2018 年股东大会 · 上午场

Buffett opens a box of peanut brittle for Munger

WARREN BUFFETTGood morning.

VOICEWarren and Charlie, we love you! (Applause)

WARREN BUFFETTI'm Warren. He's Charlie. Charlie does most things better than I do, but — (laughter) — you know, this one's a little tough. Charlie, maybe you can chew on that a while. OK. (Laughter) At the formal meeting that will begin at 3:45, we will elect 14 directors. Charlie and I are two of them, and I would like to introduce the other 12. I'll do it in alphabetical order. If they will stand as I announce their name. Withhold your applause. May be hard to do, but give it your best. And when we get all through, then you can let loose, but — We'll do this alphabetically beginning with Greg Abel, if you'll stand and stay standing. Howard Buffett, Steve Burke, Sue Decker, Bill Gates, Sandy Gottesman, Charlotte Guyman, Ajit Jain, Tom Murphy, Ron Olson, Walter Scott, and Meryl Witmer. (Applause)

Accounting-rule net loss "not representative" of the business

WARREN BUFFETTLet's see. This morning, we posted both our earnings and our 10-Q. And if we can put up slide one, you can take a look at what was reported. And as I warned you in the annual report, a new accounting rule was introduced at the beginning of this year. And it provides that our equity securities, whether we sell them or not, are marked to market every day. So we can have a gain or loss of a couple billion dollars in our equity securities portfolio, and that day, according to the accounting principles now in effect, which are a change, will be recorded as making a couple billion dollars that day or losing a couple billion. And I told you that would produce some very unusual effects from quarter to quarter. And it further explains why I like to release our earnings early Saturday morning and — as well as the 10-Q — to give people a chance to read through the explanation. Because if you just were handed this with a TV monitor, you know, at 3:30 in the afternoon or whatever it might be, you would report the net earnings figure, understandably, very quickly. And it really is not representative of what's going on in the business at all. So, if you look at the figure of operating earnings, which is what we look at, we actually earned a record amount for any quarter we've ever had. And that includes no realized gains or losses on securities, or on the few remaining derivatives we have. You might leave that slide up there just a little longer. Maybe it is up — The insurance underwriting — GEICO had a quite a good-sized turnaround in profitability and a good gain, although not as big a gain as last year, which was a record in terms of policies in force and, really, throughout most of our businesses. And the details are in the 10-Q, which is up on our website now. And as you can see, the railroad was up significantly, and we had — most of our businesses tended to be up. Now we were aided in that, in a material way, by the reduction in the federal income tax rate from 35 percent to 21 percent. Our businesses were up significantly on a pretax basis, but the gain was further enhanced by the change in the income tax rate. So that pretty well sums up the first quarter. We'll probably get some — may well get some questions on it when we get into the question and answer section.

Master class: How to think about investments

WARREN BUFFETTThe questions we’ll be getting, we've got the press over here, and then we have the analysts on my left. And of course, we have our partners out in front of me. And we will rotate among you. And the questions we get, as we go through the next six hours or so, will understandably relate to a lot of current events. You know, you will — We may get asked, and we don't know the questions, but we may get asked, you know, about Fed policy, or whether we're seeing any inflation, or whether business is speeding up or down, or the threats we may face competitively in our businesses as we go along. And you — anything goes on the questions, except we won't tell you what we're buying or selling. But it really can be a question sometimes of confusing the forest with the trees. And I would like to just spend just a couple of minutes giving you a little perspective on how you might think about investments, as opposed to the tendency to focus on what's happening today, or even this minute, as you go through. And to help me in doing that, I'd like to go back through a little personal history. And we will start — I have here a New York Times of March 12th, 1942. I'm a little behind on my reading. (Laughter) And if you go back to that time, that — it was about, what? Just about three months since we got involved in a war which we were losing at that point. The newspaper headlines were filled with bad news from the Pacific. And I've taken just a couple of the headlines from the days preceding March 11th, which I'll explain was kind of a momentous day for me. And so you can see these headlines. We've got slide two up there, I believe. And we were in trouble, big trouble, in the Pacific. It was only going to be a couple months later that the Philippines fell, but we were getting bad news. We might go to slide three for March 9th. Hope you can read the headlines, anyway. The price of the paper's three cents, incidentally. The — and let's see, we've got March 10th up there, as slide — I — when I get to where there’s advanced technology of slides, I want to make sure I'm showing you the same thing that I'm seeing in front of me. So anyway, on March 10th, when again, the news was bad: "Foe Clearing Path to Australia." And it was like it — the stock market had been reflecting this. And I'd been watching a stock called Cities Service preferred stock, which had sold at $84 the previous year. It had sold at $55 the year — early in January, two months earlier — and now it was down to $40 on March 10th. So that night, despite these headlines, I said to my dad — I said, "I think I'd like to pull the trigger, and I'd like you to buy me three shares of Cities Service preferred" the next day. And that was all I had. I mean, that was my capital accumulated over the previous five years or thereabouts. And so my dad, the next morning, bought three shares. Well, let's take a look at what happened the next day. Let's go to the next slide, please. And it was not a good day. The stock market, the Dow Jones Industrials, broke 100 on the downside. Now they were down 2.28 percent as you see, but that was the equivalent of about a 500-point drop now. So I'm in school wondering what is going on, of course. Incidentally, you'll see on the left side of the chart, the New York Times put the Dow Jones Industrial Average below all the averages they calculated. They — they had their own averages, which have since disappeared, but the Dow Jones has continued. So the next day — we can go to the next slide — and you will see what happened. The stock that was at 39 — my dad bought my stock right away in the morning because I'd asked him to, my three shares. And so I paid the high for the day. That 38 1/4 was my tick, which was the high for the day. And by the end of the day, it was down to 37, which was really kind of characteristic of my timing in stocks that was going to appear in future years. (Laughs) But it was on the — what was then called the New York Curb Exchange, then became the American Stock Exchange. But things, even though the war, until the Battle of Midway, looked very bad and — and if you'll turn to the next slide, please — you'll see that the stock did rather well. I mean, you can see where I bought at 38 1/4. And then the stock went on, actually, to eventually be called by the Cities Service Company for over $200 a share. But this is not a happy story because, if you go to the next page, you will see that I — (Laughter) Well, as they always say, "It seemed like a good idea at the time," you know. (Laughter) So I sold — I made $5 on it. It was, again, typical — (laughs) — of my behavior. But when you watch it go down to 27, you know, it looked pretty good to get that profit. Well, what's the point of all this? Well, we can leave behind the Cities Service story, and I would like you to, again, imagine yourself back on March 11th of 1942. And as I say, things were looking bad in the European theater as well as what was going on in the Pacific. But everybody in this country knew America was going to win the war. I mean, it was, you know, we'd gotten blindsided, but we were going to win the war. And we knew that the American system had been working well since 1776. So, if you'll turn to the next slide, I'd like you to imagine that at that time you had invested $10,000. And you put that money in an index fund — we didn't have index funds then — but you, in effect, bought the S&P 500. Now I would like you to think a while, and don’t — do not change the slide here for a minute. I'd like you to think about how much that $10,000 would now be worth, if you just had one basic premise, just like in buying a farm you buy it to hold throughout your lifetime and depend — and you look to the output of the farm to determine whether you made a wise investment. You look to the output of the apartment house to decide whether you made a wise investment if you buy an apartment — small apartment house — to hold for your life. And let's say, instead, you decided to put the $10,000 in and hold a piece of American business, and never look another stock quote, never listen to another person give you advice or anything of this sort. I want you to think how much money you might have now. And now that you've got a number in your head, let's go to the next slide, and we'll get the answer. You'd have $51 million. And you wouldn't have had to do anything. You wouldn't have to understand accounting. You wouldn't have to look at your quotations every day like I did that first day — (laughs) — when I'd already lost $3.75 by the time I came home from school. All you had to do was figure that America was going to do well over time, that we would overcome the current difficulties, and that if America did well, American business would do well. You didn't have to pick out winning stocks. You didn't have to pick out a winning time or anything of the sort. You basically just had to make one investment decision in your life. And that wasn't the only time to do it. I mean, I can go back and pick other times that would work out to even greater gains. But as you listen to the questions and answers we give today, just remember that the overriding question is, "How is American business going to do over your investing lifetime?" I would like to make one other comment because it's a little bit interesting. Let's say you'd taken that $10,000 and you'd listened to the prophets of doom and gloom around you, and you'll get that constantly throughout your life. And instead, you'd used the $10,000 to buy gold. Now for your $10,000 you would have been able to buy about 300 ounces of gold. And while the businesses were reinvesting in more plants, and new inventions came along, you would go down every year in your — look in your safe deposit box — and you'd have your 300 ounces of gold. And you could look at it, and you could fondle it, and you could — I mean, whatever you wanted to do with it. (Laughter) But it didn't produce anything. It was never going to produce anything. And what would you have today? You would have 300 ounces of gold just like you had in March of 1942, and it would be worth approximately $400,000. So if you decided to go with a nonproductive asset — gold — instead of a productive asset, which actually was earning more money and reinvesting and paying dividends and maybe purchasing stock — whatever it might be — you would now have over 100 times the value of what you would have had with a nonproductive asset. In other words, for every dollar you had made in American business, you'd have less than a penny by — of gain — by buying in this store of value, which people tell you to run to every time you get scared by the headlines or something of the sort. It's just remarkable to me that we have operated in this country with the greatest tailwind at our back that you can imagine. It’s an investor’s haven — I mean, you can't really fail at it unless you buy the wrong stock or just get excited at the wrong time. But if you’d — if you owned a cross-section of America and you put your money in consistently over the years, there's just — there's no comparison against owning something that's going to produce nothing. And there — frankly — there's no comparison with trying to jump in and out of stocks and pay investment advisors. If you'd followed my advice, incidentally — or this retrospective advice — which is always so easy to give — (Laughs) If you'd follow that, of course you — there's one problem. Your friendly stock broker would have starved to death. I mean, you know, and you could have gone to the funeral to atone for their fate. But the truth is, you would have been better off doing this than a very, very, very high percentage of investment professionals have done, or people have done that are active that — it's very hard to move around successfully and beat, really, what can be done with a very relaxed philosophy. And you do not have to be — you do not have to know as much about accounting or stock market terminology or whatever else it may be, or what the Fed is going to do next time and whether it's going to raise three times or four times or two times. None of that counts at all, really, in a lifetime of investing. What counts is having a philosophy that you’ve — that you stick with, that you understand why you're in it, and then you forget about doing things that you don't know how to do.

Nothing's changed - Buffett's still "semi-retired"

WARREN BUFFETTSo with all those happy words, we will move on and start the questioning, and we'll start with Carol.

CAROL LOOMISGood morning. In choosing a first question to ask each year, I look for a question that is definitely Berkshire-related and is timely. And this question seemed to fill the bill. The question came from William Anderson (PH) of Salem, Oregon. And he said, "Mr. Buffett, you have previously said that there are two parts to your job, overseeing the managers and capital allocation. Mr. [Greg] Abel and Mr. [Ajit] Jain now oversee the managers, which leaves you with capital allocation. "However, you share capital allocation with Ted Weschler and Todd Combs. Question. Does all that mean you are semi-retired? Or if not, please explain." (Laughter)

WARREN BUFFETTI've been semi-retired for decades. (Laughter) The answer is that I was probably — well, it's hard to break down the percentage of the time that I was involved in but now — the jobs that are now done by Ajit and Greg, and in the case of investing, the sub part of the job that is done by Ted and Todd. Ted and Todd each manage 12- or $13 billion, so in total, that's 25 billion. And we have in equities 170-some billion, probably now, and 20 billion in longer-term bonds, and another hundred billion in cash and short-term. So they're managing 20 - 25 and doing a very good job. And I still have the responsibility, basically, for the other 300 billion. So — (Laughter and applause) I think Charlie will tell you — in fact, I'd like him to comment — nothing's really changed that much. We’ve got — clearly we've got two people in Ajit and Greg that are smarter, more energetic, just bring more to the job every day. But they don't bring too much, because the culture is that our managers are running their business. But there's a lot — there’s a good bit to oversee. So they do a superb job. And Ted and Todd not only do a great job with the 12 or 13 billion each — they started with a couple billion each — not that it’s all been the growth of the 2 billion — but they also do — have done a number of things for Berkshire that they do it cheerfully, but more important, very skillfully. So there's just — there's one thing after another that I will have them looking into or working on. And sometimes I steal their ideas and — But I think, actually, semi-retired is probably — catches me at my most active point. I think if —(laughter) — your questioner’s got a good point. OK, Charlie?

CHARLIE MUNGERWell, I've watched Warren for a long time, and he sits around reading most of the time and thinking. And every once in a while he talks on the phone or talks to somebody. I can't see any great difference. A lot of people — (Laughter) Part of the Berkshire secret is that when there's nothing to do, Warren is very good at doing nothing. (Laughter)

WARREN BUFFETTI'm still looking forward to being a mattress tester. (Laughter)

Precision Castparts is "a very good business"

WARREN BUFFETTOK, Jonathan Brandt.

JONATHAN BRANDTHi Warren. Hi Charlie. Given the growth in airplane build rates, it seems surprising that Precision Castparts isn't doing better on the top or bottom line. I understand the issue with a bumpy transition from old to new programs, but I've also heard from industry sources that Precision's market position is not as strong as it used to be amid intensifying competition and some technological disruption. What does Precision need to do to solidify and strengthen its preeminent position with its aerospace customers so that it can deliver the growth you expected when Berkshire acquired it?

WARREN BUFFETTYeah —

JONATHAN BRANDTMore generally, two years after the acquisition, what is your outlook for that business?

WARREN BUFFETTGive me the last part again. The outlook.

JONATHAN BRANDTMore generally, two years after the acquisition, what is your updated outlook for that business longer term?

WARREN BUFFETTOh, longer term, I think — and in the reasonably shorter term — it's a very good business. I mean, you were — You mentioned aircraft, but we get into other industries. But certainly aircraft's the most important. You have manufacturers that are very dependent on both the quality of the parts and the promptness of delivery. You do not want to have an aircraft with 75- or 100- or maybe $200 million and be waiting for a part or something of the sort. So it's — Reliability is, both in terms of quality and delivery times and all of that sort of thing, is enormously important. And we get contracts that extend out many years. And sometimes we — I mean, we will get them well before the plane even starts in production. So there's very long lead times. And we have found in the last year — found it earlier, but I know of some specific cases in the last year — where other suppliers have failed in their deliveries and then the manufacturers come to us and say, "We would like you to help us out." And we say, "Well, we'd be glad to help you out, but we'd like about a five-year contract, if we're going to do it because we're just not going to make up for these other guys' shortfalls periodically." But that sort of thing has a very long lead time. The business is a very good business. One thing you will see their earnings charged with is about $400 million — little over $400 million a year — of intangible — nondeductible in that case — amortization of goodwill, which is really — is not an economic cost in my view. We have a significant amount of that through Berkshire, but by far, the largest amount is related to the Precision acquisition. So whatever you see, you can add about 400 million that in my view is not an economic expense, but the accountants would argue otherwise. But it's our money, so we'll take my view. The — (Laughter) Mark Donegan, who runs that operation, is incredible, and he has been not only — he's a fabulous manager. I wouldn't have bought it without him in charge. He also has been very helpful to us in other areas, and he loves to do it. So you can't beat him, both as a manager in his own operation, but with his devotion to really doing everything that will help Berkshire. It was — it's a very good acquisition with very long tails to the products that are being developed. Charlie?

CHARLIE MUNGERWell, yeah, I think we'd buy another one just like it tomorrow if we had the chance.

WARREN BUFFETTYeah, that's the answer. (Laughter) Man of few words, but he gets the point. (Laughter)

Trade benefits are huge, so U.S. and China won't do something "foolish"

WARREN BUFFETTOK, now we will go to the shareholder in Station 1. I believe that's probably up here to my right.

AUDIENCE MEMBERHello. This is Chao (PH) from Wuxi, China, (Inaudible) Capital. I've been to the meeting for 12 years. Wish you and Charlie good health, so we could see you both from meeting for 12 more years.

WARREN BUFFETTThank you. (Applause)

AUDIENCE MEMBERQuick question. We know both you and China delegations — U.S. and China delegations — are in China for intense discussion, also called a trade war. Let's go one step beyond the trade war. Do you think there's a win-win situation for both countries or the world is just too small for both to win and we have to revisit your 1942 chart again? Thank you.

WARREN BUFFETTThank you. I'd like to just mention one thing. In August, I'm going to be 88, and that will be the eighth month of the year, and it's a year that ends with an eight. And as you and I both know, eight is a very lucky number in China. So if you find anything over there for me, this is the time we should be acquiring something. All those eights.

AUDIENCE MEMBERWill do. (Buffett laughs)

WARREN BUFFETTThe United States and China are going to be the two superpowers of the world, economically and in other ways, for a long, long, long time. We have a lot of common interests, and like any two big economic entities, there are times when there'll be tensions. But it is a win-win situation when the world trades, basically. And China and the U.S. are the two big factors in that, but there's plenty of other citizens of the world that are involved in how this comes out. And there is no question — The nice thing about in this country I think is that both Democrats and Republicans basically, on balance, believe in the benefits of free trade. And we will have disagreements with each other. We'll have disagreements with other countries on trade. But it's just too big and too obvious for — that the benefits are huge, and the world's dependent on it in a major way for its progress, that two intelligent countries will do something extremely foolish. We both may do things that are mildly foolish from time to time, and there is some give and take, obviously, involved. But U.S. exports in 1970 and U.S. imports in 1970 were both about 5 percent of GDP. I mean, here we we were, selling 5 percent of our GDP and buying up 5 percent of our GDP, basically. Now people think we don't export a lot of things. Our exports are 11 and a fraction percent of GDP. They've more than doubled as a share of this rising GDP. But the imports are about 14 1/2 percent, so there's a gap of three percent or thereabouts. And I would not like that gap to get too wide. But when you think about it, it's really not the worst thing in the world to have somebody send you a lot of goods that you want and hand them little pieces of paper. I mean, because the balancing item is, if you have a surplus or deficit in your trade, you're going to have a surplus in investment. And so the world is getting more claim checks on the United States, and they — to some extent they buy our government securities, they can buy businesses. And over time, you don't want the gap to get to be too wide because the amount of claim checks you are giving out to the rest of the world could get a little unpleasant under some circumstances. But we've done remarkably well with trade. China's done remarkably well with trade. The countries of the world have done remarkably well with trade. So it is a win-win situation. And the only problem gets to be when one side or the other may want to win a little bit too much, and then you have a certain amount of tension. But we will not sacrifice — the world, I mean — will not sacrifice world prosperity based on differences that arise in trade. Charlie?

CHARLIE MUNGERYeah, well I think that both countries have been advancing. And of course China is advancing faster economically, because it started from a lower base and they've had a little more virtue than practically anybody else in the world in having a high savings rate. And of course, a country that was mired in poverty for a long, long time, and that assimilates the advanced technology of the world, and has a big savings rate, is going to advance faster than some very mature company like Britain or the United States. And that's what's happened. But I think we're getting along fine, and I'm very optimistic that both nations will be smart enough to realize that the last thing they should do is have any ill will for the other.

Deals don't depend on Buffett: "The reputation belongs to Berkshire now"

WARREN BUFFETTOK, Becky Quick. (Applause)

BECKY QUICKThis question comes from Kirk Thompson. He says, "Warren, in this year's annual letter to shareholders, you referenced both cheap debt and a willingness by other companies to leverage themselves as competitive examples as to why it's hard to get more acquisition deals done. "It seems like the trust in — and prestige of doing a deal with Warren Buffett and Charlie Munger allow Berkshire to get a hometown discount and beat out other firms that might pay a little more to a prospective seller. "Have you given thought to having other Berkshire managers have more public exposure, so future generations of successful business owners continue to bring deal opportunities to Berkshire like they have in prior decades?"

WARREN BUFFETTYeah, that sort of reminds me of — who was it? Tony O'Reilly remarked one time about the responsibility of a CEO. That the very first job of the CEO was to search through his organization and find that person who had the initiative and the brains, the determination, all of the qualities to be his logical successor, and then fire the guy. (Laughter) The — there's no question. I think the reputation of Berkshire as being a very good home for companies — particularly private companies — but a good home for companies, I don't think that reputation is dependent on me or Charlie. It may take a little, you know, there'll be a little testing period for whoever takes over, in that respect. But, you know, basically we've got the money to do the deals. We'll have the money to do the deals subsequently. People can see how our subsidiaries operate in the future. And the truth is that, I think some of the other executives are going — are getting better known. But there will be a — you know, I'll tell you this, if things get bad enough, you don't have to worry. They'll be calling us no matter what. (Laughs) So I do not worry about the so-called "deal flow," which is a term I hate. But I don’t think there’s — I think that's dependent on Berkshire and not dependent on me. And, you know, as I've mentioned, my phone isn't ringing off the hook with good deals. So apparently this big winning personality or something is not delivering for you. (Laughter) So it may be the next person will be even more — get even more calls. Berkshire — the reputation belongs to Berkshire now. And we are, for somebody that cares about a business that they and their parents and maybe their grandparents lovingly built over decades — if they care about where that business ends up being after, for one reason or another, they don't want to keep it or can't keep it in the family, we absolutely are the first call. And we will continue to be the first call, whether Charlie or I answer the phone or somebody else does. Charlie?

CHARLIE MUNGERWell, a lot of the subsidiaries have for a long time already been making all kinds of acquisitions with people they know and we don't. So it's already happening. And, in fact, it's happening more there than it is at headquarters, so —

WARREN BUFFETTDon't tell them, Charlie.

CHARLIE MUNGERYou're getting your wish. (Laughter) And it is weird that about 99 percent of the public companies that change hands, in terms of control, change hands in a sort of auction presided over by an investment banker. And the people that buy are usually just leverage it to the gills, and when it starts doing a little better, they re-leverage it. And that money is coming out of the charitable endowments and pension plans who are making these highly-leveraged investments in all these companies changing hands at very high prices. Sooner or later, this is not going to work perfectly.

WARREN BUFFETTYeah.

CHARLIE MUNGERAnd it's going to have an unpleasant episode. And I think we'll be around and in good shape at that time.

WARREN BUFFETTThere was one fellow who came to me many years ago. And he had a wonderful business. And he had been worried because he had seen a friend of his die. And the problems that arose later when the managers, to some extent, tried to take advantage of the widow. And it became a disaster. So he said he thought about it a lot the previous year. And he decided he didn't want to sell the business to a competitor, who would be a logical buyer, because they would fire all of his people. And the CFO that would remain, and, you know, all up and down the line, they'd all be the acquirer's people. He didn't want to do that to his people. And then he thought, and he didn't want to sell it to a private equity firm, because he thought they'd leverage it up. He never liked to leverage that much, and then they'd just resell it later on to somebody, so it would be totally out of control of what he wanted to do. And he wanted to keep running it himself. So he said, "Warren," he said, "It isn't that you're such a great guy," he says, "It's you're the only one left." So — (Laughter) — Berkshire will continue to be the only one left in many cases.

"We don't know what we're doing" in cyber insurance

WARREN BUFFETTGary Ransom.

GARY RANSOMGood morning. Warren, in your annual letter, you wrote about a potential for a $400 billion natural catastrophe event, something out in the tail of the loss distribution. I can think of another risk that could have a similar order of magnitude, and that would be cyberrisk. I'm sure all your managers have taken steps against that potential, but in — out in the tail of the cyberrisk distribution, it could hit a lot of industries, a lot of your companies. So how do you think about and prepare for the big one in cyber?

WARREN BUFFETTYeah. Well, I include, incidentally, in my — that part I wrote in the annual report where I said that roughly — nobody knows the answer on this. I mean, I could stick down two, and somebody else much smarter in insurance would stick down a different figure. But I think it's about a 2 percent risk of what I call a 400 billion super-cat of all time. And — But cyber is in that equation. I mean, that's not just earthquakes and that sort of thing. And frankly, I don't think we, or anybody else, really knows what they're doing when writing cyber. I mean, we — it is just very, very, very early in the game. And we don't know what the interpretations of the policies, necessarily, will be. We don't know the degree to which they'll be what — there'll be correlated incidents, which we don't really think are correlated now or haven't had the imagination to come up with. We know that every year when I go and hear these people from the CIA or wherever it may be, they tell me that the offense is ahead of the defense, and will continue that way. And I can dream of a lot of cyber incidents, which I'm not going to spell out here, because people that have twisted minds may be — they've probably got more — way more — ideas than I've got, but I don't believe in feeding them any. But it's a business where we don’t — we have a pretty good idea of the probabilities of a quake in California, or the probabilities of a three or a four hurricane hitting Florida, or whatever it may be. We don't know what we're doing in cyber, and we try to keep — we don't want to be a pioneer on this. We do some business in that arena in Berkshire Hathaway Specialty. But if you're doing something for competitive reasons — which I'm OK with — but when I'm doing something where I — that people tell me is a competitive necessity, we are going to try not to have — we don't want to be number one or number two or number three in exposures on it. And I don’t — and I am sure we are not in cyber. But I don’t — I think anybody that tells you now that they think they know in some actuarial way, either what general experience is likely to be in the future, or what the worst case would be, I think, is kidding themselves. And that's one of the reasons that I say that a $400 billion event has a — I think has roughly a 2 percent probability per year of happening. Cyber's uncharted territory, and it's going to get worse, not better. And then the question is whether, if we have a whole bunch of $25 billion commercial limits out there, whether there's some aggregation that we didn't foresee or that the courts interpret those policies differently, then you know — they are generally going to give the benefit of the doubt to the insured. So you're right in pointing that out as a very material risk, which didn't exist 10 or 15 years ago and that — and will be much more intense as the years go along. And all I can tell you, Gary, is that, that's part of my 400 billion and my 2 percent. But if you've got a different guess, it's just as likely that yours is right than mine on that. Charlie?

CHARLIE MUNGERYeah, well, something that's very much like cyberrisk is, you've got computers programmed to do your security trading and your computer goes a little wild from some error. And that's already happened at least once where somebody just was fine one morning and by the afternoon they were broke because some computer went crazy. We don't have any computers we allot — we allow to do big, automatically trading securities. I think, generally, Berkshire is less likely than most other places to be careless in some really stupid way.

WARREN BUFFETTI do think if there's a mega-cat from cyber, and let's say it hits 400 billion, I do not think we'll have more than a 3 percent —

CHARLIE MUNGERNo, no —

WARREN BUFFETT— exposure.

CHARLIE MUNGERNo, no, we'll get our share.

WARREN BUFFETTAnd but it, you know, it will destroy — what will destroy a lot of companies — that we will actually, if we had a $12 billion loss, I would think, except for the new accounting rule, but I believe from what I call operating earnings, we would probably still have a reasonable profit that year. I mean, we are in a different position than any insurance company I know of in the world, in our ability to handle the really — really super, super-cat. OK, shareholder from station 2.

CHARLIE MUNGERMay I point out that the main shareholder to my right here has almost all his net worth in one security. That's likely to be more carefully managed than some public place with people just passing through.

WARREN BUFFETTYeah, you don't want a guy that's 64 and is going to retire at 65. And a lot of decisions you really don't want him or her to be making. (Laughter)

Capital allocation in the public sector

WARREN BUFFETTStation 2?

AUDIENCE MEMBERWally Obermeyer, Obermeyer Wood Investment Counsel, Aspen, Colorado. Warren and Charlie, you two have demonstrated great talent in private sector capital allocation and shown the world the power of excellence in this area. Do you think there is a similar opportunity for outstanding capital allocation in the public sector, at both the state and federal levels? And if so, what approach and/or changes would you suggest for society to achieve these benefits?

CHARLIE MUNGERThat's too tough. Why don't we go on to a new question? (Laughter)

WARREN BUFFETTI'm afraid I have nothing to add. (Laughter and applause) I don't mean to be unfair to somebody asking a question, but it — you know, it is unfortunately an entirely different game. And the electorate — the motivations are different, the terms, the reward system is different. I mean, everything is different. And if we knew how to solve that, we wouldn’t — we can't add anything to what you had in your view. I'm sorry on that.

Wells Fargo will emerge stronger after its "big mistake"

WARREN BUFFETTOK, Andrew?

ANDREW ROSS SORKINHi Warren. This question comes from Paul Spieker (PH) of Chicago, Illinois. I believe he may be here today. He writes, "One of your more famous and perhaps most insightful quotes goes as follows: "'Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.' "In light of the unauthorized accounting scandal at Wells Fargo, of its admission that it charged customers for duplicate auto insurance, of its admissions that it wrongly fined mortgage holders in relation to missing deadlines caused by delays that were its own fault, of its admission that it charged some customers improper fees to lock in mortgage interest rates, of the sanction placed upon it by the Federal Reserve prohibiting it from growing its balance sheet, and of the more than recent $1 billion penalty leveled by federal regulators for the aforementioned misbehavior, if Wells Fargo company is a chronically leaking boat, at what magnitude of leakage would Berkshire consider changing vessels?"

WARREN BUFFETTYeah, well, Wells Fargo (Applause) — Wells Fargo is a company that proved the efficacy of incentives, and it's just that they had the wrong incentives. And that was bad. But then they committed a much greater error — and I don't know exactly how or who did it or when, but — ignoring the fact that they had a faulty incentive system which was incenting people to do things that were kind of crazy, like opening nonexistent accounts, et cetera. And, you know, that is a cardinal sin at Berkshire. We know people are doing something wrong, right as we sit here, at Berkshire. You can't have 377,000 employees and expect that everyone is behaving like Ben Franklin or something out there. They — we — I don't know whether there are ten things being done wrong as we speak, or 20, or 50. The important thing is, we don't want to incent any of that if we can avoid it, and if we find — when we find it's going on, we have to do something about it. And that is absolutely the key to it. And Wells Fargo didn't do it, but Salomon didn't do it. And the truth is, we've made a couple of our greatest investments where people have made similar errors. We bought our American Express stock — that was the best investment I ever made in my partnership years — we bought our American Express stock in 1964 because somebody was incented to do the wrong thing in something called the American Express Field Warehousing Company. We bought — A very substantial amount of GEICO we bought that became half the — half of GEICO, for $40 million because somebody was incented to meet Wall Street estimates of earnings and growth. And they didn't focus on having the proper reserves. And that caused a lot of pain at American Express in 1964. It caused a lot of pain at GEICO in 1976. It caused a layoff of a significant portion of the workforce, all kinds of things. But they cleaned it up. They cleaned it up, and look where American Express has moved since that time. Look at where GEICO has moved since that time. So the fact that you are going to have problems at some very large institution is not unique. In fact, almost every bank has — all the big banks have had troubles of one sort or another. And I see no reason why Wells Fargo as a company, from both an investment standpoint and a moral standpoint going forward, is in any way inferior to the other big banks with which it competes on — It — they made a big mistake. It cost — I mean, we still got — I mean we have a large, unrealized gain in it, but that doesn't have anything to do with our decision-making. But the — I like it as an investment. I like Tim Sloan as a manager, you know. He is correcting mistakes made by other people. I tried to correct mistakes at Salomon, and I had terrific help from Deryck Maughan as well as a number of the people at Munger, Tolles. And I mean, that is going to happen. You try to minimize it. Charlie says that, "An ounce of prevention isn't worth a pound of cure, it's worth about a ton of cure." And we ought to jump on everything. He's pushed me all my life to make sure that I attack unpleasant problems that surface. And that's sometimes not easy to do when everything else is going fine. And at Wells, they clearly — and I don't know exactly what — but they did what people at every organization have sometimes done, but it got accentuated to an extreme point. But I see no reason to think that Wells Fargo, going forward, is other than a very, very large, well-run bank that had an episode in its history it wished it didn't have. But GEICO came out stronger, American Express came out stronger. The question is what you do when you find the problems. Charlie?

CHARLIE MUNGERWell, I agree with that. I think Wells Fargo is going to be better going forward than it would have been if these leaks had never been discovered.

WARREN BUFFETTOr happened.

CHARLIE MUNGERYeah, so I think it’s — it — but I think Harvey Weinstein has done a lot for improving behavior, too. (Laughter) It was clearly an error, and they're acutely aware of it and acutely embarrassed, and they don't want to have it happen again. You know, if I had to say which bank is more likely to behave the best in the future, it might be Wells Fargo, of all of them.

WARREN BUFFETTThis New York Times that I have here from March 12th, 1942, if you go toward the back of it, in the classified section, you have one big section that says, "Help Wanted Male," and another one that says, "Help Wanted Female." You know, was the New York Times doing the right thing in those days? You know, I think the New York Times is a terrific paper. But people make mistakes. And you know, the idea of classifying between — taking ads and saying, "Well, we'll take them and divide them up between men and women, what jobs we think are appropriate," or that the advertiser thinks is appropriate. We do a lot of dumb things in this world. And GEICO, as I say, in the early 1970s, they just ignored — and you can do it in the setting of proper reserves, which mean they charged the wrong price to new customers because they thought their losses were less than they were. And I'm sure some of that may have been a desire to please Wall Street or just because they didn't want to face how things were going. But it came out incredibly stronger. You know, and now it's got 13 percent of the households in the United States insured. And it came out with an attention to reserves and that sort of thing that was heightened by the difficulties that they'd found themselves in where they almost went bankrupt. Forty-two —

CHARLIE MUNGERIt was a lot more stupid than Wells Fargo. It was really stupid what they did way back, right?

WARREN BUFFETTYeah. They had the world by the tail, and then they quit looking at the reserve development. But — and American Express was just picking up a few dollars by having the field warehousing company in 1963. And, you know, they were worried whether it was going to sink the company. And when some guy named Tino De Angelis in, I think it was Bayonne, New Jersey — In fact, I went to the annual meeting in 1964 of American Express after the scandal developed, and somebody asked if the auditor would step forward. And the auditor from one of the big firms, which I won't mention, came up to the microphone, and somebody said, "How much did we pay you last year?" And the auditor gave his answer, and then the questioner said, "Well, how much extra would you have charged us to go over to Bayonne, which was ten miles away, and check whether there's any oil in the tanks?" (Laughs) So it — you know, here was something — a tiny little operation — some guy was calling him from a bar in Bayonne and telling him this phony stuff was going on, and they didn't want to hear it. They shut their ears to it. And then what emerged was one great company after this kind of, what they thought was a near-death experience. So it’s — we're going to make mistakes. I will guarantee you that we will get some unpleasant news at Berkshire. I don't know what it'll be, you know — the most important thing is we do something about it. And there have been times when I procrastinated, and Charlie has been the one that jabs me into action. And so he's performed a lot of services you don't know about. (Laughter)

"I like to think I'll be missed a little bit, but you won't notice it"

WARREN BUFFETTOK. Gregg, Gregg Warren.

GREGG WARRENGood morning, Warren. I have a little bit of a follow-up on Becky's question. At the 2014 annual meeting, as well as this morning, you noted that the power of Berkshire brand and its reputation, as well as the strength of Berkshire's balance sheet, would allow the company's next managers to replicate many of the advantages that have come with your being the face of the organization, one of which has been an ability to extract high rents from firms in exchange for a capital infusion and the Buffett seal of approval during times of financial distress. I buy the argument about the strength of the balance sheet and believe that deals will continue to be done with sellers still lining up to become part of the Berkshire family, especially if the company's next managers are allowed to keep a ton of cash on hand. But I'm not entirely convinced that they'll be able to garner the same 8, 9, 10 percent coupons, as well as other add-ons, that you've been able to extract from firms like Goldman Sachs and Bank of America in times of distress. I'd expect those rents to be at least a few percentage points lower once you're no longer running the show. That is, until those managers build up a reputation to warrant higher returns. Am I right to think about it that way?

WARREN BUFFETTI'm not sure. The — when we, in two — you mentioned Goldman Sachs, and we also did with General Electric, in September or early October of 2008. We probably could actually have extracted better terms. You know, I think it might have been counterproductive in the end, but I was — we would have done better, incidentally, financially, if we'd really waited until the panic developed further — because I didn't know how far it would develop — but we could have made a lot better purchases three or four or five months later than we did at that time. And we also did not want to do something that looked to be so high as to in — make the transaction disadvantageous to Goldman or to GE. They were going to take the terms we offered, but we actually didn't push it to the limit, because there really wasn't anybody else around. I think — and we're working on something right now that probably won't happen. It's not huge. But actually, in this case, both Todd [Combs] and Ted [Weschler] have brought deals to me. One of them brought something to me, and, you know, he was thinking in the same terms that I got — was thinking about — and he's the one that returned the call that he had received about a transaction. And I do not think the party on the other side is going to care about the fact that they had him on the phone rather than me on the phone. I — You know, there may — there could be just a little bit at certain times in history. But, you know, we will continue to have our standards of what we think money is worth at any given time. And Ted and Todd think just as well about that as I do. And there will be times, very occasionally, when our phone will ring a lot. And I don't think they'll hang up because I don't answer it, if they need the money. Charlie?

CHARLIE MUNGERWell. The times he's referring to, a lot of them, were like the worst in 50 years. So that's a really rare kind of an occurrence. And we didn't make all that many deals. So I think he's right that it'll be harder for us to make similar deals in the future.

WARREN BUFFETTYeah, the problem is the sums involved now, more than the problem of deciding what the proper terms should be. And sometimes we can get what we think is appropriate and sometimes we — most of the time, today, we can't. But you may see a transaction or two that — not in terms of buying business but in terms of securities — that strike you as perfectly decent ways to invest Berkshire's money. And they may well have come through Todd or Ted instead of directly to me. I like to think I'll be missed a little bit, but I — you won't notice it. (Laughter)

Buffett talks to Ajit Jain about insurance pricing because it's fun

WARREN BUFFETTOK, Station 3.

AUDIENCE MEMBERI'm Todd Lichter (PH) from Boulder, Colorado. Mr. Buffett, are you still involved in pricing decisions at See's Candies and The Buffalo News? And with what other Berkshire subsidiaries do you take more than a hands-off approach?

WARREN BUFFETTYeah, you're correct that at one time I, and for some — for quite a while — both Charlie and I took part in the pricing decisions at See's Candy. And certainly, for some years, particularly with the question of the survival of The Buffalo News was really in question, I definitely took part in those decisions. In both cases, we had good managers, but still we wanted to — we thought those decisions were important. But it's been a long, long time — very long time — since we've participated in anything like that. I can't tell you what the per pound price is for See's Candy, which is because people, and you're invited to join this group, send me free candy from time to time. (Laughter) And I can’t — I really, I can't tell you the prices at The Buffalo News. All I know is it's very, very, very hard to move up prices on advertising, generally. So no, we — The only thing is, Ajit [Jain] and I talk frequently. And if there's some very big risk, if somebody wants a $5 billion cover on a chemical plant some way excessive loss of over 3 billion or something — we have a certain amount of fun with him deciding on the price in his head. And I decide in my head, and then we compare notes. It's the kind of risk that you really can't look up in a book and see, actuarially, what it’s fairly — the parameters — are fairly likely to be. I enjoy thinking through the pricing of that, and I particularly enjoy comparing it with Ajit. So the — These are just oddball situations, but we do that sort of thing, and we've done it for three decades. And it's part of the fun of my job. The candy prices, if you got to complain about those, you have to go to Charlie. (Laughter)

CHARLIE MUNGERWell, the answer is, Warren is still doing it and talking to Ajit, and — but that's because Ajit likes it that way.

WARREN BUFFETTYep.

CHARLIE MUNGERWe have a very peculiar place where the — where Warren's contact with the various people elsewhere in the organization largely depends on what they want, not what he wants.

WARREN BUFFETTThe CEO of one of our —

CHARLIE MUNGERIt's very unusual, and it's worked beautifully.

WARREN BUFFETTThe CEO of one of our most successful subsidiaries, I may have talked to — unless I saw him here and just said hello — I probably talked to him three times in the last ten years. And he does remarkably well. (Laughs) He might have done even better if I hadn't talked to him those three times. (Laughter) And on the other hand, Ajit and I talk very, very frequently. And he's got the kind of business, A, I do know — I know more about the insurance business than I know about a good many of the other businesses. And it's interesting. And we are evaluating things that you don't look up in a book, you know. I mean, actuarial talent is not what's important in the things that Ajit talks to me about. It's plenty important throughout our insurance operation. But in these particular cases, you know, we're making judgments, and his judgment's better than mine. But I like to — I just like to hear about them. They're interesting propositions.

Putting business values in income account is "enormously deceptive"

WARREN BUFFETTOK, Carol.

CAROL LOOMIS… shareholder named Jack Ciesielski . He's a well-known accounting expert, who for many years has written "The Accounting Observer." "Mr. Buffett, in this year's shareholder letter you have harsh words for the new accounting rule that requires companies to use market value accounting for their investment holdings. "'For analytical purposes,' you said, 'Berkshire's bottom-line will be useless.' "I'd like to argue with you about that. Shouldn't a company's earnings report cite everything that happened to, and within, a company during an accounting period? "Shouldn't the income statement be like an objectively written newspaper informing shareholders of what happened under the management for that period, showing what management did to increase shareholder value and how outside forces may have affected the firm? "If securities increased in value, surely the company and the shareholders are better off. And surely they're worse off if securities decreased in value. "Those changes are most certainly real. In my opinion, ignoring changes in the way that some companies ignore restructuring costs, is censoring the shareholders' newspaper. "So my question is, how would you answer what I say?" (Laughter)

WARREN BUFFETTWell, my answer to the question that asks what my answer would be to what he said — the — I would ask Jack, if we've got $170 billion of partly-owned companies, which we intend to own for decades, and which we expect to become worth more money over time, and where we reflect the market value in our balance sheet, does it make sense to, every quarter, mark those up and down through the income account, when at the same time we own businesses that have become worth far more money, in most cases, and become, you know, since we bought — you name the company — take GEICO, an extreme case — we bought half the company for $50 million, roughly — do we want to be marking that up every quarter to the value — and having it run through the income account? That becomes an appraisal process. There's nothing wrong with doing that, in terms of evaluation. But in terms of — and you can call it gain in net asset value or loss in net asset value — that's what a closed-end investment fund, or an open-investment fund would do. But to run that through an income account — if I looked at our 60 or 70 businesses, or whatever number there might be, and every quarter we marked those to market, we would have, obviously, a great many, in certain cases, where over time we'd have them at 10 times what we paid, but how quarter-by-quarter we should mark those up and run it through the income account, where 99 percent of investors probably look at net income as being meaningful, in terms of what has been produced from operations during the year, I think would be — well, I can say it would be enormously deceptive. I mean, in the first quarter of this year — you saw the figures earlier — where we had the best what I would call operating earnings in our history, and our securities went — were down six billion, or whatever it was, to keep running that through the income account every day you would say that we might have made on Friday, we probably made 2 1/2 billion dollars. Well, if you have investors and commentators and analysts and everybody else working off those net income numbers and trying to project earnings for quarters, and earnings for future years, to the penny, I think you're doing a great disservice by running those through the income account. I think it's fine to have marketable securities on the balance sheet — the information available as to their market value — but we have businesses there — if we — we never would do it — but if we were to sell half, we'll say, of the BNSF railroad, we would receive more than we carried — carried for them — we would turn — we could turn it into a marketable security and it would look like we made a ton of money overnight. Or if we were to appraise it, you know, appraise it every three months and write it up and down, A, it could lead to all kinds of manipulation, but B, and it would just lead to the average — to any investor— being totally confused. I don't want to receive data in that manner and therefore I don't want to send it out in that manner. Charlie?

CHARLIE MUNGERWell, to me it's obvious that the change in valuation should be noted, and it is and always has been — it goes right into the net worth figures. So the questioner doesn't understand his own profession. (Laughter and applause) I'm not supposed to talk that way but it slips out once in a while. (Laughter)

WARREN BUFFETTSometimes he even gives it a push. (Laughter)

McLane profits hurt by severe competitive pressure

WARREN BUFFETTOK. Jonathan.

JONATHAN BRANDTMcLane's core operating margins have dropped about 50 percent from where they've generally been since acquisition [from Walmart]. Could you elaborate on the competitive pressures in the grocery and convenience store distribution business that have caused the deterioration in profits? And do you expect the margin structure of that business to eventually get back to where it was, or is this the new normal?

WARREN BUFFETTWell, I don't know the answer to the second part about the future, but there's no question that the margins have been squeezed. They were very, very narrow, as you know, they were about one cent on the dollar pretax, and they have been squeezed from that. Payment terms get squeezed. In some cases we have fairly long-term contracts on that, so it will go on for five years (inaudible). It's a very, very tight margin business. And the situation is even worse than you portray because within McLane we have a liquor distribution business in a few states and that business has actually increased its earnings moderately, and we've added to that business, so within McLane's figures there are about 70 million or so pretax from the liquor part that have nothing to do with the massive parts you're talking about, in terms of food distribution. So it's even — the decline is even greater in what you're referring to than you've (inaudible). That's just become very much more competitive. We have to decide — if you'll look at our competitors, they're not making much money either. And that's capitalism. I think, you know, there comes a point where the customer says, you know, "I'll only pay X," and you have to walk away. And there's a great temptation when you're employing — particularly employing thousands of people —and you've built distribution facilities, and all of that sort of thing — take care of them — to meet what you'd like to term as "irrational competition," but that is capitalism. And — you're right. We took — the earnings went up quite a bit from the time we bought it. And we're still earning more than then. And we've earned a lot of money over time. But, as I say, a fair amount of that is actually coming from liquor distribution, activities in about four states that we purchased — very well-run. And — we will do our best to get the margins up. But I would not — I could not tell you — give you a really — your guess is almost as good as mine, or better than mine, maybe, as to what margins will be in that distribution business five years from now. It's a very essential service. We do $40-some billion. And we move more of the product of all kinds of companies that names are known to you, than anybody else. But — when you get — when you get — Kraft Heinz for that matter, or Philip Morris, or whomever it may be, on one side of the deal, and you get Walmart and some other — 7/11 — on the other side of the deal, sometimes they don't leave you very much room in between. Charlie?

CHARLIE MUNGERI think you've described it very well. (Buffett laughs)

Health care costs partnership with Amazon and JPMorgan

WARREN BUFFETTOK. (Laughter) Station 4.

AUDIENCE MEMBERGood morning, Charlie and Warren. I know that seems a little bit out of order, but I'm a huge fan of yours, Charlie, mostly for your 25 Cognitive Biases. I'm from Seattle, Washington. I run a one-person digital marketing firm that specializes in Facebook ads and email marketing. I use these a lot. I — your breakdown of Coca-Cola was really, really solid. And I use that as reference when looking to how to understand the mechanics of my clients' products and how to promote them. So I'm fairly certain that your cognitive biases work for internet-related companies. Now that you're partnering with Amazon [and JPMorgan] on health care, I'm curious, have you started to understand how to apply these biases to internet-related companies? Or is there another set of tools you use to decide if you understand a business? Because you guys talk a lot about not investing in businesses that you don't understand.

WARREN BUFFETTWell, health care is a — we don't plan to start health care companies or, necessarily, insurers or anything. We simply have three organizations with leaders that I admire and trust. And we — mutually goes around all three. And we hope to do something which Charlie correctly would probably say is almost impossible to change in some way a system which is — was taking 5 percent of GDP in 1960, and now is taking close to 18 percent. And we have a hugely noncompetitive medical cost in American business, relating to any country in the world. The countries that — there were some countries that were around our 5 percent when we were at 5 percent. But we've managed to get to 18 without them going beyond 11 or so. Literally, in 1960, we were spending $170 per capita on medical costs in the United States. And now we're spending over 10,000. And, you know, every dollar only has a hundred cents. So there is a cost problem. It is a tapeworm, in terms of American business and its competitiveness. We don't — we have fewer doctors per capita. We have fewer hospital beds per capita, fewer nurses per capita, than some of the other countries that are well below us. And you've got a system that is delivering $3.3 trillion — that's almost as much as the federal government raises — it's delivering 3.3 trillion, or some number like that, to millions and millions and millions of people who are involved in the system. And every dollar has a constituency. It's just like politics. And whether we can find the chief executive, which we're working on now, and which I would expect we would — we would be able to announce before too long — that — but that's a key part of it. And whether that person will have the imagination and support of people that will enable us to make any kinds of significant improvements in a system which everybody agrees is sort of out of control on cost, but what — but — but they all think it's the other guy's fault, generally — we'll find out. It won't be — it won't be easy. But it is not a — the motivations are not primarily profit-making. They're — we want to deliver — we want our employees to get better medical service at a lower cost. We're not going to — we're certainly not going to come up with something where we think the service that they receive is inferior to what they're getting now. But we do think that there may be ways to make a real — significant changes — that could have an effect. And we know that the resistance will be unbelievable. And if we fail, we've at least tried. And — but they — the idea is not that I will be able to contribute anything to, you know, in some breakthrough moment, by reading a few medical journals or something — (laughs) — changing something that is as embedded as the medical system. But the idea is that maybe the three organizations, which employ over a million people and which, after we announced it, we had a flood of calls from people that wanted to join in, but there isn't anything to join into now. But they will if we have — come up with any ideas that are useful. Whether we can — bring the resources, bring the person. And the CEO is terribly important. And then bring the person, support that person. And somehow, figure out a better way for people to continue to receive better medical care in the United States without that 8 percent — 18 percent — going to 20 or 22 percent, you know, in the lifetime of, you know, our children or something of the sort — because there are only a hundred cents in the dollar. And we will see what happens. It's — you know — if you were Ajit [Jain], actuarially figuring, it would not — you would not bet on us. But — I think there is some chance we will do something. There's a chance — nobody can quantify it — that we can do something significant. And we are positioned better than most people to try. And we've certainly got the right partners. So, we will give it a shot and see what happens. Charlie? (Applause)

CHARLIE MUNGERThere is some precedent for success in this public service activity. If you go back many decades, John B. Rockefeller I, using his own money, made an enormous improvement in American medical care. Perfectly enormous. In fact, there's never been any similar improvement done by any one man since that rivals it. So Warren, having imitated Rockefeller in one way, is just trying another. And maybe it'll work.

WARREN BUFFETTRockefeller, incidentally, lived a very long time. So I actually am trying to imitate him three ways there. (Laughter) We'll see what happens. But we are — we're making a lot of progress. And I think we'll probably have a CEO within a couple of months. But if we don't have one, then we're not going to pick somebody just because we want to meet any deadline or anything like that. We've got these wonderful partners. We don't have a partnership agreement among us. Somebody started drawing up one in a legal department and the CEO just put a stop to it. They — you do have places that have a lot of resources. And while we all have our share of bureaucracy, we can cut through it if we've got something that we really think makes sense. And we will get the support — we'll get — we'll get a lot of resistance, too. But we will get the support of a lot of American business, if we come up with something that makes sense. But if it was easy, it would've already been done. There's no question about that.

CHARLIE MUNGERIt's not easy.

WARREN BUFFETTNo. (Laughs) But it should be tried.

Weschler and Combs "slightly ahead" of S&P

WARREN BUFFETTOK. Becky?

BECKY QUICKThis question comes from David Rolfe, who is with Wedgewood Partners, and has been — the company — has been shareholders in Berkshire since 1989. The stock is currently the largest holding in their stocks — 18 stocks. He asks this question: "Over the past two years, you have listed the individual fund-of-funds performance from Protégé Partners. When will you start showing the annual performance on 25 billion that Ted [Weschler] and Todd [Combs] manage? Can you state if either Ted or Todd has beaten the S&P 500 index over the last five years?

WARREN BUFFETTYeah. Both — A, we'll probably never report their individual performance. But you can be sure that I have an enormous interest in — as does Charlie — in how much we think they contribute to Berkshire. And they have — they've been terrific. They've — they not only have the intellect, and the record, but they are exceptional human beings. And they — Todd has done a tremendous amount of work, for example, on the medical project. And — Ted is — I've given him several things, and he's done them better than I could do them. So the record, since inception — and I'm measuring it — Ted came later than Todd, a year or so later — but the record, since inception, is almost identical — both for the two managers — from their different inception and matching the S&P. And they've received some incentive compensation, which they only get if they beat the S&P. And as I say, they're just slightly ahead. That really hasn't — It's been better than I've done, so naturally, I can't criticize it. (Laughs) They — they were the — they were two very, very, very good choices. Charlie?

CHARLIE MUNGERYou did report it in a previous year. You just didn't do it this year. And — but now you have your report. (Laughter)

WARREN BUFFETTI would — the problem that all of us has is size. It's actually — it's harder to run even 12 or $13 billion, frankly, than it is to run a billion. And if you're running a million dollars or something of the sort, it's a whole different game. You'd agree with that, wouldn't you, Charlie?

CHARLIE MUNGEROf course.

WARREN BUFFETTYeah, OK. (Laughter) Just like any good lawyer, you never ask him a question unless you think you know the answer they're going to give. (Laughter)

GEICO is on a good growth and profit track

WARREN BUFFETTOK. Gary?

GARY RANSOMMy question's on GEICO. Last year, you promised growth and delivered. But along the way, the combined ratio was moving up, and it was the first time it was over a hundred in about 15 years. Granted, some of that was catastrophes. But even excluding catastrophes, there was something going on in the loss trends that caused you to slow down that growth, at least at the — as we got to the latter part of the year. And I wondered if you could tell us what was going on. And I did look this morning, too, so it looked like the first quarter has settled down a little bit, but I'd still like to know about the fourth quarter.

WARREN BUFFETTYeah, sure. It — the only thing I differ with the question on slightly — when you say it caused us to slow down — we didn't want to slow down the growth. I mean, you're looking at a guy here that has never wanted to slow down the growth of GEICO. The growth did slow down, but it wasn't because we wanted it to. Our prices that led to the underwriting loss — we actually — we'd have been slightly in the black without the catastrophes. But, you know, if we hadn't have paid our light bills, we might have been in the black, too. I mean, this "except for" stuff doesn't mean much in insurance as far as I'm concerned. The — if you'll look at the first quarter — our margins were around 7 percent, which is actually a little more than we aimed for. And I received the unaudited — I mean, the preliminary — figures for April, and they're similar. So, the underwriting gain is — or margins — are perfectly satisfactory now. And we'd love to get all the growth we can. And we will gain market share this year. And we gained market share — Tony — when Tony [Nicely] took over the place, it was — in 1993 — it was two and a very small fraction percent. And it'll be 13 percent of the — you know — 13 percent of the households in the country now. And we will keep gaining share. We will keep writing profitably — most of the time. And every now and then, our rates will be slightly — modestly inaccurate — inadequate, I should say. And/or we'll have, maybe, some big losses on hurricanes or something of the sort, or we'll have a [Hurricane] Sandy in New York. The — but GEICO is a jewel. And it's — you know, it's really a — we've got some others we feel awfully close to similarly about, but it's an incredible company. It has a culture all of its own. It's saving its customers probably 4 or $5 billion a year against which they would — against what they would otherwise be paying, based on the average in auto insurance. And it will be profitable on underwriting a very high percentage of the year. It contributed another $2 billion to float last year. It is a terrific company. And like I say, the first four months are dramatically better. Now, there's some seasonal in auto insurance. So, the first quarter is usually the best of the four quarters. But it's not a dramatic seasonal. So, I think when you read the 10-Q — and you can take my word for April — I think GEICO is on a good profit track as well as a good growth track. And the more it grows, the better I like it. Charlie?

CHARLIE MUNGERWell, I think you've said it perfectly.

WARREN BUFFETTHuh.

CHARLIE MUNGERIt was never very bad, and it's better now. (Buffett laughs)

Munger on steel tariffs: "Even Donald Trump can be right"

WARREN BUFFETTOK. Station five.

AUDIENCE MEMBERGood morning, Warren Buffett and Charlie Munger. My name is Ethan Mupposa (PH), and I am from Omaha, Nebraska. My question is, how will Donald Trump's tariffs affect the manufacturing business of Berkshire Hathaway?

WARREN BUFFETTWell, to date — (applause) — steel costs — we've seen steel costs increase somewhat. But as I said earlier, I don't think the United States or China — there'll be some jockeying back and forth, and there will be something that leaves some people unhappy and — but I don't think — I don't think either country will dig themselves into something that precipitates and continues any kind of real trade war in this country. We — we've had that in the past a few times. And I think we've learned a general lesson on it. But there will — there will be some things about our trade policies that irritate others. And there will be some from others that irritate us. And there will be some back and forth. But in the end, I don't think we'll come out with a terrible answer on it. Charlie, I'll let you —

CHARLIE MUNGERWell, steel has — it reached — the conditions in steel were almost unbelievably adverse to the American steel industry. You know, even Donald Trump can be right on some of this stuff. (Laughter and applause)

WARREN BUFFETTThe — the thing about trade — you know, I've always said that the president, whether it's president — any president — needs to be an educator-in-chief, which [Franklin] Roosevelt was in the Depression. That's why he had those Fireside Chats, and it was very important that he communicated to the people what needed to be done and what was happening around them, and — Trade is particularly difficult, because the benefits of trade are basically not visible, you know. You don't know what you would be paying for the clothes you're wearing today if we'd had a rule they all had to be manufactured in the United States, or what you'd be paying for your television set, or whatever it may be. No one thinks about the benefits day-by-day as they walk around buying things and carrying on their own business. The negatives, and there are negatives, are very apparent and very painful. And if you're laid off — like happened in our shoe business [Dexter Shoes] in Maine — and you know you are — been a very, very, very good worker, and you were proud of what you did, and maybe your parents did it before you, and all of a sudden you find out that American shoes — shoes manufactured in America — are not competitive with shoes made outside the United States. You know, you can talk all you want about Adam Smith or David Ricardo or something and explain the benefits of free trade and comparative advantage and all that sort of thing, and that doesn't make any difference. And if you're 55 or 60 years old, to talk about retraining or something like that, you know, so what? So, I — it is tough in politics where you have a hidden benefit and a very visible cost to a certain percentage of a — of your constituency. And you need to do two things under those circumstances, if you have that situation. You know what's good for the country. So, you have to be very good at explaining how it does really hurt, in a real way, somebody that works in a textile mill, like we had in New Bedford, where you only spoke Portuguese — half our workers only spoke Portuguese. And suddenly, they have no job. And they've been doing their job well for years. You've got to do two things. You can — you'll have to — you have to understand that that's the price individuals pay for what's good for the collective good. And secondly, you've got to take care of the people that are — that — where retraining is a joke because of their age, or whatever it may be. And you've got to take care of the people that become the roadkill in something that is collectively good for us as a country. And — That takes society acting through its representatives to develop the policies that will get us the right collective result, and not kill too many people economically in the process. And you know, we've done that in various arenas over the years. The people in their productive years do help take care of the people that are too old, and too young. I mean, every time a baby is born in the United States, you know, we take on an obligation of educating them for 12 years. It'll cost $150,000 now, you know? It — We have a system that has a bond between the people in their productive years and the ones in the young and old. And it gets better over time. It's far from perfect now. But it has gotten better over time. And I believe that trade, properly explained, and with policies that take care of the people that are roadkill, is good for our country and can be explained. But I think it's a tough — it's been a tough, tough sell to a guy that made shoes in Dexter, Maine or worked on a loom in New Bedford, Mass, or works in the steel mill in Youngstown, Ohio. (Applause)

Buffett won't impose his political opinions on Berkshire

WARREN BUFFETTAndrew?

ANDREW ROSS SORKINOK, Warren. This question comes from a Berkshire shareholder who says they've been a shareholder for ten years. I should say this may be one of the most pointed questions I've ever received for you. So —

WARREN BUFFETTBut you elected to give it, though.

ANDREW ROSS SORKINBut I did. (Laughter) The shareholder writes, "I have watched the movie every year at this meeting, when you testify in front of Congress on behalf of Salomon, as the symbol of what it means to have a moral compass. Investors are increasingly looking to invest in companies that are socially and morally responsible. "So I was disturbed when you were asked on CNBC about the role that business could play in sensible policies around the sales of guns. "You said you didn't think business should have a role at all, and you wouldn't impose your values on others. I was even more surprised when you said you'd be OK with Berkshire owning shares in gun manufacturers. "At this meeting years ago, you said you wouldn't buy a tobacco company because of the social issues. The idea that Berkshire would associate with any company as long as it isn't illegal seems at odds with everything I think you stand for. Please tell us you misspoke."

WARREN BUFFETTWell — (applause) — let's explore that a little. (Laughter) Should it be just my view, or should it be the view of the owners of the company? So, if I decide to poll the owners of the company on a variety of political issues, and one of them being whether, you know, Berkshire Hathaway should support the NRA, I don't — if a majority of the shareholders voted to do it, or if a majority of the board of directors voted to do it, I would — I wouldn't — I would accept that. I don't think that the — my political views — I don't think I put them in a blind trust at all when I take the job. And I — in the elections of 2016, I raised a lot of money. In my case, I raised it for Hillary [Clinton]. And I spoke out in various ways that were quite frank, but — (applause) — I don't think that I speak — When I do that, I don't think I'm speaking for Berkshire. I'm speaking as a private citizen. And I don't think I have any business speaking for Berkshire. We have never — at the parent company level — we have never made a political contribution, you know — And I don't go to our suppliers. I don't do anything of that sort where I raise money either for the school I went to, or for a political candidate I went to, or anything else. And I don't think that we should have a question on the GEICO policyholder form, "Are you an NRA member?" you know, and if you are, you just aren't good enough for us, or something. That — I think — I do not believe in imposing my political opinions on the activities of our businesses. And if you get to what companies are pure and which ones aren't pure — (applause) — I think it is very difficult to make that call. Thank you. I think with that response, I'm almost afraid to call on Charlie. But go ahead, Charlie. (Laughter)

CHARLIE MUNGERWell, obviously, you do draw a limit, Warren —

WARREN BUFFETTYeah, we did.

CHARLIE MUNGER— in all kinds of thing —

WARREN BUFFETTYeah.

CHARLIE MUNGER— which are beneath us, even though they're legal. But we don't necessarily draw it perfectly because we've got some sort of supreme knowledge. We just do the best we can. And certainly, we're not going to ban all guns, surrounded by wild turkeys in Omaha. (Laughter)

"Very unlikely" Berkshire would pay a special dividend

WARREN BUFFETTOK, Gregg. (Laughter)

GREGG WARRENWarren, this question's also based on something you said more recently, so I can't guarantee it's going to be any easier. (Buffett laughs) You recently noted that you prefer share repurchases over dividends as a means for returning capital to shareholders should Berkshire's cash balances continue to rise and hit the $150 billion threshold you noted as being difficult to defend to shareholders at last year's annual meeting. While I understand the rationale for not establishing a regular dividend, a one-time special dividend could be a useful option for returning a larger chunk of Berkshire's excess capital to shareholders without the implied promise to keep paying a regular dividend forever. The drawback with the special dividend, though, is that it would lead to an immediate decline in book value and book value per share. Whereas a larger share repurchase effort, while depressing book value, would reduce Berkshire's share count, limiting the impact on book value per share. If we do happen to get a few years out and Berkshire does hit that $150 billion threshold, because valuations continue to be too high, both for acquisitions and for the repurchase of company stock, would you consider a one-time special dividend as a means for returning capital to shareholders?

WARREN BUFFETTWell, if we thought we couldn't use capital effectively, we would figure — we would try to figure out the most effective way of returning capital to shareholders. And — you could — I would have probably — I think it'd be unlikely we'd do it by a special dividend. I think it'd be more likely we'd do it by a repurchase, if the repurchase didn't result in us paying a price above intrinsic value per share. We're never going to do anything that we think is harmful to continuing shareholders. So if we think the stock is intrinsically worth X, and we would have to pay some modest multiple even above that to repurchase shares, we wouldn't do it because we would be hurting continuing shareholders to the benefit of the people who are getting out. But we will try and do whatever makes the most sense, but not with the idea that we have to do something every day because we simply can't find something that day. We had a vote as you know — I don't know, a few years back — on whether people wanted a dividend. And — the B shares — so I'm not talking my shares or Charlie's or anything — but the B shares voted 47 to one against it. So I think through self-selection of who become shareholders — I don't think shareholders world — or countrywide — on all stocks would vote 47 to one at all. But we get self-selection in terms of who joins us. And I think they expect us to do whatever we think makes sense for all shareholders. And obviously, if we really thought we never could use the money effectively in the business, we should get it out, one way or another. And — You've got a bunch of directors who own significant — very significant — amounts of stock themselves. And you can expect them to think like owners. It's the reason they're on the board. And you can expect the management to think like owners and — owners will return money to all of the owners if they think it makes more sense than continuing to look for things to do. But we invested in the first quarter, maybe — have to look it up on the — well, certainly through April — probably close to 15 billion or something like that, net, so — And we won't always be in a world of very low interest rates — or high private market prices. So we will do what makes the most sense. But I can't see us ever making a special — almost — it's very unlikely we would just pay out a big, special dividend. I think that if we put that to the vote of the shareholders, and Charlie and I did not vote, I think we would get a big negative vote. And I'd be willing to — be willing to make a bet on that one. Charlie?

CHARLIE MUNGERWell, as long as the existing system continues to work as well as it has, why would we change it? We've got a whole lot of people that are accustomed to it, have done well under it. And if conditions change, why, we're capable of changing our minds, if the facts change.

WARREN BUFFETTYeah, and we've done that several times.

CHARLIE MUNGERYes.

WARREN BUFFETTYeah.

CHARLIE MUNGERAlthough, I must say, it's a little hard. (Laughter)

WARREN BUFFETTHe always brings me back to earth.

Munger is more interested than Buffett in Chinese stocks

WARREN BUFFETTOK. Station 6?

AUDIENCE MEMBERHi, good morning, Mr. Buffett and Mr. Munger. My name is Stephie Yu from Horizon Insights, a China-focused research firm based in Shanghai. So I have a lot of mutual fund clients in China, who are very young — relatively younger — and they manage a smaller portion of funds. So my question is, if you only have $1 billion in your portfolio today, how would you change your investments? Would you consider more investment opportunities in emerging markets such as China? Thank you.

WARREN BUFFETTYeah. I would say, if I were working with a billion, I would probably find — within a $30 trillion market in the United States, where I understood things better, generally, than I do around the world — I'd probably find opportunities there that would be better, incidentally, by some margin, than what we can find for hundreds of billions. But I wouldn't — there's no way I'd rule out emerging markets. There was a time, 15 years ago or so, when just because it was kind of interesting and it took me back to my youth, I — on the weekend, I went through a directory of Korean stocks. And I bought — and these were small stocks — well, they weren't small by standards of either Korean or American business. They were big, big companies. But I found 15 or 20 in — that were statistically cheap and bought some of each one myself. And there are opportunities with smaller amounts of money to do things that we just can't do. And — but I — my first inclination always would be to comb through things in the United States. And — But I've combed through — in other countries. I probably wouldn't get into very, very small markets because there can be a lot of difficulties even in market execution and taxation, (inaudible). You can find — if you can't find it, you know, in America and China and Britain and a few other places — (laughs) — you probably aren't going to find it someplace else. You may think you've found it. But that may be — it may be a different game than you know. Our problem is size, not geography. Charlie?

CHARLIE MUNGERWell, I already have more stocks in China than you do, as a percentage, so I'm with the young lady. (Laughter)

WARREN BUFFETTOK. Well, you can — you want to name names? Do these stocks have names? Or — (Laughs)

CHARLIE MUNGERNo, I don't. (Buffett laughs)

WARREN BUFFETTCarol?

CAROL LOOMISThis question is —

WARREN BUFFETTI should just add one thing. You will find plenty of opportunities in China. Charlie would say you've got a better hunting ground than even a person with similar capital in the United States. Would you agree with —?

CHARLIE MUNGERYes, I do.

WARREN BUFFETTYeah, yeah. So — and in the sense they're — it's logical that should be the case because it's a younger market, but still a large market. So that — Markets probably work toward efficiency as they age. Japan had this very strange situation with warrants being priced out of line and all of that 30 years ago. And people notice after a while and it disappears. But there can be — some very strange things happen in markets as they develop. I think you'd agree with that, Charlie, wouldn't you?

CHARLIE MUNGERAbsolutely.

WARREN BUFFETTYeah.

Munger: Keep the faith and don't sell your stock when we're gone

WARREN BUFFETTJonathan?

JONATHAN BRANDTHello —

CAROL LOOMISYou skipped me.

WARREN BUFFETTDid I skip —? I skipped Carol?

CAROL LOOMISYup.

WARREN BUFFETTOh. I'm sorry.

CAROL LOOMISOK.

WARREN BUFFETTOK.

CAROL LOOMISThis question, and I would concede it is not a small one, comes from Gideon Pollack of Montreal. He says, "The world knows generally how the looks of Berkshire Hathaway have changed since you began to run the company in 1965. Berkshire was then a tiny northeastern, textile company. And now it is the number-four company on the Fortune 500. "What about the next 50 years? Could you give us your view of what Berkshire looks like in 2068?"

WARREN BUFFETTI think it'll look a long way away. (Laughter) No, the answer is I don't know. And I didn't know, 50 years ago, what it would like now, I mean — It will be based on certain principles. But where that leads, you know, we will find out and we'll have people that are thinking about different things than I am. And we'll have a world that's different. But — We will be — I very much hope and believe that we will be — that we'll be as shareholder-oriented as any large company in the world. We will look at our shareholders as partners and we will be trying to do with their money exactly what we'd do with our own, not seeking to get an edge on them. And who knows what else will be happening then? Charlie?

CHARLIE MUNGERWell, I want to talk to the younger shareholders in the group. Those of you who, after we are gone, sell your Berkshire stock and do something else with it, helped by your many friends, I think are going to do worse. (Laughter) So I would advise you to keep the faith. (Applause) By the way, some of that has already happened in many families.

WARREN BUFFETTI'll give his answer next time now that I see it get all of that applause. (Laughter)

"Duracell should be earning more money than it is now"

WARREN BUFFETTJonathan.

JONATHAN BRANDTDuracell's $82 million of pretax profits in 2017 were still well below what it earned as a subsidiary of P&G. Can you clarify or quantify to what extent transition costs or purchase price accounting impacts at the segment level were still temporarily burdened last year? Or is it possible that the gap in earnings contribution simply reflects a commoditization of the category given the entry of Amazon into the battery market? I did see that Duracell's earnings were up in the first quarter. Is that a sign of a more meaningful contribution in 2018 and beyond, as you finish right-sizing the manufacturing footprint and acquisition-related charges fall away?

WARREN BUFFETTYeah. Duracell should be earning more money than it is now, and will be. And as you mentioned, it's well on its way there. But it is not earning an appropriate amount now, based on the history of the company. I was around when — I was on the board of Gillette when Gillette bought Duracell. And I've seen what it does when it is managed to its full extent. And I saw what Jim Kilts did with it at Gillette when he ran it. And there were a lot more transition problems in the purchase. For one thing, there's a lot of rules connected with our swap of our stock in P&G for Duracell. There are a lot of things which you cannot do that made sense to do in that period of transition from P&G's management to ours. But Duracell — the brand is strong. Very strong. The product line is very strong. And we are making more money. And we should, and I believe we will earn, really, what the property is capable of earning. We should be earning that relatively soon. But you're absolutely right that it is — from a profit standpoint — is underperforming. We're making a lot of changes. And some of those are involved in jurisdictions — countries — where it is really expensive to change in terms of employment — payments that have to be made if a plant is changed or something of the sort. But I like the Duracell deal absolutely as well as when we made it. Charlie?

CHARLIE MUNGERI like it better than you do. (Laughter)

WARREN BUFFETTNo. Duracell is a very, very — is our kind of business.

CHARLIE MUNGERIt is.

Long-term bonds are "almost ridiculous" at current rates

WARREN BUFFETTOK. Station 7.

AUDIENCE MEMBERGood morning. And I have a question related to the bond market — U.S. Treasury bond market. And my name is Ola Larsson (PH). I live in the San Francisco bay area. And I never worked in the financial industry. I started out buying penny mining stocks on the Vancouver Stock Exchange. And then decades later, I got married. And my wife convinced me to buy Berkshire shares. That was probably a good decision. (Laughter) So my question is, I read the newspapers about the Federal Reserve and the inflation numbers. And there must be an increase supply of Treasury bonds that must go to auction. And my question is how would — what do you expect that to impact yield or interest rate?

WARREN BUFFETTYeah. The answer is, I don't know. And the good news is, nobody else knows, including members of the Federal Reserve and everyone — There are a lot of variables in the picture. And the one thing we know is we think that long-term bonds are a terrible investment, and we — at current rates or anything close to current rates. So basically all of our money that is waiting to be placed is in Treasury bills that, I think, have an average maturity of four months, or something like that, at most. The rates on those have gone up lately, so that in 2018, my guess is we'll have at least $500 million more of pretax income than we would've had in the bills last year. But they still — it's not because we want to hold them. We're waiting to do something else. But long-term bonds — they're basically, at these rates — it's almost ridiculous when you think about it. Because here the Federal Reserve Board is telling you we want 2 percent a year inflation. And the very long bond is not much more than 3 percent. And of course, if you're an individual, then you pay tax on it. You're going to have some income taxes to pay. And let's say it brings your after-tax return down to 2 1/2 percent. So the Federal Reserve is telling you that they're going to do whatever's in their power to make sure that you don't get more than a half a percent a year of inflation-adjusted income. And that seems to me, a very — I wouldn't go back to penny stocks — but I think I would stick with productive businesses, or productive — certain other productive assets — by far. But what the bond market does in the next year, you know — you've got trillions of dollars in the hands of people that are trying to guess which maturity would be the best to own and all that sort of thing. And we do not bring anything to that game that would allow us to think that we've got an edge. Charlie?

CHARLIE MUNGERWell, it really wasn't fair for our monetary authorities to reduce the savings rates, paid mostly to our old people with savings accounts, as much as they did. But they probably had to do it to fight the Great Recession, appropriately. But it clearly wasn't fair. And the conditions were weird. In my whole lifetime, it's only happened once that interest rates went down so low and stayed low for a long time. And it was quite unfair to a lot of people. And it benefited the people in this room enormously because it drove asset prices up, including the price of Berkshire Hathaway stock. So we're all a bunch of undeserving people — (laughter) — and I hope that we continue to be so. (Laughter)

WARREN BUFFETTAt the time this newspaper came out in 1942, it was — the government was appealing to the patriotism of everybody. As kids, we went to school and we bought Savings Stamps to put in — well, they first called them U.S. War Bonds, then they called them U.S. Defense Bonds, then they called them U.S. Savings Bonds. (Laughs) But they were called war bonds then. And you put up $18.75 and you got back $25 in ten years. And that's when I learned that that $4 for three — in ten years — was 2.9 percent compounded. They had to put it in small print then. And even an 11-year-old could understand that 2.9 percent compounded for ten years was not a good investment. But we all bought them. It was — you know, it was part of the war effort, basically. And the government knew — I mean, you knew that significant inflation was coming from what was taking place in finance, in World War II. We actually were on a massive Keynesian-type behavior, not because we elected to follow Keynes, but because war forced us to have this huge deficit in our finances, which took our debt up to 120 percent of GDP. And it was the great Keynesian experiment of all time, and we backed into it, and it sent us on a wave of prosperity like we've never seen. So you get some accidental benefits sometimes. But the United States government (inaudible) every citizen to put their money into a fixed-dollar investment at 2.9 percent compounded for ten years. And I think Treasury bonds have been unattractive ever since — (laughs) — with the exception of the early '80s. That was something at that time. I mean, you really had a chance to buy — you had a chance to invest your money by buying zero-coupon Treasury bonds, and in effect, guarantee yourself that for 30 years you would get a compounded return, you know, something like 14 percent for 30 years of your lifetime. So every now and then, something really strange happens in markets and the trick is to not only be prepared but to take action when it happens. Charlie, did you ever buy any war bonds?

CHARLIE MUNGERNo. No. I never bought war bonds.

WARREN BUFFETTNo. Used to be like take me —

CHARLIE MUNGERI didn't have any money when I was in the war. (Laughter)

WARREN BUFFETTThat's a good reason not to buy. (Laughs)

"A bureaucracy is sort of like a cancer"

WARREN BUFFETTOK, Becky?

BECKY QUICKThis question comes from Angus Hanton (PH), who — he and his wife are based in London, and he says they've been shareholders in Berkshire Hathaway for over 30 years. He says, "We have all read about the zero-based budgeting that has been so effective with Kraft Heinz and other investments that you've done with 3G Partners. Can we expect these cost-reduction techniques to be used by your managers in other parts of the Berkshire Hathaway enterprise?"

WARREN BUFFETTWell, in general, we do not expect the managers, generally, to get in the position where there would be a lot of change in terms of zero-based budgeting. In other words, why in the world aren't you thinking that way all of the time? The 3G people have gone into certain situations where there were — probably primarily in personnel, but in other expenses as well — a lot of expenses that were not delivering a dollar of value per dollar expended. And so, they made changes very fast that — to a situation that probably shouldn't have existed in the first place. Whereas, we hope that our managers — take a GEICO. GEICO's gone from, I think, 8,000 to 39,000 people since we bought control. But they're all very productive. I mean, you would not find a way for a 3G operation to take thousands of people out of there. On the other hand, I can think of some organizations where you could take a whole lot of people out, where it isn't being done because the businesses are very profitable to start with. That's what happened with the tobacco companies, actually. They were so profitable that they had all kinds of people around that didn't — weren't really needed. But they — the money just flowed in. So I — our managers have different techniques of keeping track of — or of — trying to maximize customer satisfaction at the same time that they don't incur other than necessary costs. And I think, probably, some of our managers may well use something that's either zero-based budgeting or something akin to it. They do not submit budgets — never have — to me. I mean, they've never been required to. We've never had a budget at Berkshire. We don't consolidate our figures monthly. I mean, I get individual reports on every company. But there's no reason to have some extra time spent, for example, by having consolidated figures at the end of April, or consolidated figures at the end of May. We know where we stand. And — you know, I'm sure we're the only company that — probably in the whole Fortune 500 — that doesn't do it. But we don't do unnecessary things around Berkshire. And a lot of stuff that's done at big companies is unnecessary. And that's why a 3G finds opportunities from time to time. Charlie?

CHARLIE MUNGERWell, if you've got 30 people at headquarters and half of those are internal auditors, that is not the normal way of running a big company in America. And what's interesting about it is, obviously, we lose some advantages from big size. But we also lose certain disadvantages from having a big bureaucracy with endless meeting after meeting after meeting around headquarters. And net, I think we've been way ahead with our low overhead, diversified method. And also, it makes our company attractive to very able, honorable people who have companies. So generally speaking, the existing system has worked wonderfully for us. I don't think we have the employment that could be cut effectively that a lot of other places have. And I think our methods have worked so well that we'd be very unlikely to change them.

WARREN BUFFETTYeah. I think if some — at headquarters, you could say we have kind of subzero-based budgeting. (Laughter) And we hope that the example of headquarters is, to a great extent, emulated by our —

CHARLIE MUNGERBut it isn't just the cost reduction. I think the decisions get made better if you eliminate the bureaucracy.

WARREN BUFFETTOh yeah.

CHARLIE MUNGERI think a bureaucracy is sort of like a cancer. And it functions sort of like a cancer. (Applause) And so, we're very anti-bureaucracy. And I think it's done us a lot of good. In that case, we're quite different from, say, Anheuser-Busch at its peak.

We’re experimenting with lower-cost commercial insurance

WARREN BUFFETTOK. Gary.

GARY RANSOMMy question is on small commercial, and specifically, direct small commercial. You seem to have some websites that enable buyers to purchase small commercial insurance directly; biBERK is one of them. It's a very competitive, fragmented market. But what is your strategy for that market? And then, can you ultimately GEICO-ize the small commercial market?

WARREN BUFFETTWell, we'll find out. I mean, it's a very good question because that's exactly the question we ask ourselves. And we have this incredible company at GEICO, which has gone direct in the personal auto field, and was, you know, first started it in 1936. And there's no question in my mind that over a lot of years — and maybe not so many years — something like small commercial — anything that takes cost out of the system, you know, makes it easier for the customer, is going to work over time, if you've got a system that was based on something that had more layers of agency costs and that sort of thing. So we are experimenting, and we'll continue to experiment, on something like small commercial, workers' comp, whatever it may be. We'll try and figure out ways to take cost out of the system, offer the customer an equivalent product or better at lesser price, and we'll find out what can be done and what can't be done. And we're not the only ones doing it, as you know. But we are not going — we've got some managers that are going to be quite, I'm sure, enterprising on that. And we back them. And we expect some to fail and some — and if a few succeed — we'll have some very good businesses. And the world is going in that direction. So — you could expect us to try and go with it. Charlie?

CHARLIE MUNGERWell, if it were easy, I think it would've happened more fast —

WARREN BUFFETTYeah —

CHARLIE MUNGER— than it has.

WARREN BUFFETTIt will happen as we go along. I mean, it wasn't easy in auto, I mean, when you think about it.

CHARLIE MUNGERNo, it wasn't.

WARREN BUFFETTNo. I mean, it was a system with all kinds of extra costs that go back to the turn of the 19th century into the 20th. I mean, it was built on fire insurance and strong general agencies. And that slopped over into auto when the auto came along in 1903 from Ford or whenever. And — so it grew within a system that really wasn't very efficient compared to what was available. But it took State Farm initially to go to a direct, or a captive agency system. And then it took USAA, and then later, GEICO, and then later, Progressive, to go to direct systems that are even more efficient and consumer-friendly. And the same thing is going to happen, to some degree, in all kinds of industries, and certainly small commercial — somebody will —

CHARLIE MUNGERIt could happen, but it will be slow.

WARREN BUFFETTIt takes an amazingly long time. I mean, it — but you know, the battle doesn't always go to the strong and the race to the swift. But that's the way to bet, you know, as they say. So — (Laughs)

Health care partnership is attacking a huge "industry moat"

WARREN BUFFETTOK, station 8?

AUDIENCE MEMBERAustin Merriam, from Jacksonville, Florida. Mr. Buffett, with the recent news of the partnership between you, Mr. [Jeff] Bezos, and Mr. [Jamie] Dimon, to challenge the health care industry and the self-admitted difficulties you are running across, this would lead me to believe the industry has higher barriers to entry than may have originally been hypothesized; a larger moat, if you will. Would that justify a higher earnings multiple for established players in the industries, such as PBMs, for example?

WARREN BUFFETTWell, just — though the system may have a moat against intruders, it doesn't mean that everybody operating within the system has individual moats, for one thing. Now, I — we are — if this new triumvirate succeeds at all, we are attacking an industry moat. And I'm defining industry very broadly; health care, not just, you know, health care insurers or this or that. We're trying to figure out a better way of doing it and making sure that we're not sacrificing care. And the goal is to improve care. And like I say, that is a — that's a lot bigger than a single company's moat. It's bigger than a component of the industry's moat. The moat held by the whole system, since it interacts in so many ways, is actually — that's the moat that essentially has to be attacked, and that's a huge moat. And like I say, we'll do our best. But — I hope if we fail, I hope somebody else succeeds. Charlie?

CHARLIE MUNGERWell, I suspect that eventually when the Democrats control both houses of Congress and the White House, we will get single-payer medicine. And I don't think it's going to be very friendly to many of the current PBMs. (Applause) And I won't miss them. (Laughter)

Buffett vs Elon Musk on whether competitive moats are "lame"

WARREN BUFFETTAndrew?

ANDREW ROSS SORKINThis question comes from Kiwi (PH) and actually is directly about the issue of moats. He notes that — "Elon Musk, this week, on his Tesla earnings call, said the following, quote, 'I think moats are lame. They are, like, nice in a sort of quaint, vestigial way. And if your only defense against invading armies is a moat, you will not last long. What matters is the pace of innovation. That is the fundamental determinant of competitiveness,' unquote. "So, Warren, it seems the world has changed. Business is getting more competitive. Pace of innovation. Technology is impacting everything. Is Elon right?"

CHARLIE MUNGERLet me answer that one, Warren. Elon says a conventional moat is quaint. And that's true of a puddle of water. And he says that the best moat would be to have a big competitive position. And that is also right. You know, it's ridiculous. (Laughter) Warren does not intend to build an actual moat. (Laughter) Even though they're quaint.

WARREN BUFFETTYeah. (Laughter) There's certainly a great number of businesses — this has always been true, but it does seem like it — the pace has accelerated and so on, in recent years. There's been more moats that have been — become susceptible to invasion — than seemed to be the case, earlier. But there's always been the attempt to do it. And there — here and there, there are probably places where the moat is as strong as ever. But certainly — you could work at — certainly should be working at improving your own moat and defending your own moat all of the time. And Elon may turn things upside down in some areas. I don't think he'd want to take us on in candy. But — (Laughter) And we've got some other businesses that wouldn't be so easy to — You can look at something like Garanimals out there in the other room. And — it won't be technology that takes away the business in — (laughs) — Garanimals. Maybe something else that catches the young kid's fantasy or something. But — there are some pretty good moats around. Being the low-cost producer, for example, is a terribly important moat. And something like GEICO — technology has really not brought down the cost that much. I think our position as — there is a couple of companies that have costs as low as ours. But among big companies, we are a low-cost producer, and that is not bad when you're selling an essential item.

Not surprised "if we find good uses" for Berkshire Hathaway Energy's capital

WARREN BUFFETTOK, Gregg?

GREGG WARRENWarren, Berkshire Energy has benefited greatly from operating under the Berkshire umbrella. By not having to pay out 60 to 70 percent of earnings annually as a dividend, the company was able to amass 9 billion in capital the past five years, and closer to 12 billion in the past ten, money that can be allocated to acquisitions and capital spending, especially on renewables. While tax credits for solar energy don't run out until next year, we've already seen a dramatic reduction in Berkshire Energy's capital commitment to solar projects. And even though spending on wind generation capacity is projected to be elevated this year and next, it does wind down in 2020 as the wind production tax credits are phased out. Absent a major commitment to additional capital projects, it looks like Berkshire Energy's expenditures in 2021 will be its lowest since 2012, leaving the firm with more cash on hand than it has had in some time. Do you think it is likely at that point that Berkshire Energy starts funneling some of that cash up to the parent company? Or will it be earmarked for debt reduction, or just be left on the balance sheet as dry powder for acquisitions?

WARREN BUFFETTYeah. The — you're right about when tax credits phase out and all of that. Although, as you know, they've extended that legislation in the past. Who knows exactly what the government's position will be on incentivizing various forms of alternative energy? But my guess is — I mean, if you take the logical expenditures that may be required in all aspects of the public — like regeneration and the utility business generally — I think there'll be a lot of money spent. And the question is whether we can spend it and get a reasonable return on it. There again, we'll do what's logical. There are three shareholders, basically, of Berkshire Hathaway Energy. Berkshire Hathaway itself owns 90 percent of it. And Greg Abel and his family, perhaps, and Walter Scott and, again, family members — own the other 10 percent. And we all have an interest in employing as much capital as we can at good rates. And we'll know when it can be done and when it can't be done. And we'll do — there's no tax consequences to Berkshire at all. So — but the three partners will figure out which makes the most sense. But when you think of what might be done to improve the grid in the U.S. and the fact that we do have the capital, I wouldn't be surprised if we find good uses for capital in Berkshire Hathaway Energy for a long time in the future. Charlie?

CHARLIE MUNGERYeah. Well, I think there'll be huge opportunities in Berkshire Energy as far ahead as you can see to deploy capital very intelligently. So I think the chances of a big dividend is approximately zero.

WARREN BUFFETTYeah. And we've not only got the money to an extent that virtually no utility company does — we've also got the talent, too. I mean, we've got a very, very talented organization there. So it's a big field and we've got shareholders that are capitalists. And we've got managers that are terrific. And you would think we'd find something intelligent to do over time in the field. So far, we have. I mean, we've owned it now for close to 20 years. And we've deployed a lot of capital and so far, so good. I mean, it's — If you look at the improvements that can be made in our utility system in the United States, you're talking hundreds and hundreds and hundreds of billions of dollars, if not trillions. So — you know, where else but Berkshire would you look for that kind of money? (Laughs)

"We do expect that normalized earning power to increase over time"

WARREN BUFFETTOK, station 9.

AUDIENCE MEMBERI'm Richard Sercer (PH) from Tucson, Arizona. "At Berkshire what counts most are increases in our normalized per-share earning power." That was in your last letter. What is our normalized per-share earning power, as you estimate it?

WARREN BUFFETTWell, I would say that what you saw in the first quarter, under these tax rates, would probably be a reasonable guess. You know, obviously, it depends on the economy in any given year. I would say that would — is a reasonable estimate. But we have firepower we haven't used. And we'll have more firepower as we go along. So we do expect that normalized earning power to increase over time. And if it doesn't, you know, one way or another, we're failing you because we're retaining those earnings. So — I don't see anything abnormal in our earnings, figured now at a 21 percent federal rate. But as I look at the 5 1/4 billion in the first quarter — seasonally, insurance is better in the first quarter — but seasonally, most of our businesses, the first quarter is not the strongest quarter for us. I don't see anything abnormal with it. And then I think you can expect, you should expect, we expect, substantial capital gains over time in addition to what comes from the operating businesses. So how much you figure in for that — I would say that the retained earnings beyond dividends of our 770 billion of equities — in other words, how much they're keeping from us, but that our share of the earnings, which can be used by them, whether it's Apple or American Express or Coca-Cola or Wells Fargo or whatever, our share, you know, is in many billions of dollars annually. And one way or another, we think that those dollars will benefit us as much as if they had been paid out. Now, in certain cases, they won't. But in certain cases, they'll excel the amount, in terms of market value created. So there's many billions of dollars we are not showing in our earnings that is being retained by our investees. And one way or another, I think we'll get value received out of those. So you can take 20 or 21 billion under present tax rates, present economic conditions, and then we should get something from that and we should get more when we get 100 billion of cash invested. And we should get more as we retain the earnings. So we hope it adds up to a bigger number as we go along. Charlie?

CHARLIE MUNGERWell, I don't think our shareholders are going to see another increase in net worth of $65 billion in a single year. They may have to wait a while for another. But I don't think that — I think eventually there — another will come, and then another. Just be patient. (Laughter)

WARREN BUFFETTWe don't regard the present situation as, you know, as disadvantageous, except we'd like to get more money out. But we like the businesses we have. We like the businesses that we own part of. We are not reflecting — in the way we look at earnings — the dividends we get from those partially-owned companies falls far short of what they're going to contribute, in our view, to Berkshire's overall earnings over time. We wouldn't own those stocks otherwise. So —

CHARLIE MUNGERAnd you also like the Apple and airline stocks you've recently purchased better than the cash you parted with.

WARREN BUFFETTAbsolutely. Yeah.

CHARLIE MUNGERAnd that's quite a lot.

WARREN BUFFETTYeah, yeah, yeah. OK. We won't pursue that further. Carol? (Laughter)

No "unusual profits involved in being a real estate agent"

CAROL LOOMISThis question is from Daniel Kane (PH) of Atlanta. "Your annual letter this year pointed out that Berkshire has become a leader in real estate brokerage in the United States. Congratulations. That is a significant feat in less than 20 years. "But let me mention a sticky point. If fees charged by stock market active managers are a drag on investor performance, I would argue that real estate commissions are no different, and perhaps more detrimental, especially when one considers the lifetime effects of large, forgone, upfront cash flows and the power of compounding interest. I would be pleased to hear your rejoinder on the points I've raised."

WARREN BUFFETTWell, the purchase of a home is the largest financial transaction, for a significant percentage of the population, that they make. And — people — a lot of people need a lot of attention. And you can show a lot of houses before you sell one. I would say this. If you look at our close to 50,000 agents now, I think they make a good living — or a decent living. But I would say that that people who manage money make a whole lot more money with perhaps less contribution to the welfare of the person that they are dealing with. So I don't think that there are unusual profits involved in being a real estate agent. I don't think there are unusual profits involved in the ownership. We like it because it's fundamentally a good business. But here we are, doing 3 percent of all the real estate transactions in the United States, and we're making, maybe, $200 million a year — which — well, we won't get into what the comparative efforts are in Wall Street to earn $200 million. But — I think I have to tell them about Roy Tolles a little bit on this. Roy Tolles, for example — Charlie's partner — many, many, many years ago, decided he was going to want to buy a house in San Marino. He's going to have a number of kids. So he sent his wonderful wife, Martha, out. And for six months, he had her look at houses in San Marino. And this was many years ago. And if they were priced at 150,000, she would offer (inaudible), or offer 75,000. And of course, the real estate agents were going crazy because they're never going to get something listed at 150 sold at 75. And then finally, when she found one that they both really liked, he had her offer something like 120 and the real estate was so happy to get a bid that was in the general area — (laughs) — of the offering price that he would work very hard on the seller to take that bid. Because he knew what — (laughs) — he did not want six more months of Roy bidding at the lower prices. So you don't sell them on the first trip. Incidentally, I had Roy buy a house for me, sight unseen, because this was a guy that — (laughs) — knew human nature. You don't get rich — real estate agency — you know, the people earn their money, and they earn it in a perfectly respectable and honorable manner in terms of what they get paid. And as in every single industry there is, you know, there can be excesses or mistakes or that sort of thing. But we will continue to buy more brokers. In fact, we'll probably have another couple to announce before long. And we will feel that if we get to where we're doing 10 percent of the real estate brokerage business in the country and we're making 6- or $700 million a year, pretax, we will not think that's a crazy amount of money to make for enabling 10 percent of 5 million people to change their homes every year in the United States. Charlie?

CHARLIE MUNGERWell, the commissions in real estate may get unreasonable if you're talking about $20 million houses. It seems a little ridiculous to pay a 5 percent commission on a $20 million transaction. But do any of us really care if the kind of people who pay $20 million for a house have a slightly higher commission? (Laughter) The ordinary commission is pretty well-earned.

WARREN BUFFETTYeah. We have a number of brokerage firms. So the highest has their average transaction — in one section of the country — would be close to $600,000 a unit. But the — in terms of the sales price of the house. But the — in most of our real estate operations — the average price is more like $250,000 or something in that area. And you can show a lot of houses to make one $250,000 sale. And of course, you split — the listing company and the selling company are usually two different companies. So it's — it does not strike me as excessive. And incidentally, it doesn't strike the people in the industry that way either. It has not been particularly susceptible to online-type substitution or something of the sort. The real estate agent earns their commission in most cases. But Charlie's had more experience with $20 million houses. So he will comment on that area. (Laughter)

Some Kraft Heinz products "enjoy fairly healthy" growth

WARREN BUFFETTOK, we'll have one more question before we break. Jonathan?

JONATHAN BRANDTGiven the changes in consumer tastes in the food business, and Kraft Heinz's already high margin structure, do you think the brands they own today, plus new product introductions, can together maintain or increase the current level of profits over the next ten years without the benefit of acquisitions? Is there anything in their portfolio besides ketchup that is enjoying growing demand?

WARREN BUFFETTWell, in effect, you're asking me whether Kraft Heinz is a good buy. And we don't — (laughs) — we don't want to give information on marketable securities in that manner. But — yeah, there are a number of items besides ketchup that enjoy growing demand. And some vary quite a bit by geography. There's enormous differences in the penetration of various products in the portfolio. Consumer packaged goods are still a terrific business in terms of return on invested assets. And you know — but the population, worldwide, grows fairly smally and at — a fairly minor rate. And — people are going to eat about the same amount. And there is some more willingness to experiment, you know, or go for organic products of the sort. It's a very good business. And there are new products coming out constantly. It's not one where you're going to get terrific organic growth, but it never has been. And — you know, I like the business and we own 26 or so percent of it. But there are a number of items within Kraft Heinz that enjoy pretty — fairly — healthy growth. And I think you'd find that at most food companies. And I think you'd find very good returns on invested — on tangible net assets — at those businesses.