Morning Session

1. Jimmy Buffett sings “Berkshire Hathaway-ville”

ANNOUNCER: And now, please welcome the charming, insightful, witty, rather brilliant, debonair, influential, well-heeled yet down-to-earth, talented, surprisingly modest, handsome, and refined exemplar of unflappable character, Mr. Buffett. (Applause and cheers as musician Jimmy Buffett comes on stage with a guitar)

JIMMY BUFFET: Who were you expecting? My junior partner? (Laughter) For those of you who don’t know, I’m the distant cousin, Jimmy Buffett. This would be a good day to rob a bank in Omaha. Everybody’s here, you know, so — (Applause) I couldn’t be around for the game with LeBron James. I was busy working on my wardrobe for this surprise appearance. This is my first time in the Qwest Center, so I feel very at home in large spaces like this. It’s great to be back in Omaha. (Applause) That’s the good news. The disturbing news is, as a long-time Berkshire Hathaway stockholder and shareholder, the big question is, you know, those guys are getting up in age, you know, Charlie and Warren. Who are they going to leave it to? Well — (laughter) — I got news for you. We did a genetic test, Warren and I did. You won’t see that in your program or in the shareholders report.

And somewhere back about 6,000 years ago, in some ancient village in Scandinavia, they were trading Buffett genes, and I got the talent. He got the business. So, later on in life, after Doris [Buffett, Warren’s sister] introduced us — I don’t know, 30 years ago — I started figuring out, so I better get that business thing going as well. So, since blood is thicker than water, I am your new chairman. So, I hope you like that. (Applause) Don’t run out to sell. I’m keeping my mine. (Laughter) So, on the way out here on the plane, I figured — it was an interesting day, if you read The New York Times business section yesterday. There was a lot going on. So, I thought I would — this song has done very well for me, so I thought I would bring this for my first appearance in Omaha at the Qwest Center — I would rewrite a little “Margaritaville” with a little Berkshire — well, actually we’re wasting away in Berkshire Hathaway-ville this — today.

I’ve never sung this early in the morning, except on the [NBC] “Today” show, so you’re not paying, so don’t worry about it, so — (Laughter) Don’t worry, I’m a semi-professional. This is OK. I will be looking at these notes. As you can tell, Warren gave me a really big budget for a teleprompter here. (Laughter) All right. So, you can sing along if — but you will not know — you’ll know a few of the words to these songs. But then I’ll try to do this slowly, and I have my bifocals, so I think we’re in good shape here, so — We’ll start the morning off with a little hymn. (Singing to the melody of “Margaritaville”) Nibblin’ on sponge cake, And Omaha beef steak, Watchin’ you stockholders buying the rounds. The Qwest Center’s rockin’, The press is all blockin’.

There isn’t a doubt Warren’s big in this town. Wastin’ away in Berkshire Hathaway-a-ville, Searchin’ for my lost box of See’s. Some people claim that Charlie Munger’s to blame, And you know, Rupert Murdoch is peeved. From World Books to sofas, Jet planes, diamonds, and (inaubible), (Inaudible) in euros, Let’s not forget euros. (Spoken) Uh oh. I made a mistake here. All right. Hold on. You won’t pay for that, OK? Are you going anywhere? We’ll start again. From — from — Let me get these bifocals off here. (Singing) From World Books to sofas, (Inaudible) and (inaubible), Jet planes, diamonds, and underwear cover the floor. (Spoken) It was the Fruit of the Loom that got me. (Singing) Tool books (inaudible). Let’s don’t forget euro, Make all those — (Spoken) Oh, this is a good line.

I got to — (Singing) Make all those hedge funders Want to go and buy stores. Wastin’ away again in Berkshire Hathaway-ville, Searchin’ for some good companies to buy. Some people claim privatization’s to blame, But we know, this holding company’s on fire. So, who was the wizard, Who thought up the lizard, To sell car insurance to humans while making some jokes? Projects we’ll surmount, But I still want that discount. Can someone show me where they’re sitting those rich Geico bulbs? Wastin’ away again in Berkshire Hathaway-ville, Searchin’ for my lost shaker of salt. And some people claim that Doris Buffett’s to blame, But I know this is all Warren’s fault. And some people claim that ukulele’s to blame, If there’s a God, he’ll turn that thing into (inaubible). (Applause) (Spoken) All right. So you thought I was kidding about that running the company stuff, didn’t you? So — I was.

(Laughs) That’s a big relief there. So, with a great bit of pride and admiration, please welcome my junior partners, Warren and Charlie. (Applause)

WARREN BUFFETT: Separated at birth. Separated at birth. (Laughs) Thanks, Jimmy.

JIMMY BUFFETT: All right.

WARREN BUFFETT: OK. I actually had asked Charlie to do that number — (Laughs)

2. Opening remarks

WARREN BUFFETT: Got a lot of people to thank, starting off with Jimmy. Wonderful. We hid him out — came in last night kind of late and we — to be sure it was a surprise, we stashed him away over at the Hilton, and I just want to say thanks to him. We both got the commercial gene, but unfortunately, he got the singing gene. I got this voice you’re hearing. We — the movie, as we mentioned, we get a lot of help from a lot of people. They all do it just for the fun of it. I particularly want to thank Andy Heyward of DIC who did that cartoon. He’s done them now for a number of years. They come back here to get my voice recorded and to get Bill’s [Gates] voice and Charlie’s voice. They do it all themselves just to participate in the movie. Andy and I — I’m working with Andy on a cartoon series that will be out pretty soon, which we’re aiming toward younger people to try and work a little financial education into a good time on Saturday morning for kids. And we’ll see how that all comes out.

But Andy is wonderful to work with. It’s been — (Applause)

WARREN BUFFETT: My daughter Suze puts that movie together. It’s a lot of work and it’s a labor of love. She does a terrific job, and I just want to thank her for — as usual. (Applause) Thank you.

WARREN BUFFETT: Then finally I want to particularly thank the grand impresario of this whole affair is Kelly Broz. And Kelly puts this all together, the exhibition hall. I just turn it over to her. I forget about it, and Charlie and I just show up on Saturday morning. And Kelly is having her 50th birthday tomorrow. So, Kelly, would you stand up and take a bow, please. Yeah. (Singing) Happy birthday to you. Happy birthday to you. Happy birthday, dear Kelly. Happy birthday to you. For Kelly. (Applause)

WARREN BUFFETT: Now, today we’re going to follow the usual format. We have a number of microphones placed around this room and we have overflow rooms. We will go from one station to the other, keep going until about noon or thereabouts, and then we’ll break for 30 or 45 minutes for lunch. We’ll come back here, and we will then go until about 3 o’clock, continuing the same routine. We don’t prescreen the questions or the questioners. It’s whoever got in line first for the microphones. At 3 we will take a break for a few minutes. We will reconvene at 3:15 for the official business meeting. We have an item of business — normally we take care of business in about five minutes, reelect the directors. But today we have an item on the proxy relative to our holdings of PetroChina. We were not required to put that on the ballot. The SEC told us we didn’t have to, but we really thought it would be a good idea to do it so that all of you that are interested can hear about our reasoning and the reasoning of the people who disagree with us.

We’ll give them plenty of time to tell you why they think we’re wrong and we’ll respond. And I hope anybody that’s interested at all on the subject, I hope you stay right until 4 o’clock when we will adjourn, because Charlie and I are then going to greet, perhaps, as many as 600 shareholders who have come from outside of North America. We have a record number. I think we have a hundred or so from Australia, and we have close to that number from South Africa. We have shareholders from all over the world. So we feel if they come all the way to Omaha, Charlie and I would at least like to shake their hands, and we have that from about 4 till 6:00 o’clock, and then we’ll be doing some other things this evening. But that is the drill for this meeting. We won’t elect the directors until the regular meeting, which commences at 3:15, but I would like to introduce them at this time and we have a few special announcements in that connection.

3. Berkshire directors introduced

WARREN BUFFETT: But we start off — this is Charlie, this fellow that’s been making all the noise over here. (Laughter) He’s quite hyperkinetic. But we seem — I think he’s on his medicine. (Laughter) Charlie, incidentally, can hear quite well and I can see, so we work together. I have a little — I thought I was doing pretty well when I remembered his name, actually. But our combined ages are 159 for those of you who can’t work with big numbers. So Charlie. And then we have — and if you’ll stand as I read your name — Howard Buffett. (Applause) Bill Gates. (Applause) Sandy Gottesman. (Applause) Charlotte Guyman. (Applause) A former Omahan, Don Keough. (Applause) Tom Murphy. (Applause) Ron Olson. (Applause) And a lifetime Omahan, Walter Scott. (Applause) Now, in addition, we have with us a director whose family has been involved with Berkshire Hathaway and its predecessor companies for over a hundred years.

His father played a very key role in Buffett partnership obtaining control of Berkshire Hathaway in 1965. He was supportive in every possible way, as his father, and now his son. And Kim Chace has been on our board for a great number of years. He’s been a — just like his father before him, he’s been a wonderful director. He’s been a great friend. He will be leaving the board this year, but Kim is here with his family and, Kim and the family, if you would stand up, I’d like the shareholders to recognize you. (Applause)

WARREN BUFFETT: And then finally we will have a new director get elected, and I’ve got the votes in my pocket so there’s no question about it, and that is Sue Decker. And, Sue, if you will, please stand. (Applause)

4. Q1 earnings are “good”

WARREN BUFFETT: Just one or two items of business the — before we start the questioning. We did report our earnings yesterday after the close, and I can’t see the — are they up on the monitor? But it was a good first quarter. We had a good year last year. The insurance earnings are going to go down. There’s no question about that. How much they go down depends on Mother Nature and a few other factors. But it’s been an extraordinary period for insurance. I mean, nothing bad happened last year, and the same was true in the first quarter. As you might expect, that favorable experience has caused people to lower prices in some areas quite dramatically. And the nature of insurance, if you write a one-year contract, say, six months ago, you were still getting premium at the old rate, if you write at a one-year policy, for another six months. So there’s a lag effect when things are getting either better or worse. And the lag effect from this point forward, we will — our insurance rates results will show the effect of lower prices. They will probably show — certainly we have the most benign hurricane season imaginable last year.

We have less hurricane exposure that we’ve written this year but, nevertheless, as natural catastrophes occur we will be paying out lots of money if and when they occur. It couldn’t get any better than it was last year from our standpoint. So things in the insurance world, our insurance earnings, underwriting earnings, are bound to decrease. Now, what we really hope over time is more or less to break even on the underwriting of insurance. So when you see a significant profit like last year or underwriting profit this year, just look at that as kind of the good side of what will later be an offset to it in a way of an underwriting loss. But if we break even in insurance on underwriting, we do very, very well because we generate lots of float and we earn money on that float and our float is at an all-time high. So this is really the frosting on the cake when we have an underwriting profit, and it’s not to be expected to necessarily — well, it won’t occur year after year.

Ever since we’ve been in the insurance business, about half the years we’ve made money underwriting and half we haven’t. I think our mix of business now is such that we’ll even maybe do a touch better than that in the future, but we won’t do anything like what we did in the last year and in the first quarter this year. There’s one unusual item in our balance sheet that you should be aware of. March 31, you’ll see our receivables went up by about $7 billion. That was because of the Equitas transaction I described in the annual report. On March 31st, the deal, basically, was closed at the end of the quarter. So we had a receivable of 7 billion, and then a couple of days later we were given 7 billion of cash and securities. So that receivable very quickly turned into liquid assets, cash. And we sold all those securities we got. So we had 7 billion transferred from receivables to cash very early in April. Other than that, most of our noninsurance businesses did fine.

The residential constructionrelated businesses are getting hit, in some cases getting hit very hard, and in some cases getting just — but still reflecting decreases in their business. And my guess is that that continues, perhaps, for quite a while. So you will see lower earnings coming from the companies that are related to residential construction such as Shaw, Johns Manville, ACME Brick, and that group. But overall, compared to the companies they compete with, our managers continue to do an absolutely sensational job. We have the greatest group of managers and, for that matter, we’ve got the greatest group of stockholders, of any company I know of in the world, and Charlie and I are very grateful. You saw in the movie Charlie and I going over there to give the fellows in Israel a lot of advice on how to run their operation better. And Charlie might want to — you might want to comment on ISCAR.

CHARLIE MUNGER: Well, that was a great experience, and ISCAR is a very great company. I have never seen anything as automated as that ISCAR operation. I think they regard it as a disgrace if any human hand has to do anything.

WARREN BUFFETT: We bought it without looking at it, but after we looked at it, we really liked it. (Laughter) For those of you who won’t be around for the 3:15 — and I hope everybody that’s interested sticks around for that — it will be an interesting discussion. But we do have a preliminary vote. Again, I can’t see the vote up there. But, [CFO] Marc [Hamburg], is the vote up there? Unable to hear anything there, but I assume it. The — basically, I can’t see it from here, but it’s about 2 percent are in favor of the resolution and about 98 percent opposed. And that was true of both the A and the B stock. So there really wasn’t any great difference in the way people voted on the proposal. And even if you leave out my personal vote, which was against, it’s about a 25-to-one margin that voted in opposition to it.

And anybody that wishes to vote in person or to change their vote, be sure and stay for the meeting at 3:15, and I think you’ll find the discussion very interesting if you care to stay.

5. Buffett sees no private equity “bubble” about to burst

WARREN BUFFETT: Let’s get a map here. Here we are. We will start with area 1, which I think is over here, and there we are and we have a questioner.

AUDIENCE MEMBER: Good morning, Mr. Buffett and Mr. Munger. My name is Kevin Truitt (PH) from Chicago, Illinois. Thank you both for, again, hosting this “Woodstock for Capitalists” for your shareholders and fellow capitalists. I have two questions. My first question is for both Mr. Buffett and Mr. Munger.

WARREN BUFFETT: I don’t like to interrupt you, but we’re only letting everybody do one question, so pick whichever one you feel the strongest about getting an answer for, please.

AUDIENCE MEMBER: OK. First, given the ocean of equity money that is out there — private equity money — that is out there today chasing deals, and with the quality of the deals continually diminishing as the quantity of good deals continues to go down, and given the fact that these private equity funds are getting their equity portion of the money from pension funds and college endowments and using very high levels of borrowed money from the banks, this has the look, feel, and smell of a bubble that is about to burst and is likely to end badly for many of the deal-makers and the investors. What events, in your opinion, could cause this bubble to burst, and how do you think this is likely to all end?

WARREN BUFFETT: Well, as you were reading off that list, we are competing with those people, so I started to cry as you — (laughs) — explained the difficulty we have in finding things to buy. The nature of the private equity activity is such that it really isn’t a bubble that bursts. Because if you’re running a large private equity fund and you lock up $20 billion for five or longer years and you buy businesses which are not priced daily, as a practical matter, the plug will not — even if you do a poor job, it’s going to take many years before the score is put up on the score board, and it takes many years, in most cases, for people to get out of the private equity fund even if they wished to earlier. So it does not — it’s not like a lot of leverage can lead to in-marketable securities or something there. And the investors can’t leave and the scorecard is lacking for a long time. What will slow down the activity — or what could slow down the activity — is if yields on junk bonds became much higher than yields on high-grade bonds.

Right now the spread between yields on junk bonds and high-grade bonds is down to a very low level, and history has shown that periodically that spread widens quite dramatically. That will slow down the deals, but it won’t cause the investors to get their money back. There’s one other aspect, of course, that — of this frenzied activity, you might say, in private equity is that if you have a $20 billion fund and you’re getting a 2 percent fee on it or $400 million a year, which seems like chump change to those that are managing them but sounds like real money in Omaha — if you’re getting 400 million a year from that $20 billion fund, you can’t start another fund with a straight face until you get that money pretty well invested. It’s very hard to go back to your investors and say, well, I’ve got 18 billion uninvested and I’d like you to give me money for another fund. So there’s a great compulsion to invest very quickly because it’s the way to get another fund and another bunch of fees coming in.

And those are not competitors for businesses that Charlie and I are going to be particularly effective in competing with. I mean, they — we are going to own anything we buy forever. The math has to make sense to us. We’re not given to optimistic assumptions, and we don’t get paid based on activity. But I think it will be quite some time before — it’s likely to be quite some time — before disillusionment sets in and the money quits flowing to these people that are promoting these. And whether they can continue to make deals will depend on whether people will give them lots of financing at what I would regard as quite low rates. Charlie?

CHARLIE MUNGER: Yeah. It can continue to go on a long time after you’re in a state of total revulsion.

WARREN BUFFETT: The voice of optimism has spoken. (Laughter.)

6. I didn’t do enough to “sell” Berkshire internationally

WARREN BUFFETT: We’ll go on to 2. And I should have mentioned at the start. We really only take one question per person because there’s a lot of people waiting and some people get very talented about rolling four or five into one, but we — we’ve gotten more talented about unraveling them, so try to keep it to one. Area 2, please.

AUDIENCE MEMBER: Greetings to all of you from the Midwest of Europe from the city of Bonn in Germany. My name is Norman Rentrop. I’m a shareholder in Berkshire since 1992, as well as a shareholder in Wesco and Cologne Re. I’m a great admirer of both of you and want to thank you again for sharing your wisdom with us and for continuing to stay humble by managing Berkshire for the benefit of all of us without any big 2 and 20 percent fees, without stock option plans. (Applause)

WARREN BUFFETT: Be careful. You’re giving Charlie ideas here. (Laughter)

AUDIENCE MEMBER: And I want to applaud you in setting another great example by donating most of your wealth to charity and for donating — (applause) — and for donating it in a very intelligent and selfless — that it’s not your name on the foundation — way. Now, I’m a little disturbed by the remarks from another great investor, from John Templeton, who continues to say that you are narrow-sighted in not investing more overseas. You do focus on the U.S. with relatively little, so far, internationally. You explained that it doesn’t really matter whether a company is headquartered in the U.S. or London or Munich or Paris, and that you would pay almost as high an amount for such companies as for similar U.S. companies. You were audacious to invest your petty cash in South Korean stocks. Coca-Cola went totally global many years ago; whereas, Hershey’s missed the opportunity to go global, leaving the chocolate globalization to Swiss-based Lindt & Sprungli. Now, what would it take you to go totally global with Berkshire by investing internationally in a big way?

WARREN BUFFETT: Well, that’s a very good question. And I would say that I know I probably bought my first stock outside the United States at least 50 years ago. It is not that we have not looked in the marketable securities field beyond this country, and we’ve made some investments there. It really wouldn’t make any difference to us if Coca-Cola was based in Amsterdam or Munich or Atlanta as long as they had the business they had. So we’re very involved in international business, but the hard fact is that in terms of buying entire businesses, we were simply not on the radar screen to the same extent — close to the same extend —outside the United States as we became in the United States. When we started in the United States, really, nobody knew anything about Berkshire, either, so we had — we had a selling job to do here, but we did not do the selling job — or I did not do the selling job — well abroad. And thanks to Eitan Wertheimer, he found us. And I think has contributed in a very significant way to getting us better known.

We have no bias against buying either marketable securities or entire businesses outside the United States. Eitan is even planning a little procedure to get us even better known — get Berkshire even better known — outside the United States, and I’m going to participate in that with him within the next six or eight months. But we can be very validly criticized for not being a better effort to get on that radar screen. I think we’re — I think it’s improving. We own a number of non-U.S. securities. We own stock in — just stock, marketable securities — we own two that are based in Germany, and we own others — as it’s been pointed out — we own, for example, 4 percent of POSCO, which is based in South Korea. That’s over a billion-dollar investment at current market. And we have — I can think of a half a dozen or so marketable securities investments outside the United States.

We don’t have to report those in the 13F — I believe I’m right on this, [CFO] Marc [Hamburg] — so they don’t necessarily get picked up the same way as do our domestic investments by reports we make to the SEC. There’s a problem — for example, in Germany we have to report our holdings in Germany if our holdings exceed 3 percent. Well, if you’re talking about a company with 10 billion in market value, that means at $300 million we have to tell the world what we’re buying, and telling the world what we’re buying is not the favorite activity of Charlie and myself. So — and it tends to screw up future buying. So that 3 percent threshold, which exists in the UK, exists in Germany, is a real minus to us, in terms of accumulating shares. But I can assure you that the entire world is definitely on our radar screen, and we hope to be on its. Charlie?

CHARLIE MUNGER: Well yes. I’d say that John Templeton made a fortune going into Japan very early and having the Japanese stocks go up to 30 or 40 times earnings. And that was a very admirable piece of investment. But, you know, we did all right in the same period. (Applause)

7. CEO compensation is a “joke”

WARREN BUFFETT: Let’s go to station 3, please.

AUDIENCE MEMBER: Hi. (Inaudible). I lived most of my life in India, but now in Hoboken, New Jersey. Warren, first thank you for replying to my letter. I misspelled your name, and where I come from if I did the same thing, the reply would have been, more on, get my name correct before asking a question. So thank you once again. Investment managers nowadays are benefiting a lot more at the expense of the investors and the (inaudible). My question is both to you and Charlie is, what do you think is the best structure/fees that managers should have that will give him an opportunity to maximize the time (inaudible) and money (inaudible) over the next few decades and being fair to the profession — the investors and himself? Thank you.

WARREN BUFFETT: Before I answer that, I think I should tell you a very short story. It’s a little embarrassing, but I got worried a few years ago about Charlie’s hearing. But I mean, the guy’s been my pal for 45 or 50 years. I didn’t really want to confront him with this apparent evidence of old age. So I went to a doctor and I said, “You know, I got this good pal. I don’t think he’s hearing so well. I really don’t want to confront him with it, so what do you suggest I do to check this out?” He said, “Well, stand across the room, talk in a normal tone of voice, see what happens.” So the next time I was with Charlie, I got across the room and I said, “Charlie, I think we ought to buy General Motors at 30. Do you agree?” Not a flicker. Not a flicker. I went halfway across the room. I said, “Charlie, I think we ought to buy General Motors at 30. Do you agree?” Nothing changes.

Get right next to him, put my voice in his ear and said, “Charlie, I think we ought to buy General Motors at 30. Do you agree?” Charlie said, “For the third time, yes.” (Laughter) So, Charlie, would you like to address that question? (Laughter)

CHARLIE MUNGER: Yes. The question addressed the problem of unfairness of executive compensation and the effects of that unfairness on investors. And now that you know the question, you can solve the problem. (Laughter)

WARREN BUFFETT: Well, Charlie and I have plenty to say about compensation, and some of it makes our stomach turn. I will say this, though. There are more problems with having the wrong manager than with having the wrong compensation system. I mean, it is enormously important who runs — you name the company — Proctor & Gamble, Coca-Cola, American Express — and any compensation sins are generally of minor importance compared to the sin of having somebody that’s mediocre running a huge company. That said, Charlie and I think that compensation has — there’s a natural tendency — because of ratcheting, because of the publicity of what other people get, and because of the lack of intensity in the bargaining process. I mean, you read about labor contracts, you know, where impasses go on for weeks and where they negotiate till 3 in the morning and, you know, both sides take their case to the press and everything. I ask you, when have you heard of a comp committee, you know, working until 4 in the morning, declaring an impasse for a week, not being able to make a deal?

It just doesn’t happen because the CEO cares enormously how he or she is paid, and to the comp committee — and they’re doing, perhaps, a little better job now — but it’s basically play money. And, of course, as I’ve pointed out in the past, I’ve been on 19 boards. They put me on one comp committee and they regretted it subsequently. You know, they are looking for cocker spaniels with their tails wagging to put on comp committees and, you know, they’re not looking for Dobermans. And I try to pretend I’m a cocker spaniel just to get on one, but it doesn’t work. (Laughter) But it is not — there is not a parity of intensity in the bargaining process. One guy cares enormously and the others don’t. And as Charlie has pointed out in the past, what really drives a lot of this ratcheting impact is envy. I saw that on Wall Street.

You can talk about greed, but if you paid somebody $2 million, they might be quite happy until they found out the guy next to them made 2 million-one, and then they were miserable. And Charlie has also pointed out that envy, of the seven deadly sins, is probably the dumbest, because if you’re envious of somebody, you feel terrible and, you know, the other guy isn’t bothered at all. So all you get out of envy is this miserable grinding in your stomach and all that sort of thing. You know, compare that to some of the other sins like gluttony, which we are about to engage in. (Laughter) You know, there’s some upside to gluttony. I’m told there’s upside to lust, but I’ll leave that to Charlie to explain. (Laughter) But envy, where the hell is the upside, you know? But it does produce this ratcheting effect in pay. The comp committee sits down. The human relations person comes in. The human relations person knows what the CEO thinks of them is going to determine their future, and the human relations department recommends some comp consultant.

The comp consultant knows that his recommendation to other firms is dependent on what these people say about him. So under those circumstances, you know, can you imagine that it’s anything like a fair fight? It’s a joke. Charlie?

CHARLIE MUNGER: Yes. The process is contributed to by a wonderful bunch of people called compensation consultants. And that reminds me of the old story where the mother asked the child why she told the census taker that the man of the house was in prison for embezzlement. And the child said, “I didn’t want to admit he was a compensation consultant.” (Laughter)

WARREN BUFFETT: We’ll get around to the rest of you later on, too. Don’t feel smug because we haven’t attacked your — I just had a note handed to me. We do have about 27,000 people here. The overflow rooms are full, and we will have a whole bunch in the exhibition hall as well. (Applause)

8. Corporate jets can be good

WARREN BUFFETT: Let’s go to number 4.

AUDIENCE MEMBER: Yes. Good morning. I’m Rob (inaudible). I’m from the UK, and I traveled from Switzerland to be here today. This is a question that Charlie will like. There’s a study by David Yermack that companies with private jets underperform their peers by 4 percent. What is the yardstick that you use to judge whether people are good stewards of money — management?

WARREN BUFFETT: Did he direct that to you, Charlie?

CHARLIE MUNGER: Well, he referred to private jets being a possible indication of executive excess. I want to report that we’re solidly in favor of private jets. (Laughter)

WARREN BUFFETT: We even pay for them ourselves. (Laughs) Charlie used to only — he traveled on the bus, and only then when they offered a senior citizen’s discount. But in recent years I’ve shamed him into getting his own NetJets share — I have my own — I have two NetJets shares. Actually, Berkshire is significantly better off in a number of its businesses, and including at the corporate level, because we use corporate jets. I don’t know which deals wouldn’t have been made, but I do know that — excuse me — I would not have had the same enthusiasm for traveling thousands of miles to go after deal after deal and so on. And I see what it produces at our — a number of our other businesses. So it has been a valuable business tool. It can be misused like anything else. I remember many, many years ago, we owned stock in a public company, and the CEO stopped off in Omaha on the way to see me, and he explained that they use some grocery chain in Idaho or something to be sort of their test case on all new products. And they would go visit it because they also had this lodge out there.

I mean, you can abuse any system. But properly used, I would say that corporate jets have been a real asset to Berkshire. I would go back to this comp question just one second, too. I mean, comp is not rocket science. I mean, we have very simple systems that compensate those people whose pictures you saw during the movie. They’re terrific people. We compensate them based on things that are under their control and that we care about. And we don’t make it complicated, and we don’t pay them for things that are happening that they have nothing to do with. I mean, we talked last year about what you do in a commodity business like copper, oil. I mean, if oil goes from $30 to $60 a barrel, there’s no reason in the world why oil executives should get paid more for what’s going on. They didn’t get it to $60 a barrel.

If they have low finding costs, which is under their control, and which is important, I would pay like crazy for that, because a person who finds oil and develops reserves at $6 a barrel is worth a lot more than somebody that finds and develops them at $10 a barrel, assuming they’re similar quality reserves. That is the job that you hire the person for. But the price of oil, they’ve got nothing to do with it, and to hand them huge checks because oil goes up or to cut them back because it goes down — if oil went down and somebody had the lowest finding costs that was working for us, we would pay them like crazy. Charlie?

CHARLIE MUNGER: Yeah. Well, I’d like to go back to that corporate jet thing. If the trappings of power are greatly abused, I think you would find a correlation that some of those companies would be disappointing to investors. And, you know, man has known for a long time that getting too enchanted with the trappings of power is counterproductive. The Roman emperor that’s most remembered as presiding over a period of great felicity was Marcus Aurelius, who was totally against the trappings of power even though he had them all — he had all the power. So I think all these things can be abused, and I think the best way to tackle a subject is to provide examples of contrary behavior.

WARREN BUFFETT: Charlie, have a (inaudible) —

CHARLIE MUNGER: I think I’ll go over here.

WARREN BUFFETT: This is our idea of corporate benefits up here, lots of fudge, lots of peanut brittle. I recommend the diet to everyone.

9. “Extraordinary” things can happen when people panic

WARREN BUFFETT: Let’s go to number 5.

AUDIENCE MEMBER: David Winters, Mountain Lakes, New Jersey. Could you please explain what you believe the impact and, hopefully benefit, of a credit contraction would be on Berkshire Hathaway, and maybe higher interest rates as well?

WARREN BUFFETT: Well, we do benefit when others suffer. That doesn’t mean we enjoy their suffering, but times of chaos in financial markets, the situation that existed in junk bonds in 2002, the situation that existed in equities, you know, back in 1974. So I don’t think you’ll necessarily see a contraction in credit. That — I think most authorities are very reluctant to really step on the brakes. You know, it’s too easy to figure out who did step on the brakes. But you could very well see some exogenous event that starts feeding on itself in markets. In fact, I think it’s much more prone to feed on itself in markets than in most periods in the past, if you really got a shock to the system. And that would result in a huge widening of credit spreads, cheaper equity prices, all kinds of things that actually are helpful to Berkshire because we usually have at least some money around to do something at times like that. There will be periods like that. If you go back 30 or 40 years, when credit contracted, it just really wasn’t available. Charlie and I went through a couple periods like that.

We were trying to buy a bank in Chicago 40 — 40 or so years ago, and the only people that would lend it to us in the world — because banks weren’t lending for acquisitions — we found some people over in Kuwait who said they’d lend it to us in dinars. And we thought, you know, it might be fine to borrow it, but when it came time to pay them back the dinars, they would probably be telling us what the dinar was worth, so we passed on that particular deal. But you had real credit contractions then. And, of course, the whole reason — not — I would say the major reason the Federal Reserve was established was the huge contractions in credit that were felt, particularly here in places like the Midwest where they were dependent on correspondent banks in the larger cities, and when those banks had problems, the banks here got shut off. And we really needed a system that would not have that happen except by design. And I would say the Fed, by design, is probably not going to produce any credit crunches. Charlie?

CHARLIE MUNGER: Well, the last time we had that credit contraction, we made, what, a quick 3 or $4 billion? And we were acting with vigor. The whole investment world is more and more competitive, and if you talk about a real credit contraction, which gums up the whole civilization, no one would welcome that. And I would predict that if we ever had a really big credit contraction after a period like the one we’re in with all this excess, which is causing so much envy and resentment, that we would get legislation that most of us wouldn’t like.

WARREN BUFFETT: There’s a book by Jonathan Alter that came out about a year ago that talks about the first hundred days after [President Franklin] Roosevelt took over [in 1933], and by the nature of the book it tells about some of the days before that, too. But if you want to get an example of — I mean, this country was close to the brink at that point, and, basically, Roosevelt got anything passed he wanted, just as fast as they could write the bills there, initially. And that was a good thing, you know, with banks closing and people dealing in scrip and that sort of thing. So nobody wants that to come back, and we’ve learned a lot more about that sort of thing since the Great Depression. I don’t think you’ll see an orchestrated credit contraction. Now, you had in 1998, in the fall, when Long-Term Capital Management got in trouble, you had a seize up of the credit markets. It wasn’t an orchestrated by the Fed-type contraction. You simply had people panicked about even the most — even the safest of instruments and credit spreads doing things that they’d never done before.

And that’s rather an interesting example, because that was not a hundred years ago. It was less than ten years ago. You had all kinds of people with high IQs in Wall Street. You had all kinds of people with cash available. And you had some really extraordinary things happen in credit markets simply because people panicked and they felt other people were going to panic. And you get these second- and thirddegree type reactions in markets. We will see that sort of thing again. It won’t be the same but, you know, as Mark Twain said, history doesn’t repeat itself but it rhymes. And we will have something that rhymes with 1998.

10. Munger reminds people “too much of John Adams”

WARREN BUFFETT: Number 6.

AUDIENCE MEMBER: Hello. My name is Andrew Paullin (PH), a former Michigander now from Woburn, Massachusetts. My question is for Charlie, though Warren, please add your thoughts as well. Charlie, you were quoted in “Poor Charlie’s Almanack” as saying, quote, “Ben Franklin was a very good ambassador and whatever was wrong with him from John Adams’ point of view probably helped him with the French,” end quote. If you are willing, I’m curious to hear your additional thoughts regarding John Adams and his wife, Abigail Adams.

CHARLIE MUNGER: Well, of course, they were wonderful people, both of them. And —

WARREN BUFFETT: Did you know them personally, Charlie? (Laughter)

CHARLIE MUNGER: No. No. But if you wanted to have a really jolly evening, I would have taken Franklin every time. And the French love Franklin. I think I remind many people too much of John Adams and too little of Ben Franklin. (Laughter)

WARREN BUFFETT: He does pretty well in respect to Ben Franklin, too

11. Corporate profits can’t stay at record highs

WARREN BUFFETT: Let’s go to number 7.

AUDIENCE MEMBER: My name Takashi Ito (PH) from Japan. In addition to the global excess liquidity, corporate profits are very high compared to the share of labor. Does that make it extra challenging for you to find investment opportunities? Thank you.

WARREN BUFFETT: Yes, corporate profits in the United States are — except for just a very few years — are record, in terms of GDP. I’ve been amazed that after being in a range between 4 and 6 percent of GDP, they have jumped upward. And — (coughs) — you would not think this would be sustainable over time. Excuse me just one second. Charlie, want to talk for a second? (Laughter) You’ve just heard him on the subject. But corporate profits, when they get up to 8 percent plus of GDP, you know, that is very high. And so far it has caused no reaction. One reaction could be higher corporate taxes. You have lots and lots of businesses in this country earning 20 or 25 percent on tangible equity in a world where long-term bond rates are 4 3/4 percent — government bond rates. That’s extraordinary. If you’d read an economics book 40 years ago and it talked about that kind of a situation persisting, you wouldn’t have found a book like that.

I mean, that does not make sense under pure economic theory, but it’s been occurring for some period of time and, as a matter of fact, it’s gotten more extreme. Corporate profits continue to rise as a percentage of GDP. That means somebody else’s share of GDP is going down. And you’re quite correct that the labor component of GDP has actually fallen fairly significantly. Whether that becomes a political issue — maybe in the next campaign — whether it becomes something that Congress does something about — Congress has the power to change that ratio very quickly. Corporate tax rates not that long ago were 52 percent and now they’re 35 percent and a whole lot of companies get by with paying 20 percent or less. So I would say that, at the moment, corporate America is kind of living in the best of all worlds, and history has shown that those conditions don’t persist indefinitely. What brings it to an end, when it happens, I don’t know. But I would not expect corporate profits to be eight-and-a-fraction percent of GDP, on average, in the future. Charlie?

CHARLIE MUNGER: Yeah. Of course, a lot of the profits are not in the manufacturing sector or the retailing sector, either. A lot of them are in this financial sector. And so we’ve had a huge flow of profit to banks and investment banks and investment management groups of all kinds, including various kinds of private equity. And that has, I think, no precedent. I don’t think it’s ever been as extreme as it is now. Do you agree with that?

WARREN BUFFETT: Yeah. And Charlie and I would have said 20 years ago — and we’ve done things in banking from time to time, including owning a bank. But if you had said to us, in a world of 4 3/4 percent long-term governments, will one major bank after another be earning more than 20 percent on tangible equity, dealing in what is basically a commodity — money — we would have said that that condition just wouldn’t persist. Now, part of that is because the banks are geared up more. So if you earn 1 1/2 percent on deposits, you know, and you have — or 1 1/2 percent on assets — and you have assets of 15 times equity, you’re going to be earning 22 1/2 percent on equity. And by gearing up more, it does improve the return on equity. But you still would think that would be self-neutralizing.

You’d think that after one guy did it, another guy would do it, and then instead of earning 1 1/2 percent on assets, you’d earn, you know, 9/10 of a percent or 1 percent on assets, but it hasn’t happened. It’s gone on for a long time. And, you know, we are living — I’d have to look at a chart on it, but there may have been a year or two post-World War II, but I don’t think that — I would bet there haven’t been more than two or three years in the last 75 when corporate profits, as a percentage of GDP, have been this high.

CHARLIE MUNGER: Some of this has come from consumer credit, which I think has been pushed to extremes that we’ve never before seen in the history of this country. Some other countries that pushed consumer credit very hard had enormous collapses. Korea had one, for instance, that caused chaos for, what, two or three years? Maybe longer. So I don’t think this is a time to just swing for the fences.

WARREN BUFFETT: And the chaos in 1997 and 1998 when the IMF stepped in, I mean, it was bad in Korea for a while. It produced some of the most ridiculously low stock prices that I’ve ever seen in my life. In fact, I mean, you could go back to 1932 in this country and you wouldn’t have seen things any cheaper. And in the meantime, the companies rebuilt their balance sheets and their earning power. So things do turn around in financial markets. You will — if you’re young enough, you will see everything and then some. I mention in the annual report, in looking for an investment manager to succeed me, that we care enormously about finding somebody who’s not cognizant of everything risky that’s already happened, but that also can envision things that have not yet been experienced. That’s our job in the insurance business, and it’s our job in the investment business.

And there are a lot of people that just don’t seem to — they’re not — they’re very smart, but they just — they’re just not wired to think about troubles that they haven’t actually witnessed before. But, you know, that’s the problem Noah had. You know, the first 40 days, it was tough sledding for Noah, but he got revenge eventually.

12. We welcome short-sellers betting against us

WARREN BUFFETT: Let’s go to number 8.

AUDIENCE MEMBER: Hello. My name is Brian Bowalk (PH), Fremont, Nebraska. With the growing number of fail-to-deliver trades happening in our stock markets, including investors’ cash accounts, Roth IRAs, and other retirement accounts, it seems like the problem is getting worse. With some companies being on the Regulation SHO list for hundreds of days, what can be done to make Wall Street deliver stock that they have sold but never delivered? Thank you.

WARREN BUFFETT: Yeah. The so-called fail to deliver and naked shorting, I think is the question. I don’t know exact — I’ve never been in a position where I’ve asked a broker from whom I bought stock to give me the certificate and have them decline it for any period of time. I would think that you might have some action against them. But I’ve never — I do not see the problem at all with people shorting stocks. I mean, I would welcome people shorting Berkshire Hathaway. I mean, it — if you own stock, and they need to borrow from you, you can get some extra income from your stock. And the one sure buyer of your stock eventually is somebody who shorted it. I mean, that guy is going to buy it someday. And I have no problem with shorts. If there’s some kind of a game that’s played — and I’ve read about it — I’ve never seen it happen to anything that we’ve owned.

Like I say, if anybody wants to naked short Berkshire Hathaway, they can do it until the cows come home, and we’ll be happy to. We’ll have a special meeting for them. But — and I would say this: the shorts generally have the tougher time of it in this world. I mean, there are more people bowling stocks for phony reasons than there are burying stocks for phony reasons. So I do not see shorts as any great threat to the world. If enough people shorted Berkshire stock, they would have to borrow it and they would pay you to borrow your stock and that’s found money. We did that on USG. When USG got hammered after they went into bankruptcy — or maybe just before — one large brokerage firm came to us and they wanted us to lend them millions of shares and they paid us a lot of money. And we happily lent them the stock. We wished they borrowed more. In fact, we insisted that they borrow it for a given length of time just so that we could collect a large premium.

And I don’t know how many — I’d have to look it up but — I don’t know whether it’s in the hundred thousands or, maybe, low millions, but we were better off. And they didn’t do too well shorting USG at $4 a share either, but it was immaterial to us. So I do not regard — I do not regard shorts as — it’s a tough way to make a living. It’s very easy to spot phony stocks and promoted stocks, but it’s very hard to tell when that will turn around. And somebody that’s promoted a stock to five times what it’s worth, may very well promote it to ten times what it’s worth, and if you’re short, that can get very painful. Charlie, do you have any thoughts on shorting?

CHARLIE MUNGER: Well, not on shorting. But those delays in delivering sometimes reflect a tremendous slop in the clearance process, and it is not good for a civilization to have huge slop in the clearance processes for its security trades. That would be sort of like having a lot of slop in the management of your atomic power plants. It’s not a good idea to have slop that causes a lot of financial exposure that people are ignoring.

WARREN BUFFETT: Charlie, reach back into your law practice. If I buy a thousand shares of General Motors, and my broker doesn’t deliver it to me, and I ask him to deliver it and he doesn’t deliver it to me after a week or two weeks or three weeks, what’s the situation?

CHARLIE MUNGER: Well, if you’re a private customer, you may wait a while. And a lot of the other trades — the clearance systems do cause people to put up collateral and so on. But a lot of — take derivative trading. There’s a lot of slop in derivative trading. And the clearance problem would be awful if a lot of people wanted to do something at once.

WARREN BUFFETT: But if I demand delivery after three weeks, can I walk into court and say I want my stock, I’ve given you the money?

CHARLIE MUNGER: I don’t think there’s any court that can issue you a stock certificate just because you want it. No, the clearance system is failing you. Why, you can scream a lot, and you may have some ultimate remedy, but there’s —

WARREN BUFFETT: I’ll get somebody else to represent me. (Laughter)

13. “Gambling is a tax on ignorance”

WARREN BUFFETT: Number 9.

AUDIENCE MEMBER: Hello, hello. My name is Johann Fortenberg (PH) from Hanover, Germany. Do you think gambling companies will have a great future? Thank you.

WARREN BUFFETT: What kind of company?

CHARLIE MUNGER: Gambling companies.

WARREN BUFFETT: Gambling companies. Gambling companies will have a terrific future, if they’re legal. You know, which ones or anything, I don’t know anything about that. But the desire of people to gamble and to gamble in stocks, incidentally, too. Day trading, I would say, very often was — came very close to gambling as defined —. But people like to gamble, you know. I mean, it’s a — if the Super Bowl is on — better yet, if a terribly boring football game is on but you don’t have anything to do, and you’re sitting there with somebody else, you’re probably going to enjoy the game more if you bet a few bucks on it one way or the other. As you know, I mean, we insure hurricanes, so I watch the Weather Channel. But that’s a — (Laughter) It can be exciting. (Laughter) But people — the human propensity to gamble is huge. Now, when it was legalized only in — pretty much in Nevada — you had to go to some distance, or break some laws, to do any serious gambling.

But as the states learned to — you know, what a great source of revenue it was, they gradually made it easier and easier and easier for people to gamble. And, believe me, the easier it’s made, the more people will gamble. I mean, when I was — my children are here, and 40 years ago I bought a slot machine and I put it up on our third floor, and I could give me kids any allowance they wanted as long as it was in dimes. I mean, I had it all back by nightfall. (Laughter) I thought it would be a good lesson for them. Now they weren’t going to Las Vegas to do it, but believe me when it was on the third floor, they could find it, you know. And my payout ratio was terrible, too, but that’s the kind of father I was. (Laughter) The — but gambling, you know, people are always going to want to do it.

And for that reason, I particularly think that access — you know, in terms of friendly gambling or anything like that, I’m not a prude about it, but I do think that to quite an extent, gambling is a tax on ignorance. I mean, if you want to tax the ignorant, people who will do things with the odds against them, you know, you just put it in and guys like me don’t have to pay taxes. I really don’t — I find that — I find it kind of socially revolting when a government preys on the weaknesses of its citizenry rather than acts to serve them. And, believe me, when a government — (Applause)

WARREN BUFFETT: When a government makes it easy for people to take their Social Security checks and start pulling handles or participating in lotteries or whatever it may be, it’s a pretty cynical act. It works. It’s a pretty cynical act. And it relieves taxes on those, you know, who don’t fall for those or who don’t — who aren’t dreaming about having a car instead of actually having a car or dreaming about a color TV instead of having one. So it’s not government at its best, and I think other things flow from that over time, too. Charlie?

CHARLIE MUNGER: You know, I would argue that the gambling casinos use clever psychological tricks to cause people to hurt themselves. There is undoubtedly a lot of harmless amusement in the casinos, but there’s also a lot of grievous injury that is deliberately caused by the casinos. It’s a dirty business, and I don’t think you’ll find a casino soon in Berkshire Hathaway. (Applause)

14. How to be a better investor

WARREN BUFFETT: Number 10, please.

AUDIENCE MEMBER: Good morning. I’m Thomas Gamay (PH) from San Francisco. I’m 17-yearsold and this is my tenth consecutive annual meeting. (Applause)

WARREN BUFFETT: You must be a Ph.D. by now at least.

AUDIENCE MEMBER: Mr. Buffett and Mr. Munger, I’m curious about what you think is the best way to become a better investor. Should I get an MBA? Get more work experience? Read more Charlie Munger almanacs or merely is it genetic and out of my hands?

WARREN BUFFETT: Well, I think you should read everything you can. I can tell you in my own case, I think by the time I was — well, I know by the time I was ten — I’d read every book in the Omaha Public Library that had anything to do with investing, and many of them I’d read twice. So I don’t think there’s anything like reading, and not just as limited to investing at all. But you’ve just got to fill up your mind with various competing thoughts and sort them out as to what really makes sense over time. And then once you’ve done a lot of that, I think you have to jump in the water, because investing on paper and doing — you know, and investing with real money, you know, is like the difference between reading a romance novel and doing something else. (Laughter) There is nothing like actually having a little experience in investing. And you soon find out whether you like it. If you like it, if it turns you on, you know, you’re probably going to do well on it. And the earlier you start, the better, in terms of reading.

But, you know, I read a book at age 19 that formed my framework for thinking about investments ever since. I mean, what I’m doing today at 76 is running things through the same thought pattern that I got from a book I read when I was 19. And I read all the other books, too, but if you — and you have to read a lot of them to know which ones really do jump out at you and which ideas jump out at you over time. So I would say that read and then, on a small scale in a way that can’t hurt you financially, do some of it yourself. Charlie?

CHARLIE MUNGER: Well, Sandy Gottesman, who is a Berkshire director, runs a large and successful investment operation, and you can tell what he thinks causes people to learn to be good investors by noticing his employment practices. When a young man comes to Sandy, he asks a very simple question, no matter how young the man is. He says, “What do you own and why do you own it?” And if you haven’t been interested enough in the subject to have that involvement already, why, he’d rather you go somewhere else.

WARREN BUFFETT: Yeah. It’s very — that whole idea that you own a business, you know, is vital to the investment process. If you were going to buy a farm, you’d say, I’m buying this 160-acre farm because I expect that the farm will produce 120 bushels an acre of corn or 45 bushels an acre of soybeans and I can buy — you know, you go through the whole process. It’d be a quantitative decision and it would be based on pretty solid stuff. It would not be based on, you know, what you saw on television that day. It would not be based on, you know, what your neighbor said to you or anything of the sort. It’s the same thing with stocks. I used to always recommend to my students that they take a yellow pad like this and if they’re buying a hundred shares of General Motors at 30 and General Motors has whatever it has out, 600 million shares or a little less, that they say, “I’m going to buy the General Motors company for $18 billion, and here’s why.”

And if they can’t give a good essay on that subject, they’ve got no business buying 100 shares or ten shares or one share at $30 per share because they are not subjecting it to business tests. And to get in the habit of thinking that way, you know, Sandy would have followed it up with the questions, based on how you answered the first two questions, that made you defend exactly why you thought that business was cheap at the price at which you are buying it. And any other answer, you’d flunk.

15. When you don’t need a huge margin of safety

WARREN BUFFETT: Number 11.

AUDIENCE MEMBER: Mr. Buffett and Mr. Munger, I’m Marc Rabinov from Melbourne, Australia. I just wanted to ask you, how do you judge the right margin of safety to use when investing in various common stocks? For example, in a dominant, long-standing, stable business, would you demand a 10 percent margin of safety and, if so, how would you increase this in a weaker business? Thank you.

WARREN BUFFETT: We favor the businesses where we really think we know the answer. And, therefore, if a business gets to the point where we think the industry in which it operates, the competitive position or anything is so chancy that we can’t really come up with a figure, we don’t really try to compensate for that sort of thing by having some extra large margin of safety. We really want to try to go on to something that we understand better. So if we buy something like — See’s Candy as a business or Coca-Cola as a stock, we don’t think we need a huge margin of safety because we don’t think we’re going to be wrong about our assumptions in any material way. What we really want to do is buy a business that’s a great business, which means that business is going to earn a high return on capital employed for a very long period of time, and where we think the management will treat us right. We don’t have to mark those down a lot when we find those factors.

We’d love to find them when they’re selling at 40 cents on the dollar but we will buy those as much closer to a dollar on the dollar. We don’t like to pay a dollar on the dollar, but we’ll pay something close. And if we really get to something — you know, when we see a great business, it’s like if you see some — somebody walk in the door, you don’t know whether they weigh 300 pounds or 325 pounds. You still know they’re fat, right, you know? And so if we see something we know it’s fat, financially, we don’t worry about being precise. And if we can come in, in that particular example, at the equivalent of 270 pounds, we’ll feel good. But if we find something where the competitive aspects are — it’s just the nature of the business that you really can’t see out five or 10 or 20 years because that’s what investing is, is seeing out. You don’t get paid for what’s already happened. You only get paid for what’s going to happen in the future.

The past is only useful to you in the extent to which it gives you insights into the future, and sometimes the past doesn’t give you any insights into the future. And in other cases, like the stable business that you postulated, it probably does give you a pretty good guideline as to what’s going to happen in the future, and you don’t need a huge margin of safety. You should have something that — you always should feel you’re getting a little more than what it’s worth, and there are times when we’ve been able to buy wonderful businesses at a quarter of what they’re worth, but we haven’t seen those — well, we saw it in Korea here recently — but you don’t see those sort of things very often. And does that mean you should sit around and hope they come back for 10 or — you know, wait 10 or 15 years? That’s not the way we do it. If we can buy good businesses at a reasonable valuation, we’re going to keep doing it. Charlie?

CHARLIE MUNGER: Yeah. You’re — that margin of safety concept boils down to getting more value than you’re paying. And that value can exist in a lot of different forms. If you’re paid four-to-one on something that’s an even money proposition, why, that’s a value proposition, too. It’s high school algebra. And people who don’t know how to use high school algebra should take up some other activity.

16. Health care is too tough for Berkshire

WARREN BUFFETT: Number 12.

AUDIENCE MEMBER: — morning. Good morning.

WARREN BUFFETT: Morning.

AUDIENCE MEMBER: My name is Mike Klein, and I’m a general surgeon from Salinas, California. Given your resources and experience in underwriting insurance, do you have any thoughts of entering into, or helping to solve, our health care mess? Time is right for a new approach with Berkshire’s clarity brought to the formula. Let’s acknowledge the stakes are huge with implication for our economy and our future as a country.

CHARLIE MUNGER: Let me try that one. It’s too tough.

WARREN BUFFETT: I would —

CHARLIE MUNGER: Warren and I can’t solve that.

WARREN BUFFETT: Yeah, we can’t solve that one. We try to look for easy problems because those are the ones we find we have the answers for. And you can do that in investments. We don’t really try tough things. Now, sometimes life hands you a problem, not in the financial area in our case, usually, but it will hand you a problem that is very tough and that you have to wrestle with. But we don’t go around looking for tough problems. I would say this: we do very, very little in health insurance. You know, if we were to have — if we were looking for a solution through the private sector, we would be looking for something with very, very low distribution costs. I mean, you do not want a lot of the revenue soaked up in frictional costs between the benefits paid and the premiums received.

I don’t know how to do that, and I haven’t seen anybody else that’s very good at doing it, and you can say if you’re paying close to 15 percent of GDP for health costs, you know, somebody ought to be able to figure out something, but I haven’t heard it. Maybe we’ll hear it in the upcoming political campaign but Charlie’s views reflect mine at the present.

17. Munger on what’s driven Berkshire’s “extreme” success

WARREN BUFFETT: Now we’re going to go to the grand ballroom. We have these two overflow rooms that are full — or more or less full — and the grand ballroom is number. 13. Would they come in, please?

AUDIENCE MEMBER: This is Phil McCall (PH) from Connecticut. I wondered if you could comment on a subject I don’t think you like to talk about very much, which is intrinsic value, and the evolution over the past 10 or 12 years of going to — off and on — but giving us investments and then giving us the operating income and suggesting that might be a good guide to us. I find it extremely helpful. I’m not sure other people do when looking out the 20 years you’re talking about, looking ahead on both those two parts. Any comments you might have, I’d surely appreciate.

WARREN BUFFETT: Yeah. Well, the intrinsic value of Berkshire, like any other businesses, is based on the future amount of cash that can be expected to be delivered by the business between now and judgment day, discounted back at the proper rate. Now, that’s pretty nebulous. Another way of looking at it is to try and figure out the value of the businesses we own presently, and we try to give you the information that will enable you to make a reasonably close estimate at that. We own lots of marketable securities. It’s probably safe to say that they’re worth more or less what they are carried for. And then we own a number of operating businesses, and we try to give you the figures on those businesses that are the figures that we use in making our own judgments about the value of those businesses. Now, that tells you what we have today and more or less what it’s worth. But since Berkshire retains all of its earnings, it becomes very important to evaluate what will be done with those earnings over time. I mean, it is not only a question what the present businesses are worth.

It’s a judgment on the efficiency or the effectiveness with which retained earnings will be used. If you had looked at the intrinsic value of Berkshire in 1965, we had a textile business that was probably worth about $12 a share. But that was not the only part of the equation, because we intended to use any cash generated to try and buy into better businesses than we had, and we were fortunate to be able to buy in the insurance business in 1967 and build on that. So it was not only a combination of the business we had, but the skill with which retained earnings would be used, that determined what the present value actually should have been at Berkshire going back that far. It’s the same situation today. We will put to work billions and billions of dollars this year and next year and the year after. If we put that to work effectively, each dollar has a greater present value than a dollar has simply in cash or distributed. If we do ineffectively, it has a value of something less. The businesses today, you know, we have whatever the figure is in the annual report — roughly $80,000 in marketable securities.

If our insurance business breaks even, that $80,000 is free to us, in terms of using it. And we have a group of operating businesses and we show their earnings in the report and we’re going to try to add to those and they’ll try to add to their earnings. But if Charlie and I were each right now to write down on a piece of paper what we think the intrinsic value of Berkshire is, our figures would not be the same. They’d be reasonably close. And I think with that, I’ll turn it over to Charlie.

CHARLIE MUNGER: Yeah. What’s hard to judge at Berkshire is the likelihood that you’ll have anything like the past to look forward to in the future. Berkshire has gotten very extreme, in terms of investment results. In fact, it’s gotten so extreme that it’s hard to think of another similar precedent in the history of the world. And the balance sheet is gross, considering the small beginnings of the place. Now, what on earth has caused this extreme record to go on for such a very long time? I would argue that the young man who was reading everything he could read when he was 10years-old became a learning machine, and he got a lot of power early, and then he got a very long run when he kept learning. If Warren had not been learning all the while, I’m telling you having watched the process closely, the record would be a pale shadow of what it is. And Warren has improved since he passed the retirement age of man. In other words, in this field, at least, you can improve when you’re old. Now, most people don’t even try and create that kind of a record.

They pass power from one 65-year-old to one 59-year-old and then do it over and over again. But you get an enormous advantage from practice in this field. And so what happened accidentally in the case of Warren has helped you shareholders greatly because you had this long run with power extremely concentrated, and with the man holding the power being a ferocious learner. Our system ought to be more copied than it is. (Applause) This idea of passing the power from one old codger to another, in a settled way, is not necessarily the right system at all.

WARREN BUFFETT: We have a very strong culture now of rationality, of being owner-oriented, that will go on long after I’m not around. And we have a talent on the operating side in place to do a lot of wonderful things over time. We will need, in capital allocation, to keep doing intelligent things. We won’t get to do brilliant things because you don’t get to do brilliant things with the kind of sums we’re talking about. Maybe once in a blue moon or something, you know, you’ll get a chance. But we will need somebody that never does — basically doesn’t do any dumb things, and occasionally does something that’s reasonably good. That can be done. And we have — we’re on that road already. It does not — fitting into this organization as an investment officer or a capital allocator, you’re getting in the right vehicle. It has the right standards. It will reject ideas that really are irrational. I’ve been on a lot of boards. Charlie’s been on a lot of boards.

You would be amazed at the number of things that are responding to “animal spirits” rather than to rationality that take place. And we have our animal spirits but we devote them to other areas.

18. “Deficient” auditing of derivatives will cause problems

WARREN BUFFETT: Let’s go on to number 14. That’s in — that’s in the junior ballroom.

AUDIENCE MEMBER: Yes. Hi, Mr. Buffett and Mr. Munger. This is Whitney Tilson, a shareholder from New York. For many years both of you have been warning about the dangers of derivatives, at one point calling them “financial weapons of mass destruction.” Yet every year, tens of trillions of dollars of derivatives are bought and sold. It just seems to be getting bigger and bigger and almost certainly improperly accounted for. And so I was wondering if you could comment, and, specifically, if you have any thoughts on how much longer this might go on. Do you see anything imminent that could derail this ever inflating bubble? What might trigger it? And who should be doing what to try and mitigate this looming danger?

WARREN BUFFETT: Well, we’ve tried to do a little to mitigate it ourselves by talking about it, but the — you’re right, the — and it isn’t the derivative itself. I mean, there’s nothing evil about a derivative instrument. As I mentioned, we have 60-some of them at Berkshire, and on Monday I’ll go over with the directors — I’ll go over all 60-some and, believe me, we’ll make money out of those particular instruments. But they — usage of them on an expanding basis, more and more imaginative ways of using them, introduces, essentially, more and more leverage into the system. And it’s an invisible — or largely invisible — sort of leverage. If you go back to the 1920s, after the crash, the United States government held hearings. They decided that leverage — margin, in those days, as they called it — leverage contributed to, perhaps, the crash itself and certainly to the extent of the crash.

And it was like pouring gasoline on a fire was — when people’s holdings got tripped, you know, when stocks went down 10 percent people had to sell, another 10 percent, more people had to sell and so on. Leverage was regarded as dangerous and the United States government empowered the Federal Reserve to regulate margin requirements, regulate leverage, and that was taken very seriously. And for decades it was a source of real attention. I mean, if you went to a bank and tried to borrow money on a stock, they made you sign certain papers as to — that you weren’t in violation of the margin requirements, and they policed it. And it was taken quite seriously when the Fed increased or decreased margin requirements. It was a signal of how they felt about the level of speculation. Well, the introduction of derivatives and index futures, all that sort of thing, has just totally made any regulation of margin requirements a joke. They still exist and, you know, it’s an anachronism. So I believe — I think Charlie probably agrees with me — that we may not know where, exactly, the danger begins and where — and at what point it becomes a superdanger and so on.

We certainly don’t know what will end it, precisely. We don’t know when it will end, precisely. But we probably — at least I believe — that it will go on and increase to the point where at some point there will be some very unpleasant things happen in markets because of it. You saw one example of what can happen under forced sales back in October 19, 1987, when you had so-called portfolio insurance. Now, portfolio insurance — and you ought to go back and read the literature for the couple years preceding that. I mean, this was something that came out of academia and it was regarded as a great advance in financial theories and everything. It was a joke. It was a bunch of stop-loss orders which, you know, go back 150 years or something, except that they were done automatically and in large scale by institutions and they were merchandise. People paid a lot of money to people to teach them how to put in a stop-loss order. And what happened, of course, was that if you have a whole series of stop-loss orders by very big institutions, you are pouring gasoline on fire.

And when October 19th came along, you had a 22 percent shrink in the value of American business, caused, essentially, by a doomsday machine. A dead hand was selling as each level got hit. And three weeks earlier, you know, people were proclaiming the beauty of this. Well, that is nothing compared — it was a formal arrangement to have these — this dynamic hedging or portfolio insurance — sell things. But you have the same thing existing when you have fund operators operating with billions in aggregate, trillions of dollars, leveraged, who will respond to the same stimulus. They have what we would call a “crowded trade,” but they don’t know it. It’s not a formal crowded trade. It’s just that they’re all ready to sell if a certain given signal or a certain given activity occurs. And when you get that, coupled with extreme leverage which derivatives allow, you will someday get a very, very chaotic situation. I have no idea when.

I have no idea what the exogenous factor — I didn’t know that shooting some archduke, you know, would start World War I, and I have no idea what will cause this kind of a thing, but it will happen. Charlie?

CHARLIE MUNGER: Yeah. And, of course, the accounting being deficient enormously contributes to the risks. If you get paid enormous bonuses based on reporting profits that don’t exist, you’re going to keep doing whatever causes those phony profits to keep appearing on the books. And what makes that so difficult is that most of the accounting profession doesn’t even recognize how stupidly it is behaving. And one of the people in charge of accounting standards said to me, “Well, this is better, this derivative accounting, because it’s mark-to-market, and don’t we want current information?” And I said, “Yes. But if you mark-to-model, and you create the models, and your accountants trust your models, and you can just report whatever profit you want as long as you keep expanding the positions bigger and bigger and bigger, the way human nature is, that will cause terrible results and terrible behavior.” And this person said to me, “Well, you just don’t understand accounting.” (Laughter.)

WARREN BUFFETT: If four years ago, or whenever it was, when we started to liquidate Gen Re’s portfolio, we had reserves set up for in the hundreds and millions and all sorts of things. And our auditor — and I emphasize any other of the Big Four auditors absolutely would have attested to the fact that our stuff was mark-to-market. You know, I just wish I’d sold the portfolio to the auditors that day. (Laughs) I’d be 400 million better off. So it’s a real problem. Now there’s one thing that’s really quite interesting to me. If I owe you, on my dry cleaning bill or something, $15, and they’re auditing the dry cleaners, they check with me and they find out that I owe you $15 and it’s all fine. If they’re auditing me, they find out I owe the dry cleaner 15 bucks. There are only four big auditing firms, you know, basically in this country.

And I will — so in many cases, if they’re auditing my side of the derivative transaction, you know, what I’m valuing it at, the same firm may often be valuing — or attesting to the value of the mark by the person on the other side of the contract. I will guarantee you that if you add up the marks on both sides, they don’t equate out to zero. We have 60-some contracts, and I will bet that people are valuing them differently on the other side than we value themselves, and it won’t be to the disadvantage of the trader on the other side. I don’t get paid based on how ours are valued, so I have no reason to want to game the system. But there are people out on the other side that do have reasons to game the system. So if I’m valuing some contract at plus a million dollars for Berkshire, that contract on the other side, it’s just one piece of paper, should be valued at a minus 1 million by somebody else.

But I think you probably have cases — and this is — I’m not talking about our auditors, I’m talking about all four of the firms — but they have many cases where they are attesting to values that — of the exact same piece of paper — where the numbers are widely different on both sides. Do you have any thoughts on that, Charlie?

CHARLIE MUNGER: Well, I — as sure as God made little green apples, this is going to cause a lot of trouble in due course. As long as it keeps expanding and ballooning and so on and the convulsions are minor, it can just go on and on. But eventually there will be a big denouement.

19. Dangers of short-term investing and advanced mathematics

WARREN BUFFETT: Let’s go back to number one.

AUDIENCE MEMBER: Hi. I’m Stanley Ku from Hong Kong. My question is about a proliferation of short-term mindset to investing. As more and more money is being placed under absolute return mandate, these managers, as you just said, responded the same response, and tried to trade issues. So with credit spread on — I should say, risk premium — on various products declining across the board and correlation across markets increasing, can we read into it and say what is healthy or not healthy for the economy or the markets? And can we arguably say the portfolio insurance dynamics is already in place today?

WARREN BUFFETT: Well, I think you put your finger on it. And, you know, we do think it’s unhealthy. Obviously, if you take — and no way of precisely measuring this, but I’m quite certain I’m right — if you take the degree to which, say, either bonds or stocks, the percentage of them that are held by people who could change their minds tomorrow morning based on a given stimulus, whether it be something the Fed does or whether it be some kind of an accident in financial markets, the percentage is far higher. There is an electronic herd of people around the world managing huge amounts of money who think that a decision on everything in their portfolio should be made, basically, daily or hourly or by the minute. And that has increased turnover on the New York Stock Exchange — and I don’t know the exact figures — but I think it was down around the 15 or 20 percent range 40 years ago and it’s increased it to a hundred percent, I believe, plus, now. So — and certainly in the bond market, the turnover of bonds has increased dramatically.

People used to buy bonds to own them and they’d buy bonds to trade them. And there’s nothing evil about that, but it just means that the participants are playing a different game, and that different game can have different consequences than in a buy-andhold environment. And I do think it means that if you’re trying to beat the other fellow on a day-to-day basis, you’re watching news events very carefully or watching the other fellow very carefully. If you think he’s about to hit that key, you know, you’re going to try to hit the key faster, if that’s the game you’re playing and if you’re getting measured on results weekly. So I think that you describe the conditions that will lead to a result that we’ve been talking about expecting at some point. It’s not new to markets, though. I mean, markets will do crazy things over time.

Every time — when Charlie and I were at Salomon, they’d always talk to us about five sigma events or six sigma events, and that’s fine if you’re talking about flipping coins, but it doesn’t mean anything when you get human behavior involved. And people do things that — and intelligent people do things — very intelligent, educated people do things — that are totally irrational, and they do them en masse. And you saw it in 1998. You saw it in 2002. And you’ll see it again. And you’ll see it — it’s more likely to happen when you have people trying to beat currency, bond, stock markets, day by day. It’s — I think it’s a fool’s game. But — you know, it may be what’s required to attract money. When I set up my partnership, I told the partners, you know, you’ll hear from me once a year.

And I even thought — in 1962 I put the partnerships together and in May of 1962 the market got terrible — and I actually thought of sending all my partners a letter, and then sending it down to Brazil to have it reshipped back up, just to sort of test them out, but — how they felt about things. But, you know, I had a few with bad hearts. I decided it wasn’t worthwhile. Charlie?

CHARLIE MUNGER: Yeah. When people talk about sigmas, in terms of disaster potentialities in markets, they’re all crazy. They got the idea that bad results in markets would be predicted by Gaussian distributions. And the way they decided on that outcome was it made everything so easy to compute. They don’t follow Gaussian distributions. You have to believe in the Tooth Fairy to believe that. And the disasters are bigger and more irritating than [German mathematician Carl Friedrich] Gauss would have predicted.

WARREN BUFFETT: It was easier to teach as well.

CHARLIE MUNGER: It’s easier to teach, too.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: I once asked a distinguished medical school professor why he was still doing an obsolete procedure, and he said, “It’s so wonderful to teach.” (Laughter)

WARREN BUFFETT: There’s more of that in finance departments than you might think. It’s very discouraging to learn advanced mathematics and, you know, how to do things that none but the priesthood can do in your field, and then find out it doesn’t have any meaning, you know. And what you do when confronted with that knowledge, after you’ve invested these years to get your Ph.D., you know, and you’ve maybe written a textbook and a paper or two, having a revelation that that stuff has no utility at all, and really has counter-utility, I’m not sure, you know, too many people can handle it well. And I think they just generally keep on teaching.

20. Quantitative approach to intrinsic value and investments

WARREN BUFFETT: Number 2.

AUDIENCE MEMBER: Hello. Burkhardt Whittick (PH) from Munich in Germany. I would like to get some more transparency on how you make investment decisions, particularly how you determine intrinsic value. You mentioned that the theoretically correct method is discounted cash flow, but at the same time you point out the inherent difficulties of the methodology. From other books, I see that you use multiples on operating earnings, or (inaudible) multiples. Your [former] daughter [in law] Mary, in one of her books, describes another methodology where you apply compounding economics to the value of the equity. Could you give us a bit more transparency which quantitative approach you use and how many years out you try to quantify the results of the investments you’re interested in?

WARREN BUFFETT: I understand the question, but I’m going to pretend I don’t and let Charlie answer first. (Laughs) I really do.

CHARLIE MUNGER: Yeah. When you’re trying to determine something like intrinsic value and margin of safety and so on, there’s no one easy method that could be simply mechanically applied by, say, a computer and make anybody who could punch the buttons rich. By definition, this is going to be a game which you play with multiple techniques and multiple models, and a lot of experience is very helpful. I don’t think you can become a great investor very rapidly any more than you could become a great bone tumor pathologist very rapidly. It takes some experience and that’s why it’s helpful to get a very early start.

WARREN BUFFETT: But if you’re — let’s just say that we all decided we’re going to buy a — or think about — buying a farm. And we go up 30-miles north of here and we find out that a farm up there can produce 120 bushels of corn, and it can produce 45 bushels of soybean per acre, and we know what fertilizer costs, and we know what the property taxes cost, and we know what we’ll have to pay the farmer to actually do the work involved, and we’ll get some number that we can make per acre, using fairly conservative assumptions. And let’s just assume that when you get through making those calculations that it turns out to be that you can make $70 an acre to the owner without working at it. Then the question is how much do you pay for the $70? Do you assume that agriculture will get a little bit better over the years so that your yields will be a little higher? Do you assume that prices will work a little higher over time? They haven’t done much of that, although recently, it’s been good with corn and soybeans.

But over the years agriculture prices have not done too much. So you would be conservative in your assumptions, then. And you might decide that for $70 an acre, you know, you would want a — if you decided you wanted a 7 percent return, you’d pay a thousand dollars an acre. You know, if farmland is selling for 900, you know you’re going to have a buy signal. And if it’s selling for 1200, you’re going to look at something else. That’s what we do in businesses. We are trying to figure out what those corporate farms that we’re looking at are going to produce. And to do that we have to understand their competitive position. We have to understand the dynamics of the business. We have to be able to look out in the future. And like I’ve said earlier, some businesses you can’t look out very far at. But the mathematics of investment were set out by Aesop in 600BC. And he said, “A bird in the hand is worth two in the bush.” Now our question is, when do we get the two? How long do we wait?

How sure are we that there are two in the bush? Could there be more, you know? What’s the right discount rate? And we measure one against the other that way. I mean, we are looking at a whole bunch of businesses, how many birds are they going to give us, when are they going to give them to us, and we try to decide which ones — basically, which bushes — we want to buy out in the future. It’s all about evaluating future — the future ability — to distribute cash, or to reinvest cash at high rates if it isn’t distributed. Berkshire has never distributed any cash, but it’s grown in its cash producing abilities, and we retain it because we think we can create more than a dollar present value by retaining it. But it’s the ability to distribute cash that gives Berkshire its value. And we try to increase that ability to distribute cash year by year by year and then we try to keep it and invest it in a way so that a dollar bill is worth more than a dollar. You may have an insight into very few businesses.

I mean, if we left here and walked by a McDonald’s stand, you know, and you decided, would you pay a million dollars for that McDonald’s stand, or a million-three, or 900,000, you’d think about how likely it was there would be more competition, whether McDonald’s could change the franchise arrangement on you, whether people are going to keep eating hamburgers, you know, all kinds of things. And you actually would say to yourself this McDonald’s stand will make X — X plus 5 percent — maybe in a couple years because over time prices will increase a little. And that’s all investing is. But you have to know when you know what you’re doing, and you have to know when you’re getting outside of what I call your circle of competency, you don’t have the faintest idea. Charlie.

CHARLIE MUNGER: Yeah. The other thing, you’ve got to recognize that we’ve never had any system for being able to make correct judgments on the values of all businesses. We throw almost all decisions into the too hard pile, and we just sift for a few decisions that we can make that are easy. And that’s a comparative process. And if you’re looking for an ability to correctly value all investments at all times, we can’t help you.

WARREN BUFFETT: No. We know how to step over one-foot bars. We don’t know how to jump over seven-foot bars. But we do know how to recognize, occasionally, what is a one-foot bar. And we know enough to stay away from the seven-foot bars, too.

21. What Buffett wants as he hires portfolio managers

WARREN BUFFETT: Number 3.

AUDIENCE MEMBER: John Stevo (PH), shareholder from Chicago. Mr. Buffett — Mr. Buffett, Mr. Munger, thank you for the great weekend. In your annual shareholders letter, you stated that you’re looking for someone younger to possibly work at Berkshire, and I was wondering if you could expand on that, and how would I apply for that job? (Laughter)

WARREN BUFFETT: I think you just did. (Laughter) The — we’re looking for one or more. I mean, I would — I don’t think it’s at all impossible we might even find three or four that we would decide to have run some money and to take a closer look. We’re not looking for someone to teach. I probably didn’t make that clear enough in the annual report. We’re not — we’re not going to be mentors or teachers or anything of the sort. We’re looking for somebody that we think knows how to do it. And there are people like that out there. We’ve heard from 6- or 700. I did hear — I heard from one that had a four-year-old son. I thought that was quite a compliment that — I mean, I knew a caveman could do my job, but a four-year-old? (Laughter) The — but we’re looking — and we’ve heard from a number of very intelligent people.

We have heard from a number of people that have had good investment records for — in recent years, and in some cases some time. The biggest problem we have is whether they would scale up, because it’s a different job to run a hundred billion than it is to run a hundred million. And incidentally — and you can’t do as well running a hundred billion as a hundred million, in terms of returns. You can’t come close to doing it. That doesn’t bother us. But we do want to find somebody that we think can run large sums of money mildly better than the general performance in securities. And I emphasize mildly. There’s no way in the world somebody’s going to beat the S&P by 10 percentage points a year with a hundred billion dollars. It isn’t going to happen. But we think maybe we can find somebody or some group, several of them, that can maybe be a couple percentage points better, but we really are interested in being sure that we have somebody that, under conditions that people haven’t even seen yet, will not blow it. You know, anything times zero is zero.

And I don’t care how many wonderful figures are in between. So we are looking for somebody that’s wired in a way that they see risks that other people don’t see that haven’t occurred, and they’re plenty cognizant of the risks that have occurred. And those people are fairly rare. Charlie and I have seen a lot of very smart people go broke, or end up with very mediocre records where, you know, 99 out of the 100 things they did were intelligent but the hundredth did them in. So our job is to filter through these hundreds and hundreds of applications, find a couple of them that we think can do the job who are much younger, perhaps give them a chunk — two, three, five billion — have them manage it for some time, have them manage it in the kind of securities that they would scale up to a larger portfolio because — and then either one or more of them will get the job turned over to them at some point. Charlie?

CHARLIE MUNGER: Yeah. Our situation in looking for this help reminds me of an apocryphal tail about Mozart. And a young man of 25 or so once asked to see Mozart and he said, “I’m thinking of starting to write symphonies, and I’d like to get your advice.” And Mozart said, “Well, you’re too young to write symphonies.” And the guy says, “But you were writing them when you were ten-years-old.” And Mozart says, “Yes, but I wasn’t asking anybody else for advice how to do it.” (Laughter.)

CHARLIE MUNGER: And so if you remind yourself of young Mozart, why, you’re the man for us.

WARREN BUFFETT: We will come up with, probably, a couple of people. And, you know, it’s — I’ve known people over the years. I’ve been in the job before. I mean, in 1969 I wound up my partnership, and I had a lot of people that trusted me, and I wasn’t going to just mail the money back to them and, you know, say good-bye, because they would have been sort of adrift, most of them. And so I had the job of finding somebody to replace me. And there were three absolutely standout candidates. Any one of the three would have been a great choice. Charlie was one of them. Sandy Gottesman was one of them. And Bill Ruane was one of them. Charlie wasn’t interested in having more partners. Sandy was interested in individual accounts and took on the accounts of some of my partners and they were very, very happy and they’re still happy that he did it. And Bill Ruane set up a separate mutual fund called Sequoia Fund to take care of all of the partners, whether they had small amounts or not. And he did a sensational job.

So I really identified three people in 1969 that were not only superior money managers, but that were also the kind that could never get you a terrible result and that were terrific stewards of capital. Now, they were about my age at the time so it was a universe that I was familiar with, and now I have the problem that at — the people I know that are even close to my age, we don’t want anyway, and besides, most of them are already rich. They don’t care about having a job. So I have to look into an age cohort where I don’t really know lots of people, but it can be done. And like I say, we did it successfully with three people in 1969. And it was done successfully in 1979 with Lou Simpson for GEICO. And I never knew Lou Simpson before I met him down at the airport here, and I spent a few hours with him, and it was clear that he was a steward of capital. He was going to get an aboveaverage result, and there was no chance he was going to get a bad result. And he’s been managing money for GEICO now for 28 years, roughly. So it’s doable.

It’s a little more work than I like to do. I’ve been kind of spoiled. But I’ll — I’ve got a job to do on it, and I’ll do it.

22. Buffett and Munger differ on climate change

WARREN BUFFETT: Number 4?

AUDIENCE MEMBER: Good morning. I’m Glen Strong (PH) from Canton, Ohio. Please tell us where you stand on the global warming debate or where your managers at General Re stand. In particular, perhaps you can give us your thoughts on the science of global warming and how serious you believe it is, and whether warming is actually more harmful than helpful. Thank you.

WARREN BUFFETT: Yep. Well, I believe the odds are good that it is serious. I’m not enough of a — I can’t say that with 100 percent certainty or 90 percent certainty, but I think that there’s enough evidence that it would be very foolish to say that it’s 100 percent certain or 90 percent certain that it isn’t a problem. And since it’s — if it is a problem, it’s a problem that once it manifests itself to a very significant degree, it’s a little too late to do something about it. In other words, you really have to build the ark before the rains come, in this case. I think if you make a mistake, in terms of a social decision, you should, what I call err, on the side of the planet. In other words, you should build a margin of safety into your thinking about the future of the only planet we’ve got a hundred years from now. So I think — I take it seriously. In terms of our own businesses, you mentioned General Re.

Gen Re writes less — way less business — that would be subject to the annual increments in global warming that would have an effect on their results than the reinsurance division of National Indemnity, where we write far more of the catastrophe business. It’s not going to affect, you know, in any measurable degree at all, you know, excess casualty insurance, property insurance. You’re thinking much more of whether it’s going to produce atmospheric changes that change materially the probabilities of really — of catastrophes, both their frequency and their intensity. In my own mind, and in the minds of the people that run National Indemnity’s reinsurance division, we crank — we think the exposure goes up every year because of what’s going on in the atmosphere, even though we don’t understand very well what goes on in the atmosphere. And the relationship between damage caused and the causal factors is not linear at all. I mean, it can be explosive. So if temperatures in the waters of the Atlantic or something change by relatively small amounts, or what seem like small amounts, it could increase the expectable losses from a given hurricane season by a factor of two, three, four or five.

So we’re plenty cautious about it. It’s not something that keeps me up, in terms of our financial prospects, at all at Berkshire. But it’s something that I think every citizen ought to be very cognizant of and make a decision on. Charlie?

CHARLIE MUNGER: Well, of course carbon dioxide is what plants eat. And so — and generally speaking, I think it’s a little more comfortable to have it a little warmer instead of a little colder. (Laughter)

WARREN BUFFETT: I hope you don’t get a chance to test that after death, Charlie. (Laughs)

CHARLIE MUNGER: It isn’t as though there’s a vast flood of people trying to move to North Dakota from southern California. And so you’re talking about dislocation. It’s not at all clear to me that, net, it would be worse for mankind in general to have the planet a little hotter. But the dislocations would cause agonies for a great many places, particularly those that would soon find themselves underwater.

WARREN BUFFETT: Yeah. I was going to ask you. How do you feel about the sea level being 15 or 20 feet higher? (Laughs)

CHARLIE MUNGER: Well, that’s very unfortunate, but — (Laughter) Holland lives with what, 25 percent of the nation below sea level? With enough time and enough capital, why, these things can be adjusted, too. I don’t think it’s an utter calamity for man that threatens the whole human race or anything like that. You know, you’d have to be a pot-smoking journalism student or something to — (Applause)

CHARLIE MUNGER: — believe that.

WARREN BUFFETT: We’re finally unleashing him, folks. (Laughter) Well, we’ll continue to have people in charge of insurance who are plenty worried about global warming, I promise you. But it — we don’t know — we do know that 2004 and 2005, there was a frequency, and more particularly, there was an intensity of hurricanes that would not be expected at all by looking at the previous century. And we were spared — even though we had Katrina — we were spared what could have been a far worse case by a couple of Category Fives that didn’t hit the mainland. So I do not regard Katrina as being anywhere near a worst-case scenario. And, like I say, I don’t know whether — how much of — I don’t know whether the water is a half a degree or 1 degree Fahrenheit warmer than 30 years ago, but I don’t know — and I don’t know all the factors that go into hurricanes. I mean, I know that, obviously, the water temperature, you know, contributes to energy and all that sort. But there could be 50 variables.

All I know is, on balance, I think they’re probably getting more negative for us and I know we ought to be very careful about it. And I know that it would be crazy to write insurance in 2007 at the same rates that it was being written a few years ago, in relation to catastrophes. And since we’re in the catastrophe business, that is something I think about, and the people that actually write the policies think about it as well. So it’s a factor with us.

23. Bank problems don’t mean China will collapse

WARREN BUFFETT: Five.

AUDIENCE MEMBER: Hi. I’m John Golob from Kansas City. I have a question about the Chinese economy. Some observers have suggested that the Chinese banking system looks a little like Japan back in the 1990s. Are you concerned that China could experience similar disruptions as Japan in ’90 or is China possibly — with different institutions — possibly more resistant to economic disruptions?

WARREN BUFFETT: I would have to say I don’t know the answer to that. I mean, it’s a very interesting question. It’s a very important question. But, you know, I didn’t necessarily understand what was going to happen in Japan before it happened, and my insight into Chinese banks is about zero. We’ve been offered chances to buy into various Chinese banks and, again, because I don’t know anything about them, I pass. It’s no judgment that there’s anything bad. It just means that sitting in Omaha, Nebraska, not knowing what some item of loans and advances — what composes it or anything about the real operation of the place — that I can make a decision whether it’s worth X, half of X, 2X, a quarter of X, I just don’t know. And I really don’t know — I just have no notion as to the answer to your question, but maybe Charlie does.

CHARLIE MUNGER: Well, if you stop to think about it, all of the remarkable economic progress that we’ve seen in China in the last 15 years has been accompanied by practices in their government banks that would make you shutter if you compared them to normal banking standards. So everything you see in terms of progress has occurred despite — the banks were almost doling out money for aid as distinguished from doing normal banking. So I’d be very leery of predicting that that’s sure to cause a huge economic collapse in Japan — in China. They’ve been doing it for a long time, and they may actually be getting better now.

WARREN BUFFETT: Yeah. We’ve had our share of banking troubles in this country. I mean, it wasn’t that long ago in terms of the savings and loan crisis and all kinds of things. And strong economies come through those things. So, you know, if ahead of time you’d seen all the problems with foreign loans that the commercial banks got into and all the problems with real estate loans that the savings and loans got into, you could have said, you know, it’s going to be terrible for the American economy, and it did produce a lot of dislocations and all of that. But if you look at the regular American economy, it’s come through all kinds of financial crises with the real output per capita rising at a very substantial rate just decade after decade. I don’t know what will happen in China, but I think it’s pretty amazing in terms of the gains that have been made. And I think they’ll be — I think they’ll continue to be made, and I don’t know what will happen with the banking system, though.

24. Easy decision: stocks over bonds

WARREN BUFFETT: Number 6.

AUDIENCE MEMBER: Good morning, Warren and Charlie. My name is Frank Martin from Elkhart, Indiana. I’m a shareholder.

WARREN BUFFETT: Yeah. You’ve written a good book too, Frank. (Laughs)

AUDIENCE MEMBER: Thanks, Warren. I’ll do my best to be succinct with this question. As you know, my long suit is not brevity in the written word. Recently, I sequentially read everything that you and Charlie have written, or that has been written about you, since 1999, including your help wanted ad in the annual report, which sought not a Ted Williams, but the consummate defensive player in your forcefully worded quotations in last Monday’s Wall Street journal. When contemplating the chronology, I sensed a gradual but unmistakable sea change in your perspective on the investment environment for marketable securities. The intensification of your preoccupation with managing risk is conspicuous by its absence among the other biggest players at the margin — hedge funds, private equity, mutual funds — who are shamefully mute both about what are likely to be anemic prospective returns and the unconscionable risks assumed to achieve them, all the while charging a king’s ransom for such low value-added services. When I give free rein to my intuition, the post-1999 Warren Buffett reminds me of the Warren Buffett of post-1969.

Back then, when Berkshire was a small fraction of its current size, you spoke of the difficulty in playing a game you did not understand, that there was little margin of safety in the equity markets in general. You weren’t forecasting what in its own time became the bear market of ’73-’74, but you were surely intuitively aware of what [former Federal Reserve Chairman Alan] Greenspan years later has repeatedly warned: the inevitable day of reckoning that follows long periods of low equity risk premium. Imagine yourself, if you are willing, cast overnight into a new role with a clean slate as head of the investment committee of a $10 billion pension fund. Today, would your decisions reflect the same risk-averse mindset that dominated your behavior in the post-1969 period? And might you anticipate that following all of this might appear opportunities that were as mouthwatering as appeared in ’73-’74? Please explain, and I hope Charlie will weigh in on the subject as well. Thank you.

WARREN BUFFETT: Yeah Frank, when I closed up to the partnership, if I’d had an endowment fund to run then, the prospective return — and actually, I wrote this in a letter to my partners that I’d be glad to send you a copy of — the prospective return — and I was looking at them as individuals on an after-tax basis — was about the same, I felt, from equities and from municipal bonds over the next decade, and it turned out to be more or less the case. I would say that I do not regard that as being the same situation now. If I were managing a very large endowment fund, for one thing it would either be a hundred percent in stocks or a hundred percent in long bonds or a hundred percent in short-term bonds. I mean, I don’t believe in layering things and saying I’m going to have 60 percent of this and 30 percent of that. Why do I have the 30 percent if I think the 60 percent makes more sense?

So — and if you told me I had to invest a fund for 20 years and I had a choice between buying the index, the 500, or a 20-year bond, you know, I would buy stocks. You know, that doesn’t mean they won’t go down a lot. But if you — I would rather a have an equity investment — I wouldn’t rather have an equity investment where I paid a ton of money to somebody else that took my stock return down dramatically. But simply buying an index fund for 20 years of equities or buying a 20-year bond, I would — it would not be a close decision with me. I would buy the equities. I’d rather buy them cheaper, you know, but I’d rather buy the bond with a bigger yield, too. But in terms of what’s offered to me today, that’s the way I would come down. Charlie?

CHARLIE MUNGER: Yeah. I don’t think that was the answer that was expected, but that’s the answer. (Laughter)

WARREN BUFFETT: It doesn’t have a thing to do with what we think stocks — we don’t think at all — but where stocks could be or bonds could be. We don’t have the faintest idea where the S&P will be in three years, or where the long-term bond will be in three years, but we do know which we would rather own on a 20-year basis.

CHARLIE MUNGER: Warren, we’d also expect that the current scene will cause some real disruption, not too many years ahead.

WARREN BUFFETT: That’s true, but if you go back a hundred years, you could almost say that, you know, in almost any period, you will get disruptions from time to time, and it’s very nice if you have a lot of cash then and you have the guts to do something with it. But predicting them or waiting around for them, that sort of thing, is not our game. And I mean, we bought $5 billion worth of equities in the first quarter, something like that. And, you know, we don’t think they’re anything like — well, they aren’t — they’re not — it would be a joke to even compare them to 1974 or a whole bunch of other periods. But we decided we would rather have them than cash, or we would rather have them than sit around and hope that things get a lot cheaper. We don’t spend a lot of time doing that. It — you can freeze yourself out indefinitely. So any time we find something — what we think is intelligent to do, we just do it, and we hope we can do it big.

25. Buffett bought and sold silver early: “Other than that, a perfect trade”

WARREN BUFFETT: Number 7.

AUDIENCE MEMBER: My name is Nathan Narusis from Vancouver, Canada. Mr. Buffett, Mr. Munger, my question concerns your previous silver bullion investment. I’m curious to hear more about why you sold when you did. More specifically, whether you sold your bullion to the organizers of the silver exchange-traded fund in return for cash plus, perhaps, important noncash consideration in order to keep silver markets from either rising or falling sharply. Thank you very much for anything you would care to share with us.

WARREN BUFFETT: I’m not sure who we sold it to, but whoever we sold it to was a lot smarter than I was. (Laughs) I bought it too early. I sold it too early. Other than that, it was a perfect trade. (Laughter) Charlie, do you have anything to add? Charlie had nothing to do with the silver decision, so that one falls entirely on me.

CHARLIE MUNGER: I think we demonstrated how much we know about silver.

WARREN BUFFETT: Yeah. (Laughter) The very fact you asked us a question on silver flatters us because nobody asks us about silver anymore. (Laughs) But we’ll come up with something else at some point. You know, the last part of your question, there was a small implication, I think, of perhaps a silver conspiracy. We — as soon as we started — it got known that we bought silver, we started getting all these letters in the mail from people who had all these different theories about the fact that hedging was killing things or these kind of traders were doing something. In the end, silver responds as supply and demand just like oil responds to supply and demand. Oil is — the price of oil at 60 or $65 is not a product of a bunch of oil executives conspiring or anything of the sort. It’s supply and demand on a huge commodity. Silver is a small commodity, but on any kind of commodity like that, supply and demand is what determines prices over time. Although the Hunt brothers, I must admit, for a short period there, in a few years, managed to change the equation and they forever wished they hadn’t.

26. Why Buffett “outsourced” his philanthropy

WARREN BUFFETT: Number 8.

AUDIENCE MEMBER: Hello, Mr. Buffett. Eben Pagan, Santa Monica, California. You seem amazing at keeping your composure in tough situations. I would be very interested to know what your thought process was when you were in that incredibly stressful situation, you knew the world was watching, and you went head-to-head with LeBron James. (Laughter)

WARREN BUFFETT: The game was rigged. (Laughter) He was the one that had a problem. (Laughs)

AUDIENCE MEMBER: What I’d really like to know is, I’m a real big fan of you and Mr. Gates and your philosophy of channeling all the value you’ve created back into the world. And I have a successful business, and I’d like to do the same, but maybe in 20 or 30 or 40 years, and with a time horizon like that, I’d love to know what advice you’d give someone like me.

WARREN BUFFETT: Well, there’s nothing wrong with your time horizon, in my view, as long as you’re going — as long as you plan to give it back, I mean, A) the decision is yours entirely, anyway, whether you want to do it. But assuming you want to give it back, or give it to society in some way, if you’re compounding your money at a rate greater than people generally do, you are, in effect, an endowment fund for society. And, you know, all kinds of organizations in the nonprofit area have endowment funds, and they think it’s wise to have it, and they do that in order to get standard returns, usually. And if you can compound it more and you’re going to give it back later on, let someone else take care of current giving, and you can take care of giving in 20 or 30 years. But, you know, I regard that as a personal decision.

I always felt that I would compound money at a rate higher than average, and it would have been foolish to give away a significant portion of my capital to somebody who would spend it within, you know, months, when there could be a really much larger amount later on. And, on the other hand, the time had come, I’d really thought my wife would be doing that, and when that didn’t work out, the time had come to do something with it. And, fortunately, I had some great options available, and I get to keep on doing what I love doing and I let some — I farm out all the work. But, you know, when my wife had a baby, we hired an obstetrician. I didn’t try and do it myself. I mean, when a tooth hurts, you know, I don’t have Charlie fix it. I go to a dentist.

So when I have money to give away, I believe in turning it over to people who are — and I’ve got five different organizations, including my three kids — and I believe in turning it over to people who are energized, working hard at it, smart, you know, doing it with their own money, the whole thing. And I get to keep doing what I like doing. So as far as I’m concerned, I haven’t given away a penny. Charlie?

CHARLIE MUNGER: Well, I think it’s wonderful for the shareholders that somebody else is giving away the money. (Laughter) I tell you, if all Warren wanted to talk about was interfacing with applicants for donations, we would have a different life. And we wouldn’t be very well adapted to it, either.

WARREN BUFFETT: Yeah. You know, actually on the smaller ones I send them all to my sister Doris, and she does a great job with it, and enjoys it, spends lots of time on it, good at it, and I’m glad she does it and I don’t. You know, the truth is, I haven’t given away anything in a practical matter. I have everything in life I want. You know, there’s no way I can sleep better, I can eat better. Other people might think I could eat better. (Laughter) I haven’t given up anything. Now, if you think about it, you know, somebody that gives up having an evening out, somebody that, you know, gives up their time working on something, somebody that doesn’t take their kids to Disneyland this year because they’ve, you know, they’ve given the money instead to their church, I mean, those people are changing their lives in some way with what they give. I haven’t changed my life at all. I don’t want to change my life.

I’m having a lot of fun doing what I do. And, you know, it’s just a bunch of stock certificates that one way or another they’re going to go someplace. And what I really want to do is keep doing what I enjoy doing, and feel that the claim checks that I accumulate that comes about for this, are going to get used effectively for the same general purposes that I would want to use them for if I really had the energy and the interest in doing the job myself. But somebody else can keep doing the work.

27. You can always earn big returns with small amounts of money

WARREN BUFFETT: Number 9.

AUDIENCE MEMBER: Hi. I’m Eric Schline (PH) from Larchmont, New York. My question is directed at Mr. Buffett. Mr. Buffett, you claim you can do 50 percent a year. If you had to start over with a small portfolio, would you still be doing buy and hold, buying quality companies at a good price, or would you be doing arbitrage and really getting down to the nitty-gritty Benjamin Graham cigar butts that you did in the Buffett Partnership?

WARREN BUFFETT: Yeah. If I were working with a very small sum — and you should all hope I’m not — (laughs) — if I were working with a very small sum, I would be doing entirely — almost entirely — different things than I do. I mean, there’s — your universe expands. I mean, if you’re looking, there’s thousands and thousands and thousands of times as many options to think about if you’re investing $10,000 than if you’re investing a hundred billion. And, obviously, if you have that many — you’ve got all the options you got with a hundred billion, except buying entire businesses, and you’ve got all of these other options. So you can earn very high returns with very small amounts of money, and it will always be such. I don’t mean that everybody can do it, but if you know something about values and investments, you will find opportunities with small sums, and it will not be with a portfolio that Berkshire itself owns. We can’t earn phenomenal returns putting 3 billion, 4 billion, 5 billion in a stock.

It won’t work that way. It won’t even come close to working that way. But if Charlie or I were in a position of working with a million dollars or $500,000 or 2 million, we would find little things here and there — and it wouldn’t always be stocks — where we would earn very high returns on capital. Charlie?

CHARLIE MUNGER: Yeah. But it’s — there’s no point our thinking about that now. (Laughter)

WARREN BUFFETT: But he’s thinking about it, Charlie. (Laughter)

28. Subprime mortgage defaults won’t be “huge anchor”

WARREN BUFFETT: OK. We’ll take one more, and then we will go to lunch and then we’ll — after that we’ll come back. So we’ll go to number 10 now. Is the microphone open on 10?

AUDIENCE MEMBER: Hello? Hello?

WARREN BUFFETT: Do we have a problem here?

AUDIENCE MEMBER: Warren and Charlie, my question is, what’s your opinion regarding the subprime market relative to the foreign national market?

CHARLIE MUNGER: We can’t hear that.

WARREN BUFFETT: We can’t hear that.

AUDIENCE MEMBER: What’s your opinion regarding the subprime market relative to the foreign national market? Sorry. My name is Calvin Chong (PH). I’m from New York.

WARREN BUFFETT: Well, the subprime market, encouraged by both lenders, intermediaries, and borrowers themselves, resulted in a lot of people buying a lot of houses that they really didn’t want to own or that they can’t make payments on for once the normal payments were required. And the people, the institutions, in some cases the intermediaries, are going to suffer in various degrees. Now, the question is whether it spills over and starts affecting the general economy to a big degree, and I would — my guess would be — it’s quite severe some places. But my guess would be that if unemployment doesn’t rise significantly, and interest rates don’t move up dramatically, that it will be a — it will be a very big problem for those involved, and some people are very involved. Some institutions are very involved. But I don’t see it — I think it’s unlikely that that factor alone triggers anything of a massive nature in the general economy. I think it — you know, I’ve looked at several financial institutions.

I’ve looked at their 10-Qs and 10-Ks, and I’ve seen that a very high percentage of the loans they made in the last few years allowed people to make very tiny payments on the mortgages, but, of course, those subnormal payments increased principal so that they had to make above average payments later on at some point. And I think that’s dumb lending, and I think it’s dumb borrowing, because somebody that can only make 20 or 30 percent of their normal mortgage payments the first year is very unlikely to be able to make 110 percent of their normal mortgage payments a few years later. Those people and those institutions were largely betting on the fact that house prices would just keep going up, and it really didn’t make any difference whether they could make the payments. And that worked for a while until it didn’t work. And when it doesn’t work, you have an abnormal supply of housing coming on the market, similar to what happened in manufactured housing, the business we’re in, six or seven years ago, and that changes the whole equation.

From people on the demand side, you no longer have people thinking they’re buying something that’s bound to go up, and then you have the supply coming on from the people who were anticipating that before and really don’t want to hold the asset unless it’s going to go up. So you’ll see plenty of misery in that field. You’ve already seen some. And I don’t think — I don’t think it’s going to be any huge anchor to the economy. Charlie?

CHARLIE MUNGER: Yeah. A lot of what went on was a combination of sin and folly, and a lot of it happened because the accountants allowed the lending institutions to show profits on loans where nobody in his right mind would have showed any profit until the loan had matured into a better condition. And, once again, if the accountants lay down on their basic job, why, huge excess and folly is going to come inevitably, and that happened here. The national experience with low-interest starter home loans to what I would call the deserving poor, has been very good. But the minute you pay a bunch of people high commissions to make loans to the undeserving poor, or the overstretched rich, you can get loan losses that are staggering. And I don’t see how the people did it and still shaved in the morning, because looking back at them was a face that was evil and stupid.

WARREN BUFFETT: Yeah. (Applause)

WARREN BUFFETT: You’ve seen some very interesting figures in the last few months on the number — on the percentage — of loans where people didn’t even make the first or second payment. And there’s really — that shouldn’t happen. That happened, incidentally — you had a prelude to this in the manufactured housing industry. I mean, in the late 1990s — and securitization accentuated the problem, because once you had somebody in Grand Island, Nebraska, selling a mobile home — or a manufactured home — to someone and they needed a $3,000 down payment and the salesman was going to get a $6,000 commission, believe me, you start getting some very strange things going on. Now, if the person doing that had to borrow the money in Grand Island, the chances are the local banker would have seen what was happening and said, you know, we don’t want any of this where the salesman fakes the down payment and all that.

But once you just package those things and securitize them so they get sold through major investment banking houses and sliced up in various tranches and so on, you know, the old — the discipline leaves the system. And securitization really accentuates that, and we have had that in subprime loans, just as we had it in manufactured housing six or seven years ago. And, like I say, that has not all worked its way through the system, but I don’t think it’s going to cause huge troubles. Now, we do see certain areas of the country where it will be at least a couple of years before real estate recovers. I mean, the overhang is huge compared to normal monthly volume in certain sections. And the people that were counting on flipping things there are going to get flipped, but in a different way.

Afternoon Session

1. “Areas don’t make opportunities, brains make opportunities”

WARREN BUFFETT: OK. If you’re ready, we are. We’re going to keep going in the same order because there’s people in the other rooms that have been waiting. So we will go to number 11.

AUDIENCE MEMBER: Hi. My name is Christian Baha from Superfund. I have a question for you, Mr. Buffett. What do you think about managed futures funds?

WARREN BUFFETT: About which fund?

CHARLIE MUNGER: I didn’t quite get that. What kind of fund?

AUDIENCE MEMBER: Managed futures funds.

CHARLIE MUNGER: Oh, managed —

AUDIENCE MEMBER: Like a very diversified portfolio in stocks and bonds going long and short, all the different markets, based on the most natural human behavior, trying following a herd behavior?

CHARLIE MUNGER: Managed futures funds.

WARREN BUFFETT: Well, I would say that we think the most logical fund is the one we have at Berkshire where, essentially, we can do anything that makes sense and are not compelled to do anything that we don’t think makes sense. So any entity that is devoted to a limited segment of the financial market we would regard as being at a disadvantage to one that has total authority if you have the right person in charge. But you — that’s an assumption you’re going to make under any fund. So we would not want to devote our funds to something that was only going to buy bonds, something that was only going to buy futures, or anything of the sort. We would — we buy futures at Berkshire. We buy bonds at Berkshire. We’ve bought — we buy currencies. We buy businesses. So I think it’s a mistake to shrink the universe of possibilities. Ours is shrunk simply by size, but we don’t try to — we don’t set out to circumscribe our actions in any way. But in the end, there’s no form that produces investment results. Hedge funds don’t produce investment results.

Private equity doesn’t produce investment results. Mutual funds don’t produce it. If it was simply a matter of form, we’d all call ourselves, you know, whatever that form happened to be. What really makes the difference is whether the person that’s running it knows what their limitations are, knows where their strengths are, plays when they have the opportunity to play advantageously, and stays out when they don’t see any opportunities. Charlie?

CHARLIE MUNGER: Yeah. I’d go further. I’d say averaged out, I would expect that the return per dollar per year in managed futures funds would be somewhere between lousy and negative. (Laughter)

WARREN BUFFETT: And I would agree with that. Yeah. Usually those are sales tools. I mean, people find out something that will sell, and it can be — you know, it can be bond funds at some point, it could be — but when they find something to sell, it will get sold to the public. That will be — it will sell until it stops selling. And that means lots of money comes in and lots of competition for a limited number of opportunities. And I think it’s a mistake to get sold something on the basis that here is a great area of opportunity. Areas don’t make opportunities; brains make opportunities, basically.

2. Read a lot, look for opportunities, avoid catastrophes

WARREN BUFFETT: Number 12.

AUDIENCE MEMBER: Matthew Monahan (PH) from Palo Alto, California. Mr. Buffett, Mr. Munger, first of all, I want to thank both of you for so freely sharing your wisdom and knowledge over the years. Even though we’ve never met in person, I consider you both to be close personal mentors and attribute your teachings and philosophies to any success I’ve had in business so far. So thank you. Here’s my question: for a 23-year-old with high ambitions, some initial working capital, and a genetic wiring, as you call it, for disciplines like investments, mathematics, and technology, what do you foresee as the significant areas of opportunity over the next 50, even 100, years? And, if you were in my shoes, what would be your approach and methodology for really learning, tackling, and mastering these areas of opportunity for the purpose of massive value creation?

WARREN BUFFETT: Well, I remain very big on the idea of reading everything in sight. And, frankly, when you get the chance to talk to somebody like Lorimer Davidson, as I did when I was 20 years old — I probably learned more from Lorimer Davidson in those four or five hours than I learned in college, with the exception of learning some accounting and one or two subjects like that. So you just want to soak it up. If you have those qualities you talked about, you’ll see the areas as you go along. I mean, we have — Charlie and I probably — you know, we’ve made money in a lot of different ways, some of which we didn’t anticipate, you know, when we were — 30 or 40 years ago. But we did have the ability to recognize some; we didn’t have the ability to recognize others. But we did know when we knew what we were doing and when we didn’t, and we just kept looking. We had a curiosity about things. You would know at a time like the Long-Term Capital Management crisis, for example, that there were going to be ways to make money.

I mean, they were going to be out there, and all you had to do was just read and think eight or ten hours a day and you were going to cover a lot of possibilities, probably a very high percentage of them good, and some of them sensational. So you can’t really lay it out ahead of time. You can’t have a defined roadmap. But you can have a reservoir of thinking, looking at different kinds of businesses, looking at different kinds of securities, looking at markets in different places, and you will then spot a reasonable number of things that come along. You won’t spot every one of them. We’ve missed all kinds of things. But the biggest thing, too, is to have something in the way you’re programmed so that you don’t ever do anything where you can lose a lot. I mean, we — our best ideas have not been better than other people’s best ideas, but we’ve never had a lot of things that pulled us way back. So we never went two steps forward and one step back. We probably went two steps forward and a fraction of a step back.

But avoiding the catastrophes is a very important thing, and it will be important in the future. I mean, you will have your chance to participate in catastrophes. Charlie?

CHARLIE MUNGER: Yeah. And, of course, the place to look when you’re young is in the inefficient markets. You shouldn’t be trying to guess whether, you know, one drug company has a better drug pipeline than another. You want to go, when you’re young, someplace that’s very inefficient.

WARREN BUFFETT: And you shouldn’t be trying to guess whether the stock market is going to go up or whether long-term bonds are going to change in yield. I mean, you don’t have anything going in that kind of a game, but you can have a lot going in games that very few people are playing, and maybe where they’ve even got their heads screwed on wrong, in terms of how they’re thinking about the subject. The RTC was a great example of a chance to make a lot of money. I mean, here was a seller of hundreds of billions of dollars’ worth of real estate where the people that were selling it had no economic interest in it, were eager to wind up the thing, you know, and they were selling at a terrible time when the people who had been venturesome in lending were no longer lending, the people who had been venturesome in the equity end of real estate had gotten cleaned out.

So you had a great background of environment, and then you had an imbalance of intensity, in terms of analyzing situations between the seller, which was the government, with a bunch of people who had no economic interest in it and were probably eager to wind up the job, and buyers on the other side who were of the generally cautious type. Because the more venturesome type had taken themselves out of action. And there were huge amounts of property. So you get these opportunities, and you’ll get more. I mean, there won’t be any scarcity of opportunities in your life, although there will be days when you feel that way.

3. Politics and catastrophe insurance

WARREN BUFFETT: OK. Let’s go to the other rooms now. They’ve been waiting. Number 13.

AUDIENCE MEMBER: John Goss (PH), Key West, Florida. Katrina created litigation that resulted in some rulings that combined flood damage and wind damage where the insurance companies thought they covered wind only. As a result, some insurance companies are significantly reducing coverage in those states. Florida recently empowered their insurance company called Citizens to be more aggressive not only with wind storms, but also with homeowners, while at the same time not allowing requested rate increases of other insurance companies. The result is that some solid insurance companies have announced reducing their coverage or pulling out of Florida. Is this type of government interference a random fluctuation in insurance or a major cause of concern for the future?

WARREN BUFFETT: Well, that’s an easy one to understand both sides of the question on. I mean, the average homeowner is not going to sit there and read line-by-line what is in his insurance policy, and a lot of times the agent is not going to explain it carefully to them. So when something comes along and he thinks it’s insured and it turns out that he bought a policy where it wasn’t insured, he’s going to feel very unhappy about it. And when tens of thousands of people feel unhappy about it, you’re very likely to get some kind of governmental interference, and probably an inflation by judicial degree or by threats of the government to, in effect, extend the terms of the policy beyond what the insurance company thought it was insuring. Now, an insurance company that’s had that kind of experience is going to be very reluctant to write insurance policies in the future, if they don’t think that the words will be adhered to.

And, on the other hand, I can fully understand some guy who’s had his house blown away in a storm and a lot of it was water damage and a lot of it was wind damage, thinking that, you know, he’s been wiped out and the insurance company comes around waving a policy that’s got a lot of small print in it, you know, he’s going to be unhappy. So it’s a real tussle on that. And, you know, I guess I would — if I were writing policies, I would put the exclusions in very big type and very easy to understand. But I still would expect that if thousands of people suffered losses, that courts and legislators would probably seek to stretch the terms, or even abrogate the terms of the contract, in order to take care of their own constituents and figure that guys like me or institutional investors who own insurance companies can afford it better than the homeowner.

When you get into the question of whether you should, in effect, have all of the people in the country pay premiums for, we’ll say, hurricanes, in a way, subsidize it through policies in Nebraska or Minnesota or someplace, for hurricanes in Florida, that gets very tough. I mean, it can be very expensive to insure against hurricanes if hurricanes become more frequent and more intense. In fact, it can become so expensive that people really will not want to bear the cost of insurance, and they’ll want to socialize it some way. And, of course, the guy in Nebraska says, “Look it. You went down there to live on the ocean and you thought it was wonderful, and we’re back here with these terrible winters, but why should we pay a portion of your insurance?” So you’re going to have that tussle go on, and you’ll really have that tussle go on if you get a hundred billion dollar or $150 billion insured loss in Florida. Because that will mean a huge change in taxation if the State of Florida steps in to compensate people. There will be calls for Washington to pay for it.

But, you know, it’s how much people who are not exposed to a risk should pay for the people who have elected to be exposed to the risk is — you know, it becomes a political question. And my guess is that sometime in the next five or 10 years, you’ll see a struggle on that subject that exceeds — far exceeds — what we saw on Katrina. Charlie?

CHARLIE MUNGER: I’ve got nothing to add.

4. We’re still looking for a big acquisition

WARREN BUFFETT: Number 14?

AUDIENCE MEMBER: Hi. My name is Glenn Tongue, and I’m a shareholder from New York. I’d like to congratulate you on Berkshire’s newest director. Sue is a terrific addition. My question is —

WARREN BUFFETT: We agree with you.

AUDIENCE MEMBER: My question is, according to the 10-Q filed yesterday, you purchased about 5.3 billion in shares in the first quarter. This acceleration in activity is occurring while the general market levels are getting more expensive. Does this indicate some shift in your thinking about hurdle rates of return for your ever-growing asset base and/or your prospects for an elephant-sized acquisition?

WARREN BUFFETT: Well, that’s a good question. I would — incidentally, I would say in the first quarter, actually, stocks didn’t rise. But they’ve risen a lot in April. But they didn’t go down, either. I mean, they were pretty much flat. And we did invest 5 billion or so in equities. Did we change our standards? You know, I don’t think so. But, you know, you can’t be a hundred percent sure that you have — you know, if you haven’t had a date for a month, you know, you may say that was a girl you would have dated the first day, but who knows. (Laughter) So, I don’t know for sure the answer, but I think we would have dated that girl the first day. And the second question, in terms — does it reflect giving up on finding an elephant to acquire in terms of a business? The answer to that is no. We’ve got plenty of money available.

And we would sell stocks if we really — I mean, that would not be a problem — if we really needed to, to buy a really big business. So we’re as prepared as we’ve ever been prepared to buy a big business outright. We hope we do. We hope we buy relatively small ones if they’re attractive. We bought a very attractive business, TTI, run by Paul Andrews — terrific business — in the first quarter. And, you know, I wish it was five times the size, but maybe it will be some day. But we know that we’re in with the kind of person we want and the kind of business we want. And if we find larger ones, one way or another, we’ll swing them. Charlie?

CHARLIE MUNGER: Yeah. The one thing I think we can promise you is that we won’t make returns, on average, in the kind of stuff we’re buying now like those that we made 10 or 15 years ago.

WARREN BUFFETT: Yeah. We won’t come close, no.

CHARLIE MUNGER: No. It’s a different world with more modest expectations.

WARREN BUFFETT: And we hope you share them.

5. Buffett defends Planned Parenthood

WARREN BUFFETT: Let’s go to number 1.

AUDIENCE MEMBER: Hello, Charlie, Warren. Bill Paparella (PH) from St. James, New York. Warren, I brought my ten-year-old daughter, Gina, with me. She asked me last summer, “How do I get rich?” So I gave her your letters, writings, even gave her “Charlie’s Almanack.” So she’s been reading it ever since, asking me a lot of questions. So I said, “Maybe we’ll go to our first meeting together.”

WARREN BUFFETT: Is she married? I mean, she’s the kind of girl I want my granddaughter — or grandson — to meet. (Laughs)

AUDIENCE MEMBER: So we’re learning together. Warren, my question for you is in regards to your recent charitable gifts. And if I could start by saying that I mean no disrespect. You’re my hero. So — and nor is it political.

WARREN BUFFETT: You’re doing fine so far. (Laughter)

AUDIENCE MEMBER: OK. I am, as a father of five daughters, perplexed and upset that one — or I’ve read — that one or more of these foundations is a big supporter of Planned Parenthood and abortion rights. (Scattered applause) If you were to go on the Planned Parenthood website, you would see a website that promotes promiscuity, goes out of its way to support internet porn — (audience noises)

WARREN BUFFETT: Yeah. Let’s get to the question, please. Do you have a question?

AUDIENCE MEMBER: The question is, Warren, I was hoping that you could speak to the billions of dollars that’s been allocated with an agency as Planned Parenthood that is very well-funded. It just doesn’t seem to jive with the hero that I study, and I was hoping that you could speak to it.

WARREN BUFFETT: Yeah. Well, I’ll be glad to speak to it. I think it’s a terrific organization. (Applause with some boos) And I really think it’s too bad that for millennia, you know, women, not only in the United States, but all over the world, you know, have had involuntary bearing of babies forced upon them, and usually by a government run by men. (Applause) So I don’t think we want to get into a — we don’t want to get into a cheering contest here — but, you know, I think that it’s a very important issue. I think it tends to have a small natural funding constituency because it isn’t a popular-type thing where it’s like sticking your name on a hospital or something like that. But I would say that if we’d had a Supreme Court with nine women on it starting when the country became the United States, that by now I don’t think a question like yours would even be being raised.

You know, men set the rules for a lot of years — (applause) — and I think it’s wonderful that a woman can make reproductive choices. But, you know, I’ve got a lot of people that disagree with me on that. I’ve got a lot of people that agree with me on it. And I hope you’ll respect my opinion as I do yours. Thank you. (Applause)

6. “Volatility is not a measure of risk”

WARREN BUFFETT: Number 2, please.

AUDIENCE MEMBER: Hi. I’m Bob Kline (PH) from Los Angeles. Pursuing your earlier comments on sigmas from a different angle, the conventional wisdom in the investment world is that an investment risk can be measured by the volatility of the price of the investment in the marketplace. To me, this approach has it backwards. Since changes in price are determined by the changes in the opinions of investors in the marketplace, why would a rational investor substitute the opinions of the marketplace, as reflected in the volatility of the price, for his own assessment of the risk of the investment? And consultants take this idea further by tracking the volatility of a portfolio manager’s results in an attempt to measure risk. So could you guys expand on your thoughts on this?

WARREN BUFFETT: Yes. Volatility is not a measure of risk. And the problem is that the people who have written and taught about volatility do not know how to measure — or, I mean, taught about risk — do not know how to measure risk. And the nice thing about beta, which is a measure of volatility, is that it’s nice and mathematical and wrong in terms of measuring risk. It’s a measure of volatility, but past volatility does not determine the risk of investing. I mean, actually, take it with farmland. Here in 1980, or in the early 1980s, farms that sold for $2,000 an acre went to $600 an acre. I bought one of them when the banking and farm crash took place. And the beta of farms shot way up. And, according to standard economic theory or market theory, I was buying a much more risky asset at $600 an acre than the same farm was at 2,000 an acre.

Now, people, because farmland doesn’t trade often and prices don’t get recorded, you know, they would regard that as nonsense, that my purchase at $600 an acre of the same farm that sold for 2,000 an acre a few years ago was riskier. But in stocks, because the prices jiggle around every minute, and because it lets the people who teach finance use the mathematics they’ve learned, they have — in effect, they would explain this a way a little more technically — but they have, in effect, translated volatility into all kinds of — past volatility — in terms of all kinds of measures of risk. And it’s nonsense. Risk comes from the nature of certain kinds of businesses. It can be risky to be in some businesses just by the simple economics of the type of business you’re in, and it comes from not knowing what you’re doing. And, you know, if you understand the economics of the business in which you are engaged, and you know the people with whom you’re doing business, and you know the price you pay is sensible, you don’t run any real risk.

And I don’t think Charlie and I — certainly Berkshire — I don’t think we’ve ever had a permanent loss in marketable securities that was, what, 1 percent, maybe, half a percent of net worth. I made a terrible mistake in buying Dexter Shoe, which cost us significantly more than 1 percent of net worth where I bought an entire business then. But I was wrong about the business. It had nothing to do with the volatility of shoe prices or leather or anything else. It just was wrong. But in terms of marketable securities, I cannot recall a case where we’ve lost that kind of — I mean, we’ve done a lot of things in things — in securities — that had a very high beta. We’ve dealt with a lot of things in securities that had a low beta. It’s just the whole development of volatility as a measure of risk, it has really occurred in my lifetime. And it’s been very useful for people who wanted a career in teaching, but it is not — we’ve never found a way for it to be useful to us. Charlie?

CHARLIE MUNGER: Well, it’s been amazing that both corporate finance and investment management courses, as taught in the major universities — we would argue it’s at least 50 percent twaddle, and yet these people have very high IQs. One of the reasons we’ve been able to do pretty well is that we early recognized that very smart people do very dumb things, and we tried to figure out why, and also wanted to know, who so we could avoid them. And — (Laughter)

WARREN BUFFETT: We will not run big risks at Berkshire. Now, we will be willing to lose, as I put in the annual report, $6 billion in a given catastrophe, but our catastrophe business, run over many years, is not risky. You know, a roulette wheel will occasionally pay off at 35-to-1, and that sounds like you’re paying out an awful lot of money compared to the amount bet on one number, but I would love to own a lot of roulette wheels.

7. What an annual report tells you about the CEO

WARREN BUFFETT: Number 3.

AUDIENCE MEMBER: Hi. My name is Stuart Kaye, and I’m from New York City. Warren and Charlie, you spend a lot of time evaluating the management quality and integrity of the companies that you may invest in. In my current job, I do not have the opportunity to do that. As I read through annual reports and financial statements, what do you suggest I focus on to help me to determine the quality and integrity of management?

WARREN BUFFETT: Well, you can — we’ve spent many, many years — and we’ve bought many things. I mean, I — without meeting managements at all, having any entree to them. The stocks — the 5 billion of stocks — that we may have bought in the first quarter, most of those were companies I never met the management, never talked to them. We read a lot. We read annual reports. We read about competitors. We read about the industries they’re in. In terms of sizing up managements — obviously if we’re going to buy the whole business, that’s a different question. Then you — because you — we’re going to buy it, be in bed with them, they’re going to run them, and we care very much about whether they’re going to behave in the future as they have in the past once we own the business. And we’ve had very good luck on that. But in terms of marketable securities, we read the reports. Now, Charlie and I were just talking about one the other day where we read an annual report of a large oil company.

And the company — you know, hundred pages, public relations people, lots of pictures — spent a fortune on it. And you can’t find in that report what their finding cost per McF or per barrel of oil was last year. That’s the most important figure in an oil and gas company over a period of years, but every year counts. The fact it wouldn’t even be discussed — the reason it wasn’t discussed, it was absolutely terrible — but the fact it wouldn’t even be discussed — and to the extent it was touched on, it was done in a dishonest manner. When we read things where we basically are getting dishonest messages from the management, it makes a difference to us. You know, like I say, in marketable securities we can solve that by selling the stock, and it’s not the same thing as buying the entire business. But I think you can learn a lot by reading the annual letters. I mean, for one thing, if it’s clearly the product of some investor relations department or outside consultant or something of the sort, you know, that tells you something about the individual.

If he’s not willing to talk once a year through a few pages to the people that gave him their money to invest, I mean, that — I’ve really got — I’ve got some questions about people like that. So I like that feeling that I’m hearing directly from somebody who regards me as a partner. And you may not get it all the way, but when I get it 0 percent of the way, I don’t like it. I’ve still bought — we’ve still bought into some — in marketable securities — we’ve bought into some extremely good businesses where we thought they were run by people we didn’t really like very well, because we didn’t feel they could screw them up. Charlie?

CHARLIE MUNGER: Yeah. I think that’s exactly right. There are two things: the quality of the business and the quality of the management. And if the business is good enough, it will carry a lousy manager. And the converse case, where a really good manager gets in a really lousy business, he’ll ordinarily have a very imperfect record. In other words, it’s a rare person that can take over a textile business, totally doomed, which is what Warren did in his youthful folly —

WARREN BUFFETT: Right.

CHARLIE MUNGER: — and turn it into what’s happened here. You should not be looking for other Warrens on the theory they’re under every bush.

WARREN BUFFETT: I figured it out in 20 years, though. I’ll have to say that for myself. (Laughs) Twenty years, and I finally figured out I was in the wrong business. But there are businesses — if you gave me first draft pick of all the CEOs in America and said it’s your job to run Ford Motor now or, you know, pick a company that’s in a terribly tough business, you know, I wouldn’t do it. I mean, that it’s just too tough. They may get it solved, you know, if they get cooperation from unions and a whole bunch of things, but it will not be solely in the control of the CEO who has that job. He is dependent on too many good things happening outside to say that he alone can get the job, even if he’s the best in the world.

8. Stocks over bonds, but with modest expectations

WARREN BUFFETT: Number 4.

AUDIENCE MEMBER: Hi, Warren. Hi, Charlie. I’m Walter Chang (PH) from San Jose, California. My wife and I are expecting our first baby boy in July, and we’re going to name him Warren after you. (Laughter)

WARREN BUFFETT: You’re trying to get into my will again.

AUDIENCE MEMBER: Charlie, I’m rooting for you, for the next one.

WARREN BUFFETT: I’d move him further down the line, maybe to number five. (Laughter)

AUDIENCE MEMBER: Warren and Charlie — Warren, if you were writing a follow-up to the very prescient Fortune magazine article from November 1999 in which you were talking about the lean and fat 17-year periods, what would you be writing? And since we’re halfway through the third 17-year period, how is it turning out, based on your expectations from back in 1999?

WARREN BUFFETT: Yeah. The 17 years, of course, I had a little fun with because of the fact there were two 17-year periods and there are also 17-year locusts. So I stretched it a little from a literary standpoint. But there’s nothing magic about given spans of time. There was something very different between the first 17 years of that 34-year period and the second 17, and I used that for kind of a dramatic contrast. If I were writing something now, I would say what I said just a little earlier in response to Frank Martin’s question, that it is — if I had to own long bonds or long-term position equities, I’d rather have equities. But I would not have high expectations for them, but I would have expectations beyond 4 3/4 percent. How much beyond, I’m not sure, but something enough beyond four 3/4 percent that I would rather own equities than bonds. I did not feel — I felt, in 1999, that people were extrapolating the experience of the previous 17 years and assuming there was something magic about owning equities.

And expectations of the people were bound to be — that they were — people were bound to be disappointed. They simply had an unrealistic view by extrapolation, and that was the main purpose of that article. But if I were writing something now, I would not have high expectations for equities, but I would have better expectations for equities than for bonds. Charlie?

CHARLIE MUNGER: Yeah. And I would say that since that article was written, the results from owning equities have been pretty lean, at least compared to what happened in the glorious 17 years that preceded. So Warren has been right so far, and he’s probably right now when he says modest expectations.

WARREN BUFFETT: Yeah. You really don’t have — in markets you can’t say something terribly important or intelligent every day or every week or every month. That’s one of the problems of — if you went on television too often or had to write weekly letters or something of the sort. Every now and then you get something extreme. I mean, I did close down the partnership in 1969, and an article appeared. I did give an interview in ’74. I gave another interview in ‘81 or ’2. I mean, every now and then, things really get out of whack. But the gradations in between, they’re too tough. But the nice thing about it is you don’t have to have an opinion every day or every week or every month. If you own some good businesses and you bought them at the right price, if they get to a silly price, you probably should sell them. And if you find that everything is extremely cheap, like in ’74, you should put every available dime into equities. And that’s what we’ve tried to do.

9. PacifiCorp and the Klamath Dams controversy

WARREN BUFFETT: Number 5.

AUDIENCE MEMBER: Yes. Thank you, gentlemen, for this opportunity to ask you a question. My name is Ronnie Pellagreen (PH), and this is my 14-year-old daughter, Mikayla (PH). We are here representing hundreds of ocean, commercial, hook-and-line salmon fishermen, and their families from the West Coast. They are barely hanging on to their livelihoods because of the Klamath River crisis. My husband is a fourth-generation hook-and-line commercial fisherman from Eureka, California. His family has fished for the last 100 years. Last year, our commercial salmon season was completely shut down because of the crisis in the Klamath River. It is caused by the four lower hydroelectric dams owned by your subsidiary PacifiCorp. We personally took a 95 percent hit in our income — excuse me — and we had no way to make up that loss. We have used our savings and were forced to take out a Small Business Administration disaster loan to meet our financial needs. Our daughters were so upset after overhearing my husband and I last Christmas, they came to us wanting to give us all the money in their bank accounts.

I am telling you this, gentlemen and shareholders, because you and the shareholders can help. Under Klamath Dam relicensing, it is shown that this dam removal makes economic sense for PacifiCorp and MidAmerican. You are a great businessman who has built an incredible empire. We sure could use your creativity and expertise in solving this crisis situation so the Indian people along the river, and we, in the coastal communities, can continue our long and proud heritage. People back home are eagerly waiting for me to bring a response back from you. My question is, what can I tell them is your position on removing the outdated Klamath dams?

WARREN BUFFETT: Yes. Our position on it is quite simple. The FERC and several of the regulatory commissions have before them 27 different proposals or positions by various interest groups. Some want — some like hydropower, which is what comes from the dams, because it does not generate the emissions that come from coal or gas-fired generation. Some like the fact that hydropower is cheaper, several hundred thousand consumers. Some people have been hurt by what you describe in terms of the fish. And you have a public policy question which will not be determined by PacifiCorp. It will be determined by FERC because they are — they represent the public. In fact, the secretary of Interior has advised FERC that it’s a very tough question. FERC will be having hearings. They will listen to the positions. The Oregon and Utah, California, perhaps, public utility commissions will be listening to the arguments. And, in the end, we are a public utility responding to public policy. Public policy, weighing both your interests and the interests of others in the matter, will come to a determination, and PacifiCorp will do exactly what they say.

We are responsive to the people that regulate us, just as people have been in that position since the first dam was put in in 1906. So that is entirely a question for FERC and the state commissions.

10. No opinion on NYSE and Euronext merger

WARREN BUFETT: Number 6.

AUDIENCE MEMBER: Good afternoon, Mr. Buffett and Mr. Munger. Thank you for taking my question. This is my second time at the Berkshire Hathaway meeting that I have attended. My name is Cameron Sparrow (PH). I am 13-years-old and from Boulder, Colorado. My question is for Mr. Buffett. Mr. Buffett, what is your opinion about the merger of the New York Stock Exchange with the Euronext? Do you think that the merger will have a positive or negative effect on the market?

WARREN BUFFETT: Well, I really don’t know the answer to that. My guess is that — I mean, both of those institutions were very large institutions beforehand, and we would judge a positive effect in terms of narrowness of spreads, as an investor, in terms of costs of execution and that sort of thing. Both places have been very efficient in the past. I mean, we pay quite low payments. Although my broker is here. We probably should be paying even less. But the New York Stock Exchange has gotten far more efficient in terms of costs from 30 or — from the days of fixed commissions back in the early ’70s and before that. I mean, it’s a fraction of the cost. And the real test from our standpoint is, you know, do we get better executions and less costly executions. And, like I say, both institutions were big, effective institutions before. And if they get a little more efficient, I hope it gets passed on to the customers, but it may just result in larger profit. But we’re pretty satisfied with — quite satisfied, actually — with the functioning of the New York Stock Exchange where we do most of our business.

But we’ve done business — we’ve been buying international stocks, and we’ve had generally good executions throughout the world. So it’s not a source of either concern or enthusiasm to me. Charlie?

CHARLIE MUNGER: I don’t know anything about it. (Laughter)

WARREN BUFFETT: I don’t either, but I took longer to say so. (Laughter)

11. Beware when someone says “it’s so easy”

WARREN BUFFETT: Number 7, please.

AUDIENCE MEMBER: Mr. Buffett and Mr. Munger, thanks for hosting this wonderful meeting. My name is Chander Chavla (PH), and I’m visiting from Seattle, Washington. And I think Berkshire Hathaway can contribute to the reduction of global warming if, for next year shareholder’s meeting, Mr. Gates and I fly on the same plane. (Laughter) My question is, I have made a few mistakes in business by trusting the wrong people. So in — and I don’t know where to learn how to trust the right people. They don’t teach you that in business school, and the people who are supposed to teach you in the corporate world sometimes betray you. So how can I learn who to trust and who not to trust?

WARREN BUFFETT: Boy, that’s a great question. But you probably have about as good a chance of getting a good answer from me on that as you have on getting on Bill Gates’ plane next year. (Laughter) I get letters all the time, and I hear from people who have been taken advantage of in financial transactions. And, you know, it really is — it’s sad. And a lot of it isn’t even — it’s not fraud or anything. For one thing, I mean, just the charges involved, the frictional costs and the baloney that is presented is tough. Charlie and I have had very good luck in terms of buying businesses and putting our trust in people. It’s been just overwhelmingly good. But we filter out a lot of people. And then you say, “Well, how do you filter them out?” I would say — I think Charlie will agree with this — people give themselves away fairly often. And maybe it does help to have been around as long as we have in seeing the various ways they give themselves away.

They — when somebody comes to me with a business — and I probably shouldn’t tell this publicly because they’ll probably tailor their approach subsequently — but when they come, just the very things they talk about, what they regard as important and not important, there are a lot of clues that come as to subsequent behavior. And, like I say, we’ve really had a batting average I wouldn’t have thought we would have had in the people that we’ve joined with. But it hasn’t been a hundred percent. It’s been well above 90. And I get asked that, you know, I mean, “How do you make those judgments?” And I don’t know. Charlie, can you articulate the way we do it?

CHARLIE MUNGER: Well, partly we’re deeply suspicious when the proposition is too good to be true. Warren once introduced me to a gentleman promoter who wanted to inveigle us into an insurance program. And he said, “We only write fire insurance on concrete bridges that are covered by water.” He says, “It’s like taking candy from babies.” We are able to filter out propositions like that.

WARREN BUFFETT: Yeah. Anybody that, implicit in their comments or what they kind of laugh about or — all kinds of things in terms of the fact — you know, it’s so easy and — it ain’t that easy, you know, and we get suspicious very quickly. And the truth is, we rule out 90 percent of the times. And we may be wrong about a fair number that we’re ruling out. The important thing is whether the ones we’re ruling in we’re right about. And so we don’t mind — we’re looking for the obvious cases of people you can trust. I mean, go back to 1969 again. When I was thinking about who to turn my partners over to, all kinds of people with great records. That was a hedge fund — that was the first hay-day of hedge funds. And there were books written about it, “New Breed on Wall Street” and some of those. You can look them up. And dozens and dozens and dozens of people with good records.

And when I sat down and thought about, I’m going to write my partners and tell them who to turn over all their money to — because most of them had a hundred percent or close to it with me — you know, Charlie, Sandy, Bill Ruane. I couldn’t have told you which of the three was going to do the best. And, you know, I couldn’t even tell you those three would done better than five others that somebody else might pick. But the one thing I was sure of is that they were going to be sensational stewards of money. They were going to care more about those people — the people that were turned over to them — in getting the best result possible than they were going to care about, you know, whether they made X or 2X this year in terms of commissions or fees or any of that sort of thing. Anytime I find somebody with a — what I regard as an unfair fee structure, and saying, “Well, I can get it,” well, you know, I rule them out. And I may rule out some of the wrong people. But the ones that are left in, I feel very good about.

And I wish I could give you better advice than that, but that’s all I can do.

12. Pay attention to opportunity costs

WARREN BUFFETT: Eight.

AUDIENCE MEMBER: Yes. Mr. Buffett, Mr. Munger, thank you again for being so generous with your time with us every year. I’d like to follow up on the question from the gentleman from Australia and from Munich on valuation. The gentleman from Australia asked about margin of safety, and you replied that a superior business may not require that much of a margin of safety. And my follow-up would be, does that suggest market rate of returns going forward for superior businesses? And then on the Munich valuation, in which you cited a farm example on discounted cash flows, I’m very curious how you come up with your discount rate and how you might adjust that discount rate based upon various businesses. You might want to discuss your discount rates used for Coca-Cola, J&J, or some of your past investments. Thank you.

WARREN BUFFETT: Yeah. We don’t formally have discount rates. I mean, every time I start talking about all this stuff, Charlie reminds me that I’ve never prepared a spreadsheet. But, in effect, in my mind I do. But we are going to want to get a significantly higher return, obviously — in terms of cash produced relative to the amount we’re outlaying now for a business — than we are from a government bond. I mean, we — you know, we are going to — that has to be the yardstick at a base. And how much more do we want? Well, if government bond rates were 2 percent, we’re not going to buy a business to earn 3 or 3 1/2 percent expectancy over the years. We just don’t want to commit our money that way. We’d rather sit around and wait a little while. If they’re 4 3/4 percent, you know, what do we hope to get over time? Well, we want to get a fair amount more than that.

But I can’t tell you that we sit down every morning and I call Charlie in Los Angeles and say, “What’s our hurdle rate today?” I mean, we’ve never used the term. You know, it’s a little bit of the — we want enough so that we feel very comfortable if they closed down on the stock market for a couple of years, if interest rates go up another hundred basis points or 200 basis points, we’re still happy with what we’ve bought. And above that, I really — I know it sounds kind of fuzzy, but it is fuzzy. Charlie?

CHARLIE MUNGER: Yeah. The concept of a hurdle rate makes nothing but sense, and yet a lot of terrible errors are made by people who are talking about hurdle rates. Just because you can measure something and guess it, doesn’t mean that it’s the controlling variable in what you’re dealing with in a messy world. And I don’t think there’s any substitute for thinking about a whole lot of investment options and thinking about why one is better than another and what the likely returns are from each, et cetera, et cetera. And the trouble with the hurdle rate concept — not that we don’t have one, in a sense — is it doesn’t work as well as a system of comparing things. In other words, if I have something available that I think will give me 8 percent for sure and I can buy all I want of it, and you’ve got a perfectly good investment that I think will earn 7, I don’t have to waste 5 minutes with you. You’re like the mail order service offering the bride through the mail and she’s got AIDS.

You know, I can go on to some different subject. And so this — the concept of opportunity cost is — it’s so little taught in investment. They teach it in the freshman course in economics in all the major universities, but when you get to the corporate finance departments and so forth, it doesn’t lend itself with the kind of mathematics they want to use, so they ignore it. But in the real world, your opportunity costs are what you want to make your decisions based on.

WARREN BUFFETT: Yeah. And even if you had something you were really familiar with and were very sure on the 8 percent, 8 1/2 wouldn’t tempt you if somebody came along, as a practical matter.

CHARLIE MUNGER: Sure.

WARREN BUFFETT: As I mentioned, I’ve been on 19 corporate boards. I would say that of the presentations I’ve seen — and I’ve seen a lot of them — and every one of them had a calculation of internal rate of return, if they’d burned them all, the boards would have been better off. I mean, there’s so much nonsense presented, because the presenters, essentially, know what the listeners are desirous of hearing, and what is needed in order to get through something the CEO wants to do anyway — you just get nonsense figures. And, you know, we may get nonsense figures, too, but they’re ours, and we — (Laughs)

CHARLIE MUNGER: Let me give you an example of that. I have a young friend who sells private partnership interests to investors. And he’s in a really tough field where it’s hard to get decent returns. And I said, “What return do you tell them you’re aiming for?” And he said, “20 percent.” And I said, “How did you pick that number?” And he said, “If I chose any lower number, they wouldn’t give me the money.” (Laughter)

WARREN BUFFETT: And there’s no one in the world we think can earn 20 percent with big money. I mean, it just — so anybody making a promise like that, basically, we’re going to write off immediately. It’s amazing to me what — you know, in a sense, how gullible big investors are, pension funds and so on, in that they have people come around and promise them the Holy Grail. And they want it so badly, you know, that they’re willing to believe things that just have to be nonsense.

13. Some problems are too important to be “too difficult”

WARREN BUFFETT: Let’s go to number 9.

AUDIENCE MEMBER: Good afternoon, Mr. Buffett, Mr. Munger. My name is Robert Piton (PH), and I’m from Chicago, Illinois. Over your careers, has there been any question, either personally or professionally, that you haven’t been able to get a comfortable answer to that you cannot simply put in your “too difficult” pile? Thank you.

WARREN BUFFETT: Charlie?

CHARLIE MUNGER: Well, sure. You get —

WARREN BUFFETT: You may have just asked one. (Laughter)

CHARLIE MUNGER: Sure. If you’ve got a child dying of some horrible disease, you have a problem you can’t just put in a “too difficult” pile. So there are lots of things in life that come to you that you — where you have no option to not consider the issue. But where it’s voluntary, like choosing one investment from many, then the “too difficult” pile is a marvelous way of sifting your daily grist.

WARREN BUFFETT: Yeah. I have a file on my desk — Laura Graham gave it to me — that’s entitled “too hard.” And, as Charlie said, if something is optional and it’s too hard, you just throw it in there. If you’ve got the problems of weapons of mass destruction, it is too hard, but you have to keep wrestling with it. Because if you even reduce the probabilities a tiny bit, you know, you’re doing something. But you’re never going to solve it. You just have to keep working at certain types of problems, and you hope you don’t have too many like that.

14. We’re thinking all the time

WARREN BUFFETT: Ten.

AUDIENCE MEMBER: Many greetings from Germany. I am Bernard Yaadan (PH) from (inaudible), a little town close to the Black Forest, and I’m the mayor of it. My question to Mr. Buffett and Mr. Munger is, how often do you review each single position in your portfolio? Some look at their stocks every day, sometimes more, some only once a year. What is your frequency? Thank you.

WARREN BUFFETT: Well, that sort of breaks down into two periods in my life. When I had more ideas than money, I was thinking about everyone all the time because I was thinking about buying the next one and which one I would have to sell in order to buy something even more attractive. So my opportunity cost, as Charlie would put it, then, was the least attractive stock which I would give up to buy something more attractive. So I — literally, if I had $100,000 and it was all invested and I wanted to put $10,000 or 20,000 into something I felt was more attractive, I would be thinking all the time of which one of these do I unload. Now our situation is such that we have more money than ideas, and that means that we really aren’t re-examining something every minute, because the option is cash and not doing something that we really are excited about. We still think about the businesses we’re in — whether they’re wholly owned or whether they’re partially owned through stocks — we think about them all the time. I mean, we’ve got a lot of information filed away in our minds.

And you keep getting little incremental bits about that company or the competition or other things going on. So it’s — you know, it is a continuous process, but it’s not a continuous process with the idea that daily activity, or weekly activity, or monthly activity, is going to result. It’s just we want to just keep adding to our thinking and knowledge, refining it further about every business that we’re in. If we needed some money for a very big deal, for example — let’s say we needed 20 or 30 or $40 billion and we had to decide to sell 10 billion of equities, just to pick a figure, you know, we would use the information we’ve been collecting daily, which hasn’t really meant much as we’ve gone along, and we would come to a decision about where we raise that $10 billion. Charlie?

CHARLIE MUNGER: Yeah. But even in Warren’s salad days when he had way more ideas than he had money, he did not spend a lot of time thinking about his number one choice. You know, he could put that aside and devote his efforts to other subjects.

15. It’s hard to buy billions of dollars of stock

WARREN BUFFETT: Number 11.

AUDIENCE MEMBER: Good afternoon. Charles Fisher (PH) from New York. In the last 18 months, the company has allocated at least $1 billion to four or five publicly traded companies. Berkshire has an abundance of capital and a scarcity of ideas. Since these stocks investments were made in large cap companies in which we could have probably made $5 billion investments, have you thought about allocating more capital to each stock investment?

WARREN BUFFETT: Yeah, we do think about that, obviously. And there’s certain ones that we have added billions of dollars to that we already had substantial positions in a couple years ago. Obviously, when we add to the present list, we think we’re adding to the ones either that look the most attractive to us, or to the ones that we can just buy. I mean, there’s some things where we can’t put that much money in, or where we will have reporting thresholds that will cause a problem. If we own over 10 percent of a company, you know, we can’t sell a share of it, then, for six months without it being — if there’s a profit — it being recaptured pursuant to a short-swing rule. So there’s some technical things that enter into whether we cross certain thresholds of ownership size. But if you look at — you know, if you look at the portfolio at the end of 2007, you’re going to see that certain positions in there from 2006, there will probably be an increase by billions of dollars.

And that’s always something that I’m considering and Charlie is considering. We like to add to present positions. I mean, those are companies we know, understand, obviously like to some degree. And if the price gets reasonably attractive and we’ve got money around, we will add. If we can find a good business to buy, you know, we will sell the least attractive. Charlie?

CHARLIE MUNGER: Yeah. It isn’t as easy as it looks to buy these big positions. When we were buying Coca-Cola, we were buying every share we could. We bought, what, 30 or 40 percent of the daily trading?

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: And it took us a long, long time to get our position. And so there are huge difficulties to managing great, big, common stock portfolios. We like it way better when we have those problems now than we liked it when we didn’t have them early, but it does make it much harder. We have no easy way of moving these elephants around.

WARREN BUFFETT: In general, we think we usually can buy something like 20 percent of the daily trading volume and feel that we’re not causing the price to be violently different than it would have been if we hadn’t been participating in the market. So that means if we’re going to buy $5 billion worth of something, $25 billion worth of it is going to have to trade, and that’s a lot for many stocks. So we are a big ocean liner, and that has its disadvantages compared to being a smaller boat.

16. Buffett responds to concerns about Klamath Dams

WARREN BUFFETT: Number 12?

AUDIENCE MEMBER: Heya hamalio (PH). My name is Wendy George, and I am from the Hoopa Indian Reservation in northern California. I’m here with the Yurok and Karuk indigenous people who live along —

WARREN BUFFETT: I don’t know if the microphone isn’t working or not, but we want to make sure it is working.

AUDIENCE MEMBER: — who live along the Klamath River. My people are river people. Our entire culture, religion, and subsistence is centered around the river. Your subsidiary company PacifiCorp owns dams on our river. Mr. Buffett, I know you care very much about humanity and ethical business. We also understand that you cannot exercise direct control over PacifiCorp’s operations. However, there are things you can do to help us. So we are here to ask you if you would be willing to meet with the tribal representatives, learn more about our issues, and explore ways to help save our salmon?

WARREN BUFFETT: Are you complete? Just take your time here.

AUDIENCE MEMBER: Complete.

WARREN BUFFETT: OK. As I said earlier, we will not make the determination in the end. It will be made by FERC. It’s the same way as if we’re going to put in a coal generation plant or a gas generation plant or more wind-powered. For example, we put in a lot of wind power in Iowa, but that was decided, essentially, by the utility commission in Iowa, that they wished to make that decision. And, incidentally, sometimes people are unhappy when we put in wind because they don’t want the transmission lines that are going to be involved. They’re usually happy to give us the plots on which to put the wind turbines because they get paid very well for it, but they’re not happy to have the transmission lines. Anytime you get into the public utility field, there are people happy and unhappy with decisions. Nobody wants a generating plant built near them, and that’s the nature of it. The world does want electricity. And because it wants electricity, and it wants more electricity, it essentially has to decide the public policy issues through regulatory authorities.

And we will do exactly what FERC, finally — and with the consent of the state commissions — what they finally decide on it. And all of the arguments will be presented to them. As I say, there are 27 groups, I believe. And then they go and then they get the opinion of the secretary of the interior and so on and a lot of other groups. And somehow they come out with a decision on public policy, and we will follow it. It takes a lot of time, too, I must say. Anytime you’ve got an issue that’s got 27 different views and more than one authority, it’s going to take significant time. I’m in a peculiar position on this. Because when we bought PacifiCorp, we had to — Walter Scott and I both signed affidavits. As part of the acquisition of PacifiCorp, the Oregon Public Utility Commission required that we submit these affidavits. And I’ll read to you from this. I don’t want you to think I’m ducking behind this, but this was executed several years ago.

And it says, “I agree I will not exercise any control, directly or indirectly, on matters that pertain to PacifiCorp, except for relating to PacifiCorp that are ministerial in nature.” And then, “I agree, as a MidAmerican Holding Company and Berkshire Hathaway director, I will recuse myself from voting on MidAmerican Holding Corp. or Berkshire Hathaway board of director matters concerning PacifiCorp activities or operations.” This is part of the order that came down that allowed MidAmerican to buy PacifiCorp. I must say, too, that in terms of the Oregon Commission and the five other states, that our application went through in almost record time because MidAmerican does have such a good record in terms of being responsive to the public utility commissions under which it’s operated, and we will continue to be responsive.

WARREN BUFFETT: But I appreciate your point. Thank you.

17. Florida’s public-sector hurricane insurance

WARREN BUFFETT: Number 13, please.

AUDIENCE MEMBER: Peter Vanden Broeck (PH), Cleveland, Ohio. Mr. Buffett and Mr. Munger, thank you for so eloquently answering some of these tough questions. I know of no other public company that would allow a forum such as this. You’re doing a great job. (Applause)

WARREN BUFFETT: Thank you.

AUDIENCE MEMBER: My question is a follow-up question to the Katrina aftermath situation regarding policyholders with insurance companies and the tussle between coverage and what’s the proper remedy for those that suffered after such a storm. Part of that tussle, or one of the results of that tussle, was some legislation that was passed in the state of Florida. Could you please explain that legislation, as you understand it, to shareholders? And what effect, if any, does that have on Berkshire’s insurance subsidiaries? Thank you.

WARREN BUFFETT: Yeah. I can’t tell you with precision what the Florida — I don’t know whether Joe Brandon, or Ajit [Jain], or Tad Montross — if they’re in the managers’ group, if somebody could pass the microphone over to them. Essentially — I should let them explain it — but the state of Florida has gotten more into the business of insuring the citizens by a considerable margin than it did before, but there are some significant limitations on that. And I think, if we’ve got a microphone with one of the three of them, they could answer that question better than I. Do we have somebody over there? Are they all out writing insurance, or — (Laughter)

CHARLIE MUNGER: More likely buying jewelry. (Laughter)

VOICE: Check, one, two.

WARREN BUFFETT: Who do we have? It’s impossible for me to see over there with the lights.

VOICE: I’m getting a mic.

WARREN BUFFETT: What are they yelling?

CHARLIE MUNGER: Seven.

JOE BRANDON: Hello.

WARREN BUFFETT: Ah.

JOE BRANDON: Warren, it’s Joe.

WARREN BUFFETT: OK.

JOE BRANDON: Took me a little time to get here.

WARREN BUFFETT: OK. Fine.

JOE BRANDON: I was looking for Ajit. What was the specific question?

WARREN BUFFETT: I think the questioner wanted to know what has really happened in Florida in the last three or four months, in terms of the state getting involved in the homeowner’s insurance business.

JOE BRANDON: Well, back in mid-January, the Florida legislature met in a special session and passed legislation, at the urging of the governor, that expanded the reinsurance fund and ultimately is moving a lot of risk, both personal lines and commercial lines, from the private market to the public market. You know, this is going to, and has manifested itself, in lower prices for wind risks in Florida and has freed up capacity that was dedicated to Florida for other markets. So ultimately it’s going to have a depressing effect on the insurance industry. Longer term, you know, there is no free lunch, and the state and the citizens of Florida are taking a tremendous amount of risk. And it will all work out if the wind doesn’t blow, but the odds are eventually it will, and Florida is going to have a large public policy issue to deal with.

WARREN BUFFETT: Are they — Joe, are they explicitly taking on about 30 billion and then sort of leaving it in the laps of the gods above that? I’m not sure myself, but —

JOE BRANDON: Yeah. I believe they take out about 30 billion. It’s about — the increase was 12 to 16 billion. So they previously had taken about 18 billion out, and they took an additional 12 to 16.

WARREN BUFFETT: Yeah. The real problem will be if there turns out to be a $100 billion insured loss. And then the — you know, the state may decide to issue 60 or 70 billion of bonds. They may decide to go to the federal government and say, “This really isn’t our fault, and therefore the entire country should pay, in some form.” Who knows what will happen? And the truth is, you know, it’s very unlikely that a $100 billion storm occurs. The biggest one was Hurricane Andrew, which trended, through inflation to present day, probably wouldn’t quite hit 30 billion. But if that same storm come through as a Category 5 about 20 miles north of where it came — where it hit — you would have — or you could easily have something like $100 billion storm. So, you know, you’re going to have to stay tuned on that. And if they don’t have any hurricanes in the next couple of years, the whole matter will die down — big hurricanes.

And if they have a $100 billion storm, they will probably go to Washington, and we will find out whether the whole country has been insuring hurricanes in Florida or whether the federal government will throw it back to the State of Florida, and the State of Florida will, presumably, issue a lot of bonds, and taxes would go up. And, in effect, you would distribute insurance — insured losses — in relation to the proportion people pay of the general tax revenues of a state like Florida. It’s tough to be where the wind blows a lot, but it’s also a very nice place to live, apparently. So we will find out how it plays out.

18. “Associate with people who are better than you are”

WARREN BUFFETT: Number 14, please.

AUDIENCE MEMBER: Steve Rosenberg (PH), originally from Michigan. Thank you very much for continuing to serve as excellent role models and for the values that you continue to teach by example. I’m curious to know who are your present-day role models. And I know that your prior heroes included your father, Ben Graham, and Davy [former GEICO CEO Lorimer Davidson], but would be curious to know who in addition to those three. Thank you.

WARREN BUFFETT: Well, I’ve had a number of them. And I’m not sure I want to name them because the ones you don’t name might feel a little left out. But the one thing I’ve been very lucky on is that the ones I’ve had have never let me down. So I’ve never had that experience where you’ve looked up enormously to somebody and then had that person let you down in some way, which would be a terrible experience and very hard to get over it. And, you know, I’m sure some people have had that in marriage, and they’ve had it in business. And the worse situation, of course, is if you have it with your parents, but that did not happen. In fact, the reverse happened with me. So I can just tell you that choosing your heroes is very important. I tell that to the students when they come. Because you are going to gravitate toward the behavior of those around you. I tell people to be sure and associate with people who are better than you are. Marry up and hope you find somebody that doesn’t mind marrying down.

(Laughter) And it will do wonders for you. It was a huge help to me. I can tell you that. Charlie?

CHARLIE MUNGER: Yeah. I would say that you’re not restricted to living people when picking your mentors. Some of the very best people are dead. (Laughter and applause)

19. “I have my resume screen-printed on my shirt”

WARREN BUFFETT: Well, with that, we better go to number 1. (Laughter)

AUDIENCE MEMBER: Hello, everyone. My name is Kendall Brubaker (PH). I’m a senior from Purdue University in West Lafayette, Indiana. I have my resume screen-printed on my shirt. Charlie and Warren, I brought a shirt for each of you, as well as one for (inaudible), who is responsible for my presence today. Additionally, I have a strong interest in social entrepreneurship and the Gates Foundation and would love to offer a shirt to Bill, if he is willing to accept. Now, I had an overly technical question about the historic rate of economic growth and why it’s 3 percent as opposed to 2 or 5. However, given my circumstances, I feel it is more appropriate to ask if I made a sound economic decision to make this trip to Omaha to display my own intrinsic value, and to turn down the $500 that the man just offered me for my spot in line to 27,000 people and to learn from you, or if I would have been better off charging the equivalent amount to my American Express card on See’s Candy and Coca-Cola? Thank you. And, again, my name is Kendall Brubaker. (Applause)

WARREN BUFFETT: Thank you. I thought your question was going to be what shirt size we wore, but — (Laughter)

CHARLIE MUNGER: Mine is small. (Laughter)

20. Munger: Running cars on corn is “dumb”

WARREN BUFFETT: I think we’ll move on to number 2. (Laughter)

AUDIENCE MEMBER: Tom Nelson (PH), North Oaks, Minnesota. This one is for Charlie. What are your current views on the costs and benefits of ethanol production in this country?

CHARLIE MUNGER: Well, you know, even [Sen. John] McCain has had a counter revelation lately. He’s decided that ethanol is wonderful now that he realizes that’s the way they think in Iowa. I’m somewhat in his position here, but I won’t allow that to stop me. (Laughter) I think the idea of running automobiles on corn is one of the dumbest ideas — (applause) — that has gotten widespread acceptance that I have ever seen. But in a government with a lot of political pressures, weird decisions get made. But that has to be about as crazy a decision as was ever made. You want a social safety net under people, and the most basic safety net of all is food. And you’re going to raise the cost of food so you can run these automobiles around? And you use up just about as much hydrocarbons making the corn as you get out of the ethanol. I would say that — and you don’t count in the cost of the ethanol, the cost of the topsoil that goes away forever when you — it’s a — I love Nebraska.

I’m a Nebraskan to my core. But this was not my home state’s finest moment.

WARREN BUFFETT: We’re going to try to smuggle him out of town tonight. (Laughter)

21. “Supermoney” book available for purchase

WARREN BUFFETT: I should make one announcement. In terms of the books at the Bookworm outside, Jerry Goodman, a friend of mine from way back, wrote a book many years ago called “Supermoney,” which he just brought out a new addition. They actually flew those in. They arrived here at the auditorium about 9 or 10 — 10 or 11 o’clock — I guess, this morning. And the new revised issue of “Supermoney” is now out there, in addition to all the other titles. And I would feel remiss, after all the trouble they went to, if I didn’t mention that to this group. It’s a very good book. Jerry was a great writer. He wrote “The Money Game,” which was a classic. And “Supermoney” is a good book, too.

22. Best hedge against inflation

WARREN BUFFETT: Let’s go to number three.

AUDIENCE MEMBER: Good afternoon, gentlemen. Paul Wigdor (PH) from Montclair, New Jersey. What are you doing to protect our company’s portfolio against the perils of inflation? Specifically, are you looking at further currency investing and metals investing?

WARREN BUFFETT: Well, we would not necessarily look at metals investing as being any protection against inflation at all. But we are — the best protection for inflation is your own earning power. I mean, somebody that is a first-class surgeon, or lawyer, or teacher, or salesperson, or anything else, whether the currency is seashells, or paper money, or whatever, will do all right in terms of commanding the resources of other people. So your own earning power is your best — is the best hedge against inflation. The second best hedge is to own a wonderful business, not a metals business, necessarily, not a raw material business, not a minerals business, but a wonderful business. And the truth is, if you own Coca-Cola, if you own Snickers bars, if you own Hershey bars, if you own anything that people are going to want to give a portion of their current income to keep getting, and it has relatively low capital investment attached to it so that you don’t have to keep plowing tremendous amounts of money in just to meet inflationary demands, that’s the best investment you can probably have in an inflationary world.

But inflation is bad news for investors under almost any circumstances. You can argue that if you own some business that required very little capital investment and had real flexibility of price during an inflationary period so that people would continue to give up a half an hour of work — of their own work — every month to buy your product, and you leveraged it, then you might even beat inflation to some extent. But leverage is not our game, but we try to own good businesses. I think that the Berkshire would not do as well during high rates of inflation at all as it does — in real terms — as it does in periods of low inflation, but I think we would do better than a good many companies. Charlie?

CHARLIE MUNGER: I’ve got nothing to add.

23. Railroad business is better but won’t be “sensational”

WARREN BUFFETT: Number 4.

AUDIENCE MEMBER: Hello, Warren and Charlie. My name is Felton Jenkins. I’m from Savannah, Georgia. I’ve been a shareholder for a number of years. This is my third annual meeting. Thanks to you guys, and thanks to your managers and all your employees for the great job. Just briefly follow up on one thing. It’s been published in the Washington Post, LA Times, a number of media outlets, that the FERC, the California Regulatory Commission, the Department of Interior, have determined that it would save between 100 to $200 million to decommission the dams and find alternative power versus doing the capital retrofit. But, anyway, my question is, what can you tell us about your views on the future profitability of the railroad industry? And what might make that more exciting going forward versus what it’s done historically? Thank you.

WARREN BUFFETT: Yeah. Thank you. I don’t think it will be a lot more exciting. But the relative — the competitive position of the rails has improved somewhat from, really, not a very good competitive position 20 or 25 years ago. There’s been a lot of progress made on the labor front. They benefit in their competitive position vis-a-vis trucking as oil prices go up. Higher diesel fuel, obviously, raises costs for rails, but it raises costs for their competitors, the truckers, by probably a factor of close to four compared to how it hurts them. And there isn’t a whole lot of new capacity being created in the rail industry. So what was a terrible business 30 years ago, and it was operating under regulation — it’s still under — operates under the threat of reregulation, which has a tempering effect on their pricing power — but it’s a better business now. It will never be a sensational business. It’s a very capital-intensive business. And when you put tons of capital out every year, it’s very hard to earn really extraordinary returns on capital.

But if they earn a decent return on capital, it can be a good business over time, and it can be a lot better business than it was in the past. Charlie?

CHARLIE MUNGER: I’ve got nothing to add to that one, either.

24. Best ways a 10-year-old can earn money

WARREN BUFFETT: Number 5.

AUDIENCE MEMBER: Hello, Mr. Buffett and Mr. Munger. My name is Marie Blevins, and I am from Bardstown, Kentucky. This is my first shareholder meeting. My question is, what do you think are the best ways a 10-year-old can earn money? (Laughter and applause)

WARREN BUFFETT: Well, I must say that was a subject I gave a lot of thought to when I was 10 — (laughs) — more than I gave to school and some other things. You know, you have to — you’re probably a little young to deliver papers. That was always my favorite. And I got about half the capital I started with by delivering papers, and I always liked it because I could sort of do it by myself. I don’t know the situation and the town in which you live, but, like I say, 10 is probably a little young, but 12 or 13 would not be. And almost any — there can be a lot of — I tried to — I must have tried 20 different businesses by the time I got out of high school. The best one was a pinball machine business, but I’m not sure I want to recommend that you get into that. When I did it, it was a much purer business where you put a nickel in, and that was about it.

But it is interesting — I read a study a long time ago — I wish I could get my hands on it because I’ve quoted it a lot but I never quoted it as authoritatively as I would be able to if I could actually find the damn thing that I read 30 years ago. But it correlated business success with certain variables. And, you know, they tried grades in school, and they tried what your parents did, and they tried whether you went to business school, all those kind of things. And they found it correlated best with the age at which you started your first business, got into business, that the younger you were when you did your first piece of business seemed to correlate best with later business success. And to some extent, that’s sort of natural. It’s probably true that — that when you see it in athletics, you see it in music and that sort of thing.

So whatever you can figure out that other people will pay you to do that they don’t want to do themselves or that they’d like done for them — I advise you to look around the neighborhood and talk to your parents, talk to your friends, see what other people have done that have been 10 or 11 or 12 years old that’s worked for them and copy it. But if you can get a good paper route when you’re 12 or 13, that’s a sure way to save some money. I’ve often wondered about people that are having trouble being in debt, you know, that have a normal eight-hour job. If they added a route in the morning and just put that aside, you know, it could be the way out of being behind the game instead of being — and getting ahead of the game — and take another hour and a half out of their day, but not too many people seem to do it. Charlie used to sell — didn’t you used to sell yourself the best hour of the day or something, Charlie?

CHARLIE MUNGER: You bet.

WARREN BUFFETT: Yeah. Tell them what you did.

CHARLIE MUNGER: Well, when I was young, I read that savings bank thing, “The Richest Man in Babylon,” which taught the joys of underspending your income and investing the difference and how wonderfully it would work over time. And, lo and behold, I did exactly what this little pamphlet suggested, and it worked. And the other idea — and then so I got the idea that — I had a mental compound interest thing, too. And so I finally decided I was going to give the best hour of the day to improving my own mind, and then the world could buy the rest of the time. And that may have been a very selfish thing to do, but it worked.

WARREN BUFFETT: Yeah. Charlie was selling his time — I don’t know. What you were getting per hour as a lawyer?

CHARLIE MUNGER: Not much.

WARREN BUFFETT: Yeah. He just decided to sell himself the best hour, and not a crazy thing to do.

CHARLIE MUNGER: But I would tell that little girl if you make yourself a very reliable person and stay reliable all your life, faithfully doing whatever you engage to do, it will be very hard for you to fail at anything you want. (Applause)

25. Global competitors matter, not global trends

WARREN BUFFETT: Number 6.

AUDIENCE MEMBER: Good afternoon, everyone. My name is Dennis Batrowski (PH). My hometown is West Point, Nebraska, and I now live in Omaha with my family.

WARREN BUFFETT: As you may know, my mother came from West Point.

AUDIENCE MEMBER: Yes. Thank you, Warren and Charlie, for your incredible education, generosity in this great meeting. I’ve attended every meeting since 1994. Warren and Charlie, assuming a necessary margin of safety in the future cash flow estimates and proper adjustments in discount rates, would you discuss which trends of global economic growth that you think will be sustainable, given our holdings in railroads, steel, materials, and energy, with our modest expectations, enormous trade deficit, tight credit spreads, low risk premiums, and explosive growth in emerging economies? Thank you.

WARREN BUFFETT: Yeah. We think we’re — we think we’re in a pretty good group of businesses for the world we face. You know, we don’t know which ones will turn out to be the best. There’s a few that we think are real superwinners, and we think a significant number of them will do OK. And we don’t try to buy our businesses with thoughts much of world trends. We certainly think in terms of international — foreign competition. I mean, we do not want to buy into a business that has a very high labor content and that has a product that can be shipped in from abroad very easily. Because, sooner or later, that will probably be trouble, just like Charlie and I — really, I bought into an airline — he came along and tried to rescue me — some years ago that had very high seat mile costs and it had protected routes — US Airways — so it was able to operate with 12 cents a seat mile of cost because Southwest hadn’t gotten there yet with their 8 cent costs. But they get there. And you do not want to have something whose competitive position is going to erode over time.

But I think most of our businesses have got pretty strong competitive positions. And, really, the variables you name don’t bother us. You know, we will play the hand as well as we can, and we’re playing it with terrific people in very good businesses, and we’re dealing from strength all the time. You know, we’ve always got a loaded gun. And we think we’ve got the right values with our managers, the people. Think we’ve got a culture that’s owner-oriented. We’ve got a lot of things going for us, and they won’t produce huge returns, but they’re likely to work OK. Charlie?

CHARLIE MUNGER: Well, we learned about foreign labor competition in our shoe business. And in that, it reminds me of Will Rogers, who didn’t think man should have to learn these easy lessons in such a hard fashion. Will Rogers believed that you should learn not to pee on an electrified fence without actually trying it. (Laughter)

WARREN BUFFETT: Will told Charlie a lot of things he didn’t tell me. (Laughter)

26. It’s all relative with currencies

WARREN BUFFETT: Number 7.

AUDIENCE MEMBER: Hello, Mr. Buffett and Mr. Munger. I’m Shinydaz Guynadewa (PH) from Fort Lauderdale, Florida. First of all, I want to thank you for your efforts in making investors aware of the high transaction cost involved with several investments, and I got lot of personal benefit by reading your articles. My question today is in reference to the declining value of dollars compared to all other major currencies. In last three years, dollar declined as high as 25 to 30 percent. So I want to understand how it is going to impact individual investors and the how big is the threat? Thank you?

WARREN BUFFETT: The question is about the declining dollar but I didn’t get all the —

CHARLIE MUNGER: He asked you for — what do we think about it, what are we going to do about it.

WARREN BUFFETT: We think it — we think the dollar over time is — unless policies are changed in a major way — is likely to decline somewhat more against most major currencies. And we originally backed that opinion up with transactions that got as high as 21 or -2 billion in the ownership of foreign currencies. And then the carry on that, the difference between interest rates in the various countries, made that quite an expensive way to express that belief. So we have focused much more on buying into companies that earn lots of money in other currencies, on the thought that they will be somewhat favored over companies earning just U.S. But that’s not — as I mention in the report — that is not a huge determination of what we buy. It’s a factor, but it’s not — it’s not 50 percent of the decision or anything like that. We are following policies in this country that are likely to cause the dollar to decline in value against many major currencies. And who knows what speed, whether it happens this year or next year. We don’t have any idea on that sort of thing. But the fundamental forces are fairly strong.

We actually only own one currency now — trade — which would surprise you, actually. We’ll tell you about it next year. Charlie?

CHARLIE MUNGER: Yeah. So far, something peculiar has happened. During this exact period of maximum dollar decline in value versus other currencies, the dollar prices at Costco have showed an inflation factor of approximately zero. So what really matters, of course, is how things are working in your own country, and it’s been perfectly amazing how well we’ve gotten by so far with the decline of the dollar.

WARREN BUFFETT: Yeah. As Charlie says, you know, we reference everything in terms of our own country. If you look at oil, for example, which we’ll say has gone from roughly $30 a barrel to $60 a barrel over the last few years, you know, during that same time the euro has gone from, like, 83 cents to a $1.35. So the price of oil, if you’re a European, has gone up very little. I mean, we think oil has run wild. But in terms of anybody that’s using the euro, the price of oil has gone up about 25 percent, and we feel the price has gone up a hundred percent. So you do have this anchoring of thought to your own currency, which is understandable. I do think you’ll need to think about currency matters more than Americans traditionally have. I was struck 20, 30, 40 years ago, when I would travel elsewhere, how much more sophisticated most people in Europe and the UK, wherever, were about currency than the United States. We never really had to think about it.

Everything was dollar-based, and an American didn’t have to be smart about currency or even think too much about it in terms of their business. But that world has changed.

27. Corporate directors aren’t doing their job

WARREN BUFFETT: Number 8.

AUDIENCE MEMBER: John Norwood from Des Moines, Iowa. A quick question — a quick comment and then a question. The comment, following on Charlie’s comments on ethanol, I would ask him at least to look at the environmental benefits of ethanol as a fuel blend — octane boosters superior to other types of chemical additives, such as MTBE, which has been so damaging to groundwater. My question is for Mr. Buffett. And I’m hoping you might be able to tell us a little bit more about your interactions with the board of directors and the types of ideas and idea exchange and, perhaps, a model for how you believe a board of directors is supposed to function with management. Thank you.

WARREN BUFFETT: Yeah. I would say that most writers and most shareholders probably have a little bit of a distorted version, at least, how most corporations — large corporations — have operated over the years. Usually — for a long time I would say that directors, generally, were sort of potted plants. I mean, you sat there and the management had its agenda and didn’t really want input on major matters. And Charlie and I can certainly testify to the fact that we have had great lack of success, even when we were the largest shareholder of a company, in terms of talking about things that really count. I mean, if somebody spends their whole lifetime— 25, 30 years — rising to the position of CEO, you know, they want to be boss, and you can’t blame them, and the only thing in their way is the board of directors. So they look for people who are big names and they look for ways to keep them happy, but they don’t really want them getting into the business very much. There’s a lot more process now that’s been imposed by the recent rules.

But I would say still, in terms of the reality of the guts of business and the discussions that take place and all that, I think you might be surprised at the level overall of that throughout corporate America. As I’ve written in the report, overwhelmingly, the job of the board of directors is to have the right CEO. I mean, if you’ve got the right CEO, 90 percent of it takes care of itself. If you were the director of Cap Cities and you had Tom Murphy as the CEO, you know, case closed. It was all you needed. And if you have that CEO, I think you have an obligation on the board to make sure that there’s not overreaching by the CEO, because the CEO can have different interests. And I think the third thing that the board does — should do — is they really should bring some independent judgment in on major acquisitions. Because there is a natural tendency for people with, usually, big egos, big motors, who get to be CEOs that like to do big things and to become bigger spending other people’s money.

And normally, when big deals come along, you know, the management — by the time it gets there, they’ve made the deal anyway. They have investment bankers there who go through a little ritual. I’ve never seen one come in and make a presentation that says it’s a dumb idea. I mean, they know what the answer is supposed to be, and it just becomes kind of a little game. So I think in those three respects, a good director will first make an affirmative decision. You’ve got a very good CEO — not the best in the whole world, not everybody can do that — but a very good CEO. That that CEO is not overreaching. And when significant deals come along, that they get a chance to weigh in, and that you really get a balanced discussion about the real economics of what you’re doing. And I would say in that latter point, what I’ve seen over the years has really been pretty bad. But I can understand it because the CEO wouldn’t bring in the deal unless he wants it done.

And once he brings it in, he’s going to stack the deck and make the presentation in such a way that it’s almost impossible to exercise independent judgment. Charlie, do you have any thoughts on —

CHARLIE MUNGER: I think big, big deals, on average, in America, are contrary to the shareholders’ interest. That’s the way to bet. On the acquirer’s side, usually the shareholders are worse off.

WARREN BUFFETT: Most stock deals, they think about what they’re getting and they don’t think about what they’re giving. I mean, I have been involved time after time where people are giving a significant percentage of the business, which they wouldn’t sell at the current market price. If somebody came along with a tender offer 20 percent higher, they would say that’s inadequate. But they hand away a piece of the business because they want to own something else. And there’s nothing wrong with that, but you just have to be sure that you’re getting as much as you’re giving. I have very seldom heard a discussion — in fact, I don’t think I’ve virtually ever heard of a discussion — of weighing what you were actually giving away on a stock deal versus what you’re getting. I’ve heard a lot of discussion about dilution and when dilution will be overcome and all that sort of thing, but that is not the question. The real question is are you — if more value is being created, how is it being whacked up between the two companies?

And if not extra value is being created, are you getting more than you’re giving? When I gave away 2 percent of Berkshire Hathaway to acquire Dexter Shoe, that was one of the dumbest deals in the history of the world. And I did it all by myself. Charlie didn’t participate in that one. I wish he had. But, you know, it was dumb. I mean, here’s — it wasn’t 2 percent of what I had then at Berkshire, it’s 2 percent of the present Berkshire Hathaway company. You’d all be 2 percent richer — a little more than 2 percent richer — but you’d be a full 2 percent richer if I hadn’t done that.

CHARLIE MUNGER: Fortunately, you’ve made some better decisions.

WARREN BUFFETT: Yeah. Well, I have to, or we wouldn’t be here. (Laughs)

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: But, you know, the point is that doesn’t show up under conventional accounting at all. You know, it gets brushed under the rug. At Gillette, literally, we had ten deals in a row that never met — came close to meeting — the case that was presented at the time they were presented to the board. Was that ever mentioned to shareholders? Did it show up in our financial report? Never. It never will. And that goes on all the time in corporate America. And, unfortunately, shareholders, to the extent they get unhappy with managements, are complaining about whether they’ve got diversity on the board or something like that. But when you’re blowing away the company, I mean, that, to me, is a whole lot more important. Charlie, you want to —

CHARLIE MUNGER: Yeah. The self-serving delusional nature of even some very good minds, in terms of IQ points, is amazing. I had a friend who sold a business to a government-controlled business in a socialized Scandinavian country. And my friend had a very nice business, and the people on the other side, after they had bought it for stock in their government corporations, said, “This was such a marvelous deal. We got your whole business, and we didn’t have to give anything.”

WARREN BUFFETT: Well, we owned stock in the Third National Bank one time down in Nashville. And they got the ability — and they’re wonderful people — really wonderful people — but they got the ability to acquire other banks where they formerly had been limited in that ability. And they went out to some very small bank, and the guy at the very small bank said, “I want stock.” And he says, “My stock is worth private market value, and your stock is worth market price.” Well, market price happened to be half of — but he says, “All I’m getting is whatever the market is, so I want you to value your stock at market and value mine at this huge premium.” And he said, “And there’s one other condition.” He said, “Since I’m going to be putting my whole net worth in your stock,” he says, “I want you to promise you’ll never do a deal this dumb in the future.” (Laughter) Do you remember that one, Charlie?

CHARLIE MUNGER: Yeah, I remember.

WARREN BUFFETT: Yeah. And that fellow was just being a little — was just getting a little more out in the open than is typically the case. I’ve been on some terrific boards. There was a local one here called Data Documents that really functioned with everybody on the board thinking about the business, understanding the business, making decisions as owners. Every one of them had a significant percentage of their net worth in the business, and probably the best board I’ve ever been on. I mean, every decision there was made for business reasons. The worst decisions — at least they have the potential for being the worst — but it’s standard procedure now when an acquisition comes up to trot in the, you know, investment bankers and the lawyers, and the momentum is just totally to get the deal done. And, like I say, there will be a lot of slides presented. And I can — I don’t need to look at the slides. I know what the answer is going to be. At the end they’re going to say it’s a great deal, you know, and there will be nobody arguing the other side.

They’re just — you know, it is not like something where you would make a decision and you’d have somebody give pro and con. It just doesn’t work that way. I don’t know how to improve that a lot. I think we’ve got a sensational group at Berkshire. You have a group with almost everybody on the board having a significant percentage of their net worth — Bill’s is so big we can’t get him to a significant percentage, but that’s — he’s got hundreds of millions of dollars in it. We’ve got a board that is in exactly the same position as the shareholders. They don’t have directors’ and officers’ insurance. They’ve got the downside as well as the upside. They bought their stock in the open market, so it hasn’t been given to them. It is a real owners’ board, and I like it that way. I think it’s a terrific group, and I’m glad I can get them to work cheap. (Applause)

28. Why Berkshire avoids deals with partners

WARREN BUFFETT: Number 9, please.

AUDIENCE MEMBER: My name is Eid (PH) and I’m from Kuwait. In response to earlier comment about borrowing from Kuwait, I can tell you that after 40 years we now lend in dollars, and you are always welcome in Kuwait. (Laughter) My question is, if you would pick your partners to invest with you in big deals, what would be your criteria for choosing partners?

WARREN BUFFETT: Yeah. We — is that — are you complete on that?

AUDIENCE MEMBER: I’m complete.

WARREN BUFFETT: Yeah. We normally don’t want to do deals with partners. If we like a deal, we want to own it all. And we usually have the money to do it all, so almost — in very few cases would there be a need for a money partner. And then there’s a question for a knowledge partner. And we really wouldn’t want to be going into something, in most cases, where we were relying on somebody else to be the brains of the deal. We’ve made exceptions on that, but very seldom. So we — by our nature, we would like to have a hundred percent of any deal for the benefit of our shareholders. If we’re going to spend our time on it, we just as soon get a hundred percent of the rewards. We don’t mind taking a hundred percent of the downside. And we ought to understand it well enough so we don’t need a partner. Charlie?

CHARLIE MUNGER: I’ve got nothing to add to that one, either.

WARREN BUFFETT: Number 10. Wait, I’m just trying to think. Have we done any big partnership deals?

CHARLIE MUNGER: Well, you made that partnership deal with Leucadia, but they brought you the deal.

WARREN BUFFETT: That is true. We made a very good partnership deal with Leucadia. They did way more than their share, but they brought us the deal. And so they asked us to participate in their deal. Now, in effect, we own less than a hundred percent of some of our businesses, and we’re in partnership with the management. But that’s perfect. I mean, we’ve had some great experiences with that, and we’ll continue to have great experiences. But, you know, they came — they’re in on the same terms we are, and they’re owners. All of our managers think like owners. But in certain cases, they are real owners directly in those businesses as well. But just some outside party as a partner, we really haven’t done, although I would do another deal with Leucadia if they came to me and I liked the deal. I mean, that was a very good experience.

29. No opinion on commodity prices

WARREN BUFFETT: Number 10.

AUDIENCE MEMBER: Good afternoon, ladies and gentlemen. My name is Ari Jahja. I’m a junior from Baruch College, New York City. And on behalf of the Portfolio Management Club, I would like to thank you, Mr. Buffett, for inviting us to this wonderful event. And my question is that, first of all, speaking about Berkshire’s portfolio, there’s an increasing exposure of your investments toward commodities, such as to oil through PetroChina, to steel through POSCO, and to coal and agriculture through the rail stocks that you recently purchased. So my question is that what is your long-term view on commodities, and how does it impact your view on the geopolitical state of the world in the future? Thank you.

WARREN BUFFETT: Yeah. I — and, to my knowledge, Charlie — we’ll hear from him — but we have no opinion on commodities. We — if we were in an oil stock, it’s because we think it offers a lot of value at this price, but it does not mean that we think the price of oil is going up. If we thought oil was going up, we could buy oil futures, which we actually did once. But very seldom — very, very seldom would we have any opinion on what any given commodity would do. Owning POSCO, we just think it’s one of the — well, it is probably the best steel company in the world and — remarkable record. When we bought that stock, we were buying it at four or five times earnings, with a debt-free balance sheet, one of the lowest-cost producers around. I mean, it’s a fabulous company. And in addition, it was a play on the Korean won, and we made 20 percent on the won by being invested through a won-denominated security. So we may occasionally be in those kind of businesses.

We, basically, like best the businesses that require very little capital, because they’re the only ones that have a chance of earning really high returns on capital. You can’t have a business that has huge capital expenditures year after year, and end up with a high- return business. It just doesn’t work in this world. But you can find some businesses that really require relatively minimal capital investment. Here’s the case. This is a small one. But See’s Candy is not going to require a huge capital investment. It requires some capital investment, but it’s a wonderful business. It’s a small business, but it’s a wonderful business. And it’s far better business, relative to size — adjusted for size — it’s a far better business than any steel business is going to be or any oil business is going to be. It’s just that it’s not very big. We’d love to have it bigger. And we’ll do our share in every way we can, as you may have noticed up here.

But we do not have any — we do not have a bias toward — at all — toward businesses involved in commodities. And if we had any bias, it would be against. Charlie?

CHARLIE MUNGER: Yeah. We’re going to be investors in businesses, not commodities, by and large. And that has to work better over time.

30. Dual class shares at the New York Times

WARREN BUFFETT: Number 11.

AUDIENCE MEMBER: Good afternoon. My name is Andy Peake from Weston, Connecticut. Recently the newspapers have been in the news: the [Rupert] Murdoch bid for Dow Jones, Morgan Stanley’s Hassan Elmasry’s push to eliminate the New York Times dual-class share. Given you are both experts in the dual-class share and newspapers, what advice would you give to the long-suffering New York Times shareholders, and what advice do you have for Arthur Sulzberger, the besieged CEO of the New York Times and head of the family that owns the newspaper?

WARREN BUFFETT: Well, I think the “long suffering,” as you put it, shareholder of the New York Times has probably made a mistake — I don’t think I’d necessarily blame the Sulzbergers for the woes of the newspaper business. I mean, we have said for a good many years that we thought — in effect, we thought newspapers were overpriced because they reflected a valuation based on looking in the rearview mirror rather than through the window. And we — it’s interesting. We have this dual-class structure at Berkshire. But because I converted a whole bunch of shares to B, I own about the same percentage of the B as the A, because I converted about six or seven times as much as I needed for present gifts. I only go down to my safe deposit box when I have to, and I didn’t want to go down every year to convert stocks, so I just converted a bunch of stock early on. And now I own about 30 percent of each. So it has no effect, in terms of voting power at Berkshire. But the woes of the newspaper business are not connected with the difference in voting structure at the Times or other places.

The newspaper business has just gotten a lot tougher. And if you think about it — I mean, let’s assume that Mr. [Johannes] Gutenberg, back there in the 15th century, instead of wasting his time developing movable type and all of those kinds of things, decided to become a day trader or hedge fund operator and really made something of himself, so that we never had print. But along came the internet, along came cable TV, all kinds of other things. And then now this year, you know, Johannes Gutenberg the 28th or something, came along and said, “I’ve got this wonderful idea. We’re going to chop trees down. We’re going to haul them great distances. “And then we’re going to put them through expensive newsprint machines. And then we’re going to send them down to someplace where they’ve got expensive presses. “And we’ll run these things all night. And then we’ll send delivery trucks out through the snow to get these little pieces of paper out to people where they can read about what happened yesterday.”

Well, I don’t think we would be backing him, you know. Now, it happened, you know. The other one came along first, and people’s habits don’t change immediately, and, you know, the world doesn’t turn over. But, in effect, you know, the position of newspapers today still reflects the fact that they have inertia and momentum on their side from the past. And I don’t care how smart you are. You know, there was a fellow that came into the LA Times a few years back. He was going to take the circulation up to a million- five, as I remember, Charlie. And the circulation is now 800-and-some thousand of the LA Times, and it’s gone down every week. And I don’t know that — you know, I don’t know that Joseph Pulitzer or William Randolph Hearst or E.W. Scripps or anybody who were geniuses in their day, maybe, at building circulation, could do much about that. The truth is that the world has changed in a significant way. We used to sell 300,000 World Books a year. It was a good value.

You know, and we sell 22,000 sets or something like that now. And it isn’t because the World Book isn’t worth what it sells for. It’s just not worth what it sells to for most people who can go on the internet and get an awful lot of that information free. So I don’t think I would blame the dual-class structure on anybody’s investment losses in the New York Times. The companies that have not had dual-class structures — I mean, we own the Buffalo News. And the Buffalo News earnings have been — they’re certainly down over 40 percent from the peak. We have terrific management. We’ve got a paper that has among the highest penetration in circulation of any large metropolitan paper in the country. But we are — our earnings are going down, and it’s a fact of life. Charlie?

CHARLIE MUNGER: Yeah. He was talking about that dual-class structure as being intrinsically wrong, but I would argue that the Sulzbergers set it up that way when they went public, and so that was in the basic contract. And once a contract has been made, the idea that you can just stamp your foot and take away the contract strikes me as a — kind of an immature idea.

WARREN BUFFETT: I would add, too, that the Sulzbergers from the start — anybody that bought the New York Times knew that they would not try to maximize earnings in a given quarter or try to minimize the downturn by slashing costs or something of the sort. They didn’t build the New York Times by doing that. It did not have a reputation which allows it, perhaps, to have a decent future on the internet. It did not get to where it is by a policy of, you know, Management 101 as taught as some business school. And, yet, following that differing course, you know, I don’t know how many papers in New York disappeared. But whether it’s The Herald Tribune or The Sun or The World-Telegram or you name it, the world — they had a different management approach, and they all fell by the wayside, and the Times is still around. So I — I’m not sure 10 years from now or 15 years from now that people will regard the Times’ playing of their hand as being, necessarily, an inferior one. They may have a better position going into the internet than almost any newspaper around.

Certainly a lot better than, you know, the Philadelphia Inquirer or the LA Times has. You know, the LA Times will have more trouble monetizing their reputation on the internet than the New York Times will, if there’s a national game to be played in that. So we’ll see how it plays out.

31. Annual meeting is running out of space

WARREN BUFFETT: Number 12.

AUDIENCE MEMBER: My name is Betty Stuart Rodgers Jeffreys, and I live in Barrington Hills, Illinois, 35 miles northwest of Chicago. This is the first time I’ve ever been to your annual meeting, and I want to thank you both for giving us so much time to answer our questions and give us such words of wisdom. I would also like to thank you for giving us a wonderful weekend of lunches, brunches, cocktail parties, time at Gorat’s and Borsheims. The problem is that when I told my two adult daughters that I was going to have such a wonderful weekend, they both made me promise to bring them next year. And if 25,000 people bring two people next year, where are we going to meet?

WARREN BUFFETT: Well, I would — if you get the answer to that, I’m really waiting to hear it. Because we — it’s about 27,000, and we are just about maxed out here. We’re just about maxed out in terms of hotel rooms. I think we’re going to have four new hotels in Omaha —

AUDIENCE MEMBER: Oh, good.

WARREN BUFFETT: — before next year. But, you know, that’s a couple thousand people. And, you know, based on the growth, at some point we sort of hit the wall, and I haven’t figured out how to handle that. If anybody has any suggestions, I’ll appreciate hearing about them. But I’m delighted you’re having a good time here. I hope you’ve all had a good time here.

AUDIENCE MEMBER: Thank you.

WARREN BUFFETT: We’re now going to take a ten-minute recess, and then we’ll reconvene. Thank you.

32. Formal business meeting begins

WARREN BUFFETT: OK. If you’ll please take your seats? We want to finish by 4, so we’d like to move quickly through the rest of the business, and we’ll get on to the PetroChina question. And let’s see. Here we are. The meeting will now come to order. I’m Warren Buffett, chairman of the board of directors of the company. I welcome you to this 2007 annual meeting of shareholders. I will first introduce the Berkshire directors — I’ve already done that. So, also today with us are partners in the firm of Deloitte & Touche, our auditors. They are available to respond to appropriate questions you might have concerning the firm’s audit of the accounts of Berkshire. Mr. Forrest Krutter is secretary of Berkshire. He will make a written record of the proceedings. Miss Becki Amick has been appointed inspector of elections at this meeting. She will certify to the count of votes cast in the election for directors. The named proxy holders for this meeting are Walter Scott and Marc Hamburg. Does the secretary have a report of the number of Berkshire shares outstanding, entitled to vote, and represented at this meeting? Forrest?

FORREST KRUTTER: Yes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 6, 2007, being the record date of this meeting, there were 1,113,240 shares of Class A Berkshire stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 12,888,424 shares of Class B Berkshire Hathaway common stock outstanding, with each share entitled to one twohundredth of one vote on motions considered at the meeting. Of that number, 955,276 Class A shares, and enough — 11,301,274 Class B shares are represented at this meeting by proxies returned through Thursday, May 3rd.

WARREN BUFFETT: Thank you. That number represents a quorum, and we will therefore directly proceed with the meeting. The first order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott, who will place a motion before the meeting.

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

WARREN BUFFETT: Do I hear a second? I guess I heard a second. The motion has been moved and seconded. Are there any comments or questions? We will vote on this question by voice vote. All those in favor say “aye.”

VOICES: Aye.

WARREN BUFFETT: Opposed? The motion is carried.

33. Berkshire directors elected

WARREN BUFFETT: The first item of business is to elect directors. If a shareholder is present who wishes to withdraw a 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 present has not turned in a 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, and we’ll furnish a ballot to you. Would those persons desiring ballots please identify themselves so that we may distribute them. I now recognize Mr. Walter Scott to place a motion before the meeting with respect to election of directors.

WARREN BUFFETT: I move that Warren Buffett, Charles Munger, Howard Buffett, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Don Keough, Tom Murphy, Ron Olson, and Walter Scott be elected as directors.

WARREN BUFFETT: Is there a second?

VOICE: Second.

WARREN BUFFETT: It’s been moved and seconded that Warren Buffett, Charles Munger, Howard Buffett, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson, and Walter Scott be elected as directors. Are there any other nominations? Is there any discussion? The nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the election of directors and allow the ballots to be delivered to the inspector of elections. Would the proxy holders please also submit to the inspector of elections a ballot on the election of directors voting the proxies in accordance with the instructions they have received. Miss Amick, when you are ready, you may give your report.

REBECCA AMICK: My report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast not less than 1,008,564 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 any cast in person at is this meeting, will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Miss Amick. Warren Buffett, Charles Munger, Howard Buffett, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson, and Walter Scott have been elected as directors.

34. Shareholder proposal to divest PetroChina shares

WARREN BUFFETT: Now, the next item of business we’ll spend more time on, and that is a proposal put by — forth by Berkshire shareholder Judith Porter, the owner of ten Class B shares. Miss Porter’s motion, as set forth in the proxy statement, provides that Berkshire Hathaway not invest in the securities of any foreign corporation, or subsidiary thereof, that engages in activities that would be prohibited for U.S. corporations by executive order of the President of the United States. The directors have recommended that the shareholders vote against the proposal. The microphones at zone 1 and 7 are available for those wishing to speak for or against Miss Porter’s motion. These are the only microphone zones in operation; so I ask that you go to either 1 or 7 if you’d like to talk on this. I ask that you confine your remarks solely to Miss Porter’s motion. Now, we have a number of shareholders who want to the talk about this, and we will let shareholders speak.

If there’s sufficient time at the end of that — and we’re willing to — certainly willing to — have them speak for half an hour, and Charlie and I will give them, maybe, a couple minutes’ response after that. But you’ve got a half an hour. Different shareholders can speak. I hope you tailor the length of your remarks, the early ones, so that it gives other people a chance. And if we have time after the shareholders have spoken and there are other people that are in attendance as visitors that wish to speak, we’ll have them also. But if the shareholders use up the full time until almost 4 o’clock, then we’ll have to finish at that time. So, Miss Porter, if you’re available — if we can turn the light on there at station 1 — to speak, you have the floor.

JUDITH PORTER: Thank you. Mr. Buffett, my name is Judith Porter, and I’m the shareholder who introduced the proxy resolution involving Berkshire Hathaway’s divestment of PetroChina. PetroChina is implicated in the genocide in Darfur, Sudan. I want to thank you for allowing us to speak to this resolution. In many countries it would be impossible for us to do so, but we are indeed fortunate to live in a country where we can express our opinion without fear or without recrimination. Before my husband formally presents the resolution, I want to explain to you why I have introduced it. My family is no stranger to genocide. My grandparents were murdered in 1941 in the Nazi genocide, as were other members of my family. I will never forget the despair my father expressed when my aunt, who was released from Bergen-Belsen concentration camp, sent him a letter telling him what happened to his family. It deeply affected him for the rest of his life. And I was raised to believe that genocide should never, ever again happen, never again. The world was silent when my grandparents were murdered. But genocide has continued. In the genocide in Cambodia, the world was silent.

In the genocide in Bosnia, the world was silent until late in the slaughter. The world was again silent in the horrible genocide in Rwanda. How many times must we say, “Never again?” Now, there’s the first genocide of the 21st century in Darfur. Two and a half million civilians have been driven from their homes. More than 400,000 have been killed, and 1,600 villages have been destroyed. Berkshire Hathaway can play a role in ending this slaughter by divesting in PetroChina, as we’ll shortly describe. As an exemplar of both business ethics and personal integrity, your support of divestment will send a signal to China and to the Sudan that there are costs to continuing this destruction, and it will lead other corporations to follow your ethical actions. Genocide is never a good investment. I can think of no greater tribute to my grandparents than introducing this resolution. As Elie Wiesel said in his Nobel Peace Prize speech, “We must take sides. Neutrality helps the oppressor, never the victim. Silence encourages the tormenter, never the tormented. Sometimes, sometimes we must interfere.” My husband will now present the proxy resolution.

He will be followed by Jason Miller, who will speak about the relationship between CNPC and PetroChina. Abdul Makjid (PH), who is from Sudan, will speak about the genocide taking place. And Bob Edgar, Secretary General of the National Council of Churches, will conclude our discussion of this resolution. Thank you.

GERALD PORTER: Thank you. Mr. Buffett. Since you’ve read the resolution, I will not repeat the resolution. I will speak about the resolution, though. On November 3rd, 1997, President Bill Clinton issued Executive Order 13067, which imposed a trade embargo prohibiting most American businesses from operating in the Sudan. This executive order was expanded on April 27th, 2006, by President George W. Bush. While it is true that American companies cannot do business in the Sudan, Americans can invest in Asian and European companies that do business in the Sudan. Such investments do not violate the letter of this law, but they certainly do violate the spirit of the law and are counter to the stated policy of the United States. We believe there is general agreement that the Chinese National Petroleum Company, CNPC, plays a major role in funding the genocide, in providing weapons to the Sudanese, in cooperating with the Sudanese military, in forcibly displacing local populations, and in myriad other ways, facilitating the killing of hundreds of thousands of Darfuris.

CNPC is the largest foreign investor in Sudan’s oil industry, and fully 70 percent of the revenues Khartoum generates from CNPC’s operations go to its military, which, in turn, conducts the genocide in Darfur. We are here today because Berkshire Hathaway is the major non-Chinese investor in CNPC’s subsidiary, PetroChina. You, Mr. Buffett, have stated that you believe that we are wrong, both in our analysis of PetroChina’s connection to the genocide and the belief that divesting the company’s PetroChina holdings would in any way have a beneficial effect on Sudanese behavior. We disagree. You are correct in stating that PetroChina does not do business in the Sudan. However, as you agree, its parent company, CNPC, is a major investor in the Sudan, and funds from that relationship help provide the instrumentalities of genocide. Managements claim that the relationship between PetroChina and CNPC is similar to that between Fannie Mae and the U.S. government. That argument is fallacious. The Harvard University Advisory Committee on Social Responsibility examined the management of the two companies. The results of that review were striking.

There was almost total management overlap between the two companies. Andrew Leonard, writing for Salon.com commented, “To declare that a subsidiary has no ability to control the policies of the parent when the two entities are run by exactly the same people is an exercise in specious obfuscation.” In short, PetroChina is an artifact created for the sole purpose of allowing some shareholders to distance themselves from the action of its parents, CNPC. In China, the companies share the same brand name and the same logo. If you look at a coin, the images on the two sides are different, but the coin is a unity. You cannot spend one side of a dime or own one side of a quarter. It’s the same with PetroChina and with CNPC. They look different, but they are simply two faces of the same corporation. Two U.S. presidents have stated clearly that it’s against the national interests of the United States for U.S. companies to do business in Sudan. It is the position of the U.S. government that a targeted economic boycott of the Sudan will help end the genocide in Darfur. For a U.S.

company to invest in a subsidiary of a foreign company, such as PetroChina, that engages in business in the Sudan is a circumvention of Executive Order 13067 and weakens the U.S. sanctions. Economic sanctions against the Sudan have worked in the past. For example, Talisman Oil’s sale of its assets in the Sudan helped bring about the end of the civil war in the Sudan. Sudan’s main protector in the United Nations is the government of China. China will be hosting the 2008 Olympics and is very sensitive about negative publicity that could be aimed at that event. In response to the recent criticism of the Chinese support of Sudan by Mia Farrow and Steven Spielberg, a senior Chinese official traveled to Sudan to push the Sudanese government to accept a United Nations peacekeeping force. You and the company are viewed as exemplars of ethical behavior. If Berkshire were to take the lead and divest, others would follow. If Mia Farrow can cause change to occur, then so, too, can Warren Buffett. No one divestment in South Africa brought about the end of apartheid. But if we all act together, we have tremendous power to bring pressure on the Sudanese government to stop the killing of innocent people.

During the last two decades, beginning with the tearing down of the Berlin Wall in October 1989, we have seen events that no person could ever have anticipated: The breakup of the Soviet Union, the democratization of Eastern Europe, and an unbelievable transition in South Africa. What we have learned is that all things are possible. There are important issues in our society that desperately need our attention. Remember the words of Hillel: “If I am not for myself, who will be for me? If I am for myself alone, what am I? If not now, when?” Thank you. And I’m pleased to introduce Jason Miller. (Applause.)

JASON MILLER: I’m Jason Miller, the National Policy Director for the Sudan Divestment Task Force and also an owner of three shares of Berkshire Class B stock. I’d like to echo the Porters’ comments that CNPC is by far and away the most irresponsible and abusive oil operator in Sudan. They’ve participated with the government in forced displacements and other human rights violations, and 70 percent of the revenue that they provide to Sudan gets funneled into the military that prosecutes the genocide at Darfur. But what does that have to do with PetroChina? Currently, the chairman of PetroChina’s board is the immediate past president of CNPC. The president of CNPC is the president of PetroChina and vice chair of the PetroChina board. The CFO of CNPC is the CFO of PetroChina. The chairman of the PetroChina supervisory board is the chief of discipline and inspection at CNPC. Eight of the nine PetroChina directors have a current or immediate past connection to CNPC. Four of the five PetroChina supervisors have a current or immediate past connection to CNPC. All PetroChina senior executives are currently or formerly connected to CNPC.

We’ve also documented a slew of other management irregularities. Furthermore, asset transfers between the two are fluid and often cross-subsidized. After PetroChina’s IPO, it took on $15 billion in debt from CNPC, which freed up cash flows for CNPC to spend on Sudan. Ten percent of IPO revenue from PetroChina went to CNPC’s operations in Sudan. Fifty percent of CNPC’s profits come from PetroChina dividends. PetroChina, in 2005, provided $3.15 billion in cash for CNPC’s finance arm to provide to other CNPC subsidiaries like those in Sudan. And 64 percent of CNPC’s assets are represented by PetroChina stock. If this isn’t management overlap and two manifestations of the same entity, I would challenge people to find one that is more overlapping. As a result, and because of the huge magnitude of the atrocities in Darfur, even a whiff of this type of overlap between PetroChina and CNPC, and the lack of strong corporate governing structures there, would suggest that engagement with PetroChina by Berkshire Hathaway is a minimum requirement in order to investigate these connections and their potential contributions to the Darfur genocide.

I’d very quickly also like to mention the important question that Berkshire Hathaway was asked, which is what’s next? If we engage PetroChina, ask them about these questions, what happens? The answer by unanimous consent with all foreign policy experts we interact with and those international organizations working in Sudan is that China would change its behavior in Sudan. Sudan is too important to China as an energy policy for China for it to abdicate those assets. And, as a result, we’ve already seen changes in China’s behavior. And taking leadership from the queues of Berkshire Hathaway would be one more in the line of Mia Farrows and Steven Spielbergs that could help catalyze the important sea change that’s necessary to bring an end to the genocide. (Applause)

JASON MILLER: I’d now like to introduce a Darfurian who’s from Des Moines and would like to speak —

WARREN BUFFETT: I would — I would — Is he a shareholder or not? I want to be sure all the shareholders have a —

GERALD PORTER: He has the proxy of Etta and James Friend, who are the shareholders of three shares —

WARREN BUFFETT: I just want to make sure. Are there other shareholders at 7 that want to talk too or not? I want to make sure that all the time isn’t taken.

AUDIENCE MEMBER: We will not take all the time.

WARREN BUFFETT: OK. That’s fine. I just want to make sure that the shareholders aren’t shut up.

AUDIENCE MEMBER: Good afternoon, and thank you for inviting me to speak about Darfur. My name is Abdamide Jusef (PH), and I am speaking today as a proxy of Etta, Freta, and James Friend, who are the holder of four shares of Class B stocks. I am from western Darfur, and my parents still live in Darfur. I fled from Sudan to Egypt in September 2002 after being expelled from Sudan University in Khartoum for speaking out in (inaudible) of Darfur. We are detained for a few week and we suffered from abuse physically and psychologically every day until they released and told us we are not allowed to go to any university and we had to stay away from any activity for that student association. I get refugee status in the United States, and I move to Des Moines, Iowa, on March 2005. The Janjaweed attack my family — my family’s home — in Darfur in January 8, 2007. Four Arab men from the Janjaweed attack our home in the early morning. At that time, there was a guest in my family home.

The Janjaweed left him without attention; so he run away to get help from our neighbors. The Janjaweed started by taking all the money and jewelry from my family. When the Janjaweed found out that someone had run to get help, they left my family, but they promised them they were going to come back. Even that my family escaped injury, my neighbor (inaudible) and his entire family of five were murdered by the Janjaweed. The Janjaweed also took their horses, and these activities were ongoing in my town for a while. And everybody in my community or someone was murdered, have someone was murdered and raided by the Janjaweed. My mom told me everybody wake up every day, and the first thing they do is check their neighbor and their relative to see if they are alive or not, and so do I. The Janjaweed are stealing my town. Now they work as gangs who kill and rape. Every family is affected, and nobody can stop them. Even though I live in safety and peace there — here in United States, I still worry about my family back home in Darfur. Please try to do anything to help my family and all people in Darfur.

I need your help. If you do the simple thing like tell your friend about the genocide in Darfur or join an organization, or talk or send letters to your member of Congress, or don’t invest in any companies that’s helped genocide in Darfur. Please, Mr. Buffett and Berkshire Hathaway shareholders, get involved to bring the hope and peace to the children and women and all of us in Darfur. Whatever you do to stop the genocide in Darfur is saving life of human being. Thank you for listening, and now I would like to introduce Bob Edgar, the General Secretary of the National Council of the Church. Thank you.

BOB EDGAR: As we close, I’m Bob Edgar, General Secretary of the National Council of Churches and a former member of the United States Congress. I’m here in support of the resolution and a proxy for Doris Gluck, who holds ten shares in the company Class B stock. In February of 1968, I had the privilege of meeting Dr. Martin Luther King five weeks before he was assassinated. Later, as a member of Congress, I served on the Select Committee on Assassinations, looking into both the death of Dr. King and John F. Kennedy. I come here today in honor of the kind of dream that Dr. King had. He said this: “Our lives begin and end the day we have become silent about the things that matter. We will not be silent.” I am here today representing millions of faithful Americans — Christians, Jews, Muslims, and others — who have stood up and said no to this genocide. Just 11 or 12 or 13 years ago, 800,000 people were killed in Rwanda in 90 days, and we were silent. We will be silent no more. Mr.

Buffett, this morning you said a great thing, and I quote, “I find it reprehensible when a government preys on the weaknesses of its citizens rather than protecting them.” I wholeheartedly agree. You were talking about gambling. We urge you to think the same way about genocide. On the document in opposition to this resolution, you said this: “Proponents of the Chinese government’s divesting should ask the most important question in economics, ‘And then what?’” We are prepared to answer that question, “And then what? And then what?” Then the world will finally focus on the issue of genocide in Darfur. Then the international investors all over the world in many companies would follow the ethical actions of Berkshire Hathaway’s moral leadership, moral leadership, and call for all governments of the world to stop the genocide. “And then what?” Children would be saved, women would not be raped, fathers would not be killed, and we would find our way in this human family to care for one another. Jesus said, “We should love our neighbors as ourselves.”

I think he meant, “We should probably try every means available to stop those neighbors from being killed.” This is just one way we can follow those words of Jesus. And, finally, the former pope, John Paul, said, “I dream of a world where none will be so poor they have nothing to give and none will be so rich they have nothing to receive.” I urge support of this resolution. (Applause.)

WARREN BUFFETT: Are there other shareholders that would like to talk before we respond?

AUDIENCE MEMBER: Mr. Buffett, my name is Aaron Frank. Thank you for hearing us on this matter. I’m from Atlanta, Georgia. And along with being a — along with being a Berkshire shareholder, I also independently own shares of PetroChina. And this issue is something I’ve struggled with for years, in terms of whether to divest or not. What I’ve done personally is given the dividends that I receive from PetroChina to organizations that help in Darfur, but this is mostly symbolic. What is clear to me is if I had the opportunity to engage the management of PetroChina in a meaningful way as I do with you here today, that I would be compelled to do so ethically. As owners of Berkshire Hathaway, we have a unique opportunity to engage the management of PetroChina in a way that will be heard not only by the management of PetroChina but by CNPC, China, and the international community due to your standing. That’s a unique opportunity, and this is an incredibly — this is an incredibly important matter. I think we have an ethical obligation to do so. Thank you for listening.

WARREN BUFFETT: OK. Thank you. (Applause.)

WARREN BUFFETT: Is there anyone —

AUDIENCE MEMBER: Yes.

WARREN BUFFETT: Yeah.

AUDIENCE MEMBER: My name is Bill Rosenfeld from Lexington, Massachusetts. In your web posting you claim that a subsidiary can’t control the actions of its parent, so actions against PetroChina will have no impact on CNPC. Suppose that millions of Americans boycotted GEICO Insurance or other Berkshire companies because of a policy at Berkshire Hathaway. Wouldn’t that make you reconsider that policy even though your subsidiaries are voiceless in Berkshire Hathaway management? How does targeting PetroChina to influence CNPC differ from this situation? (Applause.)

WARREN BUFFETT: Well, I actually would say it’s quite different. If a shareholder of Wesco — you might — Marc, you might put up the chart that shows the flow of ownership both with China and with —

MARK HAMBURG: It’s up.

WARREN BUFFETT: OK. Wesco does not control Berkshire Hathaway. We can have all the — we can have lots of overlap in management and everything. Berkshire Hathaway controls Wesco. If a shareholder of Wesco were to complain to the management of Wesco, which is analogous to PetroChina, about the fact that, let’s say, that Berkshire bought ISCAR or any other activity or anything I was doing personally, they would have no ability to control me. If somebody controlled — complained to Berkshire about something that was going on at Wesco, we could certainly introduce action. So the — it flows downward. The overlap means nothing. I mean, obviously the Chinese government controls PetroChina. They own 88 percent of the stock. We control MiTek. We own 90 percent of the stock. We control Wesco. We own 80 percent of the stock. We can tell MiTek what to do. We can tell Wesco what to do. But MiTek and Wesco cannot tell Berkshire what to do. I think there’s a fundamental misunderstanding on that. The Chinese government controls 20 — 32 of the largest 33 publicly-owned companies in China.

And the Chinese government, in effect, is in charge of all of those companies. The Chinese government does business with the Sudan. PetroChina does not. PetroChina in no way tells the Chinese government what to do. And we’ve seen evidence of that in a lot of ways. So it seems to me it’s backwards. If it was PetroChina following a policy that the Chinese government disagreed with, believe me, there would be a change in a hurry. We have no disagreement at all about what’s going on in Darfur. There’s two questions. One is PetroChina influence the Chinese government. And, secondly, if we don’t agree with what the Chinese government is doing, should we sell our stock in PetroChina? The people here who are come, who own stock in Berkshire Hathaway, have obviously made the choice, even though they disagree with what our policy is, to continue as shareholders. And I agree with them — with that — a hundred percent. And we, in turn, elect to continue to hold our shares in PetroChina because we have no disagreement with what PetroChina is doing. If there’s a disagreement, it may be with what the Chinese government is doing.

Now, in terms of what the Chinese government is doing, you know, we’ve heard talk about divesture by China. If the Chinese left the Sudan tomorrow, 400,000 barrels of oil would be being produced, a good bit with the money that China has invested in the Sudan. You can’t take the assets. You can’t the refinery. You can’t take pipelines. You can’t take the oil out of it. They can sell their interest. They can sell it to other people who are doing business in the Sudan. They can sell it to the Sudanese government. But, believe me, they would probably sell it very cheap. The Sudanese government would get a bargain, or the Sudanese government might very well renegotiate terms in their favor, if they allowed a third party to buy. Believe me, you know, they would be in a position if they — assuming they could affect the transfer — and I think there’s a lack of understanding of what really would happen if China said tomorrow, “We’re going to get — we’re going to take our interest away from our activities in Sudan.”

They would have to sell them or they’d have to give them up one way or the other. And, like I say, I think the Sudanese government would probably end up better off financially if they had a half-decent adviser in the question than they are presently. I might mention one other thing which is kind of interesting in this. We buy about — currently about $250 billion worth more of goods from China than we sell to them, and we give them little pieces of paper in exchange. And we say to them, “We want your goods, and you should work hard and send us your goods, and we’ll send you these little piece of paper called American dollars.” Two years ago, China wanted to use some of those American dollar — we’d use their goods — to want to buy a company called Unocal. Unocal was a (inaudible) U.S. company. The majority of their production of oil and gas came from outside the United States — a substantial majority — came from places like Thailand, Indonesia. And the Chinese wanted to buy that company, and by a vote of 395 to 18, the U.S.

House of Representatives sent their message to President Bush that it would be against the national interest to let this company be sold, which, as I say, produced very little oil and gas in the United States. Got most of it from the rest of the world. So, in effect, we snubbed the Chinese in a big way on something important to them: energy. And I might mention that we import perhaps four times as much energy from all the countries around the world as the Chinese do, even though they have four times the population. So we have, in a sense, told the Chinese a couple of years ago “Don’t even think about buying the small U.S. company with a lot of production — fair amount of production — abroad to satisfy your energy needs.” And I think it’s understandable to some extent that the Chinese are looking for energy around the world just as we have for the last century. They are buying significant amounts of oil from Sudan.

They put money in there, and the — they are going to buy four or — they are going to buy that 400,000 — they’re not taking the whole 400,000 barrels a day from the Sudan, but they’re taking significant amounts. They’re going to buy that oil in the world market. That oil is going to get produced. Revenue is going to flow to the Sudan. The question is how much the Sudanese keep themselves and how much gets disbursed to the Chinese because of the investment they’ve made. So I see no effect whatsoever in Berkshire Hathaway trying to tell the Chinese government how to conduct their business. I agree a hundred percent with the fact that what is happening in the Sudan should not be happening, and I — there are other parts of the world where say some — that same situation may exist, although not to the same degree. But I don’t think you can — I don’t think it’s proper for us to divest our shares in PetroChina. They would be sold to somebody else. I think the proponents of the motion probably would like the idea that the price of the stock would go down.

But we don’t sell stocks, you know, basically to try and drive them down in price. We might sell PetroChina if it went up enough, but we would not be selling it to try and drive down the price, because all that would be doing is giving a bargain to somebody else who is buying the stock of PetroChina. It doesn’t change the funds available to them at all. One of the speakers mentioned the amount of money that goes from PetroChina up to its parent. Well, money from Wesco comes up to Berkshire from our subsidiaries. You know, that’s the nature of having a major ownership in a subsidiary is that you get money from MiTek, you get money from Nebraska Furniture Mart, which we own 80 percent of. But that really has nothing to do — in my view, at least — it has nothing to do with the fact that it is China that has a policy in respect to being partners in Sudan, and it is not PetroChina at all. Selling our stock would not change one thing.

If we would have any communications, as a practical matter, the communications should be with Chinese government — and actually people here have had a chance because we have a lot of media here — they’ve had a chance to express their views to the Chinese government. Believe me, unless the opinions get expressed to the Chinese government, expressing them to PetroChina means nothing. I mean, PetroChina is controlled by the Chinese government, and they are not — if you were an official of PetroChina, you are not going to tell the Chinese government what to do. They are going to tell you what to do. Charlie?

CHARLIE MUNGER: Well, the issue also is China is a rapidly rising nuclear power, and who should decide how the federal government — or how the Americans — should react to China? There’s a lot to be said for letting the policy flow through the U.S. government instead of sort of a vigilante effort of various citizens. Now, I would also point out that there’s a lot wrong all over the Earth, and there’s a lot of cruelty and there always has been, and there will always be a lot of oil produced in a lot of lands with a lot of cruelty. And nobody is in favor of cruelty, but there’s a limit to how much you can fix. And so I’m very skeptical of the idea that Berkshire should become an instrument of telling — of setting United States policies vis-a-vis China. (Applause)

WARREN BUFFETT: Yeah. Charlie and I have our own views, for example, on reproductive freedom, but we don’t have a Berkshire Hathaway policy on reproductive freedom nor do we finance from Berkshire Hathaway funds — the funds of our shareholders — we do not finance any activities that relate to our personal beliefs, although we may, obviously, fund them by ourselves or speak out on them by themselves, but we do not have a Berkshire Hathaway funding just because we believe that women should have the right to choose or questions of that sort.

CHARLIE MUNGER: I think reasonable minds can disagree on these subjects. At Berkshire, there’s all kinds of businesses we won’t buy and control individually, but we’re willing to own stock in the same businesses. Is that the correct moral line to draw? I don’t know. We do our best, and we make the decisions, and we make the calls.

WARREN BUFFETT: I would say — I wonder really whether when the Unocal question was being determined here, were the Chinese to whom we’d given lots of little tickets in exchange for taking their goods, and they came along with a perfectly decent offer to the shareholders of Unocal, 18 1/2 billion dollars. They wanted to buy a little more oil and gas production around the world. And the U.S. Congress overwhelmingly said this is a terrible thing and we want the United States to oppose it and we want it sold to Chevron for less money. And I really don’t recall a lot of people speaking up on behalf of the Chinese right to buy oil companies over here, just like we’ve bought oil companies around the world for many decades. So to the extent that they may feel themselves somewhat alienated from the rest of the world in this respect, I think we’ve actually contributed our share. Charlie?

CHARLIE MUNGER: Another thing in the complexity of life, the woman who lost her family to the Holocaust, we clobbered the people that committed that genocide by joining genocidal Joe Stalin. These issues are complicated.

WARREN BUFFETT: OK. If there are any shareholders that want to vote in person in this — on this — matter or to change their proxies, we have monitors. If you just raise your hand. And if there are none of those, Miss Amick, are you ready to give your report?

BECKI AMICK: My report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast 15,740 votes for the motion and 830,598 votes against the motion. As the number of votes against the motion exceeds a majority of the number of votes related to all Class A and Class B shares outstanding, the motion has failed. Certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Ms. Amick. The proposal fails.

35. Formal meeting adjourns

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

WALTER SCOTT: I move this meeting be adjourned.

WARREN BUFFETT: Is there a second?

VOICE: Second.

WARREN BUFFETT: All those in favor say “aye.”

VOICES: Aye.