2001 Berkshire Hathaway Annual Meeting (Full Version)

right and y Andy if you're here you can stand up uh I think the crowd would like to say thanks [Applause] we have one others will guest who uh after uh doing uh an incredible job for uh all Berkshire shareholders and particularly for Charlie and Maine uh uh roushay uh retired this year but Ralph and Lucy I believe are hearing Ralph and Lucy would stand up by the shareholders within I would like to say thanks [Applause] thank you Scott petzer was one of the best Acquisitions we ever made but the the reason it was the among the very best was uh was Ralph and a great many of the other companies that we own now uh uh our ownership was made possible because of the profit that Ralph delivered over the years so thanks very much Ralph now we will come to order I will go through this fast I'm Warren Buffett chairman of the board of directors of the company and I welcome you to this 2001 annual meeting of shareholders I will first introduce the Berkshire Hathaway directors that are present in addition to myself first of all of course it's Charlie on my left and the field the directors will stand when I give your name Howard Buffett Susan Buffett she was the voice on the on the songs the ones that were sang a song well Malcolm G Chase Ronald l Olson and Walter Scott Jr also with us today are Partners in The Firm of Deloitte and touch our Auditors they are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire Mr Forest crutter secretary Berkshire and he will make a written record of the proceedings as Becky amick has been appointed an inspector of Elections at this meeting she will certify to the count of votes casting the election for directors the name proxy holders for this meeting are Walter Scott Jr and Mark D Hamburg we will conduct the business of the meeting and then adjourn the formal meeting after that we will entertain questions that you might have does the Secretary have a report of the number of the number of Berkshire shares outstanding entitled to vote and represented at the meeting yes I do as indicated in the proxy statement that accompanied the notice of this meeting that was sent by first class mail to all shareholders of record on March 2 2001 being the record date for this meeting there were 1 million 343 041 shares of Class A Berkshire Hathaway common stock outstanding with each share and tell to one vote emotions considered at the meeting and five million 505 791 shares of Class B Berkshire Hathaway common stock outstanding with each year entitled to 1 200th of a one vote emotions considered at the meeting of that number one million 116 384 Class A shares and four million 507 896 Class B shares are represented at this meeting by proxies return through Thursday evening April 26th thank you that number represents a quorum and we'll therefore directly proceed with the meeting first order of business will be a reading of the minutes of the last meeting of shareholders I recognize Mr Walter Scott Jr who will place a motion before the meeting I move that the reading in the minutes the last meeting the shareholders be dispensed with do I hear a second the motion has been moved and second are there any comments or questions we will vote on this motion by Voice vote all those in favor say aye opposed say bye I'm leaving uh the motion is carried the first item of business of this meeting is to elect directors if a shareholders president who wishes to withdraw proxy previously sent in and vote in person on the election of directors he or she may do so also if any shareholder that is president has not turned into proxy and desires a ballot in order to vote in person you may do so if you wish to do this please identify yourself to meeting officials in the aisles who will furnish a ballot to you with those persons Desiring ballots please identify themselves that we may distribute them I now recognize Mr Waller Scott Jr in a place of motion before the meeting with respect to election of directors I move the Warren E Buffett Susan T Buffett Howard G Buffett Malcolm G Chase Charles T Munger Ronald l Olson and Walter Scott Jr be elected as directors it has been moved in second of the warranty Buffalo Susan T Buffett Howard G Buffett Malcolm G Chase Charles C Munger Ronald l Olson and Walter Scott Jr be elected as directors are there any other nominations is there any discussion the nominations are ready to be acted upon is there any show on the election of directors and allow the ballots to be delivered to the inspector of election with the proxy holders please also submit the inspector of Elections a ballot on the election of directors voting the proxies in accordance with the instructions they've received is amick when you are ready you may give your report my report is ready the ballot of the proxy holders in response to the proxies that were received through last Thursday evening cast not less than one million one hundred twenty six thousand four hundred eighty votes for each nominee that number far exceeds a majority of the number of the total votes related to all Class A and Class B shares outstanding the certification required by Delaware law of the precise count of the votes including the additional votes to be cast by the proxy holders in response to proxies delivered at this meeting as well as those cast in person at this meeting if any will be given to the secretary to be placed with the minutes of this meeting thank you Ms amig warranty Buffett Susan T Buffett Howard G Buffett Malcolm G Chase Charles D Munger Ronald l Olson and Walter Scott Jr have been elected as directors the next item of business was scheduled to be a proposal put forth by Berkshire shareholder Bartlett Naylor on April 20th 2001 Mr Naylor advised us he was withdrawing his proposal accordingly we will not have the proposal presented at this meeting after the German of the business meeting I will respond to questions you may have that relate to the business of Berkshire but do not call for any action at this meeting does anyone have any further business to come before this meeting before we adjourn if not I recognize Mr Walter Scott Jr to place a motion before the meeting I move this meeting be adjourned motion adjourn has been made in second we will vote by Voices there any discussion if not all in favor say aye opposed say no meetings adjourned [Applause] I ask you am I getting slower in my old age now the first we're going to go we have eight eight microphones strategically placed we have the first two on my right far back three and four and over to this back area over here and then up front for the seven and eight and if you have a question just go to the microphone and queue up at the microphone and we'll keep rotating uh like I say until noon then we'll have a break and then we'll start again around 12 30 or thereabouts and go until 3 30. now [Music] first question and in area one we have a we have a special guest the uh I received a letter from Mark Perkins on April 5th uh telling me about his daughter who has been a shareholder since she was six months old and she's going to be four in November and she would like Marietta would like to ask the first question and and frankly uh uh I take all the questions from four-year-olds and Charlie handles them from anybody that can run a little longer so Marietta if you've got the microphone there would you ask your question please unfortunately [Music] her actually her question was um she said she was three and she says Berkshire Hathaway Fistful of Dollars and she says what should we invest in now so that she'll be ready when she goes to college what should she invest in or what should Berkshire invest in and what should Berkshire invest well Berkshire Berkshire would like very much to buy businesses of the same quality and with managements of the same quality and at prices consistent with the eight businesses that we bought over the last 16 or 18 months uh our first preference is and has been for many decades although uh I would say most observers didn't seem to realize it but our first preference has always been to be buying outstanding operating businesses and we've had a little more luck in that respect lately we also own lots of marketable Securities we've bought um many of those for example in the mid 70s that did very well for us but the climate has not been as friendly toward making money out of marketable Securities and we frankly prefer uh we we prefer the activities associated with owning and and operating businesses over time so what we hope to do Marietta's by the time you're ready to go to college I would hope that uh well first of all I hope I'm still around but beyond that I would hope that we would have you'll be ready in about 14 years or so I would hope that we would have another uh maybe 40 businesses or so that would be added and I would hope that we would have every business that we have now and I would hope we would not have more shares outstanding or any at least any appreciable number more shares outstanding if we can get all that done uh I think you'll probably be able to afford College uh Charlie do you have anything to add no and there's some things in life Mary that you can really count on okay let's go to microphone number two good morning Mr Buffett Mr Munger um oh sorry okay if you want to trade a share of Berkshire a for 30 shares of Berkshire B as you had mentioned before a personal stock split or vice versa is this considered a wash sale for tax purposes um also I'd like to ask you a question which you've heard before but in a slightly different context a few years ago you said you had made a mistake by not buying shares of the major pharmaceutical companies around 1993. you cited their value to society as well as their terrific growth High profit margins and great potential you said that while you didn't know which companies would do the best you could have made some kind of sector play because the entire sector had been decimated these exact same words including those about not knowing which businesses will dominate over time can also be used to describe another industry which has recently been decimated this industry is of course technology how do you see these two investment ideas Pharmaceuticals and 93 in technology now and what difference in the two situations makes the first a good opportunity for Berkshire and the second not one well Charlie answers all the questions about mistakes so I will turn the second question over to him foreign I think that the future of the pharmaceutical and this industry was easier to predict uh than the future of the high technology sector in the pharmaceutical sector almost everybody did well and some companies did extremely well in the other sector where there are many permanent casualties in the high-tech sector yeah I would say that there's certainly nothing obvious to us about the fact that the tech sector as a group are imbued in aggregate would be a good buy or be undervalued whereas we should have had enough sense to recognize that the pharmaceutical industry as a group was undervalued but the pharmaceutical industry has a far far better record of Returns on on large amounts of equity over time uh and with a high percentage of the participants uh having those returns uh than the tech industry I wouldn't regard those two as comparable at all your first question about exchanging and whether you have a wash sale and I think you indicated exchanging from b and a if you actually physically have a share of a and turn it in for 30 shares of B that is not a taxable transaction so there there is no sale under such a circumstance if you there would be no reason unless the B was at a significant discount to actually sell the A and and buy the B but I and I'm not giving tax advice on this but I would think that the the I think the tax code refers to substantially identical Securities when they talk about wash sales and I would think that you that the IRS would be entitled to at least raise the question if you had an Asia or you were selling at a loss and replacing it with 30 shares of B you'd have a better argument than if you bought a share of ABAC the next day uh if you were establishing a loss if you're establishing a gain you'd have no reason you know they're not worried about wash sales in that respect you can't go from B to a by exchange but you could go by selling 30 shares of B in the market and buying a share of a again if that were being done at a loss I think I think the IRS could well argue that they were substantially identical but you could argue otherwise Charlie no no I think the IRS would win yeah Charlie might even go States evidence you know if there was a thief Tesla okay let's go to zone three I'm Dan Blum from Seattle Washington as an insurance holding company Berkshire Hathaway is subject to regulation by insurance for your other insurance do business uh has that handicapped or affected your operations in any way and do you have any transient or wise observations to make about governmental regulation in that context yeah we've we've really not been impeded in any way by the fact that Berkshire Hathaway itself is not an insurance company but it owns various insurance companies of course it owns a lot of other companies too but being the holding company of insurance companies which indeed are regulated by the states in which they're admitted um it really is not slowed down any acquisition there they are not whereas with the public utility holding company act under that statute the authorities are uh are directed to be concerned with the activities of the holding company uh and in the banking business to some extent they are in the insurance business there's relatively little uh in the way uh of uh of Regulation that that uh or oversight that extends up to the holding company so it it is not it has not slowed us down in that business but has been reported recently and the electric utility business there's a statute from 1935 the public utility holding company Act uh it's the acronym is that euphonia's term puka um the public utility holding company act has has a lot of rules about uh what the parent company could do and that act was was put on the books because the holding companies of the 20s most particularly ones held by other formed by Sam insult but there were others there were many abuses and a good many of those abuses involved what took place at the holding company so it was quite understandable that that Act was passed in the 30s and it achieved a pro-social purpose at the time uh I don't think there's anything frankly pro-social about limiting berkshire's ability to buy into other utilities we can buy up to five percent of the stock but we might well in the last year or two have bought an entire utility business if we're not if that statute weren't present so we're handicapped by the utility holding company statute we are not handicapped in my view by any uh State Insurance statutes Charlie nothing to add zone four good morning good morning Steve Bloomberg from Chicago I have two questions regarding the insurance operations uh with regard to the reinsurance contracts which were written at uh what some consider and call good losses you've discussed those insurance contracts in your report indicating that it's generated 482 million of losses in the year 2000. do we need an annual schedule disclosing the aggregate amortized charges of all current and past such deals to make our adjustments to reflect economic reality well there are two unusual type deals and you refer to to one type what I call the pain today gain tomorrow or good losses type deals and and under the deals you're describing we record a usually quite significant loss in the current year and then we have the use of float for many years to come and there are no subsequent charges against that so in respect to those contracts the important thing is that we tell you and we should tell you really every quarter if they're significant and certainly yearly any any significant items that fall in that category and as you mentioned you know we had over 400 million last year we had a significant amount the year before we have not had a significant amount this year I think in the first quarter there may have been a 12 million dollar charge for one of those uh if they're significant we're going to tell you about them it's a one-time adjustment in your mind that in effect uh should you should regard as different than any other type of underwriting loss that we experience because we willingly enter into these we take the hit the first year uh and accounting uh calls for that and over the life of the contract we expect to make money uh and and our experience would be that we do make money uh but we'll tell you about any significant item of that sort so that you will be able to make an adjustment cost a float last year at six percent which is high it's not unbearable but it's high very high and included in that six percent cost was um about about a quarter of it came from these transactions uh that distorted the current year figure and therefore our our cost of float if we hadn't willingly engaged in those transactions would have been about four and a half percent I should mention to you that I expect that our cost to float I said in the annual report that absent Omega catastrophe and I might Define a mega catastrophe is insured losses will say of 20 billion or more something on that order uh absent Omega catastrophe uh we expected our cost to float to come down this year and I said perhaps substantially uh in the first quarter our cost of float will probably run Just a Touch under uh three percent and on an annualized basis and I think that I think the trend is in that direction absent Omega catastrophe I would expect the cost of float actually to come down substantially this year but if we were to take on some of these gain a pain today gain tomorrow transactions and we don't have any in the works at the moment but if we were to take those on then then it would be reflected in our cost of float and we would lay out the impact of that uh sort of transaction Charlie yeah I think almost all good businesses uh have occasions where they're making today look a little worse than today would otherwise be to help tomorrow so I I regard these transactions as very much the friends of the shareholders we have a second type of transaction just to complete which we also described in the report which also creates a large amount of float but where accounting rules spread the cost of that transaction over the life of the float and those do not distort the current year figures but they do create an annual charge that exists throughout the life of float and that charge with us is running something over 300 million dollars a year but there again it's a transaction that we we willingly and and enthusiastically engaged in and that has this annual cost attached to it so when you see our cost of flow to three percent annualized in the first quarter it includes probably uh 80 million dollar charge or so relative to those retroactive insurance contracts were those which were the second kind described in the report I recognize this accounting is you know and even the transactions are somewhat Greek to some of you but but they are important in in respect to Berkshire so we do want to lay them out in in the annual report for those who want to do their own calculations of intrinsic value zone five good morning gentlemen my name is Jay Parker I'm from Washington State and this question regards uh mistakes so that being the case it should probably be directed to Mr manga Mr manga I know you're fond of uh evoking humility to promote rational thought so my question is what's the most recent business mistake that you've made Mr monger and why did it occur I'm going to take notes on this one the mistakes that have been most extreme in bercher's history are mistakes of omission they don't show up in our figures they show up in opportunity costs in other words we we have opportunities we almost do it in retrospect we can tell that we were very much mistaken not to do it in terms of the shareholders those are the ones in our history that it really cost the most and very few managements do much thinking or talking about opportunity costs but Warren we have blown billions and billions and billions I might as well say it you're right right and we keep doing it some might say we're getting better at it [Applause] I don't like mentioning the specific companies because the you know we may in due course want to but do so at our price but uh practically everywhere in in life and then corporate life too what really costs in comparison with what easily might have been are the blown opportunities I mean it just it's an awesome amount of money when I was somewhat younger I was offered 300 shares of bell reach oil an idiot could have told it was no possibility of losing money in a large possibility of making money I bought it the guy called me back three days later and offered me 1500 more shares but this time I had to sell something to buy the Damned beverage oil that mistake if you traced it through has cost me 200 million dollars and I it was all because I I had to go to a slight inconvenience and sell something Berkshire does that kind of thing too we never get over it yeah I might add that when we speak of irritable of omission of which we've had plenty and some very big ones we don't mean not buying some stock where we a friend runs it or we know the name and it went from one to a hundred that doesn't mean anything it's only we only regard errors as being things that are within our circle of competence so if somebody knows how to make money in cocoa beans or they know how money would make money in a software company or anything and and we miss that that is not an error as far as we're concerned what's an error is when it's something we understand and we stand there and stare at it and we don't do anything or worse yet what really gets me is when we do something very small with it we do an eye dropper's worth of it a one we could do it very big Charlie refers to that elegantly when I do that sort of thing is when I'm sucking my thumb uh and they're really I mean we have we have we have been thumb suckers uh at times with businesses that we understood well and it may have been because we started buying and the price moved up a little and and we waited around hoping we would get more at the price we originally started there could be a lot of things uh but those are those are huge mistakes conventional accounting of course does not pick those up at all but but uh they're in our scorebook zone six please my name is Joseph lapray I am from Minneapolis Minnesota in recent years tobacco companies have been compelled to pay large damages for marketing they're unhealthy but discretionary products my question has two parts first does the potential for similar damage liabilities reduce the intrinsic value of Coca-Cola Seas candies Dairy Queen or any other business which sells discretionary products of questionable healthfulness not that I don't like these products and second are either of you concerned that a possible erosion in the principle of caveat emptor is undermining the legal basis of contracts in general thank you for taking my question the products you described I've been living on for 70 years so they'll probably haul me in on as a witness if I uh that they don't do much damage no I I I think if you know if you're if you're opposed to sugar and the I think the average human being eats something like 550 pounds dry weight of of a food a year and I think 125 pounds are thereabouts okay it consists of sugar in one form or another I mean it's it's in practically every product that you have and it happens to be in Coca-Cola it happens to be in C's candy but it's in practically everything here I mean it's over 20 percent of what Americans are consuming one way or another and you know the the average lifespan of Americans keeps going up so I I I would I would not be worried at all about product liability in in in connection uh with those companies but product liability generally is an area that is a fertile field for the uh the plaintiff's bar and it's we are conscious in buying into businesses and we have passed up some businesses because we were worried about about the product liability potential uh unless there is some legislative solution I think you will see more and more of the GDP going uh uh into liability Awards and uh whether there will be any whether there'll be any change by legislation I don't know but it's it's you know it's a big field and the lottery ticket aspect of it is so attractive because if an attorney can gamble a modest amount of time or even a reasonable amount of time and have a potential payoff of 10 or 20 or maybe in some cases hundreds of millions of dollars you know that that that's a decent lottery ticket who knows what 12 people uh and are going to be on the jury as one of my friends was a lawyer said you know he said Lincoln said you can fool all the people some of the time and all of the uh some of the people all the time and all the people some of the time but not all of them all the time he says I'm just looking for 12 that you can fool all of the time you know and and uh all you have to do is get get an award and the odds are fairly favorable in a nation where lots of zeros have sort of lost meaning to people so it's a very real concern in any business we get into in terms of trying to evaluate uh product liability surely what's particularly pernicious is the uh increasing political power of the plaintiff's contingency bar if you're on a state supreme court in most places you're on for life and if you at least you're on for life if you want to stay for life and the one thing that could get you off the court would be to really irritate some important group and I think that greatly helps a lot of abusive conduct in the courts I think the judges of the country haven't been nearly as tough as they should be on junk science junk economic testimony uh trashy lawyers and I don't see and I don't see many signs that it's getting better in Texas they actually improve the Supreme Court of Texas which really needed it so there are occasional glamorous of light we make our decisions in insurance and in buying businesses with a very pessimistic attitude toward the chances of of that particular ill that Charlie described being even moderated I mean we we think it we would project out that the trend would accelerate but that's just our natural way of a building and a margin of safety uh in decisions don't worry about eating the seeds candy or the Dairy Queen or the coke I uh you know if you read the papers long enough I use a lot of salt and and uh you know I was I was always being warned about that and then you know a few years ago they started saying you know you can't get enough salt and all that I don't know what the answer is but I feel terrific zone seven good morning I'm Murray Cass from Markham Ontario uh the financial Community relies heavily on the PE Ratio when evaluating prospective Investments when you buy a company you must certainly consider not just the future stream of earnings but also the company's Financial condition among other things my financial condition I was speaking mainly of cash and debt but the PE doesn't take into consideration either cash or debt occasionally you see a company with consistently positive free cash flow trading just over cash value effectively giving away the future earnings in cases like this the PE looks terribly overstated unless adjusted for cash and debt I've always preferred companies with Oodles of cash to those burdened with lots of debt and then I read Phil Fisher's book conservative investors sleep well well I haven't slept well since uh he really confused me when he commented that hoarding cash was evil he wrote that instead companies should either put the cash to good use or distribute it to shareholders can I get your thoughts on this well there are times when we're Awash in cash and there have been plenty of times when we didn't have enough cash uh Charlie and I I remember in the late 60s we were when Bank credit was very difficult we were we were looking for money over in the uh in the Middle East remember that's your only yeah thank you yeah and uh they wanted us to repay it in Dinars yeah and the and the guy that wanted us to repaint it and repay him in diners or dinners or whatever the hell they called them uh was also the guy that determined the value of those things so at the we we were not terribly excited about about I'm on payday and having him decide the exchange rate on that date but but we we obviously are looking every day for ways to deploy cash and we would never have cash around just to have cash I mean we would never think that we should have a cash position uh of X percent and frankly I think these asset allocation things that that tacticians in Wall Street put out you know about 60 stocks and 35 we think that's total nonsense uh so we want to have all our money working in decent businesses but sometimes we can't find them or sometimes cash comes in expectedly or sometimes we sell something uh and and we have more cash around that we would like and more cash around being than we would like means that we have 10 or 15 cents around because we we want money employed but we'll never employ just employ it and and and and uh in recent years we've tended to be cash heavy but not because we wanted cash per se in the mid 70s uh uh you know we were scraping around for every dime we could find to buy things we don't like we don't like lots of Leverage and we never will we'll we'll never we'll never we'll never uh borrow lots of money at Berkshire it's just not our style but uh you will you will uh find us quite unhappy over time if if cash just keeps building up and I I think one way or another we'll find ways to use it Charlie I can't add anything to that zone eight good morning my name is Mark Dixon from Sarasota Florida and I'd like to thank you for providing this forum for all of us it's wonderful um in past years you've been very specific about some of the numbers related to Coca-Cola Wells Fargo Rockwood specifically like with Coca-Cola cost of aluminum and sugar and all that it goes into the bottom line of Coca-Cola can you provide some of the specific numbers that go into some of your more recent purchases of the last couple years well they they have such different characteristics that's very difficult I mean we have service businesses such as flight safety and and executive yet as a service business uh and you know in many of those companies the big cost is Personnel I mean we need people with at a flight safety we've got a lot of money invested in simulators we'll put over 200 million dollars into simulators this year just as we did last year so we have a big Capital cost in that business and then we have a big people cost because we are training we are training pilots and that's very person on person intensive netjets part of Executives yet very very people intensive I mean we we we're absolutely no better than the people that interact with with our clientele um you get into something like the carpet business uh and maybe only 15 percent of your revenues will be accounted for by by by uh employment costs and you're a very heavy raw material buyer I mean you're buying lots of fiber and and so it it varies enormously by the kind of business here I mean when we're in the insurance business you know we're in the business of paying future claims and that's our big cost and that's a that obviously involves estimates because sometimes we're we're going to pay the claim 5 10 or 20 years later so we're not going to know about it sometimes still 20 years later so it's very hard to generalize among the businesses if you're in the retail business which we are in the furniture and jewelry in a significant way uh purchased goods are are very obviously very important we don't manufacture our own Goods to any extent in those businesses and then the second cost of course is is is is labor in a business like that but we don't have any Notions as to what we want to buy based on on uh how their costs are segmented what we really are looking for is an enduring competitive Advantage I mean that's that is that's what's going through our mind all the time and then we want obviously top-notch people running the place because we don't we're not going to run a March ourselves so those are those are the two factors we look at we want to understand the cost structure but Charlie and I can understand the cost structure of many companies there's many we can't but we can we can understand a good many companies and we don't really care whether we're buying into a people-intensive business a raw material intensive business a rent intensive business uh we do want to understand it and understand why it's got an edge against its competitors Charlie basically to some extent where like the Hedgehog that knows one big thing if you generate Flows at three percent per annum and buy businesses that earn 13 per annum with the proceeds of the float we have actually figured out that that's a pretty good position to be in took us a long time and I I would hope that we would and actually expect that absent Omega catastrophe that three percent figure will will come down over the next uh well but in the near future but Omega catastrophe could change all of that I mean if you had a if you had a 50 billion dollar insured catastrophe Tokyo earthquake California earthquake Florida hurricane I mean those those were in the business of taking those risks uh we're the largest insurer as you may know of the California earthquake Authority uh uh I have a sister here who is from Carmel and she used to call me when the dogs and cats start running in circles and so we're exposed to some things that uh could change but absent Omega catastrophe uh experiences going in the right way at both at really at all of our insurance companies um uh and I would expect that to continue for a while and then at some point I expected to uh to reverse itself isn't that helpful uh uh area one please good morning I'm Martin Wiegand from Chevy Chase Maryland uh good to have you here Martin thank you thank you for the wonderful shareholder weekend and thank you for the leadership in education you give your shareholders in the General Public my question large airlines are in the news negotiating labor contracts they came they claim they can't pass along Rising labor costs to their customers in the annual report you say executive jet is growing fast and doing great executive jet seems to be able to pass along its Rising labor costs to its customers is this because executive jet has a rational Compensation Plan that keeps employees salaries in line with billable Services if not why does executive jet do well while the airlines experience troubles well the big problem with the airlines is not so much what their aggregate payments will be the the real problem is when when you're in the airline business and your and your wage rates are out of line with your competitors uh when you get right down to it the figure to look at with an airline among a lot of other things but you start with with with with the cost per available seat mile and then you work that through based on the on the capacity utilization to get to the to the revenue person or the cost per per occupied uh seat Mile and the you can you could have labor costs or any other cost you certainly have fuel costs up dramatically for the airlines from a couple of years ago uh as long as you're more efficient than your competitor and your costs are not higher than your competitor people will continue to fly uh it's when you get your costs out of line with your competitor which was the situation that or Charlie and I were directors of US Air a few years back and our cost per seat mile were far higher than competitors and that was fine where we didn't have competitors on some many of the short routes in the East but as a Southwest Airlines would move into our territory and they had costs we'll say of and there's from memory but they might have had a cost of below eight cents a seat Mile and our cost might have been 12 cents a seat mile you know that that is uh you're going to get killed uh eventually they may not get to this route this year but they'll get there next year or the year after uh so if you're running a big Airline at Delta or United or whatever if your costs are on parity or less labor costs then your other major competitors that is much more important to you than the absolute level and uh The Net Jets service is is not is not really uh designed to be competitive with the United Airlines or or an American or something of that sort it has a different group of competitors and uh I think we have a absolutely terrific uh pilot Force there and we want them to be happy but there's a lot of other ways I mean you want to pay them fairly but with our Pilots for example it's extremely important to them uh in many cases to be able to live where they want to and to work the kind of shifts that we can offer so uh we attract them in in many other ways than bidding against United Airlines or American Airlines big thing and you just you can't take labor costs that are materially higher than your competitor uh in a business that has commodity-like characteristics such as Airline seats you just can't do it over time and you can get away with it for a while but sooner or later the nature of a capitalist Society is that the guy with the lower cost comes in and kills you Charlie the Airline unions are really tough and it's interesting to see a group of people that are paid as well as airline pilots it was such a brutally tough Union structure that really makes it hard in a commodity style business and no individual Airline can take a long shutdown without having considerable effects on habit patterns and future prospects it's just a very tough business by its nature passenger rail travel even in a previous era was a pretty tough way to make a book nothing is all that different with the with the airline travel we hope that our services are preferred by customers more than uh one airline seat is preferred compared to another yeah fractional ownership is not a boundary business I mean the people care enormously about uh service and the Assurance of safety and uh I don't think that uh you know I don't think if you were buying a parachute you'd want to take the necessarily take the low bid and and uh now with the big commercial airlines with millions and millions of passengers people I think probably correctly assume that there's quite a similarity uh in both service and safety but uh if you're in a business that cannot take a long strike you're basically playing a game of chicken you know with your labor unions uh because they're going to lose their jobs too if you close down so you're playing a game of chicken periodically and uh it has a lot it's there's a lot of games you know there's a lot of game theory that gets involved to some extent you know the weaker you are the better your bargaining position is because uh if if you're extremely weak uh even a very short strike will put you out of business and the people are on the other side of the negotiating table understand that whereas if you have a fair amount of strength they can they can push you harder but it is a it is no fun being at a business where you cannot take a strike we face that one time back in the early 80s a one there where we were in kind of a death struggle in Buffalo uh with The Courier Express and when I bought the Buffalo News actually Charlie that he was stranded there during a snowstorm and he got bored so he uh he called me and said what should I do I said well you might as well buy the paper and uh so we were in this struggle and when but when we bought the Buffalo News we had two questions of the management and one of them I can't tell you uh but the second one was we wanted to meet with the key union leaders and we wanted to tell them look it if you ever strike us for any links significant length of time we're out of business you know you can you can make our investment valueless so we really want to look you in the eye and see what kind of people you are um before we write this check and we felt quite good about the people and they were good people and we had one situation in 1981 or thereabouts where a very very small Union I think less than two percent of our employees uh struck over an issue that the other 10 or 11 unions really didn't agree with them that much on but they struck in the uh and the other unions observe the picket line which you would expect them to do in a strongly pro-union Town such as Buffalo and I think as I remember they struck on a Monday and I remember leaders of some of the other unions actually with tears in their eyes over this because they they could see it was going to put us out of business and and frankly I just took the position then I said look if you come back in a day I know we're competitive if you come back in a year I know we will not be competitive and if you're smart enough to figure out where exactly the point is that you can push us to and still come back and we have a business and you have jobs I said you're smarter than I am so you know go home and figure it out and uh they came back in on Thursday and and we became very competitive again but they could have I mean it was out of my hands I couldn't make them work and if they decided they were going to stay out long enough we were not going to have a newspaper and that's the kind of situation occasionally you find yourself in and and I would say the airline industry is a good example of people whether people find themselves in that position periodically Charlie have anyone well the shareholders may be interested to know vis-a-b competitive advantages in our netjets program that the day that other Charter plane crashed in Aspen netjets refused to fly into Aspen at all people remember that kind of thing yeah zone two good morning gentlemen David Winters from Mountain Lakes New Jersey thank you for hosting Woodstock for capitalists all right Berkshire seems to have an enormous long-term advantage in spite of its large size and high Equity prices the structure of the company's activities non-callable Capital substantial free cash flow and improving Insurance fundamentals permit Berkshire to capitalize on potential asset price declines and dislocations in financial markets While most investors would not either have the money or the cool Minds to buy am I on the right track here well I I think in certain ways yeah I mean we do have but we do have disadvantages too but we we have we have some significant advantages in in buying businesses over time we would be the preferred purchaser I think for a reasonable number of private companies and and and public companies as well and we our checks clear so we we will we will always have the money people know that that when we make a deal it will get done and it will get done as fast as anybody can do it won't be subject to any kind of second thoughts or financing difficulties and we bought as you know we bought John's Manville because the the other group had had financing difficulties people know they will get to run their businesses as they've run them before if they care about that and and a lot of a lot of people do others don't um we have an ownership structure that is is probably more stable than the company our size or anywhere near our size uh in in the country and that's attractive uh to people so and we are under no pressure to do anything dumb you know if we do things dumb it's because we do things dumb and it's not but it's not because anybody's making us do it so those are significant advantages and the disadvantage the biggest disadvantage we have is size I mean it is harder to double the market value of a 100 billion dollar company than a one billion dollar company using our what we have in our Arsenal and and uh that is I hope it isn't going to go away I mean I hope we don't become a billion dollar company and enjoy all the benefits of those and I hope in fact we we have the agony of becoming you know a much larger company uh so you're on the you are on the right track whether we can deliver or not it's another question but but we go into combat every day armed with those with those advantages Charlie yeah this is not a hog heaven period for Berkshire uh the investment game is getting more and more competitive and I see no sign that that is going to change but people will do stupid things in the future even yeah there's no question I mean it I will guarantee you sometime in the next 20 years that people will do some exceptionally stupid things in inequity markets and then the question is uh you know are we in a position to do to do something about that when that happens but we do we continue to prefer to buy businesses though that's that's what we really enjoy when Charlie mentioned Hog Heaven I thought we ought to open the peanut brittle here which I recommend hardly zone three good morning most spins from Waterloo Nebraska you've often stated that value and growth are opposite sides of the same coin would you care to elaborate on that and do you prefer a growth company that is selling cheap or a value company with with moderate uh or better growth prospects well actually I think you're you may be misquoting me but I really said the growth and value they're indistinguishable they're part of the same equation or really growth as part of the value equation so there is our position is that there there is no such thing as as growth stocks or value stocks the way Wall Street generally portrays them as being contrasting asset classes growth usually is a chance to uh growth usually is a positive for Value but only when the it it it means that by adding Capital now you add more cash availability later on at a rate that's considerably higher than the current rate of of Interest so there is no we don't we we calculate into any business we buy what we expect to have happen in terms of the cash that's going to come out of it or the cash that's going to go into it as I mentioned at flight safety we're going to buy 200 million dollars worth of simulators this year our depreciation will probably be in the area of 70 million dollars or thereabouts so we're putting 130 million dollars above depreciation into that business now that can be good or bad I mean it's growth there's no question about it we'll have a lot more simulators at the end of the year but whether that's good or bad depends on what we earn on that incremental 130 million dollars over time so if you tell me that that you own a business that's going to grow to the sky and isn't that wonderful I don't know whether it's wonderful or not until I know what what the economics are of of that growth how much you have to put in today and how much you will reap from putting that in today later on and the classic case again is the airline business the airline business has been a growth business ever since well you know the Orville took off but it's the growth has been the worst thing that happened to it been great for the American public but growth has been a curse in the in the airline business because more and more Capital has been put into the business at inadequate returns Now growth is wonderful it Sees Candy because it requires relatively little like incremental investment uh to sell more pounds of candy so it's growth and I've discussed this in some of the annual reports growth is a part of the equation but anybody that tells you you ought to have your money and growth stocks or value stocks really does not understand investing other than that they're terrific people Charlie well I think it's fair to say that Berkshire with a very limited headquarters staff and that staff pretty old we are especially partial to laying out large sums of money under circumstances where we won't have to be smart again in other words if we buy good businesses run by good people at reasonable prices there's a good chance that you people will prosper us for many decades without more intelligence at headquarters and you can say in a sense that's growth Stock Investing yeah if you'd asked Wall Street to classify Berkshire since 1965 year by year is this a growth business or value business a growth stock or Value stock you know who knows what they would have said but you know the real point is that we're trying to put out Capital now to get more capital or money we're probably going to put out cash now to get more cash back later on and if you do that the business grows obviously and you can call that value or you can call it growth but but they're not two different categories and uh I just cringe when I when I hear people talk about now it's time to move from growth stocks to value stocks or something like that because it just doesn't make any sense zone four hi my name is Stephen comp from Irvine California I'm 10 years old and this is my fourth consecutive year here terrific we're glad to have you here thanks this is my fourth consecutive year here and how I got to owning stock is my dad taught me to start my own business and I bought a Berkshire Hathaway stock with my profits and in school they don't teach you how to make and save money not in high school or college so my question is how would you propose to educate kids in this area well that's a good question thank you sounds to me like you could do a good job yourself too uh and I'm you know at 10 you're you're way ahead of me unfortunately I didn't buy my first stock until I was 11 so I got a very slow start and it's uh you know what what it takes really is and you find it in some classrooms and you don't and others but you it takes teachers who who uh can explain the subject Charlie would say Ben Franklin was the best teacher of all in that respect but uh uh it looks like you either got it from your parents an education on that and parents can do more education really in that respect even than teachers um but it's you know I got a chance to talk to students from time to time and um you know one of the one of the things I tell them is you know what a valuable asset they have themselves I mean it you know I would pay any bright student uh probably fifty thousand dollars for ten percent of his future earnings the rest of his life so he's a 500 000 asset just standing there and and what you do with that 500 000 asset in terms of developing developing your mind and your talents is hugely important the best investment you can make at an early age is in yourself at uh and it sounds to me like you're doing very well in that respect I congratulate you on it that I don't have any great sweeping program for doing it throughout the school so I we have here in Nebraska we have uh an annual get-together of uh students from all the high schools throughout the state and and it's a day or two of of economic education I think it's a very good a very good program uh uh but I think I think if you just keep doing what you're doing you may be an example of other students Charlie I'd like to interject the word of caution you sound like somebody who's likely to succeed at what you're trying to do and uh that's not always a good idea if all you succeed in doing in your life is to get early Rich from passing holding of Little Bits of Paper you get better and better and only that for all your life it's a failed life life is more than being shrewd at passive wealth accumulation I think he's going to do well in both just on five morning my name is Thomas command I am 11 years old and from Canfield California this is my fourth annual meeting last year I asked how the internet might affect some of your Holdings since a lot of the internet companies have got out into business how are you has your view of Internet changed well that's a good question and I I think that the internet probably looks to most retailers um like less of a competitive threat than it did a couple of years ago for example if you look at the Jewelers who have been uh on the internet and in many cases in several cases at least had very large valuations a couple of years ago so the world was betting that they would be very effective competitors against brick and mortar uh jewelry retailers I think that that threat has diminished substantially I think that's been true in the furniture business and in both of those Industries very prominent dot coms that had aggregate aggregate valuations in the hundreds of Millions have vanished in short order so I would say that we think the internet is a huge opportunity for certain of our businesses I mean Geico continues to grow in at a significant rate uh in internet business Sees Candies uh internet business is up 40 this year the last year was up a much larger percent from the year before and it grows and it'll continue to grow so the internet's an opportunity but I think the idea that you could take almost any business idea and and turn it into wealth on the internet many were turned into wealth by promoting them to the public but very few have been turned into wealth by actually producing uh cash results over time so I think there's been a significant change uh in the degree to which I perceive the internet as a possible threat to our retail businesses there's been no change in the degree to which I regarded as an opportunity for other of our businesses Charlie well Warren you and I were once engaged in the credit and delivery grocery business and it was a terrible business it barely supported one family for a hundred years with all of them working 90 hours a week and somebody actually got the idea that was the wave of the future and turned it into a great internet idea that can only be described as Mania and it sucked down a lot of intelligent people yeah Charlie is talking about the infamous buffet in the sun grocery store which did barely support the family for 100 years and only then did we support the family by hiring guys like Charlie for slave wages uh but I used to go out on those delivery trucks and it was pretty damned inefficient you know people would phone their orders in and now it's true we took them down with a pencil and an order pad instead of punching them into a computer but when we started driving around the trucks and Hauling the stuff off and everything you know we ran into the same cost the web van is running into now and it the the what the internet offered was a chance for people to monetize the hopes of others in effect I mean you were able to to uh to capture the greed and dreams of millions of people and turn that into Instant Cash in effect uh through uh venture capital in the markets and there was a lot of money transferred in the process from the gullible to the promoters but there's been very little money created by pure internet businesses so far uh it's been a huge trap for the public Charlie anyway nothing more zone six thank you for taking my question my name is Frank jurvich I'm from London Ontario it's great to see all the young people asking questions I even have my own 11 year old here Matthew this year I first want to start by passing on a message from my wife to you Mr Buffett and that is uh thank you Mr Buffett for your autograph that Frank brought back last year however quite frankly the ring in the borsheim's Box you autographed was far more precious you can repeat that if you'd like my question relates to the future of Berkshire back in 1994 there was a PBS video interview of you at the Flagler Business School and I believe you said Berkshire was not an insurance company it appears that's not quite the case as much anymore and I suppose Insurance Acquisitions will provide the financial Fuel and the stability the Johns Manville's in Mid-America types of Acquisitions will need for their future growth but I'm hoping that you and Charlie can describe for us an anticipated future look at say 20 years out of how Berkshire might be different and uh from it from how it is today and perhaps a couple of the not so obvious problems that Berkshire will need to contend with and thank you for all the Apparently wonderful Acquisitions you've made on our behalf in the last year well thank you I think you ought to take your wife another ring too but the uh well thank you um we actually as as long ago as I don't remember whether it was in the 1980 annual reporter but at least 20 years ago we did say that we thought insurance would be our most significant business over time we had no idea that it would get to be as significant as it is but we've always felt that that was we would be in many businesses but that insurance was likely uh to be our our largest business right now it's not our largest business in terms of employment it's our largest business in terms of Revenue and we would hope it gets a lot bigger over time we don't have anything in the works that would make that happen although we will have natural growth in what we already own but we will just keep acquiring things uh and sometimes some years we'll you know we'll make a big acquisition some years will make a few small Acquisitions we'll do whatever comes down the pike I mean if there's a phone call waiting when this meeting is over and it's an interesting acquisition it'll get done um we don't have a master plan we don't we don't Charlie and I do not sit around and strategize or talk about the future of various Industries or do anything of that sort which it just doesn't happen we don't have any reports we don't have any staff we don't have any of that we've uh we we try to look at what comes in we try to survey the financial whole financial field we try to look at what comes in and look for things we understand where we think they have a durable competitive Advantage where we like the management and where the price is sensible and you know we had no idea two or three years ago you know that we would uh be the 87 owner of the largest carpet company uh broad-room Carver company in the world but it you know we just don't we don't plan these things but I would tell you in a general way that 20 or so years from now we will we will own a lot more businesses I would still think it likely I mean I think it's certain that insurance will be a bigger business for us than 20 years than it is now probably much bigger but I think it's and I think it's also likely it will be our biggest business still but that could change I mean we could get a deal offered to us uh tomorrow that you know was a 15 or 20 billion dollar deal and then we've got a lot of money in that industry at that point uh so it's we have no more master plan now than we had back in 1965 when we bought the textile mill really I mean we had a lousy business I didn't realize it was as lousy as it was when I got into it and uh we had to you know we we just started to start trying to deploy capital in an intelligent way but we've been deploying Capital you know since I was 11 and and I mean that that is a that's a that's our business and we enjoy it and we get we got opportunities to do it but the bigger you are the fewer the opportunities you're likely to get uh Charlie well I think it's almost a sure thing that 20 years from now there'll be way more strength and value behind each Berkshire share I also think it is an absolutely sure thing that the annual percentage rate of progress will go way down from what it has been in the past no question about it on that happy note we moved to zone seven uh good morning Mr Buffett Mr Munger my name is Gary ratstrom from right here in River City I've been a shareholder since 93 and have loved every minute of it recently uh there's been medication available to reduce cholesterol my doctor even gave it to me since mine is kind of high every time I hear what you like to eat Warren it makes me wonder what your cholesterol level is or if you even worry about it I think everyone here wants you to be with us for a long time so uh have you considered taking this uh new medication to reduce your cholesterol level [Applause] ah yeah my dad I I do it I do it on the number and I don't remember my doctor tells me it's a little high but if he says it's a little high it means it isn't that high there he would because he always tries to push me into uh making a few changes in my life uh but he uh I've got a wonderful doctor and uh and I was lucky last year because I hadn't been in to see him for about five years and and due to uh those guys cost a lot of money I mean and due to uh purely an accident a reaction to some other medicine I was given when I was out of the city uh he got a hold of me and then he ashamed me into having a physical and it was it was extremely lucky because I uh I had a polyp in the column that would have probably caused trouble you know within a couple of years uh I would say that uh if you ask my doctor um he would he would want me to make a few changes but he would also say that my my life expectancy is probably a lot better than the average person of of 70. and I have I have no stress whatsoever zero you know I mean I I I I get to do what I love to do every day and I'm surrounded by people that are terrific so that problem in life just doesn't exist for me you know and I don't smoke or drink or bubble end it right there and uh so my you know if you were an underwriter for a life company you would you would you would make me considerably better than that would you rate Charlie better than average too at uh uh and I'm sure that you know it could change it slightly uh perhaps on the probabilities uh you know if I change my diet dramatically or something but it's it's very unlikely to happen that uh actually when my mother got to be 80 . you know the most important thing in life in terms of how long you live is how long your parents live so I got her an exercise bike once she got the b-80 man she put 40 000 miles on it and I told her to watch her diet and do all these things and I mean she lived to be 92 so you know she did her share and I helped her do it by giving her the exercise bicycle so that I think that improved my odds at that point Charlie yeah I have a book recommendation which will be very helpful to all shareholders that weren't worry about Warren's Health and Longevity and that's this book called genome by Matt Ridgely who was for years the science editor of The Economist magazine and uh if if Ridgely is Right Warren has a very long life expectancy they're very interesting correlations between people who cause stress to others instead of suffering it themselves and [Applause] and Warren has been in that position ever since I've known him and they the figures that that Ridley quotes are awesomely interesting that it is a fabulous book of course I'm recommending a bestseller but they're selling it in the airport it's called genome and you'll feel very good about Warren's future if you agree with the science of the book zone eight my name is Charlie seek I'm from North Carolina Mr Buffett your article last year in Fortune Magazine was excellent I'm thinking well I'm wondering what your thoughts are on American Business profit margins return on equity in the future also I would like your thoughts about the um some businesses today with their huge inventory write-offs what's your thoughts about those are yeah well in that article I talked about the unlikelihood of corporate profits in the United States getting much larger than six percent of GDP and historically the band has been between four and six percent and we've been up we've been up at six percent recently so unless you think that profits as a part of the whole country's economic output are going to become a bigger slice of the pie and bear in mind they can only become a bigger slice of the pie if other slices get diminished to some extent and you're talking about personal income and items like that so I think it's I think it's perfectly rational and reasonable that in a capitalistic Society the corporate profits are something like six percent of GDP that does not strike me as outlandish in either direction it attracts massive amounts of capital because Returns on Equity will be very good if you earn that sort of money and on the other hand I think it would be very difficult in the society to get where they'd be 10 or 12 or something the sort because it just it would look like an unfair division of the pie uh to the populace so I don't see any reason for corporate profit they're gonna they're gonna be down in the near future as a percentage of DDP from Recently but then they'll go back up at some point so I think 10 years from now you'll be looking at a very similar picture now if that's your assumption and it you're already capitalizing those profits at a pretty pretty good multiple then you have to say that you you have to come to the conclusion that the value of American Business will grow at a relationship that's not much greater than the growth in GDP and most of you would estimate that probably to be you know maybe five percent a year if you expect a couple percent a year of inflation so I wouldn't I wouldn't change my my thoughts about the profitability of American Business over time and I wouldn't I wouldn't change my thoughts much about the relationship of stock prices over time uh to those profits um so I you know I would come down very similarly now interestingly enough some of those same relationships prevailed uh decades ago but you were buying stocks that were yielding you perhaps five percent or something like that so that you were getting five percent in your pocket plus that growth as you went along and of course now if you buy stocks you get one and a half percent if you're the American public before the frictional costs so that the same rate of growth produces a way smaller aggregate return and so you know I think stocks are a perfectly decent way to make six or seven percent a year over the next 15 or 20 years but I think anybody expects to make 15 per year or expects their broker or investment advisor to make that kind of money is is living in the dream world and it's particularly interesting to me the back when the prospects for stocks were far better I even wrote something about this in the late 70s Pension funds were using investment rate assumptions that were often in the six percent are there about range and now when the prospects are way poor most most Pension funds are using building into their calculations returns of nine percent are better on investments I don't know how they're going to get nine percent or better on investments but I also know that they change the investment assumption down it will change the charge to earnings substantially and they don't want to do that so they continue to use investment assumptions which I think are quite unrealistic and with companies with a big pension component uh in their in their financial uh situation and therefore in their income statement that can be quite significant it'll be interesting to me to see whether in the next couple of years where Pension funds are experiencing significant shortfalls from their assumptions how quickly they change the assumptions and the consulting firms uh are not pushing them to do that at all it's very interesting the consulting firms are telling them what they want to hear which is hardly news to any of us but uh it's what's taking place second question about inventory write-offs uh you know it that gets into the all the the category entirely of big bath charges which are the Tendencies of management um when some bad news is coming along to try and put all the bad news that's happened into a single quarter or a single year and even to put the bad news that they are worried about happening in the future into that year and it's uh it leads to real deception and accounting the SEC has tried to get quite tough on that but my experience has been that managements that want to do it uh usually can find some ways uh to do it and and um managements frequently are more conscious of what numbers they want to report than they are what is actually transpired in a given quarter or given Year Charlie yeah a pension fund accounting is drifting into scandal by making these unreasonable investment assumptions it's evidently it's just part of the human condition that people extrapolate the recent past past and uh so since returned some Common Stocks have been high for quite a long period they extrapolate that they will continue to be very high into the future and that creates a lot of reported earnings in terms of pension benefits that aren't available in cash and or likely not to be available at all and this is not a good idea and it's it's interesting how few corporate managements have just responded like Sam Goldwin include me out you'd think more people would just say this is a scummy way to keep the books and I I will not participate and instead everybody just drifts along with the tide assisted by all these wonderful Consultants I don't think I don't know of any case in the United States right now and I'm sure there are some but except for the Pension funds that we take over I don't know of any case where people are reducing their assumed investment return now you think if interest rates drifted down several percentage points that that might affect what you would think would be earned with money it certainly is to bondholders or to us with float or something of the sort uh but most major corporations I believe are using an investment return Assumption of nine percent or higher and that's with long-term governments below six percent you know and maybe high-grade corporates at seven they don't know how to get it in the bond market they don't know how to get in the mortgage Market I don't think they know how to get it in the stock market but it would cause their earnings to go down if they change their investment assumption and I like I say I don't I don't know of a major company that's thinking about it I don't know of a major Actuarial consultant that's suggesting it to the managements it just they'd rather not think about it the way they're doing things would be like living right on a an earthquake fault that was building up stress every year and projecting that the longer it's been without an earthquake a little less likely an earthquake is to occur that is a dumb way to write earthquake insurance and the current practice is a dumb way to do pension fund planning and accounting improper if you talk to a management or board of directors about that you get absolutely no place them oh they their eyes would glaze over before the hostility came area one good morning gentlemen mark rabinov from Melbourne Australia I had a question on two of our key operating businesses firstly executive get once this becomes a mature business would it be fair to say that its net margin should be about five percent and secondly would it be fair to say that our current Insurance businesses are likely to grow aggregate float at about 10 percent over time well it's really anybody's guess I mean I I don't expect executive Jeff to become a mature business for decades I mean it there's a whole world out there on that one and and uh we have something over two thousand customers in the United States at the current time we have a little over a hundred but in the in Europe but there are tens and tens and tens of thousands and perhaps hundreds of thousands uh people that or businesses where it does make sense over time so it's going to be a long time I mean they're only 700 roughly gets a year being produced and and uh and of course up till a few years ago that was limited to people who wanted to buy single planes but you won't change that output much in the next five years but so you couldn't really take on we can take on about 600 customers a year just in terms of the delivery schedule that we have built into uh our business and we couldn't change that we couldn't double that because the planes simply aren't available uh in the next year or two although we have orders further out but I would say it'll be a long time until executive jet is a mature business and I would say that a long long time I mean we're gonna when we get Europe as we make progress in Europe we'll move to Asia we'll move to Latin America over time and so we're going to be we're going to be I think growing that business significantly for a very long time when it becomes mature you're close to it you know if you're talking uh five percent after tax margins I'd say that that's probably a reasonable figure but we're so far away from even thinking about that that you know it's pure speculation uh in our insurance business uh we've grown our float and then we purchase businesses to add to the float uh this year I would certainly expect unless one a big transaction would fall through or something I would certainly expect our float to grow at least two and a half billion and that is close to 10 percent of the beginning of the year float uh that that's a that's a rational expectation but whether it can grow ten percent a year how far you can do that I would say the total float of the property casualty industry in the United States is probably it's I'm pulling this out for making some other calculations in my head as I talk but it wouldn't be much more than 300 billion so we are close to 10 percent of the entire U.S float now and I don't think the U.S float the aggregate float you know is going to grow at a 10 rate so when you're as big a part of the pie as we are it may be difficult to sustain them to sustain a 10 rate but we're doing everything possible that makes sense to grow float I mean that is a major major objective but the even bigger objective is to keep it low cost um I I don't think you can see unless the world changes in some way I don't think you can see 10 growth over 25 years but we'll do our darndest to get it at them at the rate you suggest for at least the near future Charlie well I certainly agree that long term it's not going to happen good but not that good but we've been surprised at what's happened I mean there's no question I mean when we bought Jack ringwalt's company in 1967 uh you know my my memory is Jack had a float of uh you know less than and would we have ever guessed that we might hit you know something close to 30 billion this year um we never dreamed of it but we just kept doing things and we'll keep doing things and and but it can't be if it can't be at huge rates for a long period of time because we're too big a part of the pie now uh we were we were nothing initially and and we kept grabbing a little more of the pie as we've gone along and we like that but it can't go on forever yeah that that's what I call really low-cost float if it ever should be advantageous for us to go into what I would call higher cost load that might change the figures upward in terms of growth of flow although that won't be I mean it could happen that we could take on incrementally some higher costs float under very special circumstances if we saw unusually good ways to use it but that we don't even like to think about that we certainly don't want the people running our businesses to think about that because keeping keeping it low cost you know that is the big end of the game I mean anybody can generate float I mean if we gave our managers a goal of generating 5 billion afloat next year they could do it in a minute you know and we would be paying the price for decades to come you can write them insurance policies you know there's an unlimited market for dumb insurance policies and yeah and they're very pleasant because the first day the premium comes in and that's the last time you see any new money from then on it's all going out and uh that's not our aim in life zone two My Name Is Shel Hogan I'm a Norwegian working in Tokyo in Japan I'm very satisfied to have more than 95 percent of our family Savings in Berkshire I have two questions in my work I've seen a lot of insurance companies in Europe and Japan and I think that geckos business model is quite Superior to most primary insurance companies in Europe and Japan and I think that Geico would be very successful in Europe and Asia so I'd like to hear what are the views and plans for Geico doing business in Europe and Asia second regarding Coca-Cola living in Japan I noticed that coke has a relatively low presence in advertising although they are the largest player with 30 market share versus 15 for the number two I think Coke is being too cheap on Advertising thus hurting the long-term position I wonder if advertising strategy internationally is a high enough priority of Coke's management and if they're aggressive is sufficient I'd like to hear if you have any comments on this also I'd just like to thank you very much for this experience and for the wonderful company you have created well thank you very much uh clearly when you've got a business model that works as well as Geico has in this country and it continues to work well uh and has that fundamental advantage of being a low-cost operator we think about every possible way that we can take that idea and extend it it's been remarkably hard to do it I mean the management has tried various things ever since Leo Goodwin started the company in 1936 to take it into other areas and those efforts have been modestly successful in certain things like life insurance but then they got out of it uh and and various other things but it's it's an idea still we have a you know we have four percent or so of the market in the United States this Market is so huge and as we look at the as we look at the drain on human resources involved in extending it into other countries uh and we've looked at it a lot uh and it made maybe something will do it sometime but we've never felt that the possible gain considering the rigidities of these other both in Europe and in Asia breaking in it's not easy to get into those markets and the cost the time we've just felt that it would be better to concentrate those same resources in this country it's not a question of capital at all I mean we put the money in in a second and we're doing it in something like netjets in Europe I mean we it's it's there's a human cost to it there's a financial cost to it Financial cost bothers us not at all human cost is a real question because it gets back to Charlie's opportunity cost we have talented managers but we have a finite number of them and I would rather have Tony nicely and and and and Bill Roberts and their crew focusing on how to gain additional market share in this country at the right rates starting in a project in Europe or Asia now but that's it's a very good question it's something I can guarantee you we we think about all the time we'll continue to think about we've we've tried to extend geography Coke has been the most successful company in the world in extending geography we've tried to do it with seeds candy and and it's had limited very limited success I mean we've tried 50 different ways because the trials are are relatively uh cheap to do and we think it should work we just haven't been able to make it work uh uh but that it's a very good question the question about coax advertising in Japan is you know Coke has a terrific presence in Japan Japan's an interesting Market because the percentage of of soft drinks sold through vending machines is just far far far higher than any place uh in the world and the United States is a very distant second and and then the rest of the world there's very little done in the way of vending machines uh uh I don't know the specifics of the advertising in Japan but of course Doug daft who now is the CEO of Coke uh comes with a huge background in Asia and I mean that was the that was his territory for much of uh his career and Doug uh we have a new major very major advertising campaign coming up and you probably read that coke is going to spend 300 million plus additional on marketing beyond the normal spend which is huge and I can't tell you the specific markets in which that will be but I would be surprised if Japan isn't isn't a big part of it because Japan is an enormous market for Coca-Cola Charlie I have nothing to add zone three please hi my name is Steve Rosenberg I'm from Ann Arbor Michigan uh first I just want to thank the both of you for being two phenomenal Role Models I've really looked up to you both for a long time my first question is about reinsurance I believe that you're willing to write larger policies and reinsurance than anyone else but that you still insist on the amount of your liability being capped I'm wondering uh with your investments in companies that have exposure to La asbestos have you somehow capped that or is that unlimited especially given joint and several liability my second question involves auto insurance and I was wondering does State Farms structure as a mutual insurance company compensated or help it compensate for having a higher cost structure because over the long term it need only remains solvent and that provide an adequate return on Capital to its investors the first question on asbestos we have not put any significant money to our knowledge in any company that has that has any asbestos exposure now uh you know we we have we have a small amount of money in in USG uh where the subsidiary the United States ships and has a major asbestos exposure but that that's a that's a very very minor investment uh uh the and I that that would be the only one that uh that I can think of we've walked away from several deals that were quite attractive and in every respect except asbestos but that's like saying you know to a 120 year old you know good health except for the fact that you're dead um so we we we we don't go near asbestos now in terms of our retroactive insurance policies we are at we are taking over the liabilities of companies that have lots of asbestos exposure and in that case we assume uh that those exposure that there's those contracts will be paid in full I mean we we we make no Assumption of any reduction in asbestos costs but we do cap them there's a couple things you can't cap in Insurance you can't cap workers compensation uh uh losses I mean that they uh you can as a reinsurer but I mean the director the primary insurer can't do that I believe in Auto for example in in the UK that it's uncapped uh and I think that nobody thought that was very serious until they had a recent accident that uh uh caused I think involved a car doing something that that uh an auto doing something to a train that was unbelievable so they the there are a few areas where insurance is written on an uncapped basis and and in our case we write some auto insurance in the UK and we write some workers primarily in California but generally in the reinsurance business you are capping uh the liabilities you you take on I mean obviously when we bought General ree they had asbestos liabilities from from reinsurance contracts they'd written but but uh the reinsurance companies are pretty careful about writing unlimited policies we write huge limits we're the biggest you know if somebody wants to write a huge limit or an unusual limit uh they should call us because there's no one else in the world that will will act as big or as promptly as we will but we don't write things that are unlimited now the interesting thing is that the biggest exposures in our view are the people write a lot of primary business and don't have the super the catastrophe cover they need I mean if you write 10 percent of all the business and homeowners and or 15 on Long Island or or in Florida or I mean you were writing a catastrophe cover that would blow your mind uh if you're Freddie Mac or Fannie Mae and you're guaranteeing mortgages you know for millions of people in in areas like that and they don't have Insurance earthquake in California or proper insurance in Florida there they'd be less likely to have earthquakes someplace you were taking on enormous risks I'm a huge risk far beyond what we would ever take on they just but you don't get paid for them unfortunately I mean just take the New Madrid section of Missouri down in the corner that was this that was the area of three of the greatest Quakes they're sort of related in time and certainly in the recorded history they were the three greatest Quakes in the United States you know how much homeowners business how much commercial property business does somebody have in that huge territory which you know supposedly caused church bells to ring in Boston when it happened back in whenever it was 1807 or nine or something like that so there are all kinds of risks that can aggregate in huge ways that companies are not thinking about at all I mean I don't know whether Freddie Mac or Fannie Mae for example is demanding that all of the homes they insure in in in and then you know 300 miles radius of New Madrid uh have earthquake insurance but you know it that sort of thing never comes to mind until the unthinkable happens but in Insurance the unthinkable uh always happens uh um State Farm as a competitor is a mutual company and it has a huge amount of net worth uh you referred to them as a higher cost a high cost operator or higher cost but they're really a relatively low cost operator there but they're not anywhere near as low cost as Geico but they're a low-cost operator compared to many people in the insurance business and it's certainly true that they do not have the demands for profitability partly because they've done such a great job in the past and build up so much Surplus I have nothing but basically good things to say about what State Farm has done over the years they do not need they can subsidize to some extent current Auto policyholders with the profits that were derived from Auto policyholders of the past but that's always true when a stock company competes with a mutual company and you know we know that when we go in the business and that's true of a lot of other Mutual companies out there that operate without the demands of earning a high return on Capital but if I were State Farm you know I'd probably be doing what they're doing I I don't I don't criticize them at all Charlie oh I don't criticize the State Farm either State Farm is one of the most interesting business stories in the United States the idea that it could get as big as it is and has as good a distribution system as it does it's a thoroughly admirable company in fact Berkshire has bought insurance from State Farm not auto insurance Geico still has a has a it has a lower cost structure I mean it it is a a great business operation and we have invested significantly to build that because it is so attractive and as I pointed out in the annual report the incremental investment we made last year did not produce the same results as incremental investments in previous years so we are finding it hard to grow the business under current circumstances on a basis that we would like to but it's it's a wonderful business and it has you know it has a business model that I wouldn't uh you know I wouldn't trade for anything zone four hi Mr Buffett Mr Munger my name is Dan Sheehan from Oakville Canada following up on your your discussion about Geico you've often talked about their advantages as a direct seller and investor of float my question is how do you control claims claim costs versus your competitors other than through good underwriting uh some who may have advantages in terms of economies of scale or cutting Corners you you won't you you won't do and this might allow them to eliminate some of the advantages you've gained on the other side of the combined ratio and my second question is you've said it's hard to be smarter than your dumbest competitor and along that line what are your thoughts about a recent Wall Street Journal article about a about a major airline getting into the fractional jet business thank you I don't worry about the dumbest competitor in in a business that's that's service um the customer will figure that out over time and we have a huge Advantage uh in in the fractional ownership I mean we have 265 planes flying around now and you can get one on four hours notice that anyone of 5500 airports we have planes in Europe for our American customers we have a planes here for our European customers and nobody's going to catch us in my view uh in in fractional ownership and uh we've had some dumb competitors in the past and and in that business and and you know they bleed uh and and to the extent I mean you know we've got more blood than they have uh in the uh and the question of Geico and underwriting you know that it's a fascinating it's a fascinating uh business because there are in in this audience there are people with hugely different propensities to have an accident and of course most people figure they're better than average now part of the propensity to have an accident it will depend on how many miles you drive obviously somebody never takes the car out of the garage is no matter what their driving skills might be is not going to have an accident they drive 10 miles a year you know you're pretty safe with almost anybody but so there's a relationship to miles driven but there's a relationship to all kinds of other things and the trick in insurance is being able to figure out the variables uh and not have them too many because you you still have to get people to fill out a form and and you don't want something that has practically no significance but the trick is to find out what questions you need to ask to determine in which category to place people as to their propensity to have an accident now in the Life Insurance business you know even Charlie and I figured out that the older you get the more likely you are to die in a given year now that's not the only Factor but everybody understands that the the older you are the mortality risks go up and they've learned a few other things they've learned that that females live longer than males now that doesn't get into a judgment as to why or anything else you just know it so you build that in if you're if you're pricing the product then you know a whole bunch of other things you may even know the cholesterol is bad you know that makes a difference in terms of predicting the mortality but the uh but in the in the auto insurance business there are lots of variables that correlate with the frequency with which a person will have an accident per mile driven and the more experience you have with a large body of people whom you've asked a lot of questions about and control conclusions there from the better off you are State Farm has got a wonderful body of information I mean they they're Actuarial judgments should be better than anybody else's because they've got more experience with more cars and drivers but our experience with with close to 5 million policyholders uh enables us I think to underwrite quite intelligently but every day you know we're looking for for some variable that will tell us more people with a good credit history are better than drivers by a significant margin to be with a lousy credit history why we don't care too much why because it wouldn't help it what we really know what we really need to know need to know is that the two factors correlate and we're looking for correlations all the time and we're trying to avoid spurious correlations which you can have and it's you know it's it's a moving Target you keep working on it all the time but we're better at it than we were five years ago and we'll be better at it five years from now than we are now when we go into a new state we will have a very small body of policyholders and some of the factors obviously are Prevail over all states but there's certain things that you learn actually only if you're in state for a while and you know you're more likely to have an accident if you're a everything else being equal if you're if you're an urban driver City driver in a big city than if you're driving in an area that's very rural where the density of other cars is very low if you're the only guy in the county with a car you know you're not going to have a lot of two-car accidents so the underwriting question is all important and fast Fair settlement of claims is very important because people who really weren't injured start feeling worse and worse as they talk to more and more lawyers so uh you know the the claim the claims claims delivery is is is a is a vital part of uh running a good property casualty operation and all I can tell you is at Geico that we we think very hard about those things but we'll be thinking about them tomorrow as well as today at uh Charlie well vis-a-vis the uh fractional jet ownership program which has been announced for United Airlines I find that very interesting a senior United Airlines pilot now makes about three hundred thousand dollars a year plus fancy fringes including pension and and what he does is work a very limited hour number of hours a month and about half of that he's been sleeping in a comfortable Monk on Long ocean flights that is not a culture that will work well on Correctional jet ownership maybe they think they'll get some advantage in recruiting new pilots or something I don't know why they're doing it I would not have done it well they haven't done it yet either but the um the the many of the airlines have organized second companies to take care of commuter flights and all of that and you know that that does produce problems when the pilots of the subsidiary start comparing their benefits to the pilots you know the parent and all that I mean they've tried to get lower cost structures by doing that but I would guess that if you were wanting to set up a fractional ownership company that that and you were you would probably not think about trying to align yourself with somebody that has extremely high costs in other areas and the advertising campaign will be kind of interesting too that you know give up first class travel start traveling right you know or something uh it'll be it'll be interesting but I would tell you that we have we have competitors in the fractional ownership business the two largest being companies that are uh of the part of a plane manufacturers and you can understand why they went into it but it is not an easy business and we've got the best hand frankly zone five Michael Wong San Diego California uh first I would like to thank both of you my question is when you started a new business uh why you started the investment partnership instead of a mutual fund and also can you recommend a good book or books regarding how to start a investment partnership or fund and how to service clients Etc so many books on on starting um Partnerships for hedge funds you know Charlie and um no but people seem to manage to create them without the books incentives are awesome yeah and and that the one thing I mean it's it's always interesting to both of us how you get certain things that are fashionable and people think that by naming something a given name that's that somehow that makes everybody smarter or able to make money in it I mean there is no magic to private Equity Funds International investing hedge funds all of the baloney that gets promoted in Wall Street but what happens is that certain things become very promotable usually because there's been recent successes by other people and that the new entrants extrapolate the successes of a few people in the past to promote new money from from people currently so they adopt titles that you know that uh they think will attract money and they uh but it doesn't make anybody any smarter if they hang out a shingle in front of their house that says hedge fund or they have shingles as asset allocation firm or something of the sort that the form doesn't create Talent uh I backed into the business I mean I had worked for a mutual fund closed end Investment Company in fact there's a fellow here today uh a friend of mine that the two of us worked there and we were 40 of the whole company because there were three other people all of whom outranked us considerably and uh that firm was Graham Newman Corp from 1954 to 1956 and it was a regulated Investment Company it was about six million dollars in assets which seemed like a big deal at the time and Ben Graham was one of the best known investors in the world and he had six million dollars in his fund there was a sister partnership called Newman and Graham which operated in what would today be called hedge fund style as far as a partnership split of the profits and so on and when I left there in 56 and I came back here we had seven people uh a couple of whom are here in the room who said you want to manage money and I said well here's what I learned at Graham Newman that Newman and Graham is a better way to do it than Graham Newman so I formed a little partnership and then I met Charlie a few years later and he figured if if I was making money doing it he'd make a lot more so he he formed one and uh and that was that was the that was the carefully calculated strategy of how we both became involved in the partnership business Charlie yeah is amazing how big the hedge fund industry has become they have conventions on the subject now and in the late 20s you could take a course on how to run a quick and security pool and uh these things come in great ways I'm not suggesting the hedge funds are crooked but I am suggesting that you get these waves of fashion that go to Great extremes the amount of money what is it now Warren and hedge funds it's very big although it's a little less uh in a few quarters than it used to be even yeah but I I would I would be willing to put a lot of money up that if you take the aggregate experience of all hedge funds that as starting right today and going for the next 15 years I would bet a lot of money it will not hit 10 uh in terms of return to Partners and I would if you push me I would bet at a lower figure than that then you have Bernie kornfeld's idea the fund of funds there are people who want to get paid for selecting hedge funds or other people and uh that didn't work very well for Bernie kornfeld well we're pretty well for Bernie for a while but it didn't work so well for his investors actually no yeah that result was probably something pretty to have in mind at the start maybe uh zone six I'm Michael zenka from Danvers Massachusetts that's a town who's missed who's banned Mr Buffett so generously sent to the Rose Bowl Parade last year so you're a very popular guy in my town good morning Mr Buffett Mr Munger Mr Buffett I want to ask you this question last week when I ran into after gillette's annual meeting but I choked so now there's no pressure here it goes in the years from my reading in the years from 1956 through 69 you achieved the best results of your career quantitatively 29 annually against only seven percent for the Dow your approach then was different than now you look for lots of undervalued stocks with less attention to competitive advantage or favorable economics and sold them rather quickly as a capital base grew you switch your approach to buying undervalued excellent companies with favorable long-term economics my question is if you're investing a small sum today which approach would you use well I would use the approach that I think I'm using now of trying to search out businesses that were I think they're selling at the lowest price relative to the discounted cash they would produce in the future but if I were working with a small amount of money the universe would be huge compared to the universe of possible ideas I work with now you mentioned that 50 6 to 69 was the best period actually my best period was before that was from right after I met Ben Graham in nineteen early 1951 but from the end of 1950 through the next 10 years actually returns averaged about 50 percent a year and I think they were 37 points better than the Dow Peri or something like that but that I was working with a tiny tiny tiny amount of money and so I would pour through volumes of businesses and I would find one or two that I could put ten thousand dollars into or fifteen thousand dollars into that was just ridiculous they were ridiculously cheap and obviously as the money increased uh then the universe of possible ideas started shrinking dramatically the times were also better for doing it in that time but I think that I think if you're working with a small amount of money with exactly the same background that Charlie and I have and same ideas same same whatever ability we have you know I think you can make very significant sums but you but as soon as you start getting the money up into the Millions many millions the the the curve on expectable results falls off just dramatically uh but that's that's the nature of it you've gotta you know one you've you when you get up to things you can put millions of dollars into you've got a lot of competition looking at that and they're not looking as I did when I started when I started I went through the pages of the manuals Page by page I mean I probably went through 20 000 pages uh in the Moody's industrial Transportation Banks and finance manuals and I did it twice and I actually you know looked at every business I didn't look very hard at some well that's not a practical way to invest tens or hundreds of millions of dollars so I would say if you're working with a small sum of money that and you're really interested in in the business and willing to do the work you can you will find something if you were there's no question about in my mind you will find some things that promise very large returns compared to what we will be able to uh deliver with large sums of money Charlie well yeah I think that's right a brilliant man who can't get any money from other people is working with a very small something probably should work in very obscure stocks searching out uh unusual mispriced opportunities but you know you could that's such a small world it may be a way for one person to come up but it's a it's a long slog yeah most smart people unfortunately in Wall Street figured that they can make a lot more money a lot easier just by uh one way or another and um uh getting an override on other people's money or or or uh uh delivering services in some way that people and the monetization of Hope and greed you know as a way to make a huge amount of money and right now it's very just take hedge funds I mean it's I I've had calls from a couple of friends in the last month that don't know anything about that investing money they've been unsuccessful and everything else and you know one of them called me the name said well I'm forming a small hedge fund 125 5 million he was talking about like the thought that since it was only 125 million maybe we ought to put in 10 million or something I mean if you looked at this fellow Schedule D on his 1040 for the last 20 years you know you'd think you ought to be mowing lawns but yeah but he may get his 125 million I mean you know and it's it's just astounding to me how willing people are during a bull market just uh just to toss money around because they you know they think it's easy and and of course that's that's what they felt about internet stocks a few years ago they're thinking about something else next year too but uh uh the the biggest money made you know in Wall Street in recent years has not been made by great performance but it's been by been made by great promotion basically well I would have stated even more strongly I think the current scene is obscene I think there's too much Mania there's too much chasing after easy money there's too much misleading sales material about Investments there's too much on the television emphasizing speculation in stocks zone seven uh Robert Payton from Chicago The Honorable Warren Buffett and The Honorable Charlie Munger I felt it would be appropriate to address you both in a manner that reflects the tremendous amount of value that the two of you have been instrumental in unleashing for your shareholders your employees and the good of society [Applause] the area that I'd like to inquire about is stock options as you are aware and have written about in the past reports companies have been taking advantage of and contributing to fasby's inadequate rules regarding stock options in particular the lack of having to expense them on the income statement and a lack of having to report them as a liability on the balance sheet my question is are either one of you doing anything to help fazbe's current stance on the issue if not have either one of you ever considered establishing a quote real end quote independent body of accountants that would actually try to make companies produce accounting statements that reflect economic reality I'll let you you've got the history on it well we don't like the accounting which we've called corrupt or at least I have and I don't think that's too strong a word that I think it's it's corrupt to have false accounting because you like a certain outcome better than another all that said I don't think either of us spends a lot of time fighting with Fazbear trying to create a better one it's like splending your Lance against stone or something you'd get a lot of back pressure from the butt of the Lance and and we can't be expected to cure all the ills of the world we've written about it and talked about it obviously you've picked up on it and and when it was an active issue whenever it was about I don't know four years ago or so uh Senator Levin of Michigan was one of those who who uh felt as we did and of course fazbe felt as we did uh but the pressure was incredible that American Business brought on on Congress they they they weren't getting they tried to put pressure on fasby and they weren't getting a result so they just said well you know we're not going to let fast be set the accounting rules we'll have Congress set the accounting rules and I thought that was a bad idea per se but I thought in this and and but they got plenty of supporters got a huge number of supporters I mean they uh uh and at the time I compared it I think there was there was a bill introduced in the Indiana legislature in the 1890s I believe and the bill was to change the value of the mathematical term pi to three even instead of three point one four one five and the legislator who introduced it said that it was too difficult for the school children of Indiana to work with this terribly long unending uh term and it would be so much easier if Pi was just three and he thought that they ought to enact that well I thought that was quite rational compared to what you know what what the Congress the United States was going to do and telling people that since it they the one of the arguments was that it makes it very tough for startup companies if they have to expense this well it makes it tough if they have to pay their electricity bill too but uh I mean that is that but those were the kind of arguments you got and my memory is Charlie is better on this than I am probably but I think the accounting firms 40 years ago or 50 years ago we're in accord with our position but the every client would put pressure on you know and they they don't want to report expenses they particularly don't want to report expenses that are paid to them and that can be huge and they might prove obnoxious if recorded by conventional accounting but if it's sort of lost in a in a table in the proxy statement people don't pay much attention so the only way it will get changed we wrote about it and I even talked to a few Senators at the time the all the only way it'll get changed is is it and this is the only way corporate governance problems generally will get changed if 15 or 20 large institutional investors um would band together in some way on this but some of them have the same problem because they're getting paid extraordinary sums for doing something that you know is really not adding that much value so they're not really inclined to call attention in many cases to uh what Charlie would refer to as obscenities and in other people's compensation so I think it's going to go on I mean it it's a fascinating subject but uh the institutional investors seem to focus very much on matters of form and not substance I mean you get a lot of they you know they they clock a lot about little things that don't have anything to do their economic return over time whereas on stock options there's something that that's terribly important they're the ones that are paying the cost and the costs are there whether they get recorded or not but uh American management will not change its position on that voluntarily Consultants will never change their position they're getting paid to encourage people to to look at the other at other companies and it just keeps ratcheting up so I don't think you're going to see change unless institutional investors do it and as I say I get these questionnaires you know about look at the composition of the board or a nominating committee none of that makes any difference in terms of how a business performs it then got one form it said you know it said they wanted a list of directors broken down by sex and I said none that I know of uh but uh that it just is not germane Charlie well I can't top that one zone eight please uh Steve Caswell from Atlanta my question uh concerns Gillette do you think their goal of uh trying to grow earnings at 15 plus percent kind of got them into their current inventory problems at the trade and as well the Duracell acquisition I know at the time neither one of you were the biggest fans of the deal I just want to know how you feel about it now well I I would say it's a mistake and I've said it I think it's a mistake for any company to predict 15 of your growth there are plenty of them do um for one thing you know unless the unless the U.S economy grows at 15 a year eventually any 15 number catches up with you Ed it just it doesn't make sense uh very very few large companies can compound their earnings at 15 it isn't going to happen you can look at the Fortune 500 and if you want to pick 10 names on there that will compound their growth from other than some extraordinarily depressed year I mean if they had a if they had a year where they just broke even so the number is practically zero but if if you pick any company on there that currently has record earnings and you want to pick out 10 of them that over the next 20 years will will average 15 or greater I will you know I will bet you that you that more than half of your list uh will not make it so I think it's a mistake and as I've said in the annual report I think it leads people to stretch on accounting I think it tends to make them change Trade Practices and and I you know I'm not singling out Gillette in the leash but I can tell you that if you look at the companies that have done it you will find plenty of examples of of people that have made those sort of mistakes and I think that in connection with Duracell I mean obviously Duracell has not turned out the way that the management of Gillette at the time hoped that it was going to do and who the investment bankers who came in and made the presentations those presentations would look pretty silly now Charlie I think that kind of stuff happens all the time it will continue to happen it's just built into the system just I see more predictions of future earnings growth at a high rate not less there are many few people have sort of taken an abstinence pledge but it's very few it's what the analysts want to hear that's what the investor relations departments want the managements to uh to say it makes their life easier you know but they don't have to be there five years from now or ten years from now doing the same thing it's I mean it if we predicted 15 percent from from Berkshire you know 15 percent means that assuming the same multiples I mean that means I know in five years 200 billion in 10 years 400 billion you know 15 years 800 billion trillion six in 20 years and the values get to be crazy and you know if you have a business with a market value of four or five hundred billion and you've had a few of those not so long ago just think of what it takes to deliver in the way of future cash at a 15 discount rate to justify that if you've got a business that's delivering you no cash today and it's selling for 500 billion dollars you know to to give you 15 on your money it would have to be giving you 75 billion this year but if it doesn't give you 75 billion this year you know it it it it has to be giving you 86 and a quarter billion next year and if it doesn't do it next year it has to be giving you almost 100 billion in the third year it's just those numbers are staggering I mean the implications involved in certain Market valuations really you know belong in in Gulliver's Travels or something but the but people take them very seriously and people were valuing businesses at 500 billion dollars uh a year or a year and a half ago and and there's just no mathematical almost no mathematical calculation you can make that would if you demanded something like 15 on your money there's almost no mathematical calculation you could make that would would could possibly lead you to justify those valuations Charlie how many more well I said on another occasion that to some extent stocks sell like Rembrandts they don't sell based on the value that people are going to get from looking at the picture they sell based on the fact that Rembrandts have gone up in value in the past and when you get that kind of valuation into stocks some crazy things can happen bonds are way more rational because nobody can believe that a Bond paying a fixed rate of modest interest can go to the sky but with stocks they behave partly like Rembrandts and I said suppose you filled every pension fund in America with nothing but Rembrandts and of course Rembrandts would keep going up and up as people bought more and more Rembrandts or pieces of Rembrandts at higher and higher prices I said wouldn't that create a hell of a mess after 20 years of buying Rembrandts and to the example stock prices generally become sort of irrational isn't it sort of like filling half the Pension funds with rent brands I think those are good questions once it gets going though people have an enormous interest in in pushing Rembrandts I mean it it creates its own constituency Zone one uh Mr Buffett Mr Munger my name is Joe Shulman I'm a shareholder from Oxford Maryland thank you for a wonderful meeting uh in order for Berkshire to have an opportunity to hopefully grow its earnings by about 15 percent per year if we can do that at least for the next few years it's obvious that because of the redeployment of uh earnings and Float the existing businesses do not need to grow at 15 percent at what rate would you expect the existing businesses to grow to achieve an aggregate rate close to what I'm describing and what do you think the probability is of achieving that yeah well I think the probability of us achieving 15 growth in earnings over a extended period of years is it's so close to zero it's not worth you know calculating uh I mean we'll we'll do our best and and we have a lot of fun doing it so it is not something where we have to come down and do things that that are boring to us or anything of the sort of I mean our inclination is to very much to do everything we can legitimately to add to berkshire's earnings and things we can understand but it can't happen over time it you know we will have years when we do it but and you're quite correct in pointing out we don't need to do it from the present businesses we will we will add things all the time any more than we needed to do it from the current business back in 1965 with the textile business I mean we have to improvise as we go along and we will uh and the businesses we have are good businesses in aggregate they will do well they won't do anything like 15 growth per annum but we will take a good rate of progress from those businesses and we will superimpose upon that Acquisitions which will add to that but we we can't do we can't do 15 over over a period of time and and and nor incidentally do we think any large company in the United States uh is likely to do there will be a couple that do it for a long period of time but to predict which of the Fortune 500 will end up being the one or two or three uh would be very hard to do and it won't be it won't be more than a couple out of 500 if you take large companies not working from a deflated base year I think our method is a pretty good one I mean I think the idea of having a group of good businesses the throw off cash in aggregate in in a big way that themselves grow that are run by terrific people and then adding on to those sometimes the slow rate but every now and then at a good clip more businesses of the same kind and not increasing the outstanding shares I think that's about as good a business model as you can have for a company our size but what it produces we'll have to see Charlie I certainly agree that the chances of this 15 per annum Progress extrapolated Way Forward is virtually impossible I think generally the Charlene class in America should reduce its expectations a lot including the Pension funds yeah including the Pension funds you bet it's stupid the way people are extrapolating the past this is slightly stupid massively stupid and and this is a message incidentally if you think about it I mean nobody has any interest in in saying this a financial interest in saying that this whereas people have all kinds of financial interests in saying just the opposite I mean so it you do not get an information flow if you listen to the financial world or read the financial press you do not get an information flow that is balanced in any way in terms of looking at the problem because the money is in is in believing something different and and money is what you know it's what causes people to to become prominent uh or it flows from becoming prominent in the investment World in terms of whether you go on television shows or or whether you manage money or trying to attract it through funds or whatever it may be uh I don't think if you were an Actuarial consultant and you insisted that your company the companies that that you gave your actuary report to use a six percent investment rate I don't think you'd have a client so it's it's almost impossible for the advisors in effect in my view to be intellectually honest on it don't you think so Charlie yeah there was a very small there is a very smart investment advisor in my town and he he said that years ago some uh risk Arbitrage firm would tell us clients we know how to make 15 per annum year in and year out and he said years ago everybody said that's impossible he says now in this climate they say so what you know who's interested in the lousy 15 and it was easier in the earlier climate yeah obviously because the money hadn't been attracted into it generally speaking there's more Felicity to be gained by from reducing expectations than in any other way it is simply crazy for this group to have very high expectations moderate expectations will do fine for all of us okay we'll take one more before we go we break for lunch uh we'll go to number two good morning my name is Ken Goldberg from Sharon Massachusetts a few questions ago you mentioned the company's investment in USG I was wondering how the company how you got comfortable with that as an investment in light of the asbestos exposure do you view the company the stock as cheap enough and the asbestos exposure is manageable enough over time so that so that the investment is Justified or do you view it as in a worst case scenario if the subsidiary with asbestos exposure blows up the rest of the solid businesses are insulated from that and are alone worth the price of the investment let me answer that I don't think we want to comment yeah it's one tenth of one percent of Berkshire roughly I mean it but as Charlie says we that gets too close to giving stock advice but I will tell you there are asbestos problems are serious and they would be the first to tell you that so let's take a break for lunch we'll be back here in a half an hour thereabouts and look forward to seeing you then thanks okay [Applause] I hope you've all had a cholesterol free lunch and we will move on and when we stopped we were about to go to zone three hi my name is Jason tank from Traverse City Michigan I've got uh one one kind of quick question that I'm sure you can answer relatively quickly if you're not interested um I know that Walter Scott's on the board of directors and he's also on the board of directors of a company called level three communications that is in an industry that's well there's been a lot of change happening and stock prices have been plummeting I wonder if you've ever you've probably spoken to him at Great length about the economics of that business and have you ever expressed any interest in that business especially at the prices today that's the first question the second question is um if you look at if you look at Berkshire Hathaway as a portfolio of you've got wholly owned subsidiaries as operating businesses marketable Securities common stocks and bonds if you strip out and if my premise is wrong just please tell me if you strip out the leverage effect of the cost of the of the float being you know nearly zero or negative throughout the years if you look at the portfolio minus that leverage piece how fast you think your book value would have grown over the last 30 plus years are we talking about five or six percent due to just the leverage piece on the insurance float I don't think it would run as much as five or six percentage points but the float has been very useful to us and uh and actually I've never made the calculation so you could well be correct that uh uh if it was five or six points that would be a quarter of our Book value gain over the years being attributable Insurance float and uh I think that's probably on maybe on the high side but but uh and it and you can't make it we don't look at Insurance flow to 100 the same as we would look at Equity but but we've looked at it a good bit you know in uh is largely town a month to equity because we've had so much Equity we could afford to do it that way um so I you'll have to make that calculation yourself we think insurance quote has been a huge asset to Berkshire we think it'll continue to be a huge asset and we look for every way possible to increase the amount of of low-cost float on a small scale we added U.S liability last year uh an excess Surplus lines carrier based in Philadelphia and so far that's working out extremely well got a terrific guy running it and you know we in a small way we add float there I just looked at the first quarter on it and we had a significant underwriting profit and we had float at it and you know that's the best of all worlds so we'll keep working on it uh and it will it will add it's a big asset that Berkshire has the great many companies I mean virtually no other company has it to the degree that we have that that also invests in other businesses and uses it as a source of money to invest in other businesses question about level three obviously can't answer I just I can tell you that you have two enormously smart and high-grade guys in Walter Scott and Jim Crow in that business but it's not a business I know a lot about and if I did I wouldn't talk about it Charlie I cannot talk just as well as you can [Applause] not always [Laughter] okay section four uh John Gallup from Kansas City I have a follow-up question uh to your comments about how financial statements can be distorted by making over optimistic assumptions about uh returns for the attention portfolio if you believe accounting statements is published in annual reports Returns on equity for U.S businesses are amazingly High higher than in Europe higher than they've been historically higher than Japan are these highs do you think completely attributable to accounting Shenanigans or are there any fundamental reasons in addition that might make returns in the U.S higher than in Europe or higher than they've been historically say that they certainly the extent that American returns have been higher than those around the world at least in developed countries I would say that they are not solely due at all to accounting Shenanigans I think I think that the absence of honest accounting for option costs and has been a factor but but American business has done uh very well uh excluding very well excluding any uh any uh accounting activities that Charlie and I might differ with uh you know I'm no expert on on exactly what returns have been around the world in developed countries but my impression definitely is that American Business uh is well above uh averaged average for the developed World in terms of profitability and you know I don't I don't have the answers as to why that's occurred I think that American Business uh and I think the whole American System has reflected more of a meritocracy than than exists in many countries and I think that that a meritocracy works best I think and I think that Mobility between classes which is the flip side of a meritocracy you know does tend to get the Jack Welch is into positions of uh where they run a general electric or an Andy Grove or an Intel or you know Sam Walton at Walmart I think I think if you've taken those same individuals and dropped them down in most countries it would have done very well but I don't think they would have done quite as well as here and I think that what they have done well has spilled over in a big way to benefit the American economy so and I would not lay it all on on the accounting Shenanigans and the Pension funds accounting that applies very heavily at some companies and of course most newer companies don't have pensions companies have started in the last 20 or 30 years are much more inclined to have various kinds of profit sharing or 401ks the the older industries that took on pensions spurred to a great degree I think by World War II when you got excess profits taxes that ran to 90 percent and there was a huge incentive to start pension plans and fund them heavily because the government in effect was funding 90 percent of your of your pension obligation so there was a great boon boom period in in in in the inauguration of Pension funds and of course that Amendment steel and auto and all of those big industries of that time Charlie yeah it isn't so much accounting shenanigans as it is deliberate Financial practice take General Electric there's been a deliberate increase in financial leverage which was made possible by the wonderful and deserved reputation uh there's been a deliberate increase in repurchase of stock which General Electric has done even when they're paying huge multiples of Book value sort of thing does wonders for Returns on equity as reported as does the process of writing off everything in sight in various extraordinary charges removingly uh burden of past costs for future earnings you put all those things together and uh American Returns on Equity or higher partly because the management is deliberately set out to paint the company as unusually efficient in its use of capital meaning that it earns a high return on shareholders equity uh think of how high we could drive our return on equity at Berkshire I mean you could make it almost any number you want if we just used enough leverage we could run Berkshire with no equity and then people could say gosh these guys have finally learned how to manage the damn thing it's not been an objective around here to reduce the equity to zero but at other places in order to make the reported return on equity good they they deliberately pound down the net worth as much as they can yeah the questioner may have seen if you look at the s p figures of the last 15 years they report them both before special charges and after special charges and there's been a very significant difference between those two figures and the uh American Business likes to frequently write off things and say that doesn't count and of course that takes the equity down and it actually frequently benefits future earnings because you remove costs that would otherwise hit the income statement in in in future years the truth that matters you have a part of this is is shrewd and correct management of the companies Financial structure and operations and part of it can drift into gamesmanship region five Mr Buffett my name is Mallory Marshall and I am from Kearney Nebraska I have two questions first my dad would like to know if you have any grandsons my age she wants to know if you have any grandsons hooray how many shares of stock do you have and I'll tell you then also what investment advice do you have for young people of my generation well I I've got a grandson fairly close to your age and probably would go for a younger woman anyway something I will mention him to you I mentioned you to him at the no if you're interested in financial matters a a you've got to have something to work with I mean I I was fortunate in that respect because my dad paid for my education uh uh if you hadn't I probably wouldn't have become educated if I had a paper myself but so I was able to save ten thousand dollars by the time I was 21 and uh you know that was a huge huge Head Start uh if I hadn't been able to do that and you know my first child came along when I was 22 so the family it's much easier to say but uh in those teenage years if you're lucky enough to be in a family where you don't have what your parents are taking care of your financial obligations uh every dollar then is you know worth making 10 or 20 later on and so if you are interested in financial matters getting a stake early is very useful in getting knowledge early is very useful so you know I would say you're well on well on the way if if at 11 you're even interested in coming to a meeting like this and I would if that interest is maintained you know I would read financial publications I would I would read whatever was of interest to me I'd I'd be curious about how the businesses around the town of Kearney operated I would to the extent that you can get people to talk to you and people usually like to talk you know learn about who's got good businesses in Kearney and why they're good businesses and learn about the businesses that went out of business and why they went out of business and just keep accumulating knowledge that's one of the beauties of the business that Charlie and I are in is that everything is cumulative the stuff I learned when I was 20 is is useful today not necessarily the same way and not necessarily every day but it's it's useful so you're building a database in your mind that is going to pay off over time but you have to have a little money to work with so there's nothing like there's nothing like getting a few dollars ahead stay away from credit cards and you can have a lot of fun if your mind goes along that track as you get older Charlie well I'm glad to see somebody that has so early shown an interest in getting ahead there's nothing wrong with getting ahead yeah and actually she may have the best idea about getting ahead by learning the name of my grandson well there I can give the young ladies some advice before your feelings totally take over you should look carefully at both parents and all four grandparents [Applause] right Charlie and let us know how it works out area six I'm Jack Hurst Philadelphia Pennsylvania uh three notes of thanks first for American Express for the terrific job they've done the last three times in scheduling reservations reservations for me the second is thanks for the care you take with your annual report there is nothing more accessible than the statistics in that report and the text is just absolutely marvelous the third one is the care and feeding you give to troubled businesses like World Book which I'm glad it has survived and Dexter's shoes they were they're they're closing the plant in Milo Maine which is advantageous for the shareholders but they gave the people enough time that because of the uh additional Jackson Labs expanded their hiring and Fidelity brought 6 000 jobs into the area so those people will have better chance for jobs than they had to they were kicked out right away the second point is a question about Geico you have a wonderful Quest table in your annual report showing the number of policies issued and the policies enforce at the end of each year for the last seven or eight years in general at the end of one year the policies in forests are equal to 95 percent of the policies enforce at the beginning of the year plus 60 percent of those that have been issued in the year and that's been constant all up until this last year when the amount enforced at the end of 2000 is 24 of the policies issued in 2000 and 95 percent of those that were enforced at the end of 1999 I'm curious if Mr nicely has asked first why is there such a large difference in lapse between the first year policies and the renewal policies and why is there such a discontinuity in the year 2000 em I'll answer the last one first and about Geico the the retention rate is reflect is is affected uh overwhelmingly by two factors one is the mix between uh the below standard business the standard business and and and and and and the Better Business in terms of risk in other words uh we have just making a calculation here uh we have 75 percent or so of our business Plus in the preferred category but but we have grown faster up till the last year or so in the last three or four years before that up till the last year in the standard and the non-standard business those latter two categories have far greater far greater lapse rates or non-retention ratios relapse ratios than the preferred business they're two different businesses almost so any change in the mix between preferred and the other two categories will change the aggregate retention ratio very substantially the second thing is that the first year has a much higher retention lapse ratio than the second year of a policy and in turn then the third and so on in other words if you get the preferred business that's been with you five or more years you have a very very high retention ratio in the last few years we've added more new business than we were adding in the years before that so we have had a higher percentage of new business and we've had a higher percentage of non-preferred business both of which would make the aggregate lapse ratio look higher even though the lapse ratio when when categorized by by class of business and age of business really hadn't changed very much now it's true however our retention ratio in the preferred business has fallen by a point or so but that's that's the big difference and and now unfortunately you know our new business is not as strong so you'll actually see and and but our preferred business is running stronger than our standard and non-standard so you were seeing the mix go back in the other direction uh right now I mean currently that's going on through right to date this year our preferred business is up uh in Aggregate policyholders and our our standard and and non-standard is down so what you've deduced from those figures uh reflects changes in mix and age of business far more than it does retention ratio although there was a minor change in in the retention ratio and that will be true and maybe I should explain that better in the annual reports in the future I I touched on a once a year ago but I but we can make that clear in in in in future reports what you said about them the American Express people I I I Echo I mean they have just done a fabulous job with people we sort of turned the problem over to them of how people get here and where they stay and all of that and and we've had wonderful help uh from the local American Express office and and frankly they've been so good we don't even think about it we it uh we just refer people on the American Express and and I congratulate them for the job they've done thank you area seven please I'm chip Mann from Minneapolis Minnesota thanks again for this open uh format and your direct answers to our questions you've talked a bit about the super cat class uh level of risk that you write could you share your thoughts about expanding the competitive advantage and the scale advantages at General Ray referring more to their traditional or historical franchise and the type of contracts they would write yeah General Ray was a it is a and generally a clone are a very different operation than that historical reinsurance business in the National Indemnity National Indemnity had nothing like their distribution system and uh I mean they have a they have a uh and a knowledge base for a whole different form of reinsurance than we could ever accumulate at national indemnity General Reed did not nor cologne did not take retain as much risk as we're quite willing to retain because their financial profile was was different before they joined Berkshire so it's an opportunity for us for two reasons to make more money in that respect than General rewrite might have made on its own one is we can retain much bigger portions of what they would write in the first place and which they've been writing over the years but which they've laid off with other companies and what has the fancy name of retrosessionals uh and the second point is that they have a distribution capacity that May well have the ability to deliver to us a lot of big risks that we might not otherwise see and that in the past they might not otherwise have had a good outlet for so there is there's really true I hate the word but there's really true synergy in general Ray colon being married to Berkshire Hathaway and and and you put your finger on on on really one point that has has two aspects to it and we haven't fully exploited that we probably won't fully exploit it you know 10 years from now but but it's it it's it's very much in my mind and the minds of the managers at General Ray and cologne that we have expanded opportunities simply because Berkshire is willing to take on more risk than just about anybody in the world knowingly takes on although we think some other people take on a lot more risk unknowingly but in terms of writing a specific contract we are both bigger and faster I think than anybody in the world and in effect we have some of the abilities that used to be associated with going to all Lloyds of London I mean we can we now I don't know how true all that was over the years because I wasn't around there then but but we really can give an answer on a on something on something in an hour that other companies wouldn't know what to do with in a month uh and that should be a plus for us uh in the in the world Charlie nothing to add okay zone eight my name is Ethan Berg I'm from Cambridge Massachusetts and I'd like to thank you for the education you've provided particularly with the annual reports I've got three brief questions years ago you wrote to your friend Jory orange that you were applying to Columbia's business school because they had a pretty good finance department and a couple of hot shots and Graham and Dodd if you're considering graduate or business school today with which individuals or professors would you want to study second question is a friend who wants to know your thoughts on the concrete cement and Aggregates business and the third question is from my wife you mentioned earlier if someone were buying a parachute they wouldn't buy based on lowest bid we saw you tooling around in a car this week that were to be bought today could probably be bought at a relatively low bid as someone interested in your health she's wondering whether you've considered a newer automobile possibly one with lots of airbags actually I picked out the car I have based on the fact that had airbags on both sides so that that was a that was a factor and maybe the first garbage type ever made with airbags but I think I think I I I think my car actually it's both heavy and has airbags and and that those are two primary factors in safety I don't think any any any uh I don't think it's safer car is necessarily being made it might be safer to drive around in a big heavy duty truck or something but I'm not ready for that the incidentally on a car I look at that like anything else it would take me probably a half a day to go through the you know the exercise of buying a car and reading the owner's manual and all that and that's just a half a day I don't want to give up in my life for for no benefit uh you know if if I could if I could write a check in 30 seconds and be in the same position I'm in now with a newer car I'd be glad to do it this afternoon but I I don't like to I don't like to trade away when there's really no benefit to me at all I'm totally happy with the car I'm I just don't want to trade away the the amount of time I'd have to spend fooling around to get familiar with the and get title to and do all the things rest of the things pick one out saw a new car but if there's a safer car made you know I'll be I'll be driving in it um the the uh the Aggregates business concrete all of that those are businesses and Charlie probably knows more about them than I do we've looked at businesses like that in fact we've even owned a few shares at one time or another because it's an understandable business and in it's a business that well particularly if you get into concrete cement I mean you know there have been periods of substantial over capacity particularly on a regional basis but but those are fundamental businesses and and at a price you know for low cost capacity and uh advantageously located raw materials and so on um you know we would do in fact Charlie and I look talked about one probably 10 or 15 years ago quite a bit uh and he's had fair amount of familiarity with it uh and what was the other one I jounded it down here let's see he wanted to know what business school oh Business Schools yeah well I would I would say this that that uh I think Bruce Bruce greenwald's class at Columbia is very good he gets in a lot of people but uh that uh our practitioners so there's a lot of practicality to the course and I think Bruce is good he's got a new book coming out that that uh probably within the next six months or so that that we'll deal with that and then they're also been a uh endowed at the University of Florida certain courses relating to Value investing and I think there's been one at the University of Missouri so I would suggest you at least check out the curriculum at the University of Missouri in Columbia and and Florida and uh and do a little comparison and maybe check with a few graduates recent graduates as to what kind of experience they had that I think you can if you can find them I think that's the best the best system for evaluating a place but those three at least have courses that that based on the on the catalog sound sound like uh uh they might be of interest to you Charlie the huge majority of the business school teaching on the field of investment of passive portfolios of securities is not what we believe and not what Warren was taught Years Ago by Ben Graham they're just little pockets of of uh our attitude left there's one at Stanford Jack McDonald yeah sure and uh yeah that's graduate school graduate school and what's interesting about that is I think it's the most popular course in the whole Stanford Business School they've got some kind of a bidding system and yet I asked Jack how he felt and he's he said he felt lonely he's got the most popular course but in the whole professoriat dealing with investment matters the Jack McDonald's are a little clan of their own and a in a side pocket so to speak now they're right and they can take whatever consolation they get from that but but mostly if you go to a business school you will learn a lot of things we don't believe yeah Jacob Bob Kirby comes in and works with Jack sometimes too and you couldn't and Bob has got a terrific mind in terms of investment so that I mean there's no question about that if it you know it's not the easiest School in the world to get into and and and it is at The Graduate level but there are these occasional uh uh little anomalies as they would say uh in in the teaching world I mean what you really want a course on investing to be is how to value a business that's that's what the game is about I mean if you don't know how to value a business you don't know how to value a stock and if you look at what is being taught uh I think you see very little of how to value a business and and the rest of it is playing around maybe with numbers or you know uh Greek symbols or something of the sort but but it doesn't do you any good I mean in the end you have to decide you know whether you're going whether you're going to value a business at 400 million dollars or 600 million dollars or 800 million dollars and then you compare that with the price and that's that's what investing is and I don't know any other kind of investing you know basically to do and there's that just isn't taught and the reason it isn't taught is because there aren't teachers around you know who know how to teach it I mean they don't know themselves and since they don't know themselves they teach something that says nobody knows anything and which is the efficient market theory and if I didn't know how to do it if I ever teach physics I'm going to come up with a theory that nobody knows anything because it's the it's the only only way I can get through the day you know but uh it's fascinating to me how uh I'll uh how the you know the really great universities operate in this respect they uh uh if you get a sacred writ I mean you get in the finance department because you sign on you know to whatever the present group thinks and if they think the world is flat you better think the world is flat too you know and your students better answer the world's flat when they get a on exams doesn't I I would say investment Finance teaching in this country is is uh in general is kind of pathetic well I think the Business Schools do a pretty good job when it comes to accounting or or personnel management or uh there are a whole lot of subjects I think they do quite well with but they miss one enormous opportunity if you learn to think intelligently about how to invest successfully in businesses you'll become a much better business manager than you will if you aren't good at of uh understanding what's required for successful investment so they're missing a huge opportunity to improve the management profession by doing such a lousy job in teaching investment yeah see Charlie and I see CEOs all the time who who in a sense don't know how to think about the value of businesses they're acquiring and then you know so they go out and and hire investment bankers and guess what the investment banker tells them what to do it tells them to do it because they get 20x if they do it and X if they don't do it and guess how the advice comes out so it it's uh when a manager of a business feels helpless which you won't say out loud but but inwardly feels helpless in in the question of asset allocation you know you've got a real problem and and there are they have not gone to business schools that have given them any real help I think in in terms of learning how to think about valuation in businesses and you know that's one of the reasons that we write and talk about it some because it's there's a gap there okay number one my name is Martin Mitchell I'm from Bakersfield California my question uh two-part question is concerning debt we know that individual debt can be devastating do you are you concerned that the American Consumer is so far in debt as a whole as to be a problem and part two is do you feel that our trade deficit with other countries is uh concern to you well the first question about that I think it's very hard to answer about the consumer as a whole I I get letters every day from people who have problems in life and they revolve I mean they're either health or debt and usually the frequently the debt is connected with health oh no but they it's been very easy for them to borrow money and they're in over their heads and it's all over then uh and there's no question that that the Americans consumer is somewhat more indebted in aggregate but it's a very hard thing I think to come into conclusions about whether whether it poses a a serious problem uh you know most people have had assets directly or indirectly that have gained in value enormously particularly in in real estate uh and some in insecurities so there's a greater capacity to carry debt as earning power increases and and and and assets held increases I don't I can't give you a useful answer in terms of the world as a whole but I give I constantly give advice to to young people and those are the only people I talk to aside from uh our shareholder group and I just don't start out behind the eight ball I mean it's crazy to get in debt because it's so hard to get out of debt and I mean the idea of having credit card debt and we issue credit cards in all our businesses and you know and so does every other retailer but the idea of of trying to borrow money at 18 you know and thinking you're going to get ahead in life it isn't going to work and uh I urge people they use their credit card but I urge them to pay it off before it starts revolving because it it it's just it's too expensive Charlie and I can't make money with 18 money I mean we're looking around for float because we don't want to pay five percent for money and uh so I I'm very sympathetic to people getting debt on it but once you get in it it is hell to get out I mean Charlie will have a few Ben Franklin isms to uh to uh quote on that subject uh in fact you want to uh give a few from Ben now he'd love to buddy I let it him into it the wrong way and then the second question about the trade deficit that's a very interesting thing because what when you run a trade deficit what you were doing is you're Trading assets of one sort of another for goods beyond what you're sending abroad so in effect you are selling off a tiny bit of the farm so that the country can consume more than it's producing if you if you run a net trade deficit the country in aggregate is consuming uh less than are consuming more than it's producing and if you're a very rich country you can't even see it because if you run a trade deficit of a few hundred billion dollars you know compared to an economy that may be worth what 40 trillion or something like that you don't see it but you're you're trading off a tiny bit of the farm every year to live a little bit better than if you just lived off the produce of the farm that year and uh and you can do it with ious if you've got a good record you can't do it with ious if you're a country that's got a terrible record so they have to denominate their debt in dollars and of course they don't have the ability to denominate a lot of dollars because and people don't want to accept a weak currency so a weak country can't get away with doing that unless it's getting special type loans from agencies set up to do that we can do almost anything we want in this country because we don't confiscate property and we don't we don't uh we haven't we haven't destroyed a currency that the people have accepted in terms of a payment for their goods over the years but I basically think a significant trade deficit over a long enough time is is a significant minus for the for the country you won't see it though day by day or week by week or month by month but eventually if you if you trade for trinkets or whatever you're getting uh beyond what you're sending and you trade away your assets fortunately some of the assets we traded not that many years ago uh like movie studios and some of those things uh the other people got the short end of the bargain on but but by and large it's it's not a good policy for the country to run large trade deficits year after year Charlie well it's that's certainly true of what you're trading for is crank UPS or consumer goods or something but of course a developing country that ran a trade deficit to put in power plants and what that might be a very smart thing to do in fact the United States once did that yeah we did it with railroads in a huge way you know and and but under modern conditions do we look like a twosome that would love a big trade deficit no it's one thing to build railroads with a process but but it's it's another thing to you know to buy radios and television sets I mean it depends what what you're getting but by and large we've run a trade deficit on consumption goods and and that that's not a big plus over time area two good afternoon I'm Jim hayes from Alexandria Virginia um I'd like to thank you and Mr Justin for bringing uh his Masterpiece into the Berkshire family but um the question arises will you soon run out of uh privately held firms that meet the criteria for Acquisitions of sufficient size to continue on the returns sure well that's a good question uh because people would sell to us have the option of Private Business selling elsewhere or going public there seem to be enough people that have built businesses lovingly over 50 or 100 years and their parents before them and grandparents that really do care about the eventual disposition of them in some way Beyond getting the last dollar that day uh that we have a supply from time to time of those businesses and I think I think we'll continue to see them you do raise an interesting question how many businesses like that are worth you know a billion dollars or more in the whole economy when there seem to be you know I wish there were more but there are enough so I think we will probably buy on average maybe two a year something of that sort um the really big ones I mean what we'd love to make is a 10 or 15 billion dollar acquisition and there would be very few private companies that would be in that category and and then from the ones that are in that category you have to find somebody that is not going to conduct an auction we of the of the we don't we don't we just are not interested in in auctions if somebody wants to auction their business we're not that excited about getting in with them because we need people to run it after we buy them and and if that's the way they look at their business we may get more unpleasant surprises than we've tended to get in the past with the with the kind of criteria we've used Charlie yeah there are two aspects of that situation one is are there going to be enough businesses and two how much competition are we going to get from other buyers one thing we do have going for us is that if you are the kind of a business owner that likes the culture that's in this room today there isn't anybody else like us everybody else is off on a different path with a different culture so [Applause] and look at all you I mean this culture is popular at least with a certain group and surely there will be other people who like this culture in the future as in the past and who will feel right about joining it with their companies we haven't had any luck internationally so far but we would hope that that could change I was over in Europe about a month ago and I got asked the question a lot of times about about whether we would be a prospect for businesses in Europe for example the answer is yes and then they say well you know why haven't you bought it and I said the phone's never wrong I don't know whether they thought that was a brilliant answer or not but they uh but I left my phone number a lot of places you know every time I got a chance I gave that answer and maybe the phone will ring I I I I've Got to Believe that if we were on the radar screen the same way in Europe over the last five years that we have been in the United States we would have bought a couple of companies it just they don't think of us and and a lot of people don't think of us in the United States either but more do now than did five or ten years ago and we have actually a reasonable percentage of our our acquisitions come directly or indirectly because we've made another acquisition in the past where the seller was happy uh it's very hard to find anybody that's been unhappy dealing with us and and uh they're friends with other people in their industry or whatever it may be so we hear about things now more often because we actually have uh uh us what you might call a recruiting Force out there of people that have already done business it's very much like netjets that way I mean we spend a lot of money advertising at executive jet the netjet service but still 70 percent or so of our business comes from from owners who are with us they're by far the best sales people we have and incidentally that's the way I was introduced to the business Frank Rooney who's in this room today told me about his good experience with netjets back in January or so of 1995 and that's when I joined in and if Frank hadn't told me I might six years later I might not I might not have ever looked into it I mean you know I might have just turned the pages past the ads and but when Frank said you ought to look into this I did well that's what we hope we have going for us on the acquisition front and I think we do to some degree but we'd like it to be greater and we'd like it to be more widespread geographically than it is when I was a lawyer I used to say the best business getter any lawyer has is the work that's already on his desk and similarly probably the best business getter that Berkshire Hathaway has is the uh the business practice that's already on our desk that's what that's what's driving the new businesses in right sure sure so it's a very old-fashioned idea you just do well with what you already have and more of the same comes in zone three please my name is Steve sondheimer I live in Chicago and I'm 14 years old I'm a third generation shareholder and my question is I noticed that you sold our position and Freddie met what risks do you see in that industry are you Joe's granddaughter yeah ah good we have an amazing number of second and third and even fourth generation shareholders which I'm delighted with I mean I don't think lots of companies big companies on the stock exchange are in that position uh it is true we sold the Freddie Mac stock last year and uh there were certain aspects of the business that we felt less comfortable with uh uh as uh as they unfolded and and Fannie Mae too uh and the consequences of what we solved may not hurt the companies I mean at all but they made us less comfortable than we were uh earlier when actually those practices or activities didn't didn't exist we did not I would I would stress we did not sell because we were worried about more government regulation of Freddie and Fanny if anything just the opposite so it was not it was not Wall Street occasionally will react negatively to the prospect of more government regulation and the stocks will react sometimes short term for that reason but that was that was not our reason we were uh we felt the risk profile that changed somewhat Charlie yeah but that may be a peculiarity of ours we are especially prone to get uncomfortable uh around financial institutions we're quite sensitive to it yeah the risk in whether it's in Banks insurance companies uh or in what they call gses here and and and in the case of Freddie and Fanny we we feel there's so much about a financial institution that you don't know by looking at just figures that if anything bothers us a little bit we're never sure whether it's an iceberg situation or not and that doesn't mean it is an iceberg situation in the least at Banks or insurance companies that we passed but but we have seen enough of what happens what with financial institutions that that push one way or another that if we if we get some feeling that that's going on uh we just figured we'll never see it until it's too late anyway so we just we we better do without and wish them the best and and without any implication that they're doing anything wrong it's just that we can't be 100 sure of of the fact they're doing things that we like and and when we get to that situation it's different than buying into a company with a product or something you or retail operation you can spot troubles usually fairly early in those businesses you spot troubles in financial institutions late it's just the nature of the Beast yeah financial institutions tend to make us nervous when they're trying to do well that sounds paradoxical but that's the way it is financial institutions don't get in trouble by running out of cash in most cases other businesses you can spot that way but but you know the financial institution can go beyond the point and we have Banks 10 years ago that did that and and mass but they can go beyond the point of uh solvency even while they still have plenty of money around area four please good afternoon Mr Buffett Mr Munger my name is George Brumley from Durham North Carolina we often consider evaluating companies in the context of Michael Porter's model of position relative to competitors customers suppliers substitute products you state that much more simply when you say you seek for companies with the protection of wide and deep Moats to complete the valuation of a company we all seek to choose the appropriate future cash flow coupons a qualitative assessment of the protected competitive position is required to precisely forecast those future coupons in your opinion are the dynamic changes in the nature of competition Distribution Systems Technology and even changes in customers making it more difficult to accurately forecast those future cash flow coupons our good protected business is going to be more rare going forward and than they have been in the past and if so does that make the few that do exist more valuable well you've already described the investment process well I can't see from here but which George are you are you the uh are you friends brother-in-law are you uh one generation down George III my father is here as well okay good the uh the questions you ask are right on the Mark um and we do think to extend I understand what or read what Porter has written we think alike basically in terms of businesses and we do call it a moat and he makes it all into a book but that's that's the difference between the businesses we're in uh yeah I I and Charlie may have a different view on this I don't think that the uh quantity or sustainability of Moats in American Business um has changed that dramatically in 30 or 40 years uh um now you can say that Sears and General Motors and people like that thought there were some very wide moats around their businesses and it turned out otherwise one there's a serious Walmart for example came along but I I think the businesses we think about I think the the moats that I see now seem as sustainable to me as the Moats that I saw 30 years ago but I think there are many businesses Industries where it's very hard to evaluate mulch those are the businesses of Rapid change and are are there fewer businesses around where change is going to be relatively slow than previously I don't think so but maybe Charlie does Charlie no I would argue that that the the old moat some of them are getting filled in and the new Moats are harder to predict than some of the old modes now I would say it's getting harder well there you have it unanimity at Berkshire okay I think it's a very good question and I and I really don't you know Charlie may be right I may be right I I think it's a very tough one to figure but regardless of whether there are fewer or that harder to find that's still what we're trying to do it at Berkshire I mean that that is what it's all about our instructions to our managers we don't have a lot of we don't have budgets and we don't have all kinds of reporting systems or anything else but we do tell them to try and not only protect but enlarge the moat and if you enlarge the moat everything else follows area five Bill Graham from Los Angeles Warren you've made it possible for outside shareholders to understand berkshire's Financial businesses but there is one that seems to me anyway hard to understand which is the financial products business which I guess involves trading of derivatives and for the same given the same kind of concerns that you and Charlie voiced in relation to financial businesses can you help us out on that and why you're comfortable with it well I think you put your finger on it bill it is a hard business to understand and it's a hard business to understand if you own it let alone read about it in somebody else's annual report and I would guess that most people who own complicated or extensive derivatives businesses I would say that most of the CEOs probably don't understand it and how much how many of them stay awake at nights over that I don't know actually in financial products what you see on that one line of income on that and also what you see in the and the balance sheet items is a combination of several things it's General Securities which used to be grfp General refinancial products it's and it's a couple of other operations it actually had our it has our uh has our uh structured settlement business in it which is quite predictable and a very easy business to understand and it actually has some uh some trading business that that I do uh that falls in there it's not a normal investment business but it may involve what I think are tend to be fixed income related it it would would uh it might involve uh Arbitrage or semi-arbitrage or various types of fixed income uh security it wouldn't involve any Equity Arbitrage that would not be in there but I would say that it would be a fair criticism to say that neither Charlie nor I know fully or even in large part what goes on in the derivatives business now we have a fellow who is both smart and trustworthy running that in Mark Burns so we feel very good about the individual we we do not feel the instinctive understanding of everything that's going on uh that we do probably in most of the businesses that we're in I think I think we probably got 17 000 outstanding tickets uh at General race Securities and those interplay in all kinds of ways and uh I don't I don't think that Charlie uh or I have my my our minds around uh that book of products that that means we want to be very comfortable with a fellow whose job it is to have his mind around those products and I will tell you that we you know there's nobody that I feel more comfortable with than Mark Byrne but it is it's not a natural type business Force the other things in that area and we made a fair amount of money in in in some things that aren't related to the derivative business uh last year uh and those are under my direct control uh so I feel okay about that the structured settlement businesses is a minor a profit area but it's it's made us some money and right now it's not attractive but it it could be again in the future and there could be other Financial type things we would stick in there but if we stuck in anything it would be something that I would be running to Charlie mix includes what I would call Oddball pastimes of Warren Buffett outside the ones that are publishable outside the the common stock field that I'm quite comfortable with although I'm sure the results will be irregular uh the the rest of it and and I think we also have what might be called Oddball personal ideas of Mark Byrne and I'm quite comfortable with those as you get away from that into what might be called more standardized derivative trading businesses I think it's fair to say I like them less than most of the people do who are in them quite a bit less yeah yeah we regard that area as potentially being Dynamite because if you get a group a large group of people that in many cases in that business although we've tried to go away from it ourselves but in many cases that business are getting paid based on front-ending uh potential profits uh you can get I mean that's a dangerous situation to place a hundred people in you're gonna you're gonna you're gonna find people who will crack under that in terms of what they will do uh you know they had we had a case of it actually in the electric utility industry uh a year or two ago uh when Edison in California and through a subsidiary compensated People based on on projecting the profitability of business they were putting on the books that day that's Wall Street practice and it was brought to the utility industry and it it it it produced I'd say predictable results so it's it's dangerous to pay people to make deals where you won't know the outcome for 15 or 20 years and give them a lot of money up front uh for doing it and that that's fairly standard practice in the in the in the business I mean it was it was standard practice at Solomon when I was there and and as I say people occasionally crack under that it isn't exactly analogous but it's worth reading Roger lowenstein's book entitled when genius failed because it it touches on some of the problems uh We've described Charlie and I are apprehensive about yeah the derivatives business has the very significant problem that the accounting profession sold out the accounting is uh improper it front ends way too much income it's irrationally optimistic because that's the way the denizens of the field want it because it creates bigger compensation intrinsically and irresponsible system and it and it's another case where the accounting profession has failed The Wider syllables that failed The Wider civilization we found Charlie was on the audit committee at Solomon and we and we found positions single positions Miss marked by close to 20 million dollars for example oh yeah but deliberate Miss markings was not the main bro the main problem is the whole system of accounting is wrong the whole system of accounting is too optimistic it'll be like going into the taxi cab business with a 30-year depreciation rate or or it'd be like it'd be like riding long very long tail insurance and paying a big commission up front based on the expected profit of that insurance over a 10-year period or something would that prepared by the guy who wrote the policy there's certain activities that are really just dangerous in the financial world and when you get close to that kind of situation you just have to be very careful now you actually Mark has been implementing A system that compensates that accounts for this significantly differently than than occurs at most many institutions so you know you can try to attack it but it's also hard to get it too far away from industry norms and still do business I mean yeah our accounting is way more conservative than the standard derivative accounting of the country thank God okay area six my name is Scott Tillson I'm from Owings Mills Maryland gentlemen you have stated many times that Lou Simpson manages the Geico Investment Portfolio on an independent and autonomous basis what unique or Superior qualities does Mr Simpson possess as an investor that is earning this tremendous vote of confidence secondly Berkshire invests in privately held businesses as well as publicly traded Securities while the skill set required to Value public and private businesses may be the same as Mr Simpson also have the additional experience and skills necessary to negotiate a private transaction if called upon to do so yeah I think he could but I hope he doesn't get called on to very soon [Laughter] Louis smart and K and careful in high grade and experienced so he does manage a couple billion dollars autonomously uh he will buy things I won't know about him uh until I either look at a monthly sheet or sometimes read it in the paper and that's fine you know he doesn't know what I'm doing I don't know what he's doing and every now and then we're in the same security so we try and coordinate if we're buying or selling under those circumstances and incidentally you will occasionally read uh a headline and or not a very big headline but in the financial press that says Buffett buying a XYZ well sometimes it's a Simpson buying XYZ they the reports we file uh would not necessarily tell the reader uh which one of us made the decision because even if the reports show that something was bought in Geico that could be bought in by me uh and and placed in Geico for various reasons or conceivably Luke and buy something uh and place it in National Indemnity or some other Berkshire company for for reason for also for perfectly good reasons but some of what gets reported is done by Berkshire is done by Lou entirely independent of me and and and and and most of it uh in terms of dollars is is done by me but uh but Lou's record is just as good as mine so uh and Lou would know Lou would know how to evaluate businesses whether private negotiations or public Securities and and uh but I'm in no hurry to turn it over seven good afternoon good afternoon my name is Scott Croy I'm Chicago Illinois Mr Buffett could you please describe the situation the extent if any of Berkshire Hathaway's investment in phenovo group or the Sierra vinova's back appears to be against the wall yeah it's worse than against the Waller in chapter 11. but um but that that was all contemplated obviously uh phenova is the old Greyhound leasing company and grew to about 13 or 14 billion dollars in assets uh and then just about a year ago now uh ran into funding difficulties and when you run a highly leveraged Finance business and you run into funding difficulties they Compound on you very quickly uh you know confidence is a is a real coward I mean it it runs uh when it sees trouble and in a financial business you're constantly faced with refinancing old obligations and you have commercial paper out and all of that so there's no honey honeymoon period when you get in trouble in the finance business and we've even seen big ones in the past like Chrysler financial and all of that I mean it it can strike anywhere when confidence disappears and so for that hit for Nova about a year ago and it became clear not that many months later that for Nova would have to either be sold or reorganized and I think there were attempts made to sell the company to other finance companies and even a couple of little portions of the portfolio were sold but they didn't make a sale and when the bonds started selling down to prices that I thought were very attractive uh in the fall or whenever it was of last year and by attractive I mean I I thought that if they if they they went into bankruptcy that the their the assets were considerably greater in relationship to the liabilities than indicated by the market we started buying bonds and we bought a we publicly announced it we bought a billion 428 million face of Honor bonds or Bank debt uh so we out of 11 billion of aggregate debt at phenova we own a billion 428 million uh face value and we bought those at prices that looked attractive then and looked attractive now and it became clear uh it was someone it was clear how long that they either going to sell or or go into bankruptcy and it became clear that they weren't finding a buyer as time went by and so it became very likely that they would declare bankruptcy sometime earlier this year one of the reasons being is they didn't want to use the available cash to pay out the creditors whose money was coming due tomorrow and thereby shortchange creditors whose claims were due at later dates uh we thought perhaps somebody would come in with a plan uh of reorganization and it got very close to where they were in our view they were going to default and so we jointly with Leucadia in a in a joint venture called burcadia uh put forth our our own plan and made a uh and arranged a transaction but they are now in chapter 11. and there will be plans presented to the a plan or plans presented to the court in short order and then the court will determine I'm not Charlie may know about more about exactly how bankruptcy Works than I do although I don't think he's had any personal experience today uh that a plan gets submitted to creditors for for approval and we will have a plan which will be which has been outlined in the press and will be submitted to the court uh almost certainly within a week and when you could read about it at that time and then we will see whether anything else happens I mean it may be that somebody else comes in with a plan it may be that our plan is approved uh and if our plan is approved it involves a significant additional investment so that an initial payment can be made to the present debt holders uh and then we'll see see what happens we feel very good about for Katie we think for Katie uh well we think the Leucadia part of Arcadia brings a lot to the party in terms of efficiently managing the assets that are there I think it makes it when somebody gets in or an entity gets in bankruptcy it makes a lot of differenceology how it's handled I mean it uh you can there can be a lot of wastage of Assets in bankruptcy or there could be a reasonably efficient way of handling it we think that the brocadia arrangement will maximize the value of the assets and we think that's important but we'll see what happens I think I think our position is going to work out fine Charlie yeah I think it's a very interesting transaction and uh you would hope there would be more of it there will be I mean no I mean more more not more bankruptcy but more more cures of bankruptcy following this model I think it's a very intelligent model and a very clean simple prompt way of cleaning up a corporate mess and uh I hope the rest of the world feels about it the way I do and the the judge and other people concerned will say thank God and we want this one to go through and we want more like it to happen that's what we tried to do in Solomon incidentally I mean we tried to behave in a somewhat different way in terms of a corporate crisis that had been typical and we hope that if that got a good result that that might become a a model that uh that people might might gravitate toward in future problems because there will be future problems and we we're in the we are the largest creditor of finova now so we have more money on the line than anybody else and and uh we don't have an interest in our interest is not primarily in getting fees or extending the bankruptcy or trying any of that sort of thing we're just we want to get the greatest realization of assets as possible and the swing in that between doing it right and doing it wrong you know could be measured in the billions area 8. good afternoon I'm Claudia Fenner from Long Island New York and I have two questions the first is as a big fan of the Gap I'd like to know why at this time you feel that the Gap is undervalued and the second question if you could direct your answer to my husband as a shareholder would you agree that buying a large present at borsheim's this afternoon is like taking money out of one pocket and putting it back in another thank you I'll let Charlie handle the second one he's our expert on consumption at Berkshire the Gap is a good illustration of what I talked about earlier because I think the world assumes that I made a decision to buy Gap at Berkshire and actually that's totally 100 percent uh a Lou Simpson portfolio investment I I don't think I've read the annual report of the and I know I haven't read the annual report of the Gap ever and I don't know anything about it I mean you probably know a lot more about it than I do and I hope blue knows a lot more about it than I do that it's uh it's not a company I've ever looked at and and uh Lou operates and he has people that help him Lou operates and and somewhat he can look at smaller Securities in terms of aggregate market caps than I can because I'm investing two billion dollars he can work with 200 million dollar positions or or even 100 million dollar position sometimes and I I will do that occasionally just because I happen to to bump into them in effect but I'm really looking for things that we can put a billion or two billion or more in and and lose universe of possible candidates for purchase is a bigger Universe than mine and and that that may be a good thing I mean and having two of us in there because uh he he just is going to see things that I'm not going to see so you'll have to ask Lou about the about the Gap but well Charlie give her a little advice on abortion I think when you're buying jewelry for the lady you love it's it probably shouldn't get too much Financial calculation into it I will say this and this is true and you're talking to a guy who does not normally go down this path but uh I would say this I've never bought a piece of jewelry that I've regretted in terms of what has happened subsequently so it [Applause] well if that isn't a sales pitch I don't know what it is Zone one you're a tough act to follow I'm Matt Richards I'm from Parkton Maryland last year at this meeting a gentleman stood up and implored you Mr Buffett to invest in some technology stocks to juice our returns I would like to this year thank you for having not done that come on my question is regarding Geico I've been a USAA Preferred Risk customer for something like 15 years now I would look yeah you'll do very well with USAA they're a perfect company I'd prefer to be a customer of the company that I own part of um unfortunately due to an accident and two speeding tickets in the last five years they will not accept me as a Preferred Risk and I wonder if this isn't an untapped group of people who are preferred risks with their own company couldn't Geico possibly take their current Preferred Risk status into account when determining whether to accept them as a customer I would you USAA incidentally is a is a terrific company and Leo Goodwin who started Geico which was then called government employees insurance company in 1936. Leo actually was a key employee of USAA as was his wife uh Lillian they they both came from USAA and they felt that I mean USAA is you know limits its clientele and that time they limited their clientele to the officers uh in the armed services and Leo wanted to extend and that was a preferred class and the history has shown it to be a preferred class Leo wanted to extend that to other classes that he felt also had similar characteristics uh that USAA was not interested in and that's the reason he formed government employees insurance he felt that the the the preferred characteristic that could be determined by employment in that area as to their propensity for accidents would extend beyond the officer ranks of the armed services and he was right it's a fascinating Story and there's there's a good book about USAA that came out about two or three years ago tells the whole story uh it's it's hard for us to take away the preferred customers of of USAA it's hard for them to take away our preferred customers too but USAA has some of the same qualities that we've talked about in terms of State Farm it has as I remember maybe a six billion dollar maybe larger now Surplus it's slightly different than State Farm it's not a it's not a true Mutual it's it's a reciprocal as I remember but it's it's tantamount to a mutual so the six billion that has been accumulated over the years is working for present policyholders which is a terrific asset for them um and the fact that they keep you as a Preferred Risk probably means you are a Preferred Risk I mean I I their underwriting judgment is very good you know we we have various categories uh uh that relate to speeding tickets or accidents and all of that sort of thing and in aggregate they are a good predictor of future accident potential but it's only an aggregate I mean it's like saying you know because I'm 70 that I have an X percent chance of dying but it doesn't it doesn't doesn't say what's going to happen to me specifically but it does mean you're for you're insuring a hundred thousand seventy-year-olds you better get this sort of price we have these predictors too and certain and past driving history is is an important predictor but you've got this long history with USAA and and uh Dave probably for very good reason on that total history I'll keep you on the preferred class and we based on criteria that are developed from looking at 5 million policy holders we can't make the determination we can't come out and and actually observe you driving or anything of the sort we have to look at the information that comes to us which if it says speeding tickets or accident it does result in various scoring uh scores being applied so I I really can't offer you a better deal I'd like to I have a feeling you'd be a good client if USA ever gets mad at you come over and see us area two I'm Bob Klein from Los Angeles Wall Street often evaluates the riskiness of a particular security by the volatility of its quarterly or annual results and and likewise evaluates money managers by their volatility measures their Risk by volatility I should say and I know you guys don't agree with that approach I wonder if you could give us some detail about how you come at the concept of risk how you measure it in general how you approach risk yeah we regard volatility as a measure of risk to be nuts and and the reason it's used is because the people that are teaching want to talk about risk and the truth is they don't know how to measure it in business I mean that would be part of our our course on how to value a business would also be how risky is the business and we think about that in terms of every business we buy and risk with us is relates to well it relates to several possibilities one is the risk of permanent Capital loss and then the other risk is that just an inadequate return on the kind of capital we put in it does not relate to volatility at all are See's Candy business will lose money and depends on when Easter falls but it'll lose money in in two quarters of the four quarters of the year so it has this huge volatility of earnings within the year it's one of the least risky businesses I know you know you can find all kinds of you know Wonderful businesses that have great volatility and results but it does not make them bad businesses and you can find some very you can find some terrible businesses that are very smooth I mean I have a business that did nothing you know and its results would not vary from quarter to quarter right and so I it just doesn't make any sense to translate volatility into into risk and Charlie you want to add anything on that or no well it raises an interesting question which is how can a professoriat that is so smart come up with such silly ideas and spread them all over the country it is a these are it's a very interesting question if if all of us felt that Charlie yeah your Deli bars arrived oh good yeah you've heard of getting a second wind thank you you tip tip him I didn't think our cracks were that funny right right but I've been waiting for this craziness to pass for several decades now I I do think it's getting dented some but it's not passing if somebody starts talking to you about beta you know zip up your pocketbook area three Brian Zen from China as a Coke addict myself I'm excited to report to you our worldwide promoter in Chief that the kochs in Beijing taste just as wonderful as in Omaha as ex-zen monk today I feel like visiting the Buddha of the financial world we have an investment club with a name that ends in.com believe it or not which tells you that the frenzy .com friends even seduced Zen monks when we tried to follow you we find that Mrs Susan Buffett used to send Zen Buddhism books to her sorority sisters that's probably why she always has a peaceful smile due to her low expectation of Life which according to Buddha is full of sufferings but Mr Monger would tell me that Susan's smile is because you as the husband exceeded her low expectations that's right yeah and her father's even lower expectations anyway my question is uh did Susan also send those Zen books to your office or your bedroom and if you have read those books one of the key ideas that contributed to your investment Tau which even made sense to seclude it narrow-minded Zen monks like me thanks for the financial enlightenments you've given us today thank you I sent those books on to Charlie so I'll let him answer [Applause] actually I tend to be a follower of Confucius and I think this room is full of Confucian values you know if the first law of Confucianism is filial piety particularly toward the elderly males you can see why I like that system area four [Laughter] good afternoon Mr Buffett Mr Munger my name is Kevin Truitt from Chicago I have three questions for you Mr Munger at last year's shareholder meeting you stated that you didn't feel that the concept of the cost of capital made True economic sense would you explain why you felt this way and what you would do to replace it with anything my second question is to Mr Buffett you've stated the importance of an occasional big idea how were you able to in fact tell when you had a big idea and my third question Mr Buffett you have talked about the importance of the franchise and sustainable competitive advantage companies like Kellogg and Campbell Sue are companies that most people would have said had those qualities however over time those qualities were lost as a result of a change in consumer taste what gives you confidence that the same things won't happen to Coke or Gillette well caution Capital cost of capital first obviously considerations of cost are important in business and obviously opportunity costs which is a doctrine of economics really a doctrine of lifemanship are also very important and we've always had that kind of basic thinking uh of course Capital isn't free and of course you can figure cost of capital when you're borrowing money or at least you can figure cost of loans but the theorists had to develop some theory for what Equity cost and there they just went bonkers they they said if you earned 100 on Capital because you had some marvelous business your cost of capital was a hundred percent and therefore you shouldn't look at any opportunity that delivered a lousy 80 percent that is the kind of thinking which came out of the capital assets pricing models and so forth that I've always considered ananity what is berkshire's cost of capital we have this damn capital it just keeps multiplying and multiplying what does this cost you have perfectly good old-fashioned doctrines like opportunity cost you know at any given time when we consider an investment we have to compare it to the best alternative investment we have at that time we had perfectly good old-fashioned ideas that are very basic to use but they weren't good enough for these modern theaters so they invented all this ridiculous mathematics which concluded that they companies that made the most money had the highest cost of capital well all I can say is this not for us now the other half of that question I leave for Mr Bubba yeah what what you find of course is that the cost of capital is about a quarter percent below the return promised by any deal that the CEO wants to do very simple it uh you know we have three questions on Capital with capitals around and leaving aside whether we want to borrow money which we generally don't want to do and one is does it make it more sense to pay it out to the shareholders than to keep it within the company sub question on that is if we pay it out is it better off to do it by our repurchases or by a dividend the test for whether we pay it out in dividends is can we create more than a dollar of value within the company uh with that dollar then paying it out and you never know the answer to that but so far the answer is judged by results is yes we can and we think that perspectively we can but that's that's a let's say uh you know that's a Hope on our part and it's Justified to some extent by past history but it's not a certainty once we've crossed that threshold then do we repurchase stock well obviously if you can buy your stock at a significant discount from conservatively calculated intrinsic value and you can buy it in reasonable quantity that's a use for Capital beyond that then the question becomes if you have the capital you think you can create more than a dollar how do you create the most with the least risk and that gets to business risk it doesn't get to any calculation of the volatility I don't know the the risk in See's Candy is measured by its stock volatility because the stock hasn't been outstanding since 1972 does that mean I can't determine how risky a business sees is because we don't have a daily quote on it no I can determine it by looking at the business and the competitive environment which it operates and so on so once we cross the threshold of deciding that we can deploy Capital so as to create more than a dollar of present value for every dollar retained then it's just a question of doing the most intelligent thing that you can find and you know that is the cost of every deal we do is measured by the second best deal that's around at a given time including more doing more of some of the things we're we're already in and I have listened to cost of capital discussions at all kinds of corporate board meetings everything else and and you know I've never found anything that made very much sense in it except for the fact that that is what they learned in business school and that's what the Consultants talked about and and and most of the board members would nod their head without knowing what the hell was going on and that's been my history with the cost of capital now moving on to the Big Ideas you know when you've got a big idea and I I can't tell you you know exactly what happens within your nervous system or uh brain at that time but uh we've had a relatively few Big Ideas good ideas over the years I don't know how many you think we've had in aggregate career maybe 25 each year you took the top 15 out of Berkshire Hathaway most of you people wouldn't be here so roughly one every two years yeah one every year or two men and sometimes there'll be a bunch of them like in 1970 three and four but the problem is for us is that big now really means big I mean it it has to be billions of dollars to to move the needle very much at Berkshire uh but I I would say that when I would turn those pages 50 years ago in the Moody's manuals I would know when I hit a big idea I've got half a dozen of them that I keep the xeroxes from those reports around uh from 50 years ago just because it was so obvious that they they just they were incredible and that happens every now and then when I met when I met Romer Davidson you know and end of January 1951 and he spent four hours or five hours with me explaining Geico I knew it was a big idea eight months later or probably 10 months later I wrote an article to the commercial Financial chronic on the security I like best it was a big idea when I found Western Insurance Securities I knew it was a big idea you know I couldn't put billion millions of dollars into it but I didn't have millions so it didn't make any difference and I we've seen things subsequently and we'll see you know we if we have a normal lifespan we'll see we'll see a few more before we get done uh but I I can't tell you that uh exactly how I can't tell you exactly what transpires in my mind that that says uh you know flashes of neon sign up that says this is a big idea what happens with you Charlie actually one of my what I I have a real system my idea of a truly big idea is one I get and I call Charlie and he only says no rather than that's the worst idea I've ever heard of but he says no it's a hell of an idea you know the game in our kind of life is being able to recognize a good idea when you rarely get it and uh we're rarely is presented to you and I think that's something you have to prepare for over a long period what is the old saying that opportunity comes to the prepared mind and I don't think you can teach people and two minutes how to have a prepared mind but that's the game things we learned 40 years ago though will help and recognize the next big idea an on opportunity cost going back to that the current freshman economics text which is sweeping the country has right in practically the first page and it says all intelligent people should think primarily in terms of opportunity cost and that's obviously correct but it's very hard to teach business based on opportunity cost it's much easier to teach the capital assets pricing model or you can just punch in numbers and outcome numbers and therefore people teach what is easy to teach instead of what is correct to teach it reminds me of Einstein's famous saying he says everything should be made as simple as possible but no more simple write that down interesting question about franchises too and mentioned Campbell's Soup and Kellogg and and I I'm no expert on that but I would say that that just based on on my general observation over the years is that the problems there came from two different things I think that the problems when with cereal ready to eat cereal were not so much changes in taster consumption patterns but I think they may just push their push their pricing too far to the point that they they lost market share without getting in without having the molt that they thought they had as opposed to the General Mills cereals and the general food cereals and all of that sort of thing I mean if your pricing really gets out of whack and people regard uh Wheaties or or or great months in the same category as I write regard Kellogg's Corn Flakes you know you're going to lose share and once you start losing shares it it's hard to get back problems with soup I think relate more to Lifestyle I think that it's become it's a it's a little less uh it fits in a little less well with with uh current Lifestyles maybe than 40 years ago uh soft drinks uh the consumption of soft drinks I don't have the figures here but I would wager that in a hundred and 10 years the per capita soft drinks has gone up virtually every year throughout that history I mean it it's now 30 close to 30 percent of U.S consumption of of liquids so if the average American has about 64 ounces of liquids a day you're talking about say 18 ounces of that being soft drinks and 43 percent of that 18 or almost 8 ounces a day of being Coca-Cola products in other words 1 8 of all the liquid man woman and child of the United States take in it comes from Coca-Cola products but that has gone up virtually well throughout the world that's gone up on a per capita basis and almost in soft drinks were discovered that people I would say that that trend is almost impossible to reverse on a worldwide basis I mean there's so much potential in countries where per capita consumption is like well I think it's I don't know maybe eight per capita's which is eight ounce servings they talk in terms 64 ounces a year um so you have one fiftieth of the consumption per capita on Coke products and many in some important countries that you have here I don't I just don't see it as being now it you can push pricing too far I mean there there comes a point depends on the country in which you're doing it but and then depends even on areas within the country in which you do it but if you establish too wide a differential between uh Coke and and a private label product you will change consumption patterns somewhat not huge but enough so that you don't want to do it but I don't think I don't think you'll see it's interesting coffee's gone down every year people talk about Starbucks and all that but if you look at Coffee consumption in this country if you look at male consumption in the country you know per capita just goes down down down down year after year after year after year and uh I think it's pretty clear what people like to drink once they get used to it and and with the price is when I was born in 1930 a six and a half ounce Coke cost a nickel and you put a two two cent deposit on the bottle but forget about that just take the nickel now you buy a 12 ounce can or a larger product and you're you're paying as you buy it on the weekends at the supermarket specials I'm you're paying maybe a little more than twice per ounce what you were paying in 1930 70 years ago and compare that to the price behavior of almost any product you know that you can find except for all Commodities but compare it to cars housing anything and it there's been very very little price inflation in it and I think that's contributed of course to the the growth and per capita's over time Charlie how about cereals and soup well I think those are examples where the moats got less hostile for the competitors part of the trouble was the the buying power got more concentrated and tougher I mean the big grocery chains now have a lot of clout and then you add the Walmarts and the Costcos and the Sams and the just it's a different world faced by the Kellogg's than the one they had 30 or 40 years ago yeah there will be a battle always between Brands and retailers because the retailer would like his name to be the brand and to the extent that people trust Costco or Walmart more than they or as much as they trust the brand than the value of having the brand moves over to the retailer from the product itself and that's gone on for a long long time I you know the first I would cases I know about in any real quantity back with a p in the 30s and a p I believe was was the largest food retailer in this country and they were also a big promoter of private labels and Paige I think was was a big private label with them for example and and they felt they could convince the consumer in the 30s that their brand meant more than having Del Monte on it or or or Campbells or whatever it might be in the different categories and and people thought they were going to win that war for a while but it and who knows I mean I don't know all the variables that went into the amps decline but it was dramatic I mean it was one of it was a great American success story for a while and then it was a great American failure Charlie the muscle power of the Sam's Clubs and the Costcos has gotten very extreme a little earlier this morning when I was autographing books a very good looking woman came up to me and said she wanted to thank me and I said For What and she said you told me to buy this pantyhose I'm wearing from Costco and evidently made some previous comment about how amazing it was that Costco could be at Haines of all people to allow a co-branded pantyhose hand stash Kirkland in the Costco stores that wouldn't have happened 20 years ago she must have been pretty desperate as she was consoling with you on where to buy pantyhose [Laughter] okay let's move to area five yeah all right hi I'm Dave Staples from Hanover New Hampshire and I've got two questions for you uh first I'd like to hear your thoughts on selling security short and what your experience has been recently and over the course of your career uh the second question I'd like to ask is how you go about building a position in a security you've identified uh using USG as a recent example I believe you've bought most of your shares at between 14 and 15 a share but uh certainly you must have thought it was a reasonable investment at 18 or 19. why was 14 and 15 the magic number and now that it's dropped to around 12 do you continue to build your position how do you decide what your ultimate position is going to be well we we we can't talk about any specific security so our our buying techniques depend very much on the kind of security we're dealing in sometimes uh it's a security might take many many months to acquire and other times you can do it very quickly and sometimes it may pay to pay up and other times it doesn't and and sure that you never know exactly what the right technique is to use uh as you're as you're doing it but you just use your best judgment based on on past purchases but but we can't discuss any specific one short side it's an interesting uh item to study because it's I mean it's ruined a lot of people uh it's it is the sort of thing that you can go broke doing Bob Wilson's there's famous stories about him and Resorts internationally he didn't go broke to him in fact he's done very well subsequently but but being short something where your loss is unlimited is quite different than being long something uh that you've already paid for uh and it's tempting you see way more stocks that are dramatically overvalued in your career then you will see stocks that are dramatically undervalued I mean they're they're it's the nature of Securities markets to occasionally promote various things to the sky so that Securities will frequently sell for five or ten times what they're worth and they will very very sell themselves for 20 or 10 percent of what they're worth so I therefore you see these much greater discrepancies between price and value uh and on the overvaluation side so you might think it's easier to make money on Short Selling and all I can say is uh uh it hasn't been for me I don't think it's been for Charlie it is a very very tough business because of the fact that you face unlimited losses and because of the fact that people that have overvalued stocks very overvalued stocks are frequently on some scale between promoter and crook and that's why they get there and once they're and and they also know how to use that very evaluation to bootstrap value into the business because if you have a stock that's selling at 100 that's worth 10 obviously it's to your interest to go out and issue a whole lot of shares and if you do that when you get all through the value can be 50. in fact there's a lot of Chain Letter type stock promotions that are sort of based on the implicit assumption that the management will keep doing that and if they do it once and build up to 50 by issuing a lot of shares at 100 when it's worth 10. now the now the value is 50 and people say well these guys are so good at that let's pay 200 400 or 300 and then they can do it again and so on it's not usually that quite that clear in their minds but that's that's the basic principle underlying a lot of stock promotions and if you get caught up in one of those that is successful you can you know you can run out of money before the promoter runs out of ideas in the end they they almost always work I mean I would say that of the things that we have felt like shorting over the years the batting average is very high in terms of eventual uh they would work out very well eventually if you held them through but it is very painful and it's it's in my experience it's a whole lot easier to make money on on the long side I had one situation actually an Arbitrage situation when I was in was when I moved to New York in 1954 so it was very much June or July of 1954 that involved a Surefire type transaction and Arbitrage transaction that had to work but there was a technical Wrinkle in it and I was short something and I felt like a for for a short period of time I uh I was I felt like phenovo was failing last fall I mean it was very unpleasant uh it you can't make in my view you can't make really big money doing it because you can't expose yourself to the loss that that would be there if you did do it on a big scale and Charlie how about you well Ben Franklin said if you want to be miserable you know during Easter or something like that he says borrow a lot of money he'll be repaid Atlanta or something to that effect and similarly big short something which keeps going up because somebody is promoting it in a half crooked way and you keep losing and they call on you for more margin it just isn't worth it to have that much irritation in your life that hard to make money somewhere else with less irritation it would never work on a Berkshire scale anyway I mean you could ever do it for the kind of money that that uh uh would be necessary to do it with in order to have a real effect on berkshire's overall value so it's not something we think about it it's interesting though I mean I've got a copy of the uh the New York Times from the day of the Northern Pacific corner and that was a case where two opposing each owned over 50 percent of the Northern Pacific company Northern Pacific railroad and when two people each own over 50 percent of something you know it's going to be interesting and Northern Pacific on that day went from 170 to a thousand and it was selling for cash because you had to actually have the certificates that day rather than the normal settlement date and on the front page of the New York Times which incidentally sold for a penny in those days it's had a little more inflation than Coca-Cola front page of New York Times right next to the story about it it told about a Brewer in new Newark New Jersey who had gotten a margin call that day because of this and he jumped into a bat of hot beer and died and that's really never appealed to me as you know the ending of a financial career who knows you know when when they had a corner in Piggly Wiggly Piggly Wiggly they had a corner in Auburn Motors in the 1920s I mean there were Corners that was part of the game back when it was played in a kind of a footloose Manner and uh it did not pay to be short actually during that period you might find it interesting in the current issue of the New Yorker maybe one issue ago the the one that has an interesting story about Ted Turner there's also a story about Hedy Greene and Hedy green was one of the original incorporators of Hathaway manufacturing half of our Berkshire Hathaway operation back in the 1880s and Hedy green was just piling up money she was the richest woman in the uh probably maybe in the world certainly in the United States maybe some Queen was richer or Brock but Heavy Rain just made it by the slow old-fashioned way I doubt if Hedy was ever short anything so as as a spiritual descendant of Hedy green we're going to stay away from shorts at uh Berkshire okay area six how do you incidentally this story it's a very interesting story it as I read the story it's almost conclusively clear to me that she forged a will to try and collect some significant money from I believe Iran and uh and uh it was a very very famous trial back in whenever it was 1860 or 70 and and uh they found against Teddy when it got all through but she still managed to become the richest woman in the country area six um yeah hi I'm I'm James Halpern from Dallas Texas and uh I've been a shareholder since 1995 and I feel great about it so thank you uh this question has to do with berkshire's so-called permanent Holdings and whether when making investment decisions you somehow mathematically calculate a value to berkshire's reputation for loyalty to its public investees let's say you were confident enough that Pepsi or Procter and Gamble would grow cash flow faster than Coke or Gillette would and that the replacement value of the stock was less expensive enough to more than make up for the taxes would you then sell Coke for example to buy Pepsi and if not why not and how do you value this reputation for loyalty aspect in those decisions well I think that's a very good question I don't think we would ever I think it's very unlikely we would come to the conclusion that we were that certain that you mentioned PNG and Pepsi versus the ones but but then some major consumer Products Company would do better than the ones we're in we might very well decide that some other one is going to do quite well and buy that additionally uh as a practical matter if I'm on the board of the company or Charlie were to be at uh representing Berkshire it's very difficult uh it's I would say it's almost impossible for us to trade in their Securities it just it creates too many problems people would think we knew something we didn't or you know particularly we were selling it that you know we would we would have people questioning very much whether we had detected something within the company that was not available to the rest of the world so we really give up an enormous amount of investment Mobility when we go on a on a board and uh so I don't even think about doing what you're suggesting although I might very well if I were just a money manager running the business uh we certainly and we've laid it out in the ground rules in the back of the in our owner's manual back in in the annual report we've certainly said in terms of businesses we buy control of that they they just aren't for sale and a fancy price will not tempt us and we lay out that exception related business where we think there's a permanent loss of cash for as far as we can see I can see or businesses where we have Labor troubles which we from the day we might have had it the Buffalo News at that one period but otherwise simply because we can use the money better someplace else we're not interested in it you know I can't really dig into my psyche and tell you how much of that is because I think that will help us buy businesses in the future if we behave that way or how much it's just my natural inclination that when I make a deal with somebody and I'm happy with how they behave with me that I want to stick with them it's probably both you know and I I I wouldn't want to try and wait the two I'm happy you know with the results of the first and I'm happy with the the uh the way I feel essentially about the second I just think it's crazy I know if I own all of Berkshire myself I wouldn't dream of trading around businesses with people that have trusted in me and that I like and that have been more than fair with me I wouldn't dream of trading around businesses so that my estate was 105 percent of some very large number instead of 100 of some large number I just would hear that it's a crazy way to live and I don't want the fact I run a public company to cause me to behave in a way that I would be uncomfortable behaving as if you're a private company but I also feel that you as shareholders are entitled to know that that's an idiosyncrasy of mine and therefore I lay it out and laid it out for 20 years uh as something that you should understand uh as an investor or before you become an investor I'm sure it helps us in Acquisitions over time but whether that in any way compensates the opportunity cost that Charlie talks about of making an occasional advantageous disposal I don't know and it's something I'll never calculate Charlie well I do tend to calculate it at least roughly and so far I think that the Loyalty effect is a is a A plus in our life would you regard that as true though in both public I mean both marketable Securities and and own businesses oh no I don't think the Loyalty effect in lots of public companies is nearly as important as it is of the private nominees say it's a mistake for us to be directors of companies because we give up huge amount of flexibility in investment that that because we are directors I and and there's no question the that we do the it's uh if you're thinking solely of making money you do not want to be a director of any company there's additional question about that area seven Tom Harrison from Claremore Oklahoma good afternoon gentlemen and thanks for a wonderful weekend this question is for Mr Buffett being somewhat pessimistic by Nature I have a recurrent nightmare of a Wall Street Journal headline for claiming Buffett kicks bucket they phrase it a little more elegantly than that but someday the headline will be there and of course Charlie's no spring chicken either in light of these concerns could you please go into a little more detail than that presented in your annual report regarding the secession issue and my apologies for the morbid nature of the question now there's no reason to apologize I mean it's a it's a question I ask our managers incidentally every couple of years I I bought every two years I sent him a letter and I say you know if if you die tonight what will you what will I wish you'd told me tomorrow morning you know and uh because I have to make that same decision and I and I'm not conversing with them every night so I want them to put in writing to me once every couple of years uh what they think about the subject who they think should succeed them or whether there's several candidates or what the strengths and weaknesses are and and I have that information available uh and you know you you're entitled to the same sort of answer about succession it's it's part of it's part of buying into this into this business and it I can tell you that no one has more of an interest in it uh than I do and Charlie has a similar interest because we have a very high percentage of our net worth in the business plus we've got a lifetime of effort in the business and we want it to succeed for both in our cases probably that at least my case the the ultimate reward to the foundation I have but also because we just wanted we we like what's happened so far and we want we wanted to prove that it can it's not dependent upon a couple of guys like us but that it can be institutionalized in effect and we have and Charlie and I would we know who will succeed me in what are likely to be two jobs one marketable Securities and one business Opera I want to be very sure that the culture is maintained and I think it's so strong that I think it'd be very hard to change it but in addition to stock ownership situation with me is such that that it can if there were any inclination to change it it can be prevented from happening I don't think it would anyway now in terms of who succeeds me that depends when I die I I you know and there's no sense telling you who it would be today uh there'd be no plus to that and it might not be the same 20 years no I mean 20 years ago it would have been Charlie obviously but it won't be Charlie now because of his age and it'll be somebody else but 20 years from now or 15 years from now might be some third party but we've got we feel very good about the succession situation we feel very good about the stability of the organization in terms of the stock ownership situation because that is insured for a very very long time to come we couldn't feel better about the managers we have in place and the culture we have in place and you know the individual will be named I think I've mentioned though that when they open that envelope although the contents of that envelope are already known to the key people but when they opened that envelope the first instruction is you know take my pulse again I mean I'm not but if I flunked that test there will be somebody very good in place Charlie yeah the main defense of course is to have assets that will do well more or less automatically and we have a lot of those and and the extent you improve that further by having very good managers in place and very good individualized systems for bringing new managers into the places there's a lot of momentum here that would go on very nicely with the president management gone and now I don't think our successors are going to be as good as Warren at actually allocating the money no we we ran a little test case 10 years ago um because for nine months and four days I took another job at Solomon and things went fine at Berkshire we've got the managers don't need me we have to allocate Capital we have to make sure they're treated fairly and and uh but we are not making decisions around the place except in the allocation of capital and and that will be important uh but some of that is semi-automatic and others you know it does require you know some imagination sometime or something of the sort but for nine months and four days in 1991 uh you know Solomon was primarily on my mind and Berkshire wasn't and everything went on just as before and we are far far far stronger now than we were 10 years ago so I'm I'm very comfortable with 99 of my estate uh being in in in Berkshire shares and I think it's an intelligent holding eventually for the foundation and uh knowing that you know I won't be around uh at some point uh before the foundation gets it okay area eight hello uh Mr Buffett Mr Munger my name is Matt honor I'm from Tucson Arizona it's a tremendous pleasure to be here today this question probably falls into Charlie munger's realm of Oddball investment activities but considering berkshire's previous experience in silver what are your thoughts on the silver market today how do you Analyze This Market have you determined an equilibrium price for silver and if so would you share that price or or uh explain to us how you determined it the short answer is we don't want to talk about silver yeah wait wait we're not going to comment on it you know on oil or the prices of anything in terms of making any forecasts upon the equilibrium price though I can tell you is whatever it's selling for today but uh but there may there will be a different equilibrium price uh a year from now or five years from now but we can't tell you what it'll be area one hello Mr Buffett uh Mr Munger my name is Bob Odom from Seattle Washington considering the political climate and what seems to be a more regulated environment than not in the electric utilities market and politicians that seem to be passing their constituents rather than the common sense of price and quantity is it not a risky venture to participate in these markets more than what has already been done with Mid-American considering that even with a possible repeal of the puka laws that they uh maybe reinstated some years later with the addition or subtraction of any other legislation that a politician may dream up and then put the investment at risk Charlie you're a resident of California well uh the production of electricity of course is an enormous business and it's not going away and uh the thought that there might be something additional that we might do in that field is not at all inconceivable it's a very fundamental business now you're certainly right and that we have a whole Unholy mess in California in terms of electricity and again it reflects I would say a fundamental flaw in the education system of the country that as many smart people of all kinds utility Executives Governors legislators the journalistic leaders uh they had difficulty recognizing that the most important thing with a power system is to have a surplus of capacity is that a very difficult concept you know everybody understands that if you're building a bridge you don't want a bridge that will handle exactly twenty thousand pounds of no more you want a bridge that'll handle a lot more than the maximum likely load and that margin of safety is just enormously important in Bridge Building well a power system is a similar thing now why do all these intelligent people you know ignore the single most obvious and important factor and just screw it up to a fairly well so I'm giving you a response which is of course another question as the my old Professor used to say let me know what your problem is and I'll try and make it more difficult for you well to me the interesting thing is that you had a system I mean Charlie's you know obviously right in that you've got about three goals in terms of from a societal standpoint you've got perhaps three goals and and uh what you would like your electric utility business to be one is you'd like it to be reasonably efficiently operated uh secondly since it does tend to have in many situations Monopoly characteristics you would want something that produced a fair return but not a great return for Capital but enough to attract capital and then third you'd want this margin of safety this this ample Supply now when you've got a long lead time to creation of Supply which is the nature of putting on generation capacity you have to have a system that rewards people for fulfilling that obligation to have extra capacity around a regulated system does that if you give people a return on the capital employed if they if they keep a little too much Capital employed so that they have this margin of safety on generation and they get paid for it they they stay ahead of the curve they always have 15 or 20 percent more generating capacity than needed and one of the disadvantages of that regulation and the Monopoly nature is that it doesn't incr it doesn't have the spur to efficiency they try to build it in various ways but it's difficult to have a Spur to Great efficiency if somebody can get a return on any on any Capital they spend so utility Regulators have always been worried about somebody just building any damn thing and getting whatever the state allowed return is uh but I would say that the problems that would arise from say a little bit of sloppy management are nothing compared to the problems that arise from inadequate generation so here you had in such in California my view is an outsider you had a situation under regulation where the utilities had the incentive to have a little extra generating capacity because they got allowed to earn a decent return on it a return that would attract capital then you had I think the force sell off of half of their generating capacity or something like that and they soldered it multiples of Book value to a bunch of people who are now just generators who are deregulated they've got they don't have an interest too much Supply they've got an interest in having too little Supply so you've actually totally changed the equation because the fellow that now has the deregulated asset for which he paid three times book now has to earn a return on a three times book what the fellow was formerly earning under the regulated environment at One Time's book and so he is not going to build extra generating capacity that all that does is it brings down the price of electricity you know he hopes things are tight so you've created in my view a situation where the interests of the companies in the business have diverged in a significant way from the interests of society and I it just doesn't make any sense to me and I I really think that the old system was made made more societal sense let people earn a good return not a great return but a return that attracts capital on an investment that has built into it the incentives to keep ahead of the game on capacity because you can't fine-tune it that carefully and and you do have this long lead time so now what you do with what you do with the uh scrambled eggs now you know is something and with all the political forces back and forth uh I think that you better have a system that encourages building extra capacity because you don't know how much rainfall that will be in the Pacific Northwest and therefore how much Hydro will be available and you don't know what natural gas prices will do and therefore you know whether it's advantageous for a gas-fired turbine to be operating and it the old system really uh strikes me as somewhat better than this semi-deregulated environment that we've more or less stumbled into but Charlie what do you think of course even the old system got in some troubles in the since everybody had the NIMBY syndrome not in my backyard everybody wanted any new power plant to be any place not near me and if everybody feels that way and if the political system means that the obstructionists are always going to rule which is true in some places in terms of zoning and other matters you get in deep trouble if you let the unreasonable self-centered people make all the decisions of that kind you may well get so you just run out of power that was a mistake and we may make that mistake with our refineries you know we haven't had many new big oil refineries in the last period so you may get to do this all over again all of that being said there will be need for more generation capacity I mean the electric utility industry will be will grow it will need lots of capital and there should be ways to participate in that where we get reasonable Returns on Capital we would not expect to get great Returns on Capital but we would you know we would be happy to do that we generate a lot of capital and we would be comfortable in that in that business we would not we would not feel the risks were undue as long as we didn't go around paying incredible prices for for somebody else's capacity and then have people get very upset at what that meant in terms of their electric rates you can't go out and if you've got a utility plant in this country that was put in place at X and then you go out and encourage entrepreneurs to buy in a 3X you cannot expect utility price electricity prices to fall and that was a in my view a very a very basic mistake I may not understand it fully ton area two good afternoon my name is pavil bigan I'm from Minsk Belarus and I have two questions and before uh before I'll have questions for you I'd like to say thank you for recommending to to read intelligent investor it's it's a terrific book and it reshaped me tremendously literally overnight so I'd like to thank you for that and now the question uh say I'm an owner of the business and the business has a durable competitive advantage and Superior business model and is run by uh able people and then you know I started noticing that basic management starts doing things which are far from intelligent so what should I do as an owner as an investor should they try to tell them how they should run the business or should they just sit back and do nothing because if you're a business model should overcome poor management that's the first question and the second question is how important is nominal experience in the business of invest in and by saying nominal I mean these the number of the actual time you've been in the business as opposed to real experience that also includes experienced UI acquire from say Ben Graham or you or Peter Lynch when you read books so those are the questions on your first question did you assume that you had control of the business or you just owned a marketable security yes if I own say 20 of marketable Securities all right well the situation you described is not hypothetical uh in the first case and I would say that the history that Charlie and I have had of persploiting decent intelligent people who we thought were doing unintelligent things to change their course of action has been poorer would you agree with that Charlie or him worse than poor yeah so I would say that if you really think you're in with people that have got a good business but they're going to keep doing dumb things with your money it's you'll probably do better to get out and get in with people who've got a good business and you think they're going to do sensible things with it I mean you've got that option now you also have the option of trying to persuade him to change their mind but it's just very very difficult I mean it is uh uh you know that that's been something we've faced for 50 years and initially we faced it from a position where nobody even knew the hell we were or anything of the sort but we so we've acquired a certain stature over time perhaps in talking on the subject and we've written on the subject and we still don't get very far I mean when people want to do something they want to do something and they didn't rise to become the CEO of a company to have some shareholder tell them that their most recent idea is dumb I mean that is that is just not the type that gets to the top so I would say that as a matter of investment technique and maybe as a matter of you know avoiding stress in your life and all that sort of thing that it's and dealing with smaller quantities of the stock so it's easier to sell and buy and all that sort of thing I would I would say that it's better to be in with a management you're simpatico with uh than simply to be in a great business with the management has been on doing things that don't make much sense uh to you Charlie oh I certainly agree with that is that second question so I I gather is sort of how much does our actual business experience versus book experience help us or is it well I'd say you know if you look at a person who has just laid two years of being in the business of investing and versus a person who has been for 10 years in a business of investing and say the person who has been for two years you know has read a lot about you know Ben Graham's techniques and your techniques and say better Lynch techniques so would you say that the person who has only two years of experience may do much better than the second person well if everything else is equal I mean everything else is equal except the amount of experience you've had I think the experience is probably useful but but it isn't all it isn't going to be equal and I don't think that I don't think that the I think it's way more important what you've thought about for two years than what you practiced for 10 years so if you're if if the direction if they there's a Divergence in in technique supplied I would rather be with the one that I'm philosophically in sync with if they're if I'm philosophically in sync with both and one's had 10 years of experience the chances are they will know a little bit more about more businesses if they've been around for 10 years looking at them than if they've been around for two years but uh the biggest thing is that that you know basically they've got their heads screwed on right in the first place in terms of how they value businesses and how they look at stocks uh as whether they look at them as pieces of businesses or whether they look at them little things that move around and that you can tell a lot by looking at charts or listening to strategists on or something of the sort uh we have Charlie and I learned a lot about a lot of businesses over 40 or 50 years but I would say that that in terms of the new things that would come to us at the end of the second year we were probably as about as good judges um as we would be today but I think there's a little plus to having seen more in terms of human behavior and that sort of thing than knowing about the specifics of a given business model Charlie yeah I think that I've watched Warren for a long time now and I would say he's actually getting better as he gets older not at golf or many other activities but as an investor he's better which I think is remarkable it shows the scale of experience matters yeah it it helps somewhat too have seen a lot of business situation I mean Charlie talks about models and you construct your models as you go along based on on observation and and your models will if you're paying attention your models will be somewhat better uh the more years you spent really observing and not just trying to make everything fit into what you saw the first few years area three hi my name is Richard marble from Washington DC and my question has to do with the intrinsic value of Berkshire Hathaway you've stated several times that you would prefer the stock to be neither overvalued nor undervalued so that the time people spend owning the security represents a gain from what the security the results during that period of time uh however it's a very difficult security to Value because of the disparate pieces and as we saw last year when you provide a little bit of guidance uh in last year's annual report you said that when this stock price at forty five thousand dollars a share you considered buying but cons but thought it was unfair until the uh annual report came out so everyone had the same information and um and while I I also realized that you don't feel there is a particular quote unquote correct number uh would you ever consider giving any guidance in this direction yeah the answer is we really wouldn't I mean to the extent that we were going to repurchase shares you could certainly interpret that as as indicating that we thought it was attractive from the standpoint of remaining shareholders to do so and we certainly wouldn't be paying over intrinsic value at least in our judgment uh and benefiting the exiting shareholders to the disadvantage of the continuing shareholders so you might draw that conclusion at that point but other than that we'll you know we would prefer Berkshire shares to fluctuate far less than they do because we would like the we ideally we would like the experience of every investor during the time they held the shares to be exactly proportionate to the uh the progress or lack thereof of the business and and I think we've come over the years reasonably close to that compared to most companies but but the nature of markets is such that reasonably close is is you know probably as good as it's going to get we don't know the exact intrinsic value of Berkshire obviously and and if you looked at the figures we if we'd written down secret figures over the ever since 1965 they would some of them would look silly now in terms of what has actually transpired but we try to give you I I don't think I think Berkshire is easier to Value than most businesses actually because we we give you all the information that at least is important to us in valuing it and then you the biggest judgment you have to make is how well Capital will be deployed in the future uh because it's easy it's relatively easy to figure out the present value of most of our businesses but the question becomes what do we do with the money as it comes in and that will have a huge impact on the value 10 years from now and uh that will depend a lot on the environment in which we operate over the next 10 years there'll be a lot of luck in it I think you know I think there's a reasonable chance of good luck but I did but who knows uh uh it would be a mistake for us to do anything I mean a big mistake do you ever recommend buying or selling the stock I mean it did I mean how would you tell everybody to do what it wants it you know it would negate your own advice you're certainly not going to tell one person you know to the advantage or the disadvantage of somebody else so there's really no way for us to ever talk about whether we think the stock whether we think it's a buyer a sale except to the extent like I say on repurchases where there's obviously an implicit uh judgment being uh being given the shareholders Charlie I rather like the way it's worked out the average output period that we've been through we've come with inhaling distance of the objective of having our stock track its intrinsic value it gets a little ahead sometimes and a little behind other times but averaged out it's worked pretty well area four good afternoon my name is Martin O'Leary and I'm from Houston Texas my question to you is this in your annual report this year in the letter to the shareholders you indicated that it was 50 years ago that you met Benjamin Graham and that he had a major impact in your life especially in your investment success moreover you've stated in the past that the intelligent investor is by far the greatest book ever written on investing one of the central tenants in the book was that if you bought a group of stocks say 10 or 20 that traded at two-thirds or less than net current assets that you would be assured of a margin of safety coupled with a satisfactory rate of return today if you were to find 10 or 20 stocks that traded at two-thirds of net current assets would you be inclined to purchase those stocks for your own personal portfolio not for Berkshire Hathaway and the second question since I've mentioned a book I was wondering which books that you and Mr Munger have been reading lately and would recommend thank you yeah and respect to your first question you could probably if you found a group like that and you won't I don't think uh you'd probably do all right buying the group but not because the businesses themselves worked out that well over time but because there would probably be a reasonable amount of corporate activity in a group like that either in terms of the Management's taking them private or takeovers or that sort of thing but those sub-working Capital stocks are just almost impossible uh defined now and if you got into a market where a lot of them existed you'd probably find wonderful businesses selling a lot cheaper too and our inclination would be to go with a cheap wonderful business I don't think you'll get in a high Market or something close to it I don't think you'll get a lot of sub-working capital stocks anymore there's just too much money around to promote deals before they they really get to that point but that was a technique it was 50 years ago and is Walter Schloss here still Walter are you here stand up if you're here I met Walter 50 years ago when I met Ben Graham I know Walters came out this year but he already knows everything I've been talking about so he may have left but Walter actually is practiced in Securities much closer to the original he's run a partnership now for uh 46 years I guess it is and he's he's um he's done it much more with the type of stocks that that Ben was talking about in those days and he has a record that is absolutely Sensational that uh is far better than people who who get promoted and go on television shows and do all of that sort of thing uh and he's done it in you know what I tend to call cigar but companies uh you know you get one free puff and that's about it but they don't cost anything and that's that was the sub-working capital type situations wallers had to extend that someone but it's been a great great record over a considerable I mean 46 years it comes very considerable period of time so I think if you found that kind of a group and did it as a group operation and Ben always emphasized a group operation because when you're dealing with lousy companies but you expect a certain number to be taken over and all that you better have a group of them whereas if you deal with wonderful companies you only need a couple but I think uh I think if you see that period again we'll be we'll be very active but it won't be in those kind of Securities Charlie yeah and there's another change in the old days if the business stopped working you can take the working capital and stick it in the shareholder's pockets uh and nowadays as you can tell from all of restructuring charges when things really go to hell in a bucket somebody else owns a lot of the working capital the whole culture has changed if you have a little business in France and you get tired of it that's marks and Spencer has the French say what the hell do you mean trying to take your Capital back from France they're French workers in this business and they don't care about they don't say it's your working capital take it back when the business no longer works for you they say it's our working capital the whole culture has changed on that one not completely but a lot from Ben Graham's day there are a lot of reasons why the investment idiosyncrasies of one era don't translate that perfectly into another that list that was published I I forget was published in a 1951 edition of security analysis of the 49 edition of intelligent investor but there were a list of companies there with a Sacco Lowell those Marshall welders Cleveland Washington Mills there's Foster Wheeler and all those companies were sub-working Capital companies selling it three or four times earnings and you know there was a if you bought a group of stocks like that you were going to do well but you know I was you certainly don't see that in in companies with any any of any size uh today and I've seen a few lists of of tech companies selling below cash but but they're determined to use that cash and and uh it may not be there in a year or two it was a different breed of animals to some extent in in in Ben's list at that time did you ask a second question book you've read oh books I've read well tell them what books you've read Shirley well I mentioned that one but genome I have a hell of a time putting the accident on the first syllable but that is a marvelous book and uh some shareholders send me a book that not many of you will like by uh herb Simon I think uh models of my life and that's a very interesting Book for a certain academic type but that genome which is the history of a species in 23 chapters and uh perfectly amazing book and very interesting I may have recommended it before but if you haven't read personal history by Catherine Graham I think you'd find that that's a it's a fascinating story and and the more amazing yet it's an honest story it uh you know if I ever write my autobiography I'm gonna look like Arnold Schwarzenegger but uh but she is compulsively honest about what's happened and it's really quite a saga it is a good book that that Janet blow book about me I find has had a a very interesting sub chapter so to speak in its distribution I notice a considerable number of people buying that book and sending one copy to each descendant they believe that if they just do that The Descendants will behave more like the parents it'll be interesting to see if that works if it does it's going to outsell the Bible [Laughter] hold your breath area five good afternoon I'm Laura Rittenhouse from New York City and I want to say it's a great pleasure to be here you talked earlier about companies that monetize greed and it's great to be with people and with leaders who monetize values you a couple years ago you were spoke very passionately about campaign Finance reform and I wondered if you could comment on your views of this given recent developments related to another question in Washington what's your expectation for the passage of the repeal of Puka I know there was some recent activity in the Senate subcommittee and lastly a question for Charlie how would you or or do you apply the principles of intrinsic investing to real estate okay in respect to puke up uh it's hard for me to you know I'm I have no great record of handicapping legislative action but I would say that the awareness of the public problems in the electric utility industry under current circumstances you know has has mushroomed I mean it ballooned and and so I think that I think it it's likely that Congress is more receptive the idea that they need to do something uh that ensures that the power supply is adequate and uh I think that there's probably a number of them that would would think that puka is a barrier the capital entering the industry from a lot of sources where capital is available and that is going to take Capital to solve this problem now they don't have to solve it by letting Berkshire do more things but it's not a crazy uh approach to say that if Berkshire has billions of dollars to invest um that it might be in that plus uh for the availability of electricity down the road so I I think that certainly the chances of repeal or major change are far higher now than they were a couple of years ago I mean politicians do not like to face major brownouts I mean they they can try and blame it on someone else and they may well be accurate in blaming it on someone else but the public is going to at least partially uh blame political leaders if this country runs out of electricity because it hasn't run out of the ability to build generators you know we can we could create all the generators we needed to have plenty of electricity and we could create the transmission lines and all of that but you do need a flow of capital to the industry and and puka restricts that flow to quite a degree I would say campaign Finance reform you've read about it as much as I have uh uh you know I I happen to admire enormously what McCain and Feingold have done I don't think it's a fantasy I mean money is going to find his way into trying to buy political influence one way or another but the present situation in my view has gotten totally out of control and incidentally totally out of sync with what the American Congress even as well as the public intended because in 1907 Congress said and it's never been changed the corporations shall not contribute money to Federal elections in the 1947 they said the same thing about labor union and then they enacted uh campaign legislation in the early 70s which when later interpreted by the federal election commissions enabled corporations and unions to do on an unlimited scale what Congress has said they shouldn't do at all and politicians did not really understand the potential in that initially I remember the first guy that called me Senate candidate called me for a soft money contribution in probably in 1985 or so and he was kind of embarrassed about it and sort of danced around the subject of how this money was going to find its way into his campaign and everything and it was asking me for an amount of money that was illegal under the law except if I did it via soft money and that has developed to the point where I have literally had people I where I have firsthand knowledge of requesting million dollar contributions or larger which would never be reported would never be required to be reported and uh uh I regard that as a a perversion of the of the system but I think we're going to get some significant Improvement I don't I think it was only possible because of of The credibility that McCain built up with the public and the fact that he just wouldn't let go of of this issue so I'm but I'm not hopeful about it changing the whole course of American democracy or anything of the sort but I I am hopeful that the system of of government where access is sold to the highest bidder and where the bidding starts at a higher level by a material amount in every election cycle uh will at least be checked for a while Charlie she had a question for you oh my my trouble with campaign Finance reform is that I fear career politicians just staying on and on just about as much as I fear special interests protecting themselves with money and I never know exactly how the reform is going to work uh when I came to California we had a sort of a semi-corrupt part-time legislature dominated by race tracks and saloons and liquor distributors so on and people went up and entertained the legislative legislators with prostitutes and what have you and I really sort of prefer that government in retrospect to the full-time legislators I have now so I I just am more skeptical about my ability to predict uh which reform I'm going to like the results of and and which I would like to trade back in for my former evils Laura you had one more did you on was it for Charlie there's a question about the principles of intrinsic value investing applied to real estate or that period of my life involved the remote past and I much prefer business investment to real estate investment Okay it's 3 30. we're going to have a directors meeting here we do that once a year uh following this meeting and so I'll ask the directors to stick around and I want to thank you all for coming and I hope you come back next year thanks

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Length: 304min 34sec (18274 seconds)

Published: Tue Nov 03 2020