cash than we can intelligently deploy. And then — in the business — and then the question is what do we do with the excess? And that will depend on circumstances at the time. I mean, if the stock can be bought in at a price that makes sense for continuing shareholders, in other words that their value is enhanced by the repurchase, you know, if I were around at that time I would probably be very aggressive about repurchasing shares. But who knows what the circumstances will be. Who knows what the tax law will be then, you know. What I do know is that we will have more cash than we can intelligently invest at some point in the future. That's built into what we're doing, and I hope that isn't real soon, and I don't think it probably will be. But it's not on a distant horizon. I mean, the numbers are getting up to where we will not be able to deploy intelligently everything that's coming in. But then we can deploy — it may be that we can deploy very intelligently and repurchase the shares. Who knows what the circumstances will be? All I can tell you is that whatever is done will be done in the interest of the shareholder. That, you know, that is what every decision starts from, from that principle. Charlie?

CHARLIE MUNGERIt's not a tragedy to succeed so much that future returns go down. That's success, that's winning.

WARREN BUFFETTWell, he'll name his next child after you. (Laughter) OK.

Uber, Airbnb, and the "disruptive" sharing economy

WARREN BUFFETTStation 2.

AUDIENCE MEMBERAfternoon. My name's Michael Sontag (PH) and I'm from Washington, D.C. My question's about the sharing economy. What larger implications do you expect companies like Uber and Airbnb to have on their sectors, and do you think this business model is here to stay?

WARREN BUFFETTWell, they are obviously trying to disrupt some other businesses, and those businesses will fight back in competitive ways, and they may try to fight back through legislation. You know, when anybody's threatened, or any business is threatened, it tries to fight back. If you go back to when State Farm came on the scene in 1921, that the — or '20, or whenever it was, the agency system was sacrosanct, in terms of insurance. It'd been around forever and the big companies were in Hartford or New York and they fought over having the number one agency in town. So if you came to Omaha and you were at Travelers or Aetna, or whomever it might be, your objective was to get the agent. And the policy holder really wasn't being thought about. And then State Farm came along and they had a better mouse trap, and then GEICO came along with a better mouse trap yet. And so, every — the industries originally — the insurance companies fought back in a lot of ways. But one of the ways they tried to do it was to insist, you know, on various state laws involving what agents could do and what could not be done in insurance without agents and all that. It's — that's standard. And you'll see that, and in the end the better mouse trap usually wins. But the people with the second or third-best mouse trap will try to keep that from happening. The ones you name, I don't know anything about. I mean, I know what they do, but I don't their specific prospects, which is why we kind of stay away from that sort of thing because we don't — we know there'll be change, and we don't know who the winners will be. And we try to stick with businesses where we know the winners. We know — and there are energy companies that — a railroad. A lot of our businesses are very, very, very likely to be winners, and that doesn't mean they don't have some change involved with them, but they're going to be winners. And then there's other fields where we can't pick the winners, and so we just sit and watch. We find them interesting but we don't get tempted. Charlie?

CHARLIE MUNGERWell, I think the new technology is going to be quite disruptive to a lot of people. I think retailing, in particular, is facing some very significant threats. And you heard Greg Abel talk about a power plant in Iowa that was huge to serve one Google server farm. When you get computer capacity all over the world on this scale, it is changing the world. I mean, you're talking about —

WARREN BUFFETTFast, too.

CHARLIE MUNGERYeah, fast. So — and I think it's going to hurt a lot of people just as all the past technology investments hurt a lot of people. I think Berkshire, by and large, is in pretty good shape.

WARREN BUFFETTWhere do you think we're most vulnerable?

CHARLIE MUNGERWell, I don't think I want to name them.

WARREN BUFFETTOK. (Laughs) Now you've got them all wondering, Charlie. (Laughs)

Teach financial literacy to children in school?

WARREN BUFFETTSection 3.

AUDIENCE MEMBERGood afternoon. My name is Diane Wilen, and I'm from Hollywood, Florida. I've worked in public education for over 35 years. My concern is that I think that we need to do more to proactively prepare our children and youth to be financially literate, especially in light of the serious financial stresses many adults in our society face on a daily basis. My question is, do you think that financial literacy should be a standard part of the curriculum in our nation's schools and, if so, how early do you think it should begin and what do you think some of the most important learning goals would be?

WARREN BUFFETTWell, certainly the earlier the better. I mean, habits are such a powerful force in everyone's life, and certainly good financial habits. You know, I see it all the time. I get letters every day from people that have committed some kind of financial lunacy or another, but they didn't know it was lunacy and, you know, they didn't get taught that. Their parents didn't teach it to them. And digging yourself out of the holes that financial illiteracy can cause, you know, you can spend the rest of your lifetime doing it. So I'm very sympathetic to what you're talking about. We've done a little bit. I don't know whether you saw our "Secret Millionaire's Club" exhibit in the exhibition hall. And you want to talk to people at a very young age. Charlie and I were lucky. I mean, we got it in our families so that, you know, we were learning it at the dinner table when we were — before we knew what we were learning. And that happens in a lot of families, and in a lot of families it doesn't happen. And, of course, you mention about childhood financial literacy. Then there's a big problem with adulthood, adult financial illiteracy. And it's harder to be smarter or have better habits than your parents unless the schools intercede or —probably, you know, the schools are your best bet, but it can be done — a lot can be done on television or through the internet. But it is really important to have good financial habits, and I think anything you can do very early through the school system, you know, would certainly have my vote. Charlie?

CHARLIE MUNGERWell, I'm not sure if the schools are at fault. I would place most of the fault with the parents. I think the most powerful example (applause) is the behavior of the parent, and so if you're —

WARREN BUFFETTWell, I agree with — the most important thing is the parents, but not everybody gets the right parents.

CHARLIE MUNGERYeah. Well, it's very hard to fix people who have the wrong parents. (Laughter)

WARREN BUFFETTWell, let's just say you have the job of fixing people that have the wrong parents. What would you do about it?

CHARLIE MUNGERWell, what's the — if you had the job of living forever, what would you do about it? It gets to be so impractical. (Laughter) Who would ever believe that I would have any ability to fix all the people that have the wrong parents?

WARREN BUFFETTHow about a few? (Laughs)

CHARLIE MUNGERI don't think I'm good at that, either. The only thing I've ever been slightly good at in my life is raising the top higher. It's just — they left the talent out of me. I don't scorn it. I think it's a noble work. I just — I'm no good at it. I don't think you're so hot, either. (Laughter)

WARREN BUFFETTIf he hadn't been in public, it would have been stronger. (Laughs) Stop by our "Secret Millionaire's Club," though. You may get some ideas.

CHARLIE MUNGERBy the way, the main troubles with education in this field are probably not in the grade schools. They're probably in the colleges. There's a lot of asininity taught in the finance courses at the major universities, and even the departments of economics have much wrong with them. So, if you really want to start fixing the world, you shouldn't assume that when it gets highfalutin, it's a lot better.

WARREN BUFFETTWell — (Applause) There was certainly a period of at least 20 years, I would say, when I think the net utility of knowledge given to finance majors was negative in major universities. I think maybe it's getting better now, but it is a —

CHARLIE MUNGERImagine it. Net utility was negative. It was (unintelligible) asinine.

WARREN BUFFETTYeah.

CHARLIE MUNGERI wish you'd use normal English. (Laughter)

WARREN BUFFETTI'm worried about what English you're going to use. (Laughter) I don't want to egg him on. The — it was — frankly, it was fascinating to me because here was something I understood. And to watch — I mean extraordinary universities that, essentially, were teaching people some very, very dumb things. And where even to obtain the positions in the departments of those schools, you had to subscribe to this orthodoxy, which made no sense at all. And it got stronger and stronger, and then — now it's changing to quite a degree. But it may have soured my feeling on higher education to an unwarranted degree because that — you know, it may have been particularly bad in the area that I was familiar with, but it was bad. Have I got — is my language okay, Charlie?

CHARLIE MUNGERYou would have liked academics better if you'd have taken physics instead of finance. (Laughter)

WARREN BUFFETTYeah. Well, I'm glad I didn't. (Laughs)

"There's no advantage to breaking Berkshire into pieces"

WARREN BUFFETTOK. Area 4.

AUDIENCE MEMBERMr. Buffett and Mr. Munger. First of all, great party last night. I stood there for half an hour and still couldn't get a drink, so great crowd. Oh, by the way this is Zhang Xiaozhu (PH) from Ottawa, Ontario. My question relates to the age-old question about dividends and also valuation. I think you guys are penalized by the great success of your enormously successful company. It's huge, so no one knows how to properly valuate it, and also because of your yardstick you picked, which is not quite fair. Every year I see some of the old shareholders, and they are waiting to get a dividend, using some of the monies to supplement their retirements. I do not feel it's essentially fair for them to sell their shares. I remember the case study you had in last year's letter to the shareholders. You did a case study comparing issuing dividends or having the shareholders selling their shares directly. Because of the shares are so depressed, I do not feel it's very fair. So I'm wanting to ask, is there a practical way for you to break up the company into four logical groups, as you report in every year's AGM, and unlock some of the values and still allow you to allocate the capital freely, please?

WARREN BUFFETTWe would lose — we would not unlock value. We would lose significant value if we were to break it into four companies. There are large advantages in both capital allocation, occasionally in the tax situation. There's — Berkshire is worth more as presently constituted than in any other form that I can conceive of unless we engaged in something to de-tax the whole place, which we're not going to do and which would probably be impossible anyway, but even if it was possible, we wouldn't be doing it. But the — we did have this vote, and it's now time to adjourn and then we'll come back in a few minutes for the annual meeting. But we did have a vote, and unfortunately we — there's not a way to deliver a dividend to a few shareholders and not to others, although — whereas there is a way to — for shareholders to maintain an even and greater dollar investment in Berkshire, in terms of the underlying assets, and still cash out annually some portion of their investment, just like they would with a partnership, and incur fairly little tax in the matter. And I wrote about that last year and you've read that. But there's no advantage to breaking Berkshire into pieces. It would be a terrible mistake. Charlie?

CHARLIE MUNGERWell, generally I think that you're not being deprived when the stock goes from 100 to 200, and you didn't get a dividend that year.

WARREN BUFFETTYeah. Well, it isn't going to go up every year, though. I mean, it's going to —

CHARLIE MUNGEROr two years or whatever it was.

WARREN BUFFETTYeah. We had, by a 45-to-1 vote, we had people — which actually surprised me. We had people say that they prefer the present policy to a change in that policy, so it would be a big mistake to change. And with that we will end the Q-and-A session. We'll be back in about ten or so minutes, and we'll have an annual meeting. Thank you. (Applause)

Berkshire's formal annual meeting

WARREN BUFFETTOK. If you'll take your seats, we'll get on to the meeting. OK. I have a script here that I'll read from and make sure everything's proper. The meeting will now come to order. I'm Warren Buffett, chairman of the board of directors of the company, and I welcome you to the 2014 annual meeting of shareholders. This morning, I introduced the Berkshire Hathaway directors that are present. Also with us today are partners in the firm of Deloitte & Touche, our auditors. They're available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire. Sharon Heck is secretary of Berkshire Hathaway. She will make a written record of the proceedings. Becki Amick has been appointed inspector of elections at this meeting. She will certify that the count of votes cast in the election for directors and the motion to be voted upon at the meeting. The named proxy holders for this meeting are Walter Scott and Marc Hamburg.

WARREN BUFFETTDoes the secretary have a report of the number of Berkshire shares outstanding, entitled to vote, and represented at the meeting?

SHARON HECKYes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 5, 2014, there were 857,848 shares of Class A Berkshire Hathaway common stock outstanding with each share entitled to one vote on motions considered at this meeting and 1,179,267,338 shares of Class B Berkshire Hathaway common stock outstanding with each share entitled to one ten-thousandth of one vote on motions considered at this meeting. Of that number, 601,494 Class A shares and 682,365,717 Class B shares are represented at this meeting by proxies returned through Thursday evening, May 1.

WARREN BUFFETTThank you. That number represents a quorum, and we will, therefore, directly proceed with the meeting.

Approval of last year's minutes

WARREN BUFFETTFirst order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott who will place the motion before the meeting.

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

WARREN BUFFETTDo I hear a second?

VOICEI second the motion.

WARREN BUFFETTThe motion has been moved and seconded. Are there any comments or questions? We will vote on this motion by voice vote. All those in favor say, "Aye." Opposed? The motion is carried.

Election of Berkshire directors

WARREN BUFFETTThe next item of business is to elect directors. If a shareholder is present who did not send in a proxy or wishes to withdraw a proxy previously sent in, you may vote in person on the election of directors and other matters to be considered at this meeting. Please identify yourself to one of the meeting officials in the aisle so that you can receive a ballot. I recognize Mr. Walter Scott to place a motion before the meeting with respect to election of directors.

WALTER SCOTTI move that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Don Keough, Thomas Murphy, Ronald Olson, Walter Scott, and Meryl Witmer be elected as directors.

WARREN BUFFETTIs there a second?

VOICEI second the motion.

WARREN BUFFETTIt has been moved and seconded that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Don Keough, Thomas Murphy, Ronald Olson, Walter Scott, and Meryl Witmer be elected as directors. Are there any other nominations? Is there any discussion? The nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballot on the election of directors and deliver their ballot to one of the meeting officials in the aisles. Ms. Amick, when you are ready you may give your report.

BECKI AMICKMy report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast not less than 660,619 votes for each nominee. That number far exceeds a majority of the number of the total votes of all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETTThank you, Ms. Amick. Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Don Keough, Thomas Murphy, Ronald Olson, Walter Scott, and Meryl Witmer have been elected as directors.

Advisory vote on executive compensation

WARREN BUFFETTThe next item on the agenda is an advisory vote on the compensation of Berkshire Hathaway's executive officers. I recognize Mr. Walter Scott to place a motion before the meeting on this item.

WALTER SCOTTI move that the shareholders of the company approve, on an advisory basis, the compensation paid to the company's named executive officers as disclosed pursuant to Item 402 of the regulation S-K, including the compensation discussion and the analysis and the accompanying compensation tables and the related narrative discussion in the company's 2014 annual meeting proxy statement.

WARREN BUFFETTIs there a second?

VOICEI second the motion.

WARREN BUFFETTIt has been moved and seconded that the shareholders of the company approve, on an advisory basis, the compensation paid to the company's named executive officers. Is there any discussion? I believe there may be on this. Do we have anyone? OK. Ms. Amick, when you are ready, you may give your report.

BECKI AMICKThe report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast not less than 666,751 votes to approve, on an advisory basis, the compensation paid to the company's named executive officers. That number far exceeds a majority of the number of the total votes of all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETTThank you, Ms. Amick. The motion to approve, on an advisory basis, the compensation paid to the company's named executive officers is passed.

WARREN BUFFETTThe next item on the agenda is an advisory vote on the frequency of a shareholder advisory vote on compensation of Berkshire Hathaway's executive officers. I recognize Mr. Walter Scott to place a motion before the meeting on this item.

WALTER SCOTTI move that the shareholders of the company determine, on an advisory basis, the frequency, whether by annual, biannual, or triannual, with which they shall have an advisory vote on the compensation paid to the company's named executive officers as set forth in the company's 2014 annual meeting proxy statement.

WARREN BUFFETTIs there a second?

VOICEI second the motion.

WARREN BUFFETTIt has been moved and seconded that shareholders of the company determine the frequency with which they have an advisory vote on compensation of named executive officers with the options being every one, two or three years. Is there any discussion? I believe on this one there is a — somebody wishes to speak? Yes.

AUDIENCE MEMBER— Boston, Massachusetts. I suggest a vote of one year in order to change the policy of named executives. In addition to Warren, Charlie, and Marc, the company should report Ajit Jain's salary. He is irreplaceable, and Warren works integrally with him in setting insurance rates. Since —five — there should be five members of management, either another insurance manager or someone from the capital-related industries group, from BNSF or MidAmerican, should also be added. You are so lean at corporate, the group managers should be named. Two should be named, but at least Ajit should be added. The CEOs of former Fortune 500s used to disclose what is their compensation now. There is no retirement age at Berkshire, which is fine, but there should be more depth of disclosure, and this should be done next year, not three years from now.

WARREN BUFFETTIs there anyone else that — doesn't appear to be. I personally actually agree with a one-year frequency on this, normally, but it does seem in the case of Berkshire that considering what's required and considering what the numbers are and everything, that it probably doesn't make a whole lot of sense. But I generally feel one year is not a bad idea. I do not think it's a good idea to start selecting people among the managers to give compensation for the reasons discussed earlier. OK. Ms. Amick, when you are ready, you may give your report.

BECKI AMICKMy report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast 113,530 votes for a frequency of every year, 2,412 votes for a frequency of every two years, and 552,309 votes for a frequency of every three years of an advisory vote on the compensation paid to the company's named executive officers. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETTThank you, Ms. Amick. Shareholders of the company determined, on an advisory basis, that they shall have an advisory vote on the compensation paid to the company's named executive officers every three years.

Proposal to set greenhouse gas reduction goals

WARREN BUFFETTThe next item of business is a motion put forth by Meyer Family Enterprises, LLC, a Berkshire shareholder represented by Brady Anderson and Linda Nkosi. The motion is set forth in the proxy statement. The motion directs Berkshire Hathaway to establish quantitative goals for reduction of greenhouse gases and other air emissions at its energy generating holdings and publish a report to shareholders on how it will achieve those goals. The directors have recommended that the shareholders vote against the proposal. I will now recognize Brady Anderson and Linda Nkosi to present the motion. To allow all interested shareholders to present their views, I ask them to limit their remarks to five minutes.

LINDA NKOSIGood afternoon, Mr. Buffett, Mr. Munger, ladies and gentlemen. My name is Linda Nkosi from Swaziland, and this is Brady Anderson from Iowa. We are students of economics and finance at Wartburg College in Iowa and are here representing a delegation of students who manage a $1.2 million portfolio that includes shares of Berkshire Hathaway. We very much appreciate the opportunity to take part in this celebrated event. We stand to represent Investor Voice SPC of Seattle on behalf of the Meyer Family Enterprises to move Item 4 on page 12 of the proxy, a proposal that Berkshire establish goals for greenhouse gas reduction at its energy holdings. We applaud Berkshire Hathaway Energy for having the largest renewable energy portfolio in the country. That said, it is also true that BH Energy generates close to half its power by burning coal, which makes BH Energy a huge emitter of greenhouse gas. Given these facts, it would benefit BH Energy to have a carbon reduction plan. Sixty-six percent of U.S. electric utilities have greenhouse gas reduction goals. Berkshire Hathaway Energy is not among them, despite stating on its website, "We will set challenging goals and assess our ability to continually improve our environmental performance." As shareholders are aware, climate disruption creates profound financial risk for the global economy as well as for Berkshire. The Investor Network on Climate Risk, whose members manage more than $11 trillion, and the Carbon Disclosure Project, representing more than $80 trillion in assets globally, have called on companies to disclose risks related to climate change, as well as to take steps to reduce that risk.

BRADY ANDERSONThe SEC has stated that climate risks are financially material and that they must be disclosed. This is because a high-carbon approach creates risk, whereas a low-carbon approach avoids risk, both now and into the future. Without planning and a set of forward-looking goals, neither management nor investors can truly know where they stand. In addition, Berkshire's core businesses are vulnerable to climate disruption. Why? Because many of the most negative financial impacts of climate disruption are borne by insurance companies. Berkshire's GEICO took its single largest loss in history from Superstorm Sandy, a $490 million loss due to claims on more than 46,000 flooded vehicles. Berkshire's reinsurance business is likely to bear significantly more risk from the trends towards increasingly extreme weather. For a time, some portion of these costs may be pushed onto customers in the form of higher premiums, but it is a prudent — it is (not) a prudent or sustainable long-term strategy to impose on customers the cost of not planning for the greenhouse gas reductions that climate scientists agree are urgently needed. In summary, hundreds of the world's largest institutional investors, representing trillions of dollars of invested assets, call on companies to set greenhouse gas reduction goals. Such goals are key tools for reducing the profound business risk that climate change creates. More than two-thirds of United States utilities already have such goals, and institutional proxy advisory firms repeatedly recommend voting for goal setting and disclosure of this sort. Therefore, please join us in voting for this common sense proposal, which not only benefits the planet, it will preserve, if not boost, Berkshire profits by avoiding risk. Thank you for this truly amazing opportunity to share our concerns.

WARREN BUFFETTOK, and thank you. (Applause) I assume that the fact the lights went off, there's nobody additionally that would like to speak on the motion for or against? Hearing nothing, I'll say that the motion is now ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballot on the motion and deliver their ballot to one of the meeting officials in the aisles. Ms. Amick, when you're ready, you can give your report.

BECKI AMICKMy report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast 49,553 votes for the motion and 561,642 votes against the motion. As the number of votes against the motion exceeds a majority of the number of votes of all Class A and Class B shares outstanding, the motion has failed. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETTThank you, Ms. Amick. The proposal fails.

Shareholder proposal to pay a dividend

WARREN BUFFETTThe next item of business is a motion put forward by David Witt. The motion is set forth in the proxy statement. The motion requested the board of directors consider payment of a dividend. The directors have recommended the shareholders vote against the proposal. Mr. Witt available? As neither Mr. Witt nor his representative is present to present their proposal for action, the motion fails.

Meeting adjourned

WARREN BUFFETTOK. Does anyone have any further business to come before this meeting before we adjourn? If not, I recognize Mr. Scott to place a motion before the meeting.

WALTER SCOTTI move that this meeting be adjourned.

WARREN BUFFETTIs there a second?

VOICEI second the motion to adjourn.

WARREN BUFFETTThe motion to adjourn has been made and seconded. We will vote by voice.