1994 Berkshire Hathaway Annual Meeting Warren Buffett Charlie Munger Bill Ackman FULL Q&A

Yeah right my live yet yeah morning we were a little worried today because we we weren't sure from the reservations whether we can handle everybody but it looks to me like there may be a couple seats left up there but I think next year we're going to have to find a different spot because it looks to me like we're up about 600 this year from last year and to be on the safe side we will seek out a larger spot now there certain implications for that because some of the more experienced of you know a few years ago we were we were holding this meeting at the Joslin Museum which is a temple of culture and we've now of course moved to an old vaudeville theatre and the only place in town that can hold us next year I think is the Aksarben Coliseum where they have keno and racetracks up we are sliding down the cultural change just as just as Charlie predicted years ago he is all this coming Charlie and I have some rather distressing news to report they there are always a few people that vote against everyone on the slate for directors and there did maybe a dozen or so people do that and then there are others that single shot it and they pick out people to vote against and this will come as news to Charlie haven't told him you know that but he is the only one among our candidates for directors that receive no negative votes this year no need to applaud I'd say when you lose out the title of Miss Congeniality to Charlie you know you're in trouble now I'd like to like to tell you a little bit I will run this we will we will we will have the business meeting in a hurry with cooperation of all of you and then we will introduce our managers who are here and then we will have a Q&A period we will run that until twelve o'clock at which point we'll break and then at 12:15 if the Hardcore want to stick around we will have another hour so until about 1:15 of them of questions so you're free to leave of course any time and I've pointed out in the past that it's much better for him if you leave while Charlie is talking rather than when I'm talking but yeah feel free anytime but you can you if you're panicked and you're and you're and you're worried about being conspicuous by leaving you will you will be able to leave it at noon we will have buses out front that will take you to to the hotels of the airport or to any place in town in which we have a commercial interest and wait we encourage you staying around on that basis let's have the let's get the business of the meaning out of the way that we get on to more interesting things my name is michael mullen from Omaha would you comment on the use of derivatives I noticed Dell computer stock was off two and a half points Friday with the loss and derivatives the question is about derivatives we we have in this room the author of the best the best thing you can read on that there was an article in Fortune about a month ago or so by Carol Loomis on derivatives and far and away is the best article that has been written we also have some people in the room that do business and derivatives from Salomon and it's a it's a very broad subject it as we said last year I think someone asked what might be the big financial story of the 90s and we said we obviously don't know but that if we had to pick a topic that it could well be derivatives because they they lend themselves to the use of unusual amounts of of leverage and they're sometimes not completely understood by the people involved and anytime you combine ignorance and borrowed money you can get some pretty interesting consequences and particularly when the numbers get big and you've seen that of course recently with a recent Procter & Gamble announcement now I don't know the details of the P&G derivatives but I I understand at least from prep that what started out as interest rate swaps ended up with P&G writing puts large quantities of of us and I think one other countries bonds and anytime you go from selling soap to writing puts on bonds you've made a big jump and it the ability to borrow enormous amounts of money combined with a chance to get either very rich or very poor very quickly as historically been a recipe for trouble at some point and that derivatives are not going to go away they serve useful purposes at all of that but I'm just saying that it has that potential and we've seen a little bit of that I can't think of anything that we've done that would anything we do that approaches the Riveter sterling directly know I may have to cut him off if he talks to is there anything you would like to add you're already extensive remarks them no okay that case will go to zone 2 my name is Hugh Stevenson I'm a shareholder from Atlanta my question involves the company's investment in the stock of cap cities it's been my understanding in the past that that was regarded as one of the four quote unquote permanent holdings of the company and I was a little bit confused by the disposition of 1 million shares could you clarify that was my previous misunderstanding was my previous understanding incorrect or has there been some change or is there a third possibility well we we have classified them Washington Post Company and cap cities and Geico and Coke in the category of permanent holdings and but in the case of three of those for the Washington Post Company I don't know maybe maybe seven or eight years ago Geico some years back and now cap cities we have participated in tenders where the company has repurchase shares now the first two the post end and the Geico we participated proportionally that was not feasible and incidentally not as attractive tax wise anymore the 1968 tax act changed the desirability of proportional redemptions of shares from our standpoint at that point had been missed by a lot of journalists and commenting on that but but it just so happens that that the commentary that has been written has been obsolete in some cases by six or seven years but we did participate in the cap cities a tender offer just as we did in the post and Geico we still are by far the largest shareholder of cap cities we think it's a superbly run operation in a business that that is it looks a little tougher than it did 15 years ago but looks a little bit better than it did 15 months ago Charlie you have anything done no he's thinking it over now though before that zone 3 good morning my name is Howard ask him up from Kansas City and I've got a theoretical value question for you if you were to buy a business and you bought it at its intrinsic value what's the minimum after-tax free cash flow yield you'd need to get questions that we were buying all of a business and we were buying it or what we thought it was intrinsic I what was the minimum correct president earning power or what the president the minimum discount rate of future streams no what's the minimum current after-tax free cash flow yield wait wait we could conceivably buy a business I don't think we would be likely to but we could we could conceivably buy a business that had no current after-tax cash flow but we would have to think it was had a tremendous future but we would not find obviously the the current figures particularly in the kind of businesses we buy tend to be representative we think of what's happening to happen in the future but but that would not necessarily have to be the case you can argue for example in buying stuff at a time when it was losing significant money we didn't expect it to continue to lose significant money but but if we think if we think the present value of the future earning power is attractive enough compared to the purchase price we would not we would not be we would not be overwhelmed by what the first-years figure would be Charlie you want to add to them yeah well we don't care what we report in the first year or two of after buying anything well I would say that that in a world of 7% long-term bond rates that we would certainly want to think we were discounting future after-tax streams of cash at the least of 10% rate but that that will depend on on the certainty we feel about the business the more certain if we feel about a business the closer we're willing to play it we have to feel pretty certain about any business before we're even interested at all but there's still degrees of certainty and and if we thought we were getting a stream of cash over the next 30 years that we felt extremely certain about we would we would we would use a discount rate that would be somewhat what was somewhat less than if it was one more we thought we might get some surprises in five or ten years possibility existed nothing to add okay so on four more spins from Omaha Nebraska you've made comments on several occasions about the intrinsic business value of the insurance operations and in this year's report you state that the insurance business possesses intrinsic value that exceeds Book value by a large amount larger in fact then is the case of any Berkshire other Berkshire business I was wondering if you would explain in greater detail why you believe that to be true well it's very hard to quantify as we've said many times in the report but I think that it's clear that even taking fairly pessimistic assumptions that the excess of intrinsic value over carrying value is higher by some margin for the insurance business and I think that the table and the report that shows you what our cost of flowed has been over the years and also what the trend of float has been over the years would unless you thought that table had no validity for the future I think that table would tend to to point you in the direction of saying the insurance business does have a very significant excess of intrinsic value over carrying value very hard number to put put something on but and you don't want to extrapolate that table out but I think that table shows that we started with maybe 20 million of float and there were up to something close to 3 billion of float and that that float has come to us at a cost that's extremely attractive on average over the years and just to pick an example last year when we actually had an underwriting profit the value of that float was something over 200 million dollars and that figure was a lot bigger than it was 10 years ago or 20 years ago so that's that is a stream last year was unusually favorable but that is a that's a very significant stream of earnings and it's one we feel we have reasonably good prospects in so we feel very good about the insurance business okay it's on five sorry right maker from Omaha is there any point at which your stock would rise to the point where you might split the stock surprise surprise I think I'll let Charlie answer that this year he's so popular with the shareholders now I can afford to let him take the tough questions I think the answer is No [Applause] I think the idea of carving ownerships and an enterprise and little tiny $20.00 pieces is almost insane it's quite inefficient to service a $20 accountant and I don't see why there shouldn't be a minimum as a condition of of joining some enterprise certainly we don't feel that way being a private enterprise yeah we would not carve it up in $20 units we find it very it's interesting because every every company finds a way to fill up its it's common shareholder list and you can you can start with the age and work through the disease and you know every company in New York Stock Exchange one way or another has attracted some constituency of shareholders and frankly we can't imagine imagine a better constituency than is in this room I mean we we have we don't think we can improve on this group and and we've followed certain policies that we think attracted certain certain types of shareholders and actually pushed away others and and that is part of a part of our eugenics program here at Brookes during that time yeah just look around this room and as you mingle with one another this is a very outstanding group of people and why would anybody want a different kind of a group yeah if we cause if we if we follow some policies that cause a whole bunch of people to buy Berkshire for the wrong reason the only way they buy it is to replace somebody in this room or or in this larger metaphorical room of shareholders that we have so someone and someone at one of these seats gets up and somebody else walks in the question is do we have a better audience I don't think so so I think that I think Charlie Charlie said it very well its own sex mr. Buffett my name is Rob not I'm from Omaha Nebraska my question is given the recent announcement of Midwest Express and their nonstop jet service between east and west coasts will this cut down on your use of the indefensible and will you use more commercial air travel this is a this is a question planted by Charlie I I think you should know I take it to the drugstore at the moment and and I know I just a question when I start sleeping in it at the hanger nothing nothing will cut back on the in defense'll was being painted right now but I told to make it last a long time Charlie though was pointing out the merits of other kinds of transportation last night at the meeting of our managers he might want to repeat those here well I just pointed out that the back of the plane arrived at the same time as the front of the plane invariably he's even more of an authority on buses incidentally if anybody has his own 7 mr. Buffett my name is Alan Maxwell from Omaha I've got two questions what is your next goal in life now that you're the richest man in the country that's easy it's to be the oldest man in the country [Applause] secondly you talk about good management with corporations and that you try and buy companies with good management I feel that I have about as much chance of meeting good managers other than yourself as I do bringing Richard Nixon back to life how do I have as an average investor find out what good management is well I think you judge management by by by to yardsticks one is how well they run the business and I think you can you can learn a lot about that by reading about both what they've accomplished and what their competitors have accomplished and and seeing how they have allocated capital over time you have to have some understanding of the hand they were dealt when they when they when they themselves got a chance to play the hand but if you if you understand something about the business they're in and you can't understand in every business but but you can find industries or companies that where you can't understand it then you sit you simply want to look at at how well they have been doing and playing the hand essentially that's been dealt with them and then the second thing you wanted to figure out is how well but they they treat their their owners and I think you can get a handle on that oftentimes a lot of times you can't I mean they're there they're there are many there are many companies that obviously fall in somewhere in that 20th the 80th percentile and little hard to pick out where they where they do fall but I think you can usually figure out I mean it is it is not it's not hard to figure out that say Bill Gates or Tom Murphy Don key or people like that are really outstanding managers hard to figure out who they're working for and I could give you some cases on the other end of the spectrum too it's interesting how often the ones that in my view are the poorer managers also turn out to be the ones that that really don't think that much about the shareholders to it the too often go hand in hand but I think reading of reports of competitors reports I think you'll get a fix on that in some cases you don't have to you know you don't have to make a hundred correct judgments in this business or 50 correct judgments you only have to make a few and that's all we try to do and generally speaking the conclusions I've come to about managers have really come about the same way you could make yours I mean they've come about by reading reports rather than any intimate personal knowledge or knowing them personally at all so it you know read the proxy statements see what see what they think of see how they treat themselves versus how they treat the shareholders and and look at what they have accomplished considering what the hand was that they were dealt when they when they when they took over compared to what is going on in the industry can I I think I think you can figure it out sometimes you don't have to figure it out very often charlie nothing to add okay we're back to zone 1 hi there my name is Liam from Palo Alto California in meeting @gj and I've been very impressed over the years I think I even met his parents once they came from India please comment on your deepest impressions of his personality and managerial skills and also how you go about exactly keeping somebody with such fine skills within the fold you might go to wealth Disney someday and you know pull down 200 million gets off for 200 million we may not to compete too vigorously at that level we basically try to run a business so that that's that which are going to have two jobs we we have to identify and and and and and keep good managers interested after after we figured out who they are and that often is a little different here because I would say a majority of our managers are financially independent so that they they don't go to work because they they are worried about about putting kids through school or or putting food on the table so they they have to have some reason to go to work aside from that they have to be treated fairly in terms of compensation but they also have to figure it is better than playing golf every day or whatever it may be and so that's one of the jobs we have and and we basically attacked that the same way we look at at what they do the same way we look at what we do it we've got a wonderful group of shareholders before I ran this I had a partnership I had a great group partners and essentially I like to be left alone to do what I did I like to be judged on the scorecard at the end of the year rather than on every stroke and and and not second-guessed in a way that was inappropriate I like to have people who understood the environment in which I was operating and so the important thing we do with managers generally is to find the 400 hitters and then not tell them how to swing as I put in the report second thing we do is allocate capital and aside from that we play bridge pretty much what happens at Berkshire so with any of the managers you might name here we try to make it interesting and and and fun for them to run their business we try to have a compensation arrangement that's appropriate for the kind of business there and we have no company-wide compensation plan we wouldn't dream of having some compensation expert or consultant come in and screw it up we we tried it some businesses require a lot of capital that we're in some require no capital some are easy businesses we're good profit margins are our cinch to come by but but we're really paying for the extra beyond that some are very tough businesses to make money in and it would be crazy to have some huge huge framework that we tried to place everybody in that where one size would would fit all people generally are compensated relating in some manner that relates to how their business does as opposed to there's no reason to pay anybody based on how Berkshire does because no one has responsibility for Berkshire except for Charlie I mean and and we try to make them responsible for their own units compensated based on how those units do we try to understand the businesses they're in so we know what the difference between a good performance and a bad performance it's and that's about that's that's that's how we how we work with people we've had terrific look over the years in in retaining the managers that we wanted to retain and and it's I think largely it's because particularly sell us a business that to a great extent the next day they're running it just as they were the day before and and they're having as much fun running their business as I have running Berkshire Charlie well I've got nothing to add I think it's that concept of of treating the other fellow the way you'd like to be treated if the roles were reversed it's so simple when you stop to think about it but it's a rare evening one is even more on our talking once on the phone it's it's more than a business relationship at least it seems that way to me yeah well it is stay that way and by the way we like our businesses our relationships to be more than a business relationship Charlie and I are very far we basically it's it's a luxury but it's a luxury that we should we should try to nurture as we get to work with people we like and it makes life a lot simpler it probably helps on that goal of being the oldest living American template that yeah and we tend to like people we admire yeah who do we like that we don't admire Chara start naming names these people have names zone 2 my name is Peter babbling from Sweden how do you perceive Guinness long-term economic growth wise the this is that yet would you repeat that fits what was it what for what firm growth wise Guinness Oh Guinness I'm not as much of an expert on guinnesses products as Charlie as we prove that he didn't hear me he said he said I prove that I made a decision to buy Guinness and guinnesses it's down somewhat from actually the price and pounds is about the same that the pound is at about a dollar forty six or seven against an average of dollar 80-something so we've had a significant exchange loss on that the Guinness is despite the name then the you know the main product of course is scotch and that's where most of the money is made oh they make good money in brewing but distilling is the the main business and you know the usage of scotch particularly in this country the trends have not been strong at all but that was true when we bought it too there are some countries around the world where it's where it's grown and there's there certain countries where it's a a huge prestige item I mean in certain parts of the Far East that the the more you pay for Scotch the better you think people think of you which I don't understand completely but I hope it continues but but this guy worldwide Scotch consumption then has not has not been anything to write home about Guinness makes a lot of money in the business but I would not I don't see anything in in published history that would lead you to believe that the prospects in terms of physical volume are high for Scots the Guinness itself the beer actually is shown pretty good growth rates in in some countries actually from a very tiny base in the US as well but they will have to do well in in distilling or I mean that that will govern the outcome of a Guinness I think Guinness is well run and it's it's a very important company in that business but I wouldn't count on a lot of physical growth Charlie what any consumer insights no zone three mr. Buffett my name is Arthur Colley us from Canton Massachusetts and I'd like to know how you respond to the question that my associates asked me when they say that Berkshire Hathaway has been a good investment up to now if God forbid something happens to mr. Warren Buffett well I'm glad you didn't say Charlie Munger now they're Berkshire well of Berkshire will do will do just fine we've got it we've got a wonderful group of businesses I've told you the two things I do in life and in terms of them the managers we have you'd have to come in and really want to mess it up I would think and we don't have anybody like that in terms of succession plans at Berkshire and then there's the question of allocation of capital and you could do worse than just adding it to some of the positions that we already had the ownership is if I if I die tonight the ownership structure does not does not change so you've got you've got the same large block of stock that has every interest in and having good successor management as I would having there's no others don't there would be no greater interest and it is not it's not a complicated business I mean you ought to worry more about if you own Microsoft about Bill Gates I think or something goes sort but this this place is you know we've got a group down here that are that are running these you didn't see me out of Porsche I'm selling any jewellery the other day I mean that's that's that's somebody else's job so I and it is not it's not very complicated I'm incidentally I I think I'm in pretty good health I mean this stuff will do wonders for you if you'll just try it Charlie do you want to add anything that's the yeah I think the prospects of Berkshire would be diminished obviously diminished if Warren were to drop off tomorrow morning it would still be one hell of a company and I think it would still do quite well I I used to do legal work when I was young for Charlie's Carissa I heard he once say my business which was movie theaters like this one was off 25% last year and last year was off 25 percent from the year before and that was off 25 percent from the year before and then he pounded the table and he'd say but it still von helluva business it's not a formula we want to test it so no it is one hell of a business that we've got here I mean had and if you saw what happened at Berkshire headquarters you would not worry as much there's very little going on there that contributes to things we're right now to our peak of activity this is it it's on four I first of all my name is al Martin and my wife Teri is here with me and I appreciate the invitation to attend this meeting I was a little bit dubious and quite excited at that game Saturday night I didn't know which side was going to throw the game to the other one but I did find out at the end the first question actually was somewhat answered but not fully has the board considered a reverse split my experience has been that would you like to make that a motion there was a motion for reversed but I would say a two for one because if it were three or four for one I might end up with no shares or fractional shares but anyway my experience has been that all the stocks that have split have gone down in the next two or three months for the next two or three years including one which you are drinking which is a flat coke also I have observed Merck over the last several years to be hitting a low which is split three for one so I think that you know the the reasons for splitting stocks are to make it affordable I found that every stock every board was never affordable I found the reason I bought it was acai I couldn't afford not to buy it so that's a different philosophy I guess that's somewhat shared indirectly with the boards running into the stock the second question which is has to do with compasses easier the first question [Laughter] well I didn't want to wait for an answer the first question for that reason because it could be complicated and confusing and so forth the second question has to do with could the board consider looking into a commodity broker or a lawyer or both that could take action similar to Hillary Hillary Clinton's I think you know to making your net worth or what by a factor of five overnight is more than enticing some of us might even want to wait for 10 months to get a hundred-to-one return on the money I want to sell five five hundred and thirty percent in one day it Charlie has never done that for us I mean it really caused me to reassess succession plans at Kircher and Hillary may be free in a few years I hope you're applauding overcoming to Berkshire not being fair but how lovely got a bit okay that was their second question that was my second question of course in my experience it's been that most of us have thought through this situation and I guess it's pretty speculative but I found out that the rules and laws that are made for trading are interpreted - rather than enforced and I think that applied to this particular case so let's go on to the third question all right they're getting easier this one is real easy my wife was a collector of blue chip stamps for many many years and she bought some stamps with her what should she do with them well I thought that we can give you a definitive answer that Charlie and I entered this trading stamp business to apply our wizardry to it and what 1969 or so surely him we were doing what then about a hundred and ten million no it went up to a hundred and twenty okay and then and then we arrived on the scene and we're going to do what about four hundred thousand this years yes yeah that shows you what can be done when your management gets active presided over a decline of ninety nine and a half percent yeah but we're waiting for a bounce at and I would say this the the trading stab businesses those of you who followed all know it only works because of the of the float I mean they're they're a very very high percentage of the stamps in the 60s were cashed in we have some years that we've gone up to 99 percent I believe we sampled the returns because they were given out in such quantity but our advice to to anyone who has stamps is to save them because they're going to be collectors items and besides if you bring to us we have to give you merchandise for them so I tell her to keep tell her to keep him they'll do nothing but gain in value over years going back against another year to point on the split I I think most people think that the stock would sell for more money split a we wouldn't necessarily think that was advisable in the first place but leases in the second place we don't think it would necessarily be true over a period of time we think our stock is more likely to be rationally priced over time following the present policies than if we were to split it in some major way and and we don't think the average price would necessarily be higher we think that the volatility would probably be somewhat greater and we see no way that volatility helps our shareholders as a group so 5 I am peg Gallagher from Omaha mr. Buffett are you interested in influencing mr. Greenspan at the Fed to stop raising interest rates well I wouldn't have any influence with him he was on the board of capcity some years ago and I know him a bit but but I don't think anyone would have any influence with mr. Greenspan on that point but I I generally think that his his actions have been quite sound during his period as Fed chief I mean it's part of the job of the Fed as mr. Martin said many years ago is to take away the punch bowl at the party occasionally and that's a very difficult difficult policy to quantify working with markets day by day and of course it's always been the job of the basically the lien against the wind which of course means if the wind changes you fall flat on your face but that's another question but the I don't I I think what he has done has probably been somewhat appropriate I think he's probably been surprised a little bit as to what has happened with when long term rate says he's not just up short-term rates I think he was hoping that this is just a guess on my part that the the action sort of early in the cycle on the short-term rate front would would might make people feel more confident about the the longer-term rates and therefore that the yield curve would flatten some I don't know that and he may have been a little surprised on that but it's not an easy job he has so I would not I would not second-guess him myself Charlie how do you feel about him fine Greenspan is safe zone sex mr. Buffett I'm Lee Miller from st. Louis there was an article in the April 18th burns that attempted to calculate the value behind each Berkshire Hathaway share I'm sure you have some views on that and I'd be very interested in your perspective on that issue yeah yeah there was an article about a week or so ago in Barron's the same fellow wrote an article about four years ago reaching pretty much the same conclusion I hope he hasn't been shored in between but they I would say this it's not it is not the way I would calculate the intrinsic value of Berkshire but but everyone in securities markets makes choices on that every day somebody sells a few shares of Berkshire and someone sells by sand you know they are probably coming to differing opinions about about valuation I say that I found it strange that the that the the that apparently he forgot we were an insurance business but that that's not all it really doesn't make any difference I mean what we don't pay any attention to what what people say about coca-cola stock or Gillette stock or any of those things I mean on any given day two million shares of coca-cola may trade that's a lot of people selling a lot of people buying it if you will talk to one person you hear one thing and talk to another it really you really should not make decisions in securities based on what other people think if you're doing that you should you should think about doing something else because it is a public opinion a poll will just it will not get your rich in Wall Street so you really want to stick with businesses that you feel you can somehow we value it evaluates yourself and I don't think I mean Charlie and I we don't read anything about what business is going to the economy is going to do or the markets going to do or what anybody anytime I see some articles says you know these analysts say this or that about some business it just it doesn't mean anything to us you cannot you cannot get rich with a weather vane zone 7 I'm Edward Barr from Lexington Kentucky and I'd like to ask given the amount of capital in the banking industry do you think that more banks should be buying back significant amounts of their stock like SunTrust versus just the token amounts that they're buying back or just the authorized amounts and then also related question in banking are they are banks too focused on goodwill amortization when declining to buy other banks for cash they're by using purchase accounting versus the normal practice in the industry of pooling accounting even when the stock they issue may be depressed or undervalued well the first question about the capital in the industry that you really have to look at that on a bank by bank basis and there is a lot more repurchasing of shares buy by banks taking place you mentioned SunTrust but National City is they bought it back I think 5% of their national city of Cleveland bought back five percent of their stock in the first quarter there's a there's much more repurchasing going on and that's simply a judgment call by by management that as to the level of capital they need going forward and what level of capital enables them to earn the return on equity that they think appropriate and whether they what they feel like paying for their own shares so I think you have to look at that on case-by-case we certainly like it if we were to own a bank we would our own own own shares in the bank we would like the idea of the bank repurchasing its stock at a price that we thought was attractive we would think that they probably knew more about their own bank would some other Bank they were going to buy and that that if the numbers are right it's an attractive way to use capital your second question about goodwill amortization and purchase accounting versus pooling we we care not at Berkshire it absolutely makes no difference to us but accounting treatment we get on something we are interested in the economics of a transaction some banks some some businesses generally most businesses prop perhaps prefer fur pooling because they don't like to take a goodwill amortization charge we think our shareholders are smart enough particularly we make it clear to them the accounting consequences we think they're smart enough to look through to the economic reality of what Berkshires businesses are all about and I think that I think some management's sell short their own ownership group by by doing various kinds of financial acrobatics in order to have the charges come in a certain way rather than as you point out often they might be better off buying for cash rather than their own stock as currency but they may prefer to use their own stock because they avoid goodwill charges we've written a few things on goodwill in the past and past annual reports that might get to that subject we don't care what accounting we sort of rewrite the accounting for any business that we're looking at because in our in our heads we want to have in effect a standardized way of looking at businesses and if one company goes through pulling transactions and another goes through purchase transactions we're going to recast them in our own mind so that there's comparability Charlie yeah yeah the the published accounting results are in accordance with standard convention and their place to start economic analysis the figures are frequently quite silly on a functional places I'm not criticizing accounting inventions except for some but I think it's just a place to start thinking about economic reality by their nature they can't tie perfectly you can't even tie very well to anomic reality we we regard it as a negative when we find a management that's preoccupied with accounting considerations but we find it so frequent that we can't we can't afford to use it as a as a total exclusionary factor it really surprises me how many management's focus on accounting and the time they spend on at the it it's really unproductive and if you find a management that doesn't care about the accounting but does explain to you in clear terms what's going on I think you should regard that as a plus and owning a security zone one mr. Buffett my name is Bill Ackman I'm from New York City and my question relates to the appeal of Salomon Brothers as an investment you talked earlier about leverage and the dangers of leverage Solomons of business which is levered thirty to one which has very narrow margins and earns relatively modest return on equity in light of the amount of leverage that they use what is the appeal of the business to you we have here today the chief executive of solomon inc the parent company and also the chief executive of salomon brothers the investment banking arm and i would say one of the things we Charlie and I feel extraordinarily good about are the the two fellows that are running that operation they did an exceptional job under extraordinarily difficult circumstances as did John McFarlane who is also here today the three of them I mentioned four people in the annual report and Salomon wouldn't be here today without those three and and it wouldn't be the company in the future that it's going to be without them and they did an absolutely fabulous job it's the sort of business that as you point out uses a lot of leverage it doesn't in one way it doesn't use as much as it looks like and another way it uses even more than it looks like but it the test will be a whether they control that business in a way that that leverage does not prove dangerous and secondly what kind of returns on equity they they earn while using it you certainly should expect to earn somewhat higher returns on equity when you are necessarily exposed to a small amount of systemic risk and and and and and significant amounts of borrowed money then you would in a business that's there's an extremely plain vanila business but I don't know whether you've met the Bob and Derrick but I think you'd feel better about having a leverage in their hands than about any other hands you can imagine Charlie why don't we have those three gentlemen stand up yeah you ought to give them a hand on a job Bertram yeah I'll lead the applause for them [Applause] I mentioned this before but it's worth mentioning again Derek took on the job of being the operating head of Salomon Brothers on on what August 18th 1991 he didn't know what he couldn't know what he was getting into exactly he two months later a free month later we never had a conversation about compensation he did not ask me for Berkshire or my guarantee of for indemnification because he's walking into unknown legal problems we didn't know what the we would finally uncover and he worked incredible hours to keep that place together which was not easy Bob Denham I called the I guess on the 23rd or so 20th caught him on a Friday I got home on Saturday the 24th of August he was living a nice Pleasant peaceful life in California and it had a first class law firm good group of clients wife had a good job there and I told him I was in a mess and there wasn't any second choice and three days later he was back in New York and living in a small apartment in Battery City and and and having the General Counsel's job but at Salomon they found John McFarlane on that Sunday on the 18th I think he was running in a triathlon or something not a practice the Charlie and I follow but Hey and he was yanked from that and came down and that I think John was over in New Jersey but he holed up in the downtown Athletic Club and it was his job to keep funding what was then a hundred and fifty billion dollar balance sheet during a period when people right and left were canceling is not because we weren't a good credit but because they just didn't want to have anything to do with us for a while and the World Bank I missed the state of Texas pension fund and calper all these people were we're shutting off funding at a time and and and and funding and if businesses gentlemen just indicated is the lifeblood of a of an enterprise like Solomon and so those three deserve an enormous hand by really by the Solomon shareholders but by this group in turn because we have an important investment in so I thank them publicly zone 2 I'm Kelly Ranson from San Antonio Texas and I wondered if you could comment on the mutual savings and loan there was just a footnote that the deposits had been assumed by a Federal Savings Bank and also what about the annual report for Westco Financial that I know it used to be in the annual report for Berkshire just wondered if you could comment on that please the question is about we would our 80 percent owned subsidiary Westco financial sold its ownership and mutual savings alone to Pasadena last year and let Charlie comment on that and then the second question is about the Westco report which is available to any Berkshire shareholders simply by writing Westco but we we found that the stapling problems and other things made it a little difficult to to keep adding that every year to the reports so now we just we make it available to anyone who would in Berkshire who would like to have it but Charlie you want to comment on the sale of mutual yes the savings the loan business became very much more heavily regulated after the huge nationwide collection of scandal and insolvency and so on and meanwhile we had a very small Savings and Loan Association and the combination of the new regulation and the fact that it was a very small part of our operation made us decide that we were better off without it that does happen from time to time in Berkshire we do exit once in a while and by the way we would reserve the right to change our mind I always like Lord Keynes when he said that you got new facts or new insights well he changed his mind and then he'd say what do you do so so we changed our mind they you start they asked our directors at mutual we'll start going to school on Saturday didn't they Charlie or something I think that helped change your mind about there's a time to vote with your feet and even your wallet zoltan free Chicago can you speak to some of the economic characteristics of the shoe industry that allowed the business to be profitable and in your view attractive he wanted you to comment on the merits of the shoe industry well I think our feelings for the shoe industry are very clear from what's been happening the last few years we think it's a great business to be in as long as you're in with Frank Rooney and Jim is Lou and Peter Wonder and Harold alpha otherwise it hasn't been too good they we we have a couple of extraordinary and shoe operations and but they're not extraordinary because we get our leather from different steers or anything of the sort it's that we have two companies than really three now that Lowell has been brought into it that have truly extraordinary records I think those same management's would have been enormous successes and in any business they've gone into but they have gone into the they are in the shoe business and the company's earnings unusual returns on equity they are an unusual returns on sales they've got terrific trade reputations and I think that to the extent we can find ways to expand in the shoe business while employing those management's we'll be very excited about doing so it isn't because we think that the shoe industry is any cinch you know per se or anything of the sort but but we've got a lot of talent employed in the shoe business and whenever we've got talent we like to try and figure out a way to give them as big a domain as we can and it's not inconceivable that we would expand the shoe business perhaps even significantly over time so my name is Stuart Hartman from Sioux City after the brevity of the last question from section four I'll try to be extremely brief the given the scrutiny that the tobacco business is going under right now number one what do you see is the business prospects for those huge cash cows and at any point would would that be attractive to you given their liability questions about the future the tobacco business I don't I probably know no more about that than you do because it's it's it's fraught with with questions that relate to societal attitudes and and you can form an opinion on that just as well as I could but I would I would not like to have a significant percentage of my net worth and the tobacco business myself but they may have better futures than I envision iiiii I don't really think that I have special insights on that Charlie you know you have to come to a conclusion as to how our society is going to want to treat and and the president administration for that matter and the economics of the business may be fine but that doesn't mean it has a great future its own five I'm Harriet Morton from Seattle Washington I'm wondering when you are considering an acquisition how you look at the usefulness of the product in looking at any business uh yes yeah well obviously we we look at what the market says is the utility in the market that the market has voted very heavily for dexter shoe just to be an example an example i i don't know how many how many pairs of shoes they were turning out back in nineteen fifty eight or there abouts but but the year after year people have essentially voted for the utility of that product there are seven hundred and fifty million or so eight ounce servings of one product or another from the coca-cola company consumed every day around the world and there are those of us who think the utility is very high I can't make it through the day without a few but there are other people that might rate it differently but essentially people are gonna get thirsty and and if this is the way they take care of their thirst better than and they prefer that to other forms and I would rake the utility high of the product but I think it's hard to argue with with the market on that I mean people some people may think that you know listening to a rock concert this is not something of high you tell the other people may think it's terrific and so we would judge that I don't think we would come to an independent decision that there was some great utility residing in some product that had been available to the public for a long time but but the public had not endorsed in any way Charlie well I think that's right but I'd say every stop we're in a a bunch of high utility products I mean nurses shoes work shoes casual shoes we don't have a lot of what Italian pumps don't roll or not charlie we may be here next year defend you if you judge the existing portfolio as indicating what the future is likely to be like certainly a lot of essentials were sold out of Barcia I'm gesture to hit yes [Laughter] I hear my family clapping yeah zone sex we have no question up here okay he's on seven good morning mr. birch our Buffett I have a niece here who has a son named Berkshire so at that I'm Chris blunt from Omaha my first question as in years past we've had samples of various products when are we going to have some Guinness so somewhat now guinness samples my second question is in light of the multiple disasters that have taken disasters that have taken place in LA has that had any impact on the caps for Berkshire on our super cat business yeah the LA earthquake which is originally I believe the first estimate of insured damage was a billion five which struck us as kind of ludicrous but has now asked by the last official estimate the one we use that's a trigger in our policies I think is either 4.5 billion or 4.8 billion but it's going to be higher than that our losses are fairly minor if it gets to 8 billion of insured damage that would trigger another policy or two but I would say that the the LA quake which did considerably more damage I think that people would have anticipated from a six point seven for various reasons having to do with help of quakes operate that quake is not going to turn out to be of any of any real it's not the kind of super cat that a 15 or 20 billion dollar hurricane which hit Florida or Long Island or New England would be that that's the kind of we could lose or we could pay out six or seven hundred million dollars in sort of a worst-case super cat now our total premiums this year might be say 250 million or something in that area so so one super cat in the wrong place would be would produce and and there could be more than one could producible say a $400,000,000 or there abouts underwriting loss from that business the LA quake is is peanuts on that scale but it wouldn't have taken a whole lot more in terms of numbers on the Richter scale if it happened to have an epicenter where it did and be of the type that it was relatively shallow that we could have had that sort of thing happened I think that the insurance industry has vastly underestimated maybe maybe not know maybe not now but up till a few years ago the full potential of what is what a super cat could do but Hurricane Andrew and and the LA quake may have been something of a wake-up call they were far from a worst-case situation a really big type 5 hurricane and on Long Island would end up leaving a lot of very major insurance companies and significant trouble we define our losses essentially 700 million sounds like a lot of money is a lot of money but but there are limits on our policies that is not true of people that are just writing the basic homeowners or business they those losses could go off the chart there were certain companies in the LA quake that thought they had a what they call a probable maximum loss for California quakes in it and the LA quake which is far from the worst case you can imagine it turned out to far exceed those probable maximum losses so I think the industry has had and may still have its head in the sand a little bit in terms of what can well it can happen either in terms of a quake in California or more probably in terms of a hurricane along the East Coast so far this year were we're in reasonable shape but that doesn't mean much because by far the larger larger exposure is in her and and essentially 50% of the hurricanes hit in September and about I think about 15% would be in August close to 15% in October so you have 80% roughly in those 3 months and there's a little tail on both sides but that's when you find out whether you've had a good or bad year and the Supercat business basically it's a business we like at the right rates because there very few people who can afford to write it at the level that the underlying company the reinsured companies needed and we are in a position if the rates are right to do significant business charlie and nothing dead zone one Clayton Reilly from Jacksonville Florida this is a little different than all the other questions but what were the three best books you read last year outside of the investment field well why don't even one will do I'll I'll give you a tout a book first that I've read but that isn't available yet but it will be in September the woman who wrote it I believe is in the audience and it's it's it's been Ben Graham's biography which will be available in in September by Janet Lowe and I've read it and I think those of you who are interested in investments for sure will enjoy it she's done a good job of capturing been one of the books I enjoyed a lot was written also by a shareholder was not here because he's being sworn in I believe today or tomorrow maybe tomorrow as head of the voice of America and that's Jeff Cowan's book which is on the people vs. Clarence Darrow it's the it's the it's the story of the Clarence Darrow trial for for essentially jury bribery in Los Angeles back around 1912 when the McNamara brothers had bombed the LA Times and it's a it's a fascinating book Jeff uncovered a lot of information that the previous biota the bureau didn't have I think you'd enjoy that charlie Hagen well I very much enjoyed Connie Brook Brooks biography master of the game which was a biography of Steve Ross who had a Warner and later was what co-chairman of Time Warner yes a little more than co-chairman yeah she's a very insightful writer and it's a very interesting story I am rereading a book I really like which is Van Dorn's biography of Benjamin Franklin which came out in 1952 and I'd almost forgotten how good a book it was and that's available in paperback everywhere we've never had anybody quite like Franklin in this country never again he believed in compound interest to its and Emily as you may remember but he set up those two little funds one in Philadelphia one in Boston right yeah demonstrate the advantages of compound interest then I think that's the part Charlie's rereading zone 2 thank you for teaching me teaching so much to all of us about business my name is Micah sail from New York City you mentioned earlier that Berkshires shoe business was great but that other shoe businesses were not so good what are the uncertainties of the global brand leaders that the Burke Shearer seems to like they like Coke and Gillette the global brand leaders in the shoe business being a Nike and Reebok what are their uncertainties in terms of long-term competitive advantage on business economics consumer behavior and the other risk factors that you mentioned in the annual report this year thank you so you really asked you about the future prospects of Nike and Reebok yeah iiiii I don't know that much about those businesses we do have one person in this audience at least two homes a lot of Reebok but III I'm not expressing a negative view in any way on that I just I don't understand that the I don't understand their competitive position and the likelihood of permanence of their competitive position over a 10 or 20 year period as well as I think I understand the the position of Braun and Dexter that doesn't mean I think that it's inferior doesn't mean that I think that we've got better businesses or anything I I think we've got very good businesses but I I'm not I I'm not I haven't done the work and I'm not sure if I did the work I would understand them I think they are harder to understand frankly and to develop a fix on and there are kinds but they may be easier for other people who just have a better insight into that kind of business some businesses are a lot easier to understand that others and Charlie and I don't like difficult problems I mean we if something is hard to figure you know I mean we we'd rather x 3 than by pie I mean it's just easier for us Charlie yeah well there is such an obvious point and yet so many people think if they just hire somebody with the appropriate labels they can do something very difficult that is one of the most dangerous ideas a human being can have all kinds of things just intrinsically create problems the other day I was dealing with a problem and I said this thing it's a new building I said this thing has three things I've learned to fear an architect a contractor and a hill if you go a life like that I think you at least make fewer mistakes than people who think they can do anything by just hiring somebody with a label we've come at you you don't have to hire out your thinking if you keep it simple you don't have to do we've said this before but you don't have to do exceptional things to get exceptional results and some people think that if you jump over a seven-foot bar that the ribbon they pin on you is going to be worth more money than if you step over a one foot bar and it just isn't true in the investment world and at all so you can do very ordinary things I mean what is complicated about this but you know we're three billion dollars pre-tax better off than we were a few years ago because of it there's nothing that I know about that product or its distribution system its finances or anything that really hundreds of thousands or millions of people aren't capable of that they don't already know they just just don't do anything about it and similarly if you get into some complicated business you can get a report that's a thousand pages thick then you've got PhDs working on it but it doesn't mean anything you know what you've got is a report but you don't it you won't understand that business what it's going to look like in ten or fifteen years the big thing to do is avoid being wrong there's some things that are so intrinsically dangerous another of my heroes is Mark Twain who looked at the promoters of his day and he he said a mine is a hole in the ground owned by a liar and that's the way I've come to look at projections basically I can remember when I were offered two million dollars worth of projections once and the course of buying a business and the book was this thick and for nothing and we were giving it for nothing and it wouldn't open it you know we'd almost paid two million not to look at it it's ridiculous III do not understand why any buyer of a business looks at a bunch of projections put together by a seller or or his agent or his agent I mean it you can almost say that it's it's it's naive to think that that has any utility whatsoever we just are not interested in if we don't have some idea our selves of what we think the future is to sit there and listen to some other guy who's trying to sell us the business or get a commission on it tell us what the future is going to be it like I say it's very naive yeah and five years out yeah we we had a line in the report one time don't ask the barber whether you need a haircut and quite applicable to projections of by sellers of businesses zone three mr. Buffett Greg Ulrich from Washington DC in the last year United Airlines and Northwest have resolved some of their financial problems by moving ownership over to the employees with us heirs current positions problems what do you see as occurring with US air and do you see any movement toward employee ownership and how will that affect Berkshires interest in the company well US air has a cost structure which is non viable in today's airline business out that in an important way involves it's labor cost but it involves other things too but it certainly involves its labor costs and they've they've stated this publicly and I think and they have they have they are talking with their unions about it they're talking with other people about other parts of their cost structure and I think you'll just see that what what unfolds in the next relatively few months because there's any question that that the cost structures out of line I think the cost structure could be brought into line but whether it will be brought into line or not as another there's another question and you know looking backwards the answer is not to to get into businesses that need to solve problems like that it's to but that was that was a mistake I made and I think incest Schofield you've got a manager who understands that business extremely well who probably is as in my view anyway is as well regarded and trusted by people who are going to have to make changes as anyone could be in that position but that may not be enough I mean that that there's enormous tensions when you need to take hundreds and hundreds of millions of dollars out of the cost structure of any business and when you need cooperative action all by various groups each one of which feels that maybe they're having to give a little more than some other group and understandably feels that way you know that is that is an enormous ly tough negotiating a job I think Seth is is well-equipped for that as anyone but I would not want to I you know I cannot predict the outcome Charlie yeah well if I were a union leader I would give Seth whatever he wants because he's not the kind of a fellow who would ask for more than he needs and it's perfectly obvious that's the correct decision on the labor side but whether the obvious will be done or not is in the lap of the gods it's a lot of people with a lot of different motivations and I mean those those are really tough tough questions I mean we've Charlie and I've been involved with that sort of thing a few times and frequently it works out but it's it's not it's not preordained zone for my name is Sheldon syczyk from Chicago Illinois I have two questions the first one is concerning mr. Munger we know what mr. Buffett's retirement plans ours are I was wondering what yours your plans for the future concerning Berkshire are I've always preferred the system of retirement well you can't quite tell from observing from the outside whether the man is working or retired he doesn't well toke you no problem and many businesses particularly the more bureaucratic ones is that your employees retire but they don't tell you I think I could speak for Charlie others so Charlie Charlie and I are are not in any hurry to retire he's trying to outlast me actually thank you my second question is I was just curious why you sold a portion of cap cities we thought that we thought it was a good idea for cap cities to have a tender offer they had cash that we thought that they could not use in any they were not likely to be able to use it a better way than repurchasing their own shares because they do have some very good businesses they and we felt that a tender offer would would would not be successful in terms of attracting a number of chairs unless Berkshire were tendering we felt the price was reasonable to tender at it turned out that the business was getting stronger during that period and various things were happening in media so there were only a hundred thousand shares are so tendered outside of our million that isn't necessarily what we thought was going to happen going in but that is what happened it's acceptable to us but but that doesn't mean that it was the desired outcome we would not have tendered all of our shares or anything of the sort we wanted to remain a substantial shareholder of cap cities we've always with most of the time we favored cap cities buying in at stock and it's bought in a fair amount of stock since the ABC merger took place in 1980 started in 1986 so in five good morning my name is Matt VOC I'm from Omaha last year's meeting you made reference to structured settlements I was wondering how is that business progressing for you questions about the structured settlement business which is a business in which ship Berkshire guarantees in effect an annuity to some claimant of another usually of another insurance company who suffered an injury and instead of getting a lump sum now wants to get a stream of payments over many years in the future sometimes going up 75 years we have set up a life company to do that business we formerly did it all through our property casualty companies and we have done some business but it is it's not been a big business yet and it may never be a big business it's a perfectly satisfactory business but it's not an important item at present in the analysis of Berkshires value are you getting having a problem with sound out there on this or not just know its own sex my name is David Samra from San Francisco California and in your inner report I noticed you mentioned Wrigley as being a company that has worldwide dominance somewhat like coca-cola and Gillette and was curious to know if you had looked at the company in any detail and if so whether or not if you decided not to invest what were the reasons why well we we wouldn't want to comment on a company like that because we might or might not be buying it we might or might not be selling it and we might or might not buy or sell it in the future and since it falls under that narrow definition of things that we don't talk about I you know we it's a good illustration of a company that has a high market share worldwide but but you can understand the Wrigley company just as well as I can I have no insights into into the Wrigley company that you wouldn't have and and and I wouldn't want to go beyond that and and in giving you our evaluation of the company hate to disappoint you on those but on specific securities we we're not too forthcoming sometimes Charlie I'm good at not being forthcoming so seven mr. Buffett Kathleen Ambrose from Omaha I have a question regarding global diversification just in general what do you look for in a company and if so as far as Europe or Latin America if you'd like to be specific yeah the question is about about global diversification all we want to be in as businesses that we understand run by people that we like and that priced attractively compared to the future prospects so there is no specific desire to either be in the rest of Europe or the rest of the world or Far East or to avoid it it's simply a factor that that it's it's not it's not a big factor there may be more chances for growth in some countries we 80 percent of Coca Cola's earnings roughly will come from outside the United States 80% of guinnesses earnings will come from outside the United States but they're domiciled outside the United States whereas coca-cola is domiciled here certainly in many cases there are markets outside the United States that have way better prospects for growth than then the US market would have but they probably have some other risk to them that that this market may not have but we you know we like the International prospects obviously a company like Coke we like the International prospects of a company like Gillette Gillette earn 70 percent of its money outside this country so if you look on a look through basis Coke we might this year get something like a hundred and fifty million dollars of earnings indirectly for Berkshires interest from the rest of the world just through coca-cola alone but we don't make any specific we don't think in terms of I like this region so I want to be there or something of a sort that it it's it's it's something that's specific to the companies we were looking at and we'll try to evaluate that cope is expanding in China well at you know that I think I forget what they showed last year maybe 38 percent growth or something like that in cases maybe it's it's nice to have markets like that that that are relatively untapped actually Gillette is expanding in China in a big way and the Chinese don't shave as often and more of our what they call dry shavers and wet shavers there which is electric shavers but but you know maybe we could stick something into coke they would any little synergy of Berkshire finally who knows zone one good morning I'm Marshall Patton from Bandera Texas and back to the insurance losses what is the comparison between natural disasters and such as the earthquake and so on and the LA riots well I'm not sure what the connector did they you know they obviously can both lead to two super cats that we insure against because if there is enough insured damage it's likely to trigger payment under some of our policies it would take it would take some really big riot damage to to get to our levels because normally we don't kick in now until a an event gets up to at least you know five billion or so of insured damage under a very large majority of our policies something like a quake causes a fair amount of damage that is not insured because the extent that it's it's highways and things of that sort of public buildings a lot of that is not insured but you get interesting questions on this year that the usually we insure an event but what's an event if you go back to the riots that occurred after Martin Luther King was shot he had riots and dozens of cities is that one event or is that is that a multiple number of events I mean they distorted by different people and but maybe maybe a rising from a common cause some of those things aren't actually very well defined even after hundreds of years of of insurance law and custom experience of that and but I would say that that rioting is very very unlikely to get to a level of triggers our policy the big the big risks we face are quake and hurricanes and hurricane sir are more significant risk than then quite they call them typhoons in the in the Pacific Ocean but floods tremendous damage from floods last year but but basically there's not a lot of private flood insurance what so the insured losses do not get or not get large just watch The Weather Channel zone to Diane West from Corona del Mar California I know mr. Buffett that you said that you don't read what other people say about the market or the economy but do either you or Charlie have an opinion about how you think things are going to go are you bullish or bearish you may have trouble believing this but I Charlie and I never have an opinion about the market because it wouldn't be any good and it might interfere with the opinions we have that are good at the if we're right about a business if we think of business is attractive it would be very foolish for us to not take action on that because we thought something about what the market was going to do or anything of that sort because we just don't know and and and to give up something that you do know and that is profitable for something that you don't know and won't know because of that it just doesn't it doesn't make any sense to us and it doesn't really make any difference to us I mean I bought my first stock I think in probably April of 1942 when I was 11 and since then I mean actually World War two didn't look so good at that time I mean the prospects they really didn't I mean you know we were not doing well on the Pacific and I'm not sure I calculated that into my purchase of my three shares but they I mean just think of all the things that have happened since then you know atomic weapons and major Wars and presidents resigning and and all kinds of things massive inflation at certain times to to give up what you're doing well too because of guesses about what's going to happen in some macro way just doesn't make any sense to us the best thing that can happen from Berkshire standpoint we don't wish this out anybody but is it an overtime is they have markets that go down a tremendous amount me we are going to be buyers of things over time I think can be buyers of groceries over time you like grocery prices to go down if you're going to be buying cars over time you you like car prices to go down we buy businesses we buy pieces of businesses stocks and we're gonna be much better off if we can buy those things at an attractive price then if we can so we don't have any fear at all I mean what we fear is an irrational bull market that's sustained for some long period of time you as shareholders of Berkshire unless you own your shares on borrowed money you are going to sell them in a very short period of time are better off if if stocks get cheaper because it means that we can be doing more intelligent things on your behalf than would be the case otherwise so I but we have no idea what what and we wouldn't care what anybody thought about it I mean it most of all ourselves Charlie didn't know I think the if you're agnostic about those macro factors and therefore devote all your time to thinking about the individual businesses and the individual opportunities it's just it's a way more efficient way to behave at least with our particular talents and lacks thereof if you're right about the businesses you'll end up doing fine we don't know we don't know and we don't think about when something will happen we think about what will happen it's it's fairly it's not so difficult to figure out what will happen it's impossible in our view to figure out when it will happen we focus on what will happen this company in 1890 year there abouts the whole company sold for $2,000 got a market value now of about 50 odd billion somebody could have said to the fellow was buying this in 1890 you know you're going you'll have a couple of great world wars and you'll have that you'll have the panic of 1907 all all these things will happen wouldn't it be a better idea to wait we can't afford that mistake basically yeah zone three I'm Tim medley from Jackson Mississippi last year the question was I asked about your preference for purchasing entire businesses versus parts of public companies you mentioned you preferred to buy private businesses because of the tax advantages and your attractions with people in those businesses are you finding today that there are better purchases within the private market versus in the public securities markets well I would answer that no we we very seldom find something to buy on a negotiated basis for an entire business we have certain size requirements big limiting factors has to be something we can understand I mean that eliminates 95% of the businesses and and and we get we got we don't pay attention to it we get lots of proposals for things that just totally outside the boundaries of what we've already said we're interested in we prefer to buy entire businesses or 80 percent or greater interest in businesses partly for the tax reasons you mentioned and frankly we like it better we just it's the kind of business we would like to build if we had our absolute brothers on it counter to that is we can usually get more for our money in wonderful businesses in terms of buying little pieces of them in the market because the market is far more inefficient in pricing businesses that is it is the negotiated market you're not gonna buy any bargains and I mean you shouldn't you shouldn't even approach the idea of buying a bargain and a negotiated purchase you want to buy it from people are gonna run it for you they want to buy it from people who are intelligent enough that to price their business properly and they are I mean that's the way things are the market does not do that the market and the stock market you get a chance to buy businesses at foolish prices and that is why we end up with a lot of money in marketable securities if we absolutely had our choice we would own a group of we would own three times the number of businesses we own outright we're unlikely to get that opportunity over time but periodically we'll get the chance to find something that that fits our tests and in between we will when the market officers the right prices we will buy more either businesses we already own pieces of it we'll buy one or two new ones something's usually going on there are tax advantages to owning all of them but that's more than offset by the fact that you'll never get a chance to buy the cookie never get a chance to buy the whole coca-cola company or the whole chiller I come into businesses like that the sensational businesses are just not available sometimes you get a chance to make a sensible purchase in the market of such businesses Charlie well I think that's exactly right and if you stop to think about it if a hundred percent of the business is for sale you've got the average corporate buyer as being run by people who are they'll have the mindset of people buying with somebody else's money and we have the mindset of people buying with our own money and there's also a class of buyers for a hundred percent of businesses who are basically able and shrewd financial promoters I'm talking about the leveraged buyout funds and so on and and those people tend to have the upside but not the downside in the private Arrangements they've made with their investors and that's way they tend to be somewhat optimistic and so we have formidable competition when we try and buy a hundred percent of businesses most managers are better off in terms of their personal equation if they're running something larger now they're also better off if they're running something larger and more profitable but the first condition alone will usually leave them better off we're only better off if they're running something that's more profitable they also like it if it's more larger if it's larger - but but our equation actually our personal equation is actually different than the great many managers in that respect even if that didn't operate I think most managers psychically would enjoy running running something larger and if you can pay for it with other people's money I mean that gets pretty attractive yeah you know huh how much what would and let's just say you're a baseball fan well how much would you pay to own whatever your hometown the Yankees you might pay more if you were writing a check on someone else's bank account than if you're writing it on your own but no one to happen and in corporate America at animal spirits are there and those are our competitors on buying entire businesses in terms of buying securities most managers don't even think about it it's very interesting to me because they'll say that they'll have somebody else manage their money in terms of a portfolio securities well all that is is a portfolio businesses and I'll say well why don't you pick out your own portfolio let's say that's much too difficult and then some guys come along with some business that they never heard of a week before and give them some figures and a few projections and the guy thinks he knows enough to buy that business it very puzzling to me sometimes it's owned for could you hold a little closer to you I can't can't here to him it's hard to hear I'm is the mic on there it's on okay I can hear that fine let's try it one more time a Dan Raider in San Mateo California this is a question for mr. Munger in your most recent letter to shareholders in westco's annual report you calculated the intrinsic value of Westco at about $100 per share and compared that to the then current market price of Westco of about $130 per share in the same letter you stated that it was unclear whether at then current market prices Berkshire or Westco presented a better value to prospective purchasers in light of that would you compare the intrinsic value of Berkshire to its current market price well the answer to that is no Berkshire has never calculated intrinsic value per share and reported to the shareholders and Wesco never did before this year we changed our mind at West Co because we really thought some of the buyers had gone a little crazy you know a lot of things were being said to respective shareholders that in our opinion were unwise and we don't really like attracting even though we've had nothing to do with it we don't like attracting people in the high prices that may not be why is so we we departed from our long president of mine and we did in the West Co report make an estimate of intrinsic value per per share but we're not changing the general policy that was just a one-time quirk well also I think it's true that the the Westco intrinsic value per share can be estimated by anyone within a fairly close limits that it just isn't that complicated because there aren't a number of businesses there that that that have values different than caring values or where they are they're all footnote in terms of numbers so it'd be almost impossible to come up with numbers that are significantly different than the number Charlie put in there Berkshire has has has assets that number one of which would be the insurance business that it's clear have very significant excess values but but some one person might estimate those that maybe three times what somebody else would estimate them at that's less true of our other businesses but it's it's still true in a way so that archers range would be somewhat greater and it's Charlie we basically we don't want to disappoint people we also don't want to disappoint ourselves but we we have our own yardsticks for what we think is doable we try to convey that as well as we can the people who are partners in the business and I think that we saw some things being published about about Wescoe that simply would what might have led to probably did lead to some some expectations that simply weren't consonant with our our own personal expectations and that that's that that leaves us uncomfortable zone 5 hello my name is Charles Pyle from Ann Arbor Michigan I'd like to ask you to expound on your view of risk in the financial world and I asked that against the background of what appear to be a number of inconsistencies between your view of risk and the conventional view of risk I mentioned that in a recent article you pointed out an inconsistency in the use of beta as a measure of risk which is a common standard and I mentioned that derivatives are dangerous and yet you feel comfortable playing in derivatives through Salomon Brothers and betting on hurricanes is dangerous and yet you feel comfortable playing with hurricanes through insurance companies so it appears that you have some view of risk that's inconsistent with what would appear on the face of it to be the conventional view of risk well we do define risk as the possibility of harm or injury and and in that respect we think it's it's it's it's inextricably wound up in in in your time horizon for a hope for holding an asset I mean if if your risk is that you're going if you intend to buy XYZ corporation at 11:30 this morning and sell it out before the close today I mean that is in our view that is a very risky transaction because we think 50% of the time you're going to suffer some harm or injury if you have a time horizon on a business we think the risk of buying something like coca-cola at the price we've bought it out a few years ago is essentially it's so close to nil in terms of our perspective holding period but if you ask me the risk of buying coca-cola this morning and you're gonna sell it tomorrow morning I say that is a that's a very risky transaction now as I pointed out in the annual report it became very fashionable in the academic world and then that's spilled over into the financial markets to define risk in terms of volatility of which beta became a measure but that measure that that isn't that is no measure of risk does the risk in terms of our hurt in terms of our super cat business is not that we lose money in any given year we know we're going to lose money in some given day that is for certain and and and we're extremely likely to lose money in a given year our time horizon of writing that business and it would be at least a decade and we think the probability of losing money over a decade is low so we feel that in terms of our horizon of investment that that is not a risky business and it's a whole lot less risky than writing something that's much more predictable interesting thing is that using conventional measures of risk something whose return varies from year to year between plus 20% and plus 80% is riskier as defined in something whose return is 5% a year every year that we just think the financial world has gone haywire in terms of measures of risk we we look at what we we are perfectly willing to lose money on a given transaction arbitrage being an example any given insurance policy being another example we are perfectly willing to lose money on any given transaction we are not willing to enter into transactions in which we think the probability of doing a number of mutually independent events of us but of a similar type has an expectancy of loss and and we hope that we are entering into our transactions where our calculations of those probabilities have validity and to do so we try to narrow it down they're a whole bunch of things we just won't do because we don't think we can we can write the equation on them but we basically Charlie and I by nature are are pretty risk-averse but we are very willing to enter into transaction we if we knew it was an honest coin and someone wanted to give us seven to five or something of the sort on one flip how much of Berkshire's net worth would we put on that flip well we we wouldn't it it would sound like a big number to you it would not be a huge percentage of the net worth but it would be it would be a significant number we will do things with probabilities favored us Charlie yeah we I would say we try and think like fair Madame Pascal as if they'd never heard of the modern finance theory I really think that a lot of modern finance theory can only be described as disgusting zone sex good morning I'm Paul Miller from Kansas City Missouri I've got two questions first not too long ago my ability was Fortune magazine that ran an article regarding personal tax rates and at the risk of misquoting you my recollection is that you favored higher personal rates rates even higher than those proposed by those in Washington the second question is I've heard Berkshire Hathaway referred to as nothing more than a high-priced rich man's mutual fund would you care to comment on that also well I'm tax rates I if you ask me what I personally favor I personally favor a steeply progressive consumption tax that has a little more a little more attention being paid to it now although the steeply progressive might might be modified by most of the advocates of the consumption tax maybe it's a mildly progressive or something of the sort there's a nun demented sheep proposal along that line and there are other people that are talking about it more it may be examined by the new Carey Danforth Commission of which we've got a member in the audience but I in one way or another I believe in progressive taxes and so I am not shocked in terms of my own situation and I don't think Charlie is particularly about having a progressive income tax although like I say I think society would run better over time if it were a progressive consumption tax instead you want to comment on the tax situation here well I think there is a point in which income tax has become quite counterproductive if the progression is too high but I don't think we're there yet we think at least I think I'm extraordinarily well treated by the society I think most people with high incomes are I think if you transported most of them to Bangladesh or Perl or something they would find out how much of it is them and how much is the society and and I think there's nothing better than a market system in terms of motivating people and in terms of producing the goods and services that the society wants but I do think it gets a little out of whack in terms of what the productivity may be of an outstanding teacher compared to somebody who is good at figuring out the intrinsic value of businesses I I don't have a better system on the on the on the income side but I think society should figure out some way to to make those who are particularly blessed in a sense to have talents that get paid off enormous ly in a market system to to give back a fair amount of that to the society that produces that the question about Berkshire being a I think it was at rich managed mutual fund or something we don't look at it that way at all we look at it as a collection of businesses and ideally we would own all of those businesses so it's it's to the extent that a mutual fund owns stock and a lot of companies and diversifies among businesses and we try to own a lot of businesses ourselves I guess that's true but I guess you could say the same thing of General Electric or an operation like that we we are more prone to buy pieces of businesses than the typical manager but we are trying to do in a sense the same thing Jack Welch is trying to do with General Electric which is try to own a number of first-class businesses he gets to put the imprint of his own management which I think is very good on those businesses and and we are more hands-off both in the business as we own out right and in the ones we own pieces up but we're we're going at it the same way and and General Electric has been very successful under Jack's leadership in doing it his way we think in terms of what we bring to the game and the problems of putting money to work all the time that our own system is will work best for us Charlie yeah I've got nothing dad to that it's own one [Music] hello I'm Christopher Davis from New York City interested in in that many of the holdings of Berkshire are in industries that are perceived as interest rate-sensitive industries including Wells Fargo Solomon Freddie Mac even Geico and yet you I you have an admitted sort of ambivalence towards interest rates or changes in interest rates and it therefore seems that you don't feel that those changes affect the fundamental attractiveness of those businesses I thought maybe you could share your thoughts on what you see in these businesses that the investment community as a whole is ignoring well the value of every business the value of a farm the value of an apartment house the value of any economic asset is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect a stream of money to be to come in over a period of time and the higher interest rates are the present value is going to be so every business by its nature whether it's coca-cola or Gillette or Wells Fargo is in its intrinsic valuation is is a hundred percent sensitive to interest rates now the question as to whether a Wells Fargo or a Freddie Mac or whatever it may be whether their business gets better or worse internally as opposed to the valuation process because of higher interest rates that that that is not easy to figure I mean Geico if they write their insurance business at the same at the same underwriting ratio in other words they have the same loss and expensive experience relative the premiums they benefit by higher interest rates obviously over time because they're afloat business and the float is worth more to them now externally getting back to the valuation part the present value of those earnings also becomes less than but the present value of culture needs becomes less in a higher interest rate environment Wells Fargo it's whether they earn more or less money under any given interest rate scenario is hard to figure there may be one short-term effect and there may be another long-term effect so I do not have to have a view on interest rates and I don't have a view on interest rates to make a decision as to an insurance business or a mortgage guarantor business or a banking business or something those are relative to making a judgment about Kokura Gillett Charlie I've got nothing to add zone to hello I'm from New York could you speak about your insurance business little bit and especially the retroactive policies you've been writing we speak about the the you say the reinsurance business revered the retroactive part for the first part reinsurance and the retroactive and also the market in Bermuda and how you see it as one of your potential markets I think the retroactive market is that what's called retroactive insurance has been pretty well eliminated by developments in accounting so I would not expect us to really have any volume in in in retroactive type policies now when we write workers comp with a with a with a policyholder dividend in effect that's a that's a retroactive policy but that's that's a relative that's a that's a small part of Berkshires business did I answer what you were driving out there by me did you get Benjamin still comment on the development of the insurance business in Bermuda Oh Bermuda Bermuda is simply a you know a new competitor they're not so new I mean there's been companies in Bermuda before but but in the last 15 months 18 months maybe there's been four billion plus raise and because for tax reasons maybe other reasons as well but certainly for tax reasons that capacity has been concentrated in Bermuda based Bermuda domicile reinsures but essentially there's no great difference between that type of competition and other reinsurers competition except for the fact that that capacity is new and the money's just been raised and so there may be some greater pressure on the managers of those businesses to go out and and write business promptly then on somebody that's been around for 50 years but it's it's no plus for us anytime new capacity enters any business that that we're in and and that certainly certainly goes for the reinsurance business reinsurance business by its nature will be a business in which some very stupid things are done and mass periodically I mean it you can be doing dumb things and not know it and reinsurance and and then all of a sudden wake up and find out the you know the money is gone and it's the it's what people have found out and I use that light in the report a year ago people have found out that we're speculating on on bonds with with low margins recently did you know you don't find out who's been swimming a naked until the tide goes out and essentially that's what is in reinsurance you don't you really don't find out who's been swimming naked till the wind blows symptom zone free adjust your more cash more stocks more bonds because how does Berkshire Hathaway feel about times of relative financial insecurity do you do you arrange for more cash reserves looking forward to a time when you might be able to buy or do you go along your path I think the question is do we do we get sort of getting an asset allocation by by maintaining given levels of cash depending on some kind of outlook or something of the sort we don't even we don't really think that way at all we we if we have cash it's because we haven't found any anything intelligent to do with it that day in the way of buying into the kind of businesses we like and and when we can't find anything for a while the cash piles up but that that's not that's not true choice that's that's because we're failing at what we essentially are trying to do which is to find things to buy and we make no attempt to guess whether cash is going to be worth more three months from now or six months from now or a year from now so it is you will never see we don't have any meetings of any kind anyway at Berkshire but we would never have an asset allocation meeting we would we would we would we would keep looking I mean Charlie's looking I'm looking some of our managers are looking we're looking for things to buy that meet our tests and if we if we showed no cash for short term securities a year and we would love it because it would mean that we found ways to employ the money in ways that we like I think I would have to admit that if we have a lot of money around we are a little dumber than usual I mean it it tends to make you careless at and I would say that the best purchases are usually made when you have to sell something to raise the money to get them because it it just raises the bar a little bit that you jump over in the mental decisions but we have I don't know what we'll show but certainly well over a billion dollars of cash around and that's not through a choice that's that is a that you can look you can look at that as an index of failure on the part of your management and and we will be happy when we can buy businesses or small pieces of businesses that use up that money so on for gentlemen my name is Richard sir-sir from Tucson Arizona I understand that 40% of all home mortgages have been securitized by Fannie Mae and Freddie Mac the duopoly I would at the risk of asking you for a projection since you talked about projections before I'd be interested in understanding what you think will happen to that market share over time for this duopoly thank you yeah well the answer that doesn't involve much of a prediction that that market share is essentially certain to go up that doesn't mean that those are wonderful businesses to buy but it does but the market share is essentially certain to go up because the the economics that those two entities possess compared to other ways of intermediating money between investors and people who want to borrow no one else has those economics so what holds the share of Freddie Mac and Fannie Mae down is the fact that they are only allowed to the loan roughly two hundred thousand dollars on any mortgage that's a that's a a limiting factor has probably been a good thing for them that it has been a limiting factor but the they are shut out a part of the market but the market that they are in they essentially have economics that that other people can't touch for Andhra meeting money intermediating money including the Savings and Loan business that we were in we we we had a business that intermediated money when I've got it from depositors and lent it to people who want to borrow on a home Freddie Mac and Fannie Mae do it the same way they don't do exactly the same way but they performed the same function and they did it they could do it so much more cheaply than we could do it by having branches or anything of the sort and paying paying the insurance fee we paid they're gonna get the business they should get the business and so their market share will grow Charlie well I think that's right you're doing great it's on five good morning I'm Sara Pruitt from Milwaukee Wisconsin and I wondered if you feel that the speed with which information is available and disseminated today has affected your business buying decision process and do you believe that speed has caused you to miss opportunities question about seeds expanding no there's the speed of information today affect our decision making process now we I would say that we perform about like we were doing 30 or 40 years ago I mean we we read we read annual report it isn't this it isn't the the speed of information really doesn't make any difference to us it it's the processing and finally coming to to some judgment that actually has some utility that is that it's it's a judgement about the price of a business or a part of a business of security versus what it's essentially worth and and none of that involves anything to do really with with with quick information it involves getting good information but usually that that it's not we're not looking for needles and haystacks or anything of the sort you know we like haystacks not needles basically and then and and and and and we want it to shout at us and I would say that that well virtually everything he's done has been reading public reports and and and then maybe asking questions around to ascertain trade positions or product strengths or something of that sort but we never have to we can make decisions very fast and when we get called on a business sir or we can we can make up our mind whether we're interested in two or three minutes I mean that that takes no time we may have to do a little checking on a few things subsequently but we don't need to get I can't think of anything whether we where we really need lots of price data or things like that extremely fast to make any any decisions we've got good management information systems and our operating businesses but that's that's just another you know it's a question of keeping inventories where they should be and all of that sort of thing I don't think the investment I I think you could be in some place where the Mail's were delayed three weeks and and the quotations were delayed three weeks and I think you could do just fine and investing its own sex James pan New York City I have a two-part question one do you think the stock price of berkshire hathaway it is trading within fifteen percent of its intrinsic value currently and two if you think works are halfway is undervalued with the amount of cash you have on your balance sheet would you consider a buyback the answer about a buyback is that that we generally have felt that market conditions that would make berkshire attractively priced is probably going to make other things even more attractively priced because we think our shareholders are more rational than the shareholders of many companies it's it's more likely that we will find some wonderful business at a silly price than we will find Berkshire at a silly price as we go along so that that tends to eliminate repurchases but it doesn't rule them out it just but it explains why the circumstances will not arise very often where repurchases wouldn't would make good sense in terms of giving you a number on intrinsic value I don't want to spoil your fun I mean you really should work that one out for yourself Charlie is the expert on katrinka do you have any comment for him John well your attitude on that subject reminds me of a famous headmaster who used to address the graduating class every year and he'd say you know he says 5% of you people are gonna end up criminals he says I know exactly who you are and he said what I'm not going to tell you because it would deprive excitement companies that constantly told their shareholders what the intrinsic value was where the real estate holding companies in corporate form and I must say that the amount of folly and misbehavior that crept into that process was disgusting we would be disassociating with a bad group if we were to change our ways bill Zeckendorf senior I think was probably the first one to do that with Webb & Knapp back in the late 50s and I've got her still have those annual reports and he would announce you know like two eight decimal places what the what the intrinsic value of web and app was and he did it right till the day they file for chapter 11 I remember that well because somebody said that he fell into bankruptcy and somebody else said how can you fall off a pancake beware of people that give you a lot of numbers about their businesses I mean in terms of in terms of projections or valuations or that sort of thing that we try to give you all of the numbers that we would use ourselves in making our own calculations of value we really if you read the Berkshire reports you essentially you have all the information that the Charlie and I would use in making a decision about about the security and if there's anything really lacking in that respect you know we we would actually would truly appreciate hearing from you because we want to have that kind of information in the report but then we want you to make the calculation but we've stuck to that material for example on the float in the insurance business we consider that quite relevant obviously because we use up almost a page printing it pretty serious stuff at Berkshire the but that is relevant I mean if you know your interpretation may be different than the miner Charlie's but that that those are important numbers and we can give you a lot of baloney about satisfied policyholders you know and Lincoln Nebraska wouldn't tell you a thing about what the company is worth and have pictures of them and happy you know receiving the check from the Asian all of that minute we're not gonna do that at them zone one Mike Macy from Indianapolis I have really enjoyed reading your annual letters and your annual report and I've gone back and read all the older ones too they're terrific I have also enjoyed reading the two books by Peter Lynch and I see a lot of commonalities between the two of you the way you think and your philosophy etc I'd certainly appreciate it if you'd make a few comments and what you think of Peter Lynch the things he says in his two books and the advice that he gives to investors well I know Peter I don't know them well but i but i we played bridge together in omaha as a matter of fact I mean III like him personally and obviously he has an outstanding record and he has written those two books which have been bestsellers about his investment philosophy I don't really have anything I'm not going to embroider on his we there is a there there's there's certainly a fair amount of overlap there's some difference Peter obviously likes to diversify a lot more than than I do I mean he he owns more stocks than the names of companies I can remember I may but but that's peter and i you know i i've said in investing that in the past that there's more than one way to get to heaven and that there there isn't a true religion in this but there's some very useful religions and Peter's got one and I think whether we've got one that's useful too and there is a lot of overlap but I would not do as well if I tried to do it the way Peter does it he probably wouldn't do as well if he tried to do it exactly the way I do it I like him personally very much he's a high grade guy so too as a Buffett mr. Munger my name is Dave lanka's I'm a senior editor at business insurance magazine a two-part question for you can you explain a little bit regarding your primary insurance operations what drove up britain premiums by more than 50 percent last year and if you expect that to continue this year and then regarding you earlier comments on the stupid things reinsures can do in mass you explain what potential pitfalls that the new cat facilities in Bermuda will have to avoid that you feel Berkshire Hathaway won't fall into well the first question about our primary insurance the figures I find a way of them back someplace but they're a little distorted because we bought Central States indemnity late in the year 92 so that there's a lot more premium volume in there for central states in 93 than there was in 92 our basic national indemnities basic insurance which is auto and commercial auto and general liability premium volume was barely flat the home state operation fairly flat Cypress up somewhat but those numbers were not anything like the changes so our business last year pro forma for including central states indemnity for all of 92 would not have shown a dramatic change there really hasn't been much happen in our primary business except that it's been run it's done very well but it is not growing or exploding and that's true this year as well as last year it's a good business and it could grow in certain kinds of markets very substantially but it is not growing in this market and it did not grow last year although its underwriting was very good in the reinsurance business I think essentially the difference in in our reinsurance business from many others I you know it doesn't include them all in a place like Bermuda is that is essentially the difference that may exist in our operations and securities versus other people we will we will offer reinsurance at any time in very large quantities at prices we think makes sense but we won't do business if we don't think it makes sense just like we will buy securities to the extent of the cash we have available if they make sense but we have no interest in being in the stock market per se just to be in it we want we want own securities that make sense to us I think for most management's if the only thing they're in is the reinsurance business they may like it better when the when prices makes sense but they will I think they will be prone to do quite a bit of business when prices don't make sense as well because there's no alternative except to give the money back to the owners and that is not something that most management's you know do somersaults over so I think I think we are in a favored position essentially being having the flexibility of capital allocation that lets us take the lack of business with a certain equanimity that most management's probably can't because of their their sole focus on the business rates will get silly and all in all likelihood after a period when nothing much happens when you've had a couple of years of good experience we priced of what we think is exposure we don't price to experience I mean the fact that there was no big hurricane last year I forget the name of the one that was coming in at North Carolina and then it beard out essentially but to us it has nothing to do with the rates next year whether that hurricane actually came in in a big way or veered out into the Atlantic again I mean we are pricing to exposure and everyone says that but the market tends to price and respond to experience and generally too recent experience that's why all the all the retro sessional operations in London you know then the spiral went busted because they priced in an RV oh they price to experience rather than to exposure it's very hard not to do that to be there year after year with with business coming by and investors expecting things of you and not do that but we will never knowingly do that we may get influenced subconsciously in some way to do that but we will not do that any more than we will accept stock market norms as being the proper way for us to invest money in equities basically in when you lay out money or accept insurance risks you really have to think for yourself nobody you cannot let the market think for you Charlie yeah I think Berkshire is it's basically a very old-fashioned kind of a place and it tries to exert discipline to stay old-fashioned and I don't mean old-fashioned stupid I mean you know the eternal verities so to speak basic mathematics you know basic horse sense basic fear basic discriminations regarding human nature all very old-fashioned and if you just do that with a certain amount of discipline I think it's likely to work out quite well don't free David goddess men from New York it's no wonder that this meeting draws stockholders from all the country and despite the talk about age today I'm happy to say this meeting gets better every year Berkshire stands unique in American business as a company whose name has become synonymous with management excellence unlike many American corporations we as stockholders don't have to worry about reorganizations large write-offs massive restructurings overstated earnings and overpaid executives with strategic visions instead year in and year out we enjoy the benefits of the common sense and brilliance Charlie and wine [Music] what did you say your name was I want a head I want to add to that to say nothing of your good humor it's easy to take such consistently outstanding results for granted but we in this room are the direct beneficiaries of their efforts by our presence here today we show our appreciation to them for their exceptional performance but we can also demonstrate it and done other way I would like to suggest we give them a rousing hand of applause for a job well done [Music] thank you that was sandy goddess Minh we've worked together for 30 odd years and he's finally got that doubt I appreciate that sandy with that we will adjourn and and anyone anyone who wants to stay around we'll we'll reconvene in 15 minutes and then we'll be here till about 1:15 and for the rest of you there's buses candy at set our world books out there thank you - now will I don't know where zone 2 is but we'll do you feel basically the same about your investment in Guinness now is when you made the investment in terms of the company well I wouldn't like to comment on anything that we own in terms of how we rank Radames desirability or anything I mean what it's called your letter and that we we made decisions at a given time at a given price which you can figure out by looking at our purchases but we may be buying or selling any of those securities right as we talk and we simply don't think it's in the interest of Berkshire shareholders as a group to be talking about things that we could be buying or selling I had David winters from Mountain Lakes New Jersey just worried world books had a tough time lately and I'm wondering if there's things you're doing to try to improve that and also the Buffalo News has been fabulous and I'm kind of wondering what's driving the Buffalo News Buffalo knows they're doing what fabulously yeah well doing well right well I would say you gotta get credit to Stan let's see I'm not sure where the stands here right now but who's been running the news world book in terms of unit sales as we put in the report have fallen off significantly the last few years it's actually surprising in a sense how well the profits have held up in because they've done a good job a very good job in that respect and as we put in the report we don't know the answer precisely we are Ralph Shea as as has taken some actions is taking some actions that that he thinks will improve the operations Ralph record as a manager is absolutely at the top of the list I mean it I wrote about it in the 1992 report in 1993 Ralph did even better I mean it was a fabulous I think I'm probably they have been 110 or so million pre-tax on 97 million of average equity capital or something a source so it's it's a fabulous record but encyclopedia Britannica's you probably know ran in a loss last year the in the Encyclopaedia business has been berry has been or could be do an electronic competition could be due to to recruiting problems for sales people obviously can be a combination of many factors if we we knew the answer we'd have you wouldn't be seeing those figures right now but it is a it is a top item of attention for for Ralphie takes anything that's not performing as well as before very seriously and we will see what happens but I don't have a prediction on it I wish I knew the answer I don't see any variables to do in any in any intelligent way tell you or we put in the report the best we could do on that the profitability and then as like I say it's been pretty good but obviously current trends of new sales will catch up with us at some point unless we unless we boost unit sales I don't think our market share if you look at print encyclopedias is fallen but I can't be sure that but I I think that's probably true but there are an awful lot of encyclopedias going out there as part of a bundle of product with computer sales symptom ly again from Palo Alto by Omaha standards you are a relatively young man and every year you point out that Berkshire sighs now precludes you from making the great relatively small trades which made you rip your reputation how much thought have you given to breaking up Berkshire into smaller entities how much what how much thought have you given into breaking up Berkshire into smaller entities which will allow you to make those nice small wonderful trades that you made from the beginning it wouldn't it wouldn't do any good to bring in smaller entities because I did it's still owned you know we'd still have ten billion plus of capital would be responsible for wherever it would be so I the we could distribute it out to the shareholders and let them make their own decisions on and anytime we thought that that we weren't going to get more than a dollar of value per dollar retain that obviously would be the course to follow but there's no magic to creating multiple little I mean we could we could call Berkshire to Berkshire free Berkshire fee multiple little I mean we could we could call Berkshire to Berkshire free Berkshire 4 but you still got the problem there's 10 billion dollars to invest and and it doesn't really solve anything Charlie do you have any thoughts on them no the Berkshire ISM incredibly decentralized in the in terms of power and decisions resting and the operating divisions in terms of the marketable security its securities it's incredibly centralized and so far we have not had any big penalty from not being able to do the things that we did when we were young eventually we will reach the penalty yeah I think we're there's no question we could earn a higher percentage returns working with $100,000 or than 10 billion dollars but yeah but but it hasn't hurt us as much as we thought it would as size is increased but your universal opportunity shrinks but it shrinks no matter I mean you can set it up in 20 bank accounts or one bank account but you still sure the universe still has to to fit the 10 billion in aggregate now how are we doing this do we have another zone over there no Michael when you enter New York City to questions one last year you discussed in your annual report your investment in General Dynamics and you also gave you a proxy to the company in its management this year it appears you have sold the stock for sure what this year it appears that you have sold the stock in General Dynamics what has changed that you sold 20% of your stake this is clincher number one and I have number two probably inappropriate to be talking about what we're buying or selling except to the extent that we make a public have to make a public announcement which on something like General Dynamics we've got 13g requirements if we change by more than five percent and we also have as long as we own more than ten percent we have monthly reporting requirements under form four we think the management of General Dynamics has done an absolutely sensational job obviously also it isn't the kind of business basically that we have a 20-year view on or something of the sort so it said that the shareholders of General Dynamics have been extraordinarily well served by by the management of that company and and we've we were thankful because we prospered accordingly but should I take from this comment that you have changed your view about the business itself partner should I take from your comment that you have changed your view about the business itself no I think you can take my comments or say just what I've said okay question number two could you I think we want to we want to get people a chance around the room that and then if when when in the zone you're in when a second question comes along will be the fine but we want to we want to get as many people in this hour as we can because this is a hard to court here zone one it appeared to me that in 1993 the variation between the stock price for the high and the low was much greater in years than years in the past would you mind commenting on there well there was more volatility in the price of Berkshire last year and as I put in the annual report the stock overperformed the business last year now over any ten or 20 or 30 year history every year the stock is going to perform a little differently at least in the business I mean it it may slightly under performers slightly overperform we would prefer that those variations be as as as small as possible but there was more variability last year than historically has been the case although we've had one or two other we had a few years like them we our best way to handle that is to give all the information we can to shareholders and prospective shareholders and follow policies that we think will induce the investment oriented with long time horizons to join us and not to encourage other people but occasionally you know that we can't guarantee that result one of the things was interesting to me I don't know it was three months ago or when but I I happened to be talking to the specialist terrific specialist Jimmy McGuire he had to leave but he was here earlier in the session and I think at the time the stock was around 16,000 or something like that and he had some rather significant stop-loss orders on the books at fifteen five or there abouts involving some hundreds of shares and that to me is a signal that you know we have some people that are in my view are not really the kind of owners that we would like to attract because why somebody wants to put in an order to sell something for fifteen thousand five hundred that they don't want to sell at sixteen thousand it's beyond me but and that the idea of people using stop-loss orders with Berkshire obviously it tells me that we've got some people in that that are using it as a trading vehicle of some sort or have some totally non investment type calculations in their mind I don't think we have very many of them but obviously if we have enough people like that you will have a more volatile stock than if you have a whole bunch of people who look at it as something that they're gonna hold for the rest of their life and the stock did go down at that time and hit fifteen thousand five hundred know that word that I think it was close to three hundred shares which is four and a half million dollars with the stock and somebody made a decision apparently that they are some small number of people made a decision that they wanted to sell something at fifteen thousand five hundred and that they could have sold for sixteen thousand the lower it went the better they liked it apparently I mean the better I like the sale which you know as always struck me as like having a house that that you like and you're living in and you know it's worth $100,000 and you tell your broker you know if anybody ever comes along and offers an ID you want to sell it I mean it doesn't make any sense to know but it hasn't I would say that there's been some small I think relatively small tendency for people to get of relatively few people but to get more interested in the price of the stock that in in in in terms of and thinking of it in terms of what it's going to go up or down in the next six months then might formerly been in the case I think we're unusually well blessed in that respect in that in that we've got people who basically one owned for a very long time but to the extent that you get people who were owning it because they think the stock market's going to go up or something of that sort that is that is not good news from our standpoint and it will increase the volatility in it we will do nothing to encourage that zone - yes mr. Buffett Steve Lang from Toronto I was just curious about when you were saying that one of the best things that could happen to shareholders to see the market goes down and you're able to buy good businesses at foolish prices and then a little later on you were saying that that we could judge your ability to do what it is that you feel you should be doing by how much cash you have in the account at any given point in time and by what by the amount of cash that you have in the account in other words I guess what you feel you're supposed to be doing is investing the cash in good businesses so I'm just wondering about that kind of dichotomy where does the cash come from what the market does go down if you've been successful in your first ability would that be from the cash flow on the operations of the business from the out is that it so so really the success of the company then is is to some degree the fact that you're able to dollar cost average into the market on an ongoing basis is that right well it is that precise but but a way you generate cash in in a considerable amount so that we will not husband cash simply because we think the market is going to go down or to buy something but obviously as cash comes in we're always looking for things to do and the cheaper that the the market is generally the more likely it is that we will find something that we understand that we like and that the price will be attractive and that we will do but it isn't like we can change around the whole portfolio then because that doesn't gain us anything I mean we'd be selling things at lower prices to buy things at lower prices but to the extent that we have net cash coming in which we do in which we will have unbalanced we're you know we are adding to our businesses at more attractive prices than would be the other case and it's no prediction on any given company I mean whether it's Gillette or coke or and it might be something we already own it might be something we don't own but we welcome the chance to to to buy more shares we're not wishing it on anybody but if you asked us next month whether Berkshire would be better off if the whole stock market were down 50% or where it is now we would be better off if it was down 50% whether we had any cash on hand now or not because we would be generating cash to buy things zone 3 Byron R and steel from Raleigh North Carolina thanks for your hospitality this weekend but we thank you for coming to my question concerns solomon inc and more specifically Salomon Brothers I know that you own the board of directors I think from 87 to the current time very much interested in compensation day and maybe on the compensation committee between 1987 and 1992 Solomon's financial results were quite dismal in a very lumpy way but overall quite discipline in your opinion if the compensation had been rational during this time would Solomon have shown results that would make it a quite decent business with Solomon to come and if the past compensation been wrong irrational decisions had been more rational eighty-seven to the current time would Solomon have done better you is that it yes well I wouldn't yeah I would I would say that that if if the present people and the present compensation philosophy which allows for very large payments for very large results I think I think the company would have done better now it you're going to see very big numbers paid in Wall Street that is a nature but the the trick is to pay him only when you're getting very big results for the owners I mean that there's no way you're going to pay numbers that look like numbers and other industries and get great results for owners but if you pay these big numbers I think you should be getting very good results for owners and they're the old system was not I mean it was it it wasn't totally off the mark on that but it was it was far from an ideal system in my view man its own one born I have one question plants here you were using coca-cola puts as a way to increase income and conversely if they were excised as a way of increasing your position do you still use puts in its type on investments you wish they had to five million shares as I remember of coke sometime early fall or thereby the norm over exactly the last year and the puts I think the premium was around seven and a half million dollars and they're priced around thirty five we have not done that very often and we're unlikely to do very much of it for one thing there are position limits on puts which don't apply to us but they apply to the brokers which we do them and and those position limits were not clear before that but we could we could probably write puts on that same amount by doing it through a bunch of different brokers it's not something we're really very like to do I was happy to do it and and in that particular case we made seven and a half million dollars but we're better off probably if we like something well enough to write a put on it we're probably better off applying the security itself and and particularly since we can't do it in the kind of quantities that really would make it meaningful to Berkshire there are securities I would not mind writing puts for 10 million shares or something but I added that probably it's probably allowable for us to do it it's not allowed we probably have to do it through multiple brokers to get the job done and I'm balanced I don't think it's as useful a way to spend my time as just looking for securities to buy outright Charlie do you know zone 2 mr. puppet I'm I'm from West Point my name is Rogers a couple of months ago there were stories in the World Herald that Berkshire Hathaway had taken a large position in Philip Morris and UST but in your annual report I don't see anything about that and you can you are card comment yeah I would say in the last two years maybe I'm just approximating have probably seen reports and either the Wall Street Journal USA Today may be picked up by The Associated Press or in The Herald but in papers of some significance probably seen stories that we were buying maybe any one of ten companies in aggregate over that period of time I would say a significant majority were erroneous we don't correct the erroneous ones because if we don't correct the erroneous ones if we correct the erroneous ones and don't say anything about the correct ones in effect we're identifying the correct ones too so we will never comment on those stories no matter how ridiculous they are and it's interesting because you know they keep getting printed and frankly from our standpoint the fact that most of them are inaccurate is probably useful to us we don't do anything to encourage it but it the fact that people are reading that we are buying ABC or XYZ when we aren't you know that's IIIi don't think people should be buying stocks because they're reading in the paper that we're buying something but if they do they may get they may get cured of it at some point maybe the newspapers will even get cured of writing the stories when they don't know well you know what the facts are but but it's something will we live with and we'll probably continue to live with and I would say that based on history if you read something about us buying or selling something other than through reports we've filed with the SEC or regulatory bodies the chances are well over 50% that I can tell you based on history is correct well over 50% that it's wrong zone 3 do you expect that Berkshire would become one of the standard in 500 stocks or dodging stock well I think it's not likely ever it becomes a Dow Jones site I don't know what the criteria are for the S&P 500 but I imagine there's some reason why we don't fit I don't know whether they have questions about number of shares outstanding or I've never I've never checked with S&P I wouldn't be surprised if we are have the largest market capitalization of any company that isn't in the S&P although I don't know that but they may have some criteria variety that that that clued Berkshire being part of it I've always thought to be very interesting for those of you who like to think about such things that if we were part of the S&P 500 and enough people became indexed so that 60% of the market was indexed and if Charlie and I wouldn't sell which we wouldn't it be and it'd be an interesting proposition as to how the how the index funds would ever get there 60% if they tried to replicate the SNP it'd be I don't know whether they have rules even about concentration of ownership that same line of thing he might have applied to Walmart or some company cuz just take the extreme example of a company that had 90 percent of its stock owned by one individual and 12 percent of the money in the market were indexed and the 90 percent wouldn't sell it would bring back the Northern Pacific corner or something of the sort in any event I don't think that's gonna be a problem and and I don't think we are going to end up being in either index zone one mr. Buffett my name is Aaron Morris I'm from California what I wanted to know was how you think about how large a position you're willing to take in a given security both in your case where you view cash coming in that you can invest and in a case of an investor where they have a fixed amount of capital and they're trying to decide what's the most dickship in the security that they really love well Charlie and I have probably at our present size we will never find anything that we get as much money into as we want anything that's probably true surely if we were really like it yeah I think that's quite like yeah so you we will probably never hit the limit we would we would love to we'd love to find something we felt that strongly about it and occasionally we do but we won't we won't get as much money into it as we would wish or as if we were running a million dollars of our own money or some number like that so we are willing to put a lot of money into a single security when I ran the partnership the limit I got to was about 40 percent in a single stock I think Charlie when you ran your partnership you had more than 40 percent sure and we would do the same thing if we were running smaller partnerships or our own capital were smaller and we were running that ourselves because now we're not going to do that unless we think we understand the business very well and we think that the the nature of the business what we're paying for it the people running and all of that lead up to virtually no risk and but you find those things occasionally and we would put assuming it were that much more attractive than the second third and fourth choices we would put a big percentage of our our net worth in it we only advise you to do that well probably don't advise you to do it at all maybe but but we would only advise you to do it if you're doing it based on your own conclusions about the own ideas of value and something that you really feel you know enough to buy the whole business that if your funds were sufficient and was being offered to you ought to really understand the business but people do that all the time incidentally in private businesses which it got terrible prospect I mean baby by dry cleaning establishments or filling stations or whatever they put very hyper franchises of some kind to put a very high percentage of their net worth into something a business is very risky basically I mean it it they people put all their money in a farm that it's a business it's subject to all kinds of business risks so it it's not crazy if you understand the business well and if the price is sufficiently attractive to put a very significant percentage of your network then if you don't understand businesses then you're better off diversifying and and fairly widely diversifying sorry Berkshire has a substantial shareholder whose father accumulated the original position and when he died he left a very large estate correctly all of which was in to securities Berkshire and one other outstanding company and a bank was Co trustee and the Bank trust officer said you've got a diverse way this and it was a very large estate and the young man who was Co trustee with the bank said well he said look my father had believed the way you do he might have been a trust officer Bank instead of leaving this large estate and that young man holds the virtue to this day and I suppose the bank is still giving the same advice John Cho mr. Belford this is Chuck Peterson from Omaha and I was just wondering if you could comment on the coca-cola company haven't really talked about it too much today in regards to what you foresee over the next five years earnings per share growth and where this growth is perhaps going to come from was that the question might throw off the coke yeah you really have to come to your own conclusion coca-cola company writes their and reports are extremely good I mean they're very informative you know you my guess is that at least if you read a few of the reports you absolutely knows much about the coca-cola company as I would but but in the end you have to you have to make your own decisions about growth potential profitability potential and all that but the one thing I can assure you is that probably not if you spend a relatively small amount of time on it the facts that you will have available to you for making a decision on that question will be will be just as good essentially as the fact you get if you worked at the coca-cola company for 20 years or if you are a food and beverage analyst in Wall Street or anything of the sort that's the kind of businesses we like to look at are things that we think we can understand that way and there and there are also businesses that usually I think you could understand that way but we don't like you to give you our answers I mean that that would not be a good idea Zelda Frey David does I'm sorry David swab from Austin Texas I have a question pertaining to the convertible bonds that were outstanding for about four years any thoughts on if you're a teacher to grade if that was a good deal that deal how money was applied compared to the cost of getting out of the bonds any thoughts we also know if you think in retrospect your deal with the liens was a good deal for Berkshire no I would say that that if I knew everything at the time that we did the liens day which was a convertible Sharyl coupon debenture if I knew everything now then that I know now would we have known him probably pretty close we had relatively few bonds converted when we called want to call them and so that it really wasn't a negative in that sense but if if we'd had more common we could have easily had a lot more converted and and that would not have been so good obviously if we ended up selling a lot of stock at eleven thousand eight hundred or whatever it was it's very hard to measure exactly what we did with a four hundred million or so that that we took in at the time so I money being fungible separating that 400 million from other resources to measure the what happened on the plus side from having the money is hard to do but my guess is if you could play the whole hand over again it probably was a maybe a tiny - to have issued him what do you think Charlie it's certainly close to a wash now you can ask about us Aaron that is one we would have been welded up and I might say Charlie had nothing to do with that decision he didn't even know about it till I did it and when he knew about it John one man just with respect to Berkshires large non-permanent Holdings that are therefore liquid I'm just wondering what your strategy is for managing market impact when you do decide to sell portions of those holdings given the intense scrutiny you're under question about the things we might sell and what's going to happen to the market when we sell them that depends I mean it can be a very significant impact it can be a it can be a negligible impact and depends on market conditions it depends on whether we might sell in a couple of large blocks to some institutions it depends on them it could be you know there could be a tender offer or something that sort we would sell through so it's hard to measure but it is a disadvantage size is a disadvantage you're absolutely correct in the basic point both in buying and in selling and we don't know any way around that so we allow for it in terms of what we expect you know the kind of possibilities we need to say and we do we sell so infrequently that it it's it's not a crusher of a negative point but it's it's a negative we have that you do not don't burst your hands away any of its subsidiaries have keyman insurance on you and Berkshire have keyman insurance on oh no no we have no we have no no life insurance to my knowledge on anyone except the maybe standard of the group life contracts people that we have no keyman insurance it really it really doesn't it wouldn't be material I mean if we have a market value of 18 billion or something like that either if it really didn't if a what if it made a 1% difference at the 180 million dollars and basically the math of intelligently selling insurance is better than the math intelligently buying insurance zone three mr. Buffett I'm Barry Siskin from Mesa Arizona a longtime admirer of yours question pertains to Guinness I remember reading in a publication I greatly respect asked outstanding investor digest by Henry Emerson New York that back in I think it was 58 or 59 you made a investment in Cuba decided never to make an investment outside the United States again at that time have subsequently invested in Guinness I'm a fellow investor in Guinness have invested in Guinness for andthat's sister company Louis Vuitton Moen Hennessy for over five years and I'm very happy with those investments by the way there's been a restructuring as you know of the Guinness LVMH relationship where Guinness no longer owns 24% of LVMH rather it owns only its distilling or I should say alcoholic beverage related moments are right the mo a Hennessy part the other parts of LVM matric are showing better results these days namely the Louis Vuitton luggage as well as the Christians you are perfume they've also expanded into the newspaper business's past year business that you understand do you intend to look at the possibility first of all of participating in those businesses that you no longer own now with the restructured Guinness LVMH deal through some other form and the second question relates to the currency risk inherent in the Guinness investment having bought it at about a dollar eighty as you mentioned pound sterling now down to about a dollar forty-eight the cost of hedging foreign currency through the FX has diminished through the combination of lower interest rates in the UK and the higher interest rates most recently in the u.s. to just about zero I take over all investors in companies not speculators and currencies so the second part of the question is do you intend to do anything about the currency risk portion of that investment well LVMH which is you mentioned with 24% owned by Guinness you know that's one of thousands of securities that we could be a buyer or seller so I really don't want to comment on LVMH s specific attractiveness or lack thereof and get us I think what Guinness did was quite like I mean their their interest in that operation was basically through the distribution advantages that it gave to guinnesses own brands around the world to be hooked up with Moet Hennessy and vice versa so I think what they did was logical you can the question of the exchange rate and all of that the exchange rate in terms of what they got in the in the spirits business versus what they gave up in the luggage businesses and christian dior and a few things or you can you can form your own opinion on that but i think the logic was was sound but in terms of whether we want to be an LVMH by itself that's that's like any other security which we really can't we really can't answer second question related to hedging yeah the hedge the answer to the answer to that is we don't and and and coca-cola as I mentioned gets 80% their earnings from a variety of currencies the yen and the mark being two very important ones they're going to be getting a very high percentage of five years from now ten years from now they do certain currency transactions but it's a practical matter if you own coca-cola you own a bunch of foreign bonds with coupons on them denominated in local currencies that go on forever now should you try and engage in currency swaps on all those coupons you don't know what those coupons are yet because you don't know how much they're gonna earn in Japan or Germany but you do know it's going to go on for decades and they're gonna be very significant sums should you try and engage in a whole bunch of currency to go on out and convert all that stream into dollars and we basically don't think it's worth it we don't think our opinion on currencies is any good we don't think we think the market probably know what we know it knows as much about it probably knows more about currencies but it was we don't know we do not know more than the market does about currency so there are costs to hedging and even though interest rate structures may cause the the curve to look flat going out forward so that in effect there's no contango on it it's still there's still the cost that there are costs in it now it's a relatively efficient market so that they're not huge but we see no reason to incur those costs with what we regard as a totally a 50/50 proposition and it really doesn't go out that far anyway I mean we could do it for a couple of years but if you take that way we look at businesses being the discounted flow of future cash out between now and Judgment Day we can't really hedge that kind of a risk any way we could keep rolling hedges but there's a cost to it that we don't want to occur we don't we wouldn't worry a whole lot about whether some portion of earnings whether it's from Guiness whether it's from Coke whether it's from Gillette are denominated some mixture of marks and pounds and yen and dollars or whether they're all in dollars we'd slightly preferred it we're all in dollars but we don't we don't lose sleep over the fact that it may be coming from a mix of currencies like that we wouldn't like it in terms of obviously some very weak currencies so on one Lawrence ROM in Mill Valley California on page 13 of the annual report in Canton talking about the insurance operation you say that it possesses an intrinsic value that exceeds its book value by a large amount larger in fact that is the case at any other Berkshire business to refine an earlier question that was asked could you tell me whether you mean that it is larger in by a percentage or an absolute dollars that is by by absolute dollars and that's what you're referring by absolutely it's very hard to stick a percentage figure on the insurance business because we have so much capital in there that that and and and then and we have other businesses I think that the we've got we've got businesses with a book value of of in the tens of millions that are worth in the many hundreds of millions so you can't you couldn't apply that to the insurance company base by so it's absolute dollars but in terms of absolute dollars we think the excess of intrinsic value over carrying value at least I do is substantially greater for the insurance business than any other business we own Charlie do you have any no that's exactly right Joe little love Vancouver Canada does the management succession issue for the top job at coca-cola concern you manufacture you do what with a the management succession issue over the next several years oh yeah Joe : I think any announcement that will from that would come with from coca-cola he said do you like it does it concern you oh I'm not concerned at all no now coca-cola is very well managed Don three yeah Chris Stavrou from New York according to the latest Solomon brothers proxy if Derek earns 30 percent on allocated equity of Salomon Brothers provided that that's at least 10 percent above the return for competitors he could earn a bonus of twenty four million dollars my question is whether that return number is is reduced by a charge for preferred dividends I remember in the confirmation I can't remember the detail well I think the equity I'm fairly sure but I'm not positive that the equity figure would include our preferred but not non convertible preferred and it would apply to the earnings applicable to the to our preferred plus common but not but it would it would be after after dividends on non convertible preferred but I you know I I'm not on the comp committee and I have not read the the description that carefully well I am and I can't remember well I will tell you one thing I do remember about that and that is a target which would be one would be hellishly hard to hit yeah I'm believable I mean that is you're talking about Babe Ruth squirt yeah doing 150 home runs in a season instead of both if that happens you you'll be very glad to pay the money we're either under either under either calculation yeah and it really it but it you know I'm glad it's there I hope Derek's back attention to it don't one yeah Chris Davis again from New York I wanted to ask if you I feel there's such a huge discrepancy between the valuation of some of your holdings versus others in terms of the market valuation in terms of price to earnings price-to-book in your opinion do the growth prospects of Salomon Brothers or the quality or your anticipation of your ability to clip the coupons that Salomon Brothers justify such a dramatic discount to the growth prospects of coca-cola or Gillette in terms of our ability as Berkshire shareholders to clip those coupons and if you could explain or perhaps share your thoughts on why the market perception if it is justifies that that distinction yeah I'm not sure I can answer that question without getting into a discussion of the relative merits of the two companies or the three companies you mentioned at these prices but Salomon and coca-cola are obviously very different kinds of businesses or Salomon and Gillette and Charlie and I do our best to to try to understand the businesses obviously it's easier to understand the future of a coca-cola than it is the Salomon but that doesn't mean it's a better buy and what you see at any given time in our holdings is partly the historical accident even of of when we bought and when we had money available and all that but it reflected an affirmative decision at that point obviously and our guests would be that that you know we would feel reasonably good about anything that that we owned in terms of the price at which we bought it and the facts of the time we bought it and the facts change over time Salomon I think is a a better company now than it was some years back but it's still in a business that's can be very volatile and it has a small amount as does any investment banking firm and as any commercial banking firm of systemic risk coming you can't get rid of that Charlie you wanna know I've got nothing dad so um - Thank You Sean Barie Regina Canada mr. Buffett you've indicated that most of us in this room could acquire a lot of the information that you and Charlie acquired through the annual reports yet you both also indicated that the GAAP rules a lot of times leave a little to be desired could you perhaps give an indication as to how you and Charlie come up with the economic value or the intrinsic value of the businesses that you finally decide to invest in and and a little bit about the process that you go through that thank you well lyac you know weighted in in the 1992 annual report we discussed that a fair amount but the economic value of any asset essentially is the is the present value the appropriate interest rate of all the future streams of cash going in or out of the business and there are all kinds of businesses that Charlie and I don't think we have the faintest idea what that that future stream will look like and if we don't have a faintest idea what the future stream is going to look like we don't have the faintest idea what it's worth now now that so if you think you know what the price of a stock should be today but you don't think you have any idea what the stream of cash will be over the next 20 years you've got cognitive dissonance I guess is what they call it they so we are looking for things where we feel fairly high degree of probability that we can come within a range of of looking at those numbers out over a period of time and then we discount them back and we are more concerned with the certainty of those numbers than we are with getting the one that looks absolutely the cheapest but based upon numbers that we don't have to any they don't have great confidence in and that's that's basically what economic value is all about the numbers in any accounting report mean nothing per se is the economic value they are guidelines to tell you something about how to get at economic value but they don't tell you anything it there are no answers in the financial statements there are there are guidelines to enable you to figure out the answer and to figure out that answer you have to understand something about business you don't have to understand a lot about mathematics and in the math isn't it's not complicated but you do have to understand something about the business but that's the same thing you would do if you're going to buy an apartment house or a farm or any other small business you might be interested in you would try to figure out what you are laying out currently and what you're likely to get back over time and how certain you felt about getting it and how it compared to other alternatives that's all we do we just do it with with large businesses basically the account the county figures are very helpful to us in the sense that they they generally guide us to to what we should be thinking about and and and of course if we find numbers where it looks like people are are taking the most optimistic interpretation of things that they can under GAAP on all of that we get very worried about people who who look like they massage the numbers in any way and there are plenty of people that do so I'm free I'm Howard Baskin from Kansas City when you are estimating a growth rate on a company I'm at a very predictable company I imagine you apply a big margin of safety to it what kind of rate do you generally apply I mean high single digits in the margin of safety of what kind of growth rate would you on a predictable company might you we are willing to make things aren't going to grow at all okay assuming we get enough for our money one way when we do it so it it we are not looking we're looking at the ejected numbers out as to what kind of cash we think we'll get back over time but you know would you rather have a savings if you're gonna put a million dollars in the savings account would you rather have something that paid you ten percent a year and never changed or would you rather have something that paid you two percent a year and increased at ten percent a year you can you can work out the math to answer those questions but you can you can certainly have a situation where there's absolutely no growth in the business and it's a much better investment than some company that's going to grow at very substantial rates particularly if they're going to need capital in order to grow there's a huge difference in the business that grows and requires a lot of capital to do so in the business the crows and doesn't require capital and I would say that generally financial analysts do not give adequate weight to the to the difference in those in fact it's amazing how little attention is paid to that believe me if you're investing you should pay a lot of attention to it Charlie hey I agree with that but it it's fairly simple but it's not so simple it can all be explained in one sentence are some of our best businesses that we owned outright don't grow but they they they throw off lots of money which we can use to buy something else and therefore our capital is growing without physical growth being in the business and we are much better off being in that kind of a situation being in at some business that itself is growing but it takes up all the money in order to grow and doesn't produce that high returns as we go along a lot of management's don't understand that very well actually someone fired weaned from New York you said that you decentralize the operating decisions but centralize the capital allocation decisions what kind of staff do you have in mind Omaha to help you with the capital allocation decisions and the stock selection decisions you make or do you and Charlie do that pretty much by ourselves yeah we don't have any staff to help us on it I mean basically we we tell them to mail all the money to Omaha and then when we get there we put our arms around it and we allocate all the capital ourselves I mean that is that is our job and we don't feel we should delegate I mean we wouldn't do it anyway our personalities are such that we would delegate our allocating our own money to someone letting somebody else allocate our own money but but we feel that's our job and and it's interesting and we've I've written about this in the past that that's an important job for most management's there are some companies where it's not but it's it it usually is a very important job for most management's and if you take a CEO that's in a job for 10 years and he has a business that earns say 12% on equity and he's and he and he pays out 1/3 that means he's got 8% per year of equity I mean when you think of this tenure in office how much capital is allocated it's it's an enormous factor over time and yet probably relatively few chief executives are either trained for or or are selected on the basis of their ability to allocate capital I mean they get there through other routes so I've set it to like you know somebody playing the piano all their life and then getting to Carnegie Hall and they hand them a violin I mean it is it is it is a different function than most than the route then the functions that exist along the routes to the CEOs job and most companies and so many CEOs when they get there think they can solve it by either having a staff that does it or by by by hiring consultants or whatever it may be and and in our view that is you know that's a terrible mistake because it's it is if not the key function of the CEO it's one of two or three key key functions that say 80 or 90% of all companies and if you can't do it yourself you're gonna make a lot of mistakes you may make a lot of mistakes even if you do it yourself but if you you know you wouldn't want anybody in any other position of that importance in the company essentially saying I don't know how to do this so I'm going to have somebody else do it when it's their key responsibility but that's the way it works in business and Charlie and I take responsibility for all capital allocation decisions other than just sort of routine expenditures of the at the operating businesses and we don't get into those at all I mean if if our managers are spending three or four million dollars a year on machinery or one of them is I mean on machinery equipment plants new leases we have no review process on that we we don't have a staff at headquarters we don't we don't waste the time to do that we we think those people know how to allocate but the money that relates to the actual operations their business with we think in terms of the capital that is generated above that but that's that's our job Charlie yeah yeah I would say we have practically nobody at headquarters in Omaha one of the reasons Warren shines up so well is you know he's being compared to practically nobody I might say if one interesting when we're having this meeting for example I think there's one person there in the office I mean the rest of her brother are down here helping on the meeting I'm here yeah here we are Lauren and I are selling candy and encyclopedias and so forth the chief financial officer of Berkshire Hathaway is handling the microphones I mean this makes Southwest Airlines look like they don't understand cost and filling up cost accounting it's a very old fashioned place and by the way speaking of hawking our merchandise if any of you have safety deposit boxes full of Berkshire Hathaway certificates and have children or grandchildren who don't have worldbook and printed in the house you are making a very serious error that is a marvelous thing for to have in the household and the disciplic like the discount only applies today I think that's right it is that is it it may not be sewing too well because of the current vogue for encyclopedias on computers and by the way those encyclopedias that are available are inferior compared to a world book which is very user-friendly for children and I like it that way myself and that is one product you really oughta buy we both use it personally I mean I I keep a set up the office in a set at home and I am I giveaway where that product than any other product that Berkshire Hathaway makes in any subsidiary it's a perfectly fabulous human achievement the editor thing to make that user-friendly with that much wisdom encapsulated it's a fabulous thing so on to Patrick on from Houston Texas from time to time you have quoted John Maynard Keynes the British economist so I would assume that you have read with investment writing very extensively what are two or three investment relations in your opinion one can learn from that economics well I forget which I think it's chapter eight of the general theory remember general here's a chimp know there's one chapter in the general theory that relates to the markets and the psychology of markets and the behavior market participants and so on there probably is aside from Ben Graham's to chapters 8 and 20 and the intelligent investor I think I think you'll find we've got as much wisdom from reading that as anything written in investments and you'll know it when you see it in the general theory it's a chapter that jumps out to you about the securities and so on and I could be chapter eight but I may be wrong on that but I would I would recommend reading that Keynes and Graham from vastly different starting points came to the same conclusion at about the same time in the 30s as to the soundest way to invest over time they differed some on their ideas on diversification Keynes believed in diversifying far less than did Graham but Keynes started off for the wrong theory I would say in the 20s and essentially tried to predict business cycles and markets and and then shifted to fundamental analysis of businesses in the 30s and did extremely well and about the same time Graham was writing as this first material I I think Janet lo in her book on Ben Graham actually has a little correspondence that took place between Cain said that so I would advise you to read agree that and there's some letters of his that he got Keynes's that he wrote to co-trustees of life insurance societies and colleges and so on that I think you'd find interesting - its 1:15 and Charlie and I have to go to our directors meeting at Berkshire which starts in about 15 minutes so we thank you all for coming [Applause]

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Keywords: Warren bufett, warren buffet, BRKA, BRKB, Interest, Rates, Investing, Investor, Omaha, Insurance, Value investing, Economics, Analysis, Benjamin Franklin, AGM, Derivatives, management, Berkshire 1994, Stock split, Stock splits, Charlie, Munger, Charles, 1994, 94, Annual meeting, Hathaway

Id: fjXZbW8ALRA

Length: 200min 12sec (12012 seconds)

Published: Wed Jun 20 2018