Morning Session

1. When the owners are really old, it’s good to see them in person

WARREN BUFFETT: (Applause) Thank you. I don’t hear anything from the index funds. Where are they? (Laughter) It really feels good to get back and be doing this in person. It’s been three years. And it’s a lot better seeing actual shareholders, owners, partners. (Applause) We — Charlie and I are now, combined, (unintelligible) round for fractions — the two of us are 190 years old. (Laughter) And I really think you’re entitled, if you’re the owner of a company, and if you’ve got two guys, 98 and 91 running the company, you’re entitled to actually see them in person, I mean. (Laughter) It really shouldn’t be too much to ask. I mean, for example, if we had a manager someplace that was 98, I might want to send somebody by occasionally to see whether he was cutting paper (Laughter) dolls or something. So, we probably do things that are a lot more foolish than cutting out paper dolls, but we’re having a lot of fun doing it.

And we really have a lot of fun when you come visit us. Actually, we had — if you go back a few years — we’ve had a couple of managers that suffered from dementia. Probably many more but, I mean, just a couple of known ones, actually. (Laughter) And there was one fellow that Charlie and I really loved. And he ran a business for us. Charlie — it was out in California — Charlie would see him occasionally, and I didn’t see him. But everything seemed fine. And then we found out that he’d really been suffering from dementia for quite a while. And he really was a wonderful friend of both of ours. But the business had done fine, so that’s become our test really, (Laughter) for new businesses. We try to find something that a guy with Alzheimer’s can run, actually. (Laughter) And you don’t have as much competition for businesses like that. (Laughter) The guy sitting there cutting out paper dolls and, you know, that’s our man. (Laughter)

2. Greg Abel and Ajit Jain introduced

WARREN BUFFETT: I’d like to introduce two fellows who really work at Berkshire. On Charlie’s left, Greg Abel, who runs all the operations outside — (Applause) — yeah. And next to him is — I ran the insurance business for about 15 years unsuccessfully. And then fortunately, the fellow on the far left came in one day — and I’ve written about it — but he came in on a Saturday. And I was opening the mail, and he said that he’d be happy to run our insurance business. I said, “Have you ever run an insurance business?” And he said, “No.” And as I’ve mentioned, I said to him, “Well, you know, I’ve never run one either, so I’m not doing so hot, so (Laughter) give it a try.” And, you know, he transformed Berkshire Hathaway. And Ajit Jain is here with us. (Applause)

3. The day’s schedule

WARREN BUFFETT: What we’ll do today — and I have to remind myself from time to time that the people here, of course, saw that movie and everything, but, of course, we’re webcasting this. So, I’ll probably make some references to the movie or something that’ll puzzle (Laughter) millions of people out there, but you’ll get it, so — (Laughter) We’re going to talk for a little while about what’s happened in the last quarter and bring up a few other things that you might be interested in. And we will then, whenever that’s finished, we’ll go on to questions. And we will take the questions until noon, break for an hour — that’s Midwest time for those of you who are watching in other time zones — we’ll go on until noon. And we’ll break for an hour. And then Charlie and I will come back, and we’ll take more questions until 3:30.

And then we’ll convene the shareholders meeting at 3:45 — we’ll take a break for 15 minutes — and then we’ll do the shareholders meeting. And when that’s done, we’ll all go our various ways.

4. See’s brought 11 tons of candy to sell

WARREN BUFFETT: I do want to report, incidentally, that you’ve been doing your part, in terms of the room we have adjacent to this location, where we’ve been — yesterday for five hours, from noon to 5, we had 12,000 shareholders come, and just spend money on everything we could think of to sell them. (Laughter) We brought in 11 tons of See’s Candy. And if we don’t sell out, Charlie and I get the rest, so. (Laughter) But you did your part. See’s sold — they set a record yesterday for the Friday afternoon meeting. And it’s (Cheering) pretty heartening. (Applause) Yeah. Incidentally, I’ve got a box of See’s Candy here, and it’s very — it’s sort of interesting. On this cover, which I hope you can see, there’s a picture of a woman who was born in 1854. And today, she probably gets her picture seen more often than just about any woman in America, in terms of a commercial product or something of the sort.

So, we’ve got her picture up in over 200 stores, and on every box of candy. That’s Mary See, born in 1854. A lot of people think this is me in drag, but that is not true. (Laughter) I mean — There’s a certain resemblance, but (Laughter) it’s just not. These rumors are started by our competitors. Don’t pay any attention to them. (Laughter)

5. We like to give everybody financial information at the same time

WARREN BUFFETT: So, we will — that’s our schedule for the day. And what we will do — we like to give all — we like to give shareholders — owners — partners — we like to give everybody the same information at the same time, and preferably do it when stock markets aren’t open. It seems to us that that’s — everybody ought to be on the same playing field. It’s very interesting — we don’t know how many shareholders we’ve got. They’ve changed the rules over time as to registered holders and getting stock certificates and all that sort of thing. So, we can’t keep track of it like 50 or 75 years ago, where we had an actual shareholders list. But we’re told — we’re told by the people who mail out our information — it’s a firm in, I think, New Jersey — let’s see — Broadridge — and they pretty well do this for a very significant percentage of American corporations. So, they actually mail things out for us. And they bill us for 3 1/2 million accounts. And I’ll take their word for it.

I mean, the more accounts they bill us for — we pay them by the account — so, you know, somedays, I feel like I’d like to count — but that is a — (Laughter) — that is a lot of people that trust us. And they’ve — rightly in my view — overwhelmingly — feel that they’re our partners. And some of them will like reading the financial information they’ve given us — that we give you. But most — a great many of them just say, you know, “We’ve saved this money. And we trust you and Charlie.” And that’s a great motivator, this trust. “And, you know, take care of it and I’m not going to learn accounting and try to read all those statements or anything of the sort.” But we do believe that, for those who do use the information we release, they should all get it at the same time.

And we have a few institutions that, even though in the third paragraph of my letter every year I refer to the fact that we want to have everybody get the same information, and that we don’t feel that anybody’s entitled to special meetings — we can’t hold 3 million special meetings with our partners —but we like the fact that everybody gets the same deal, everybody gets the same information. This morning, on the internet, we put up our 10-Q for the quarter. And I’d like to take you through a few comments on that and a few other comments, and then we’ll get to the questions. When we get to the questions, we will alternate between those mailed in by shareholders, which Becky Quick at CNBC and people who’ve helped her, sort of curated, to get what they think are the most interesting questions from shareholders. They’re not from CNBC itself, but they are from shareholders, owners. And we’ll alternate the ones sent in versus the ones that come here. And we don’t get the questions ahead of time. And we enjoy getting surprised by, I’d say, almost all questions.

(Laughs) And we will keep doing that, like I say, with a break for lunch, until 3:30, when we’ll have the meeting, so —

6. We have an “extreme aversion” to losing your money

WARREN BUFFETT: I would like to start by putting up the first slide, which is Q1. And there we have it. That’s what we published this morning. And there are really no great surprises in terms of the quarter. I mean, there are always some companies that are doing very well, and there are some companies that aren’t for one reason or another. And in the end, as you can see, we prefer to use something called operating earnings. Now, that is after depreciation and interest and taxes, unlike other companies that prefer to tell you anything but what they earned. But we do separate out capital gains. Now, over time, as I’ve said, over the next 20 years, I would expect us, net, to have more capital gains than not. But, you know, who knows? I hope you’ll — you know, I’ll report to you in 20 years whether that’s (Laughter) happened or not. But, as you can see, we made about $7 billion in the first quarter. And that’s a real 7 billion.

I mean, we basically have that income in cash when the quarter’s over. That isn’t true every quarter, exactly, but we are talking about 7 billion of real money in that. And those managers who the people here saw in the movie, they’re the people that work with your money to accomplish what Charlie and I never thought would — never really planned or anything to happen — but it just, sort of, came about just, sort of, putting one foot in front of the other. Now obviously, the last two years in particular, including the first quarter, all kinds of unusual things happened in our various businesses. I mean, when we had the meeting two years ago in May of — roughly the start of May of 2020 — we didn’t know what was going to happen with the pandemic. We didn’t know what was going to happen with the economy. And everybody that thought they did has gotten all kinds of surprises since. But here we are in 2022 and Berkshire, like I say, had 7 billion of operating earnings. And we’ve got lots, and lots, and lots of companies.

We’ve got 360,000 people out there that have taken your savings and go to work every day. And they have jobs. We deliver products. And you put up the money for it and you deserve to — you took the risks, and we feel very good about how things have turned out. And we want to keep feeling good. And we have a — we have a — extreme aversion to incurring any permanent loss with your funds. You know, if I went broke, it wouldn’t really make any difference. It’d keep doing what I do. I’d figure out a way to read a paper and watch a little TV (Laughter) and think about things and talk to Charlie. But the idea of losing, permanently, other people’s money — people who trust us — really, really — that’s just a future I don’t want to have. And as Charlie says, “All I want to know is where I’ll die so I’ll never go there.” And — (Laughter) — that seems pretty sound. (Laughter)

CHARLIE MUNGER: It’s worked so far.

WARREN BUFFETT: In case you missed it, Charlie says it’s worked so far. (Laughter) And we would die, psychologically, if we lost a lot of other people’s money. We wouldn’t take it in the first place. It’d be crazy to take people’s money and lose it if you’re going to feel terrible about doing it. So, the one thing I can tell you about Berkshire — although I can’t predict what our earnings will be, and I can’t predict what the stock will do, and I can’t — we don’t know. We don’t know what the economy will do and all of that sort of thing. But we do know that we wake up every morning and we want to be safer, in terms of your eventual investment. Now, whether you make the most money or anything, we do not want you to get a terrible result because you’ve decided to become our partner. And that’s a pledge you can live by.

7. “We spent 40 billion in a hurry there in three weeks”

WARREN BUFFETT: Now, let’s see what we have here. In [slide] Q-2, it gives some indication of that, because we — and this is kind of interesting. I wrote — I wrote a letter to our owners. And it was dated February 26th. And that was a Saturday — released. But I write the letter all through the year in my mind. I mean — I don’t — you know, we don’t have anybody that sits out and writes out the letter or anything like that. I mean, this is a letter between partners. And I write the letter all year in my head. I’m writing next year’s letter. I don’t write out the words, but I have things I want to tell my partners. My sister’s a partner. And I’m writing to her in my head. My older sister died not too long ago, but I used to be writing to both of them, in effect. And want to tell her, you know, what I think and about the business and what I think she ought to think about it, and so on.

So, the letter’s dated February 26th. And I said, “Not much is going on.” And actually, we might jump over to [slide] Q-3, if we will. So, I sent out a letter on February 26th. But that wasn’t written on February 26th. And I said basically, “Nothing much is happening around here.” And I said, “We’ve repurchased some shares. And we just aren’t seeing anything.” And between January 1st and February 18th, as you can see, we spent $2.2 billion, which is half the quarter, you know, so probably 30 trading days in there. And we sold — So basically, we didn’t do anything. And then in the next three weeks or thereabouts, we spent 40 billion. And incidentally, when I say we spent 40 billion, there’s one fellow in the office that does this all. I mean, he buys all the stocks. He buys the government bonds. He doesn’t have an assistant or anything. But he spent $41 billion. (Laughter) Yeah.

He literally — I mean — and he does other things for me, too. He, you know, puts together totals. He just does what he needs to do. And he’s worked in other jobs at Berkshire long ago. But he likes doing what he does. And he does it very well, and we don’t have a department for it. And as you can see, it fell off after that. And we did also in the first — in the first quarter, we spent about 3.1 or 3.2 billion — somewhere in that — for repurchasing shares. And — We didn’t — you know, we talked about that in the annual report. And as Charlie would say, it’s keeping us out of bars. I mean, you know, it gave us something to do. And it — we never do anything that we don’t think adds to the value of Berkshire Hathaway, though. So we only repurchase the shares when that is the most attractive thing. We haven’t repurchased any shares at all in April.

So, it’s — People who are looking for all these, you know, footprints in the woods and all — that isn’t what we’re doing. We’re just doing it day by day as it comes along. And I think this table kind of illustrates that, that we spent 40 billion in a hurry there between — in three weeks. And now we’re back, somewhat, in our more lethargic mood. But that — anything could change at Berkshire.

8. Cash is like “oxygen”

WARREN BUFFETT: But the one thing that won’t change — going back to [slide] Q-2, if you’ll — is we will always have a lot of cash on hand. And when I say cash, I don’t mean commercial paper. When 2008 and 2009 — the national panic came along — we didn’t own anybody’s commercial paper. You know, we didn’t have money market funds. We have Treasury bills. And, as I may get into it a little later, I’ll explain to you why. We would — we believe in having cash. And there have been a few times in history, and there will be more times in history, where if you don’t have it, you know, you don’t get to play the next day. I mean, it’s just — It’s like oxygen, you know? It’s there all the time. But if it disappears for a few minutes, it’s all over.

So — Our cash was down on March 31st because, as you saw, we spent that large sum there in that brief period during the quarter, 40 billion. We’ve committed to buy Alleghany Corp for something over 11 billion. But we will always have a lot of cash. We won’t — we don’t — Some of our companies have bank lines. I don’t know why they have the bank lines. We’re better than the banks, and we’ll give them the money if they (laughs) need it. But, you know, the local bankers have been calling on them and they need something to do. Everybody else has bank lines, so it’s harmless. But there’s no reason for any of our subsidiaries — (UNINTEL). Berkshire is stronger than the banks, but — (Yell from audience) I didn’t hear exactly what he had — I don’t know whether that was a banker screaming, or — (Laughter) I don’t — I don’t really like to torture — I don’t like to torture anybody, I mean.

(Laughs) But — and I’m all for banks, and we’ll talk about that a little later. In fact, we might even talk about it right now just for a minute. Money’s kind of an interesting thing. People seem to like to talk to me about it. I mean, they don’t ask me how to dance or anything like that, but they do ask about money. And so — if we’ll put up [slide] 20-dash-1 — it’s a photo of a $20 bill. And it says at the top, “Federal Reserve Notes.” Now — Federal Reserve Note — we’ve done all kinds of things with money in this country. It’s amazing, in a country only a couple of hundred years old, the number of different experiments we’ve made with banks and everything. But we finally just decided to let the Federal Reserve do the issuing of money. And — Down in the lower left-hand corner — incidentally, I think [former U.S. Treasury Secretary] Rosie Rios — who signed this note — I think she signed more U.S. currency than any other person in history.

So, if you see Rosie, you know, you cozy up to her. I mean, this is a woman who (laughs) has issued a lot of currency. But it says, “This note is legal tender for all debts public and private.” And that makes it money. You can go into our candy store, and if you offer us enough bushels of wheat, we’ll probably give you a box of candy. But money is the only thing that the IRS is going to take from you. You can offer them all kinds of — you can offer them paintings — you can offer them — all — whatever — but this is what settles debts in the United States. And I thought that — you’ll hear a lot about various kinds of money — this is the only kind of money you’re going to see, in my opinion, throughout your lifetime or even throughout Charlie’s lifetime. This is — And it’s very interesting because it just says that settle — legal tender for all debts, public and private, and nothing else says that, except, I thought you might be interested in seeing another $20 bill. And this one I own.

And on that — it’s got the same guy’s picture — Andrew Jackson — and everything. And that’s a $20 bill. And that $20 bill was issued during my lifetime. And it was done by a bank that Berkshire ended up owning. So, you’ll see the Illinois National Bank and Trust of Rockford. And we bought that bank back in 1969. And if you look down in the bottom of that one, it’s signed by a fellow named Eugene Abegg. And we bought it from Eugene Abegg. So, we still have some $20 bills that came in sheets. And we can cut them out like paper dolls. And they’re our money. The Illinois National Bank issued money. But just remember, the United States government, in effect, said that this became exchangeable for lawful money in the United States. That’s what money is. It may turn out that it becomes worth dramatically less in purchasing power. It can become almost like paper money, as it has in many countries. But that is all — when people tell you that they’re issuing new forms of money, this is the only thing that will pay bills, under some circumstances.

And there were days — a few days in 2008 — and we came very close to having a repeat in March, 2020 — and we had plenty of money on March 20th — but we were not very, very far away from having something that might have been a repeat of 2008 or even worse. And we have a bookstore here: The Bookworm. It’s in the other room. And they’ve got a book called Trillion Dollar Triage. And for those of you who actually like to read about this sort of thing, it’s a marvelous account of what took place day by day with the Federal Reserve and the Treasury. And believe me, if the Federal Reserve hadn’t done what they did, at least in my view, in a very, very, very short period of time, things could have stopped. And I tipped my hat a couple years ago to [Federal Reserve Chairman] Jay Powell for acting as he did. He has to act with speed. I mean, in the old days when you had runs on banks back in the 19th century, you know, a line formed, you know, and a bank would go broke.

But the fellow would pay out as slowly as possible, you know, hoping something would happen — a Wells Fargo truck or a stagecoach would pull up with a bunch of gold or something and you’d sweet-talk the people in the line dispersing. In Omaha, in August of 1931, four state banks — so-called state banks — they had those in that day — they closed and the national banks didn’t. But they were all broke as of that day. No bank can pay off in one day all of its liabilities. But the Federal Reserve is the only one that stood at that time. But I will tell you this. Berkshire Hathaway will be there (laughs) at that time. We run it on the basis that if things had just behaved slightly — very — if [former U.S. Treasury Secretary] Hank Paulson, George H. W. Bush — or no, George W.

Bush, I’m sorry — and [former Federal Reserve Chairman] Ben Bernanke and a few people hadn’t taken action, we were at that point where the line was formed, except it comes in electronic funds — they push buttons — and it’s all over very fast if there’s a run on a bank. If you ever buy a bank, and there are two banks in town, hire a few extras, and have them go over and start standing in line at the other guy’s bank. (Laughter) And there’s only one problem with that. After a while, somebody will stand in front of your bank, you know, and then both of you are gone. But the Federal Reserve is not gone. And the Federal Reserve in the United States can do whatever is necessary. They’ve got all kinds of rules about — they can do this or that, and this and that. And at one time in the 1980s, [former Federal Reserve Chairman] Paul Volcker, who was a very honest man, said to me — I said, you know, “What are the limits of what you can do?”

And he said — he was a very unusual guy — and huge — looked down at me — and said, “We can do whatever we need to do.” (Laughs) And that’s true. And that’s what happened in 2008 and ’09, and that’s what happened in 2020. And you hope it happens again next time. But you want to be — we want Berkshire Hathaway to be there and in a position to operate when — if the economy stops. And that can always happen. That can always happen. So, with those cheery words — (laughter) — let’s see if we — I think — maybe if we can actually — it might be a good idea to start with some questions. As I said, we will have the questions alternate between CNBC — Becky Quick — and those are questions that have come in from shareholders. And they can be directed to any of the four of us up here. And then we will alternate and go around the room here. And we’ve got the auditorium broken into ten or 11 sections.

Charlie and I one time, we got out a form and it said, “Officers of the company broken down by age,” and we just put all of us (laughs) as an answer to that question. But we’ll have it broken down by categories around here. And we’ll keep alternating. And we will break for lunch at noon and reconvene at 1:00.

9. How a casual email led to the Alleghany insurance deal

WARREN BUFFETT: So, let’s start off and Becky, will you lead the way?

BECKY QUICK: Thanks, Warren. The first question comes from Jack Suselesky (PH). And he says, “In the annual letter that you wrote on February 26th, you mentioned that Charlie and you saw ‘little that excites us in the market.’ Yet around March 10th, the deal for Alleghany was announced, and then later the Occidental announcement, then the disclosure of the HP investment.” His question is, “What changed from the time you dated the letter to the time the investments were announced that the names suddenly become interesting in the space of a month and a half, or half a month?”

WARREN BUFFETT: Well, Charlie, you want to give your version? I’ll give my version.

CHARLIE MUNGER: Well, my version would be we found some things we preferred owning to Treasury bills. (Laughter)

WARREN BUFFETT: And as usual, Charlie’s given the total answer, but I’ll talk longer and say less. (Laughter) Actually, the letter’s dated February 26th, when we were confessing our inability to find anything, which was a Saturday. But the day before that, February 25th, I got an email. Actually, my assistant, Debbie Bosanek, gets it because I can’t figure out quite how to handle the machinery. So, she brought it in. Actually, she puts a bunch on the edge of her desk, and I collect them occasionally. And there was a note, just a few lines long, from a fellow that is a friend of mine and that worked for Berkshire many years ago. And this was on February 25th, the day before the thing. And he said he’d now become CEO of Alleghany Corp. I’ve been following Alleghany Corp for 60 years. Now, I’d read their annual reports. I had four big file drawers full of them because it was an interesting company. And all companies interested me.

WARREN BUFFETT: So, I knew a lot about Alleghany Corp. (Laughs) And Joe [Brandon] said, you know, “This is my first annual report as CEO, and I just wanted to send it along to you. Just like you write for your sisters,” he says, “I write this report as if I’m writing to you.” And I sent a note back to Joe. And I said, you know, “I’m going to read it over the weekend,” or whatever I said to him on it, which was true. I mean, I looked forward to reading it. And I said, “By the way, I’m going to be in New York on March 7th. And can we get together? I’d like to see you.” And, I think I may have said, “I’ve got an idea.” Well, I didn’t have that idea the day before. (Laughs) This thing happened to come in on Friday the 26th. And I knew I’d buy Alleghany at a price.

And if he hadn’t sent me the note, it never would’ve occurred to me to write him and say, “Why don’t we get together on March 7th?” or anything of the sort. It just wouldn’t have happened, except for the fact that Joe wanted to send me along this annual report that he’d just written. So that’s the orderly decision-making process. I didn’t call up investment bankers and say, you know, “Will you prepare me a report on this? And, you know, what’s your advice?” and all that stuff. I knew we’d buy Alleghany at the price we offered. And if it was of interest to Alleghany, fine. If it wasn’t — But otherwise, if that email hadn’t been sent, we would not have made an offer for Alleghany.

So, give credit to the fact that Joe had written the annual report, and if he’d sent it a week earlier, well — you know, I wasn’t going to make a special trip to New York, but I wanted to sit down with him and tell him what Berkshire would do. But that explains the 11 billion. (Laughs)

10. People gambling on stocks made big Occidental stock buys possible

WARREN BUFFETT: And what happened was that a few stocks got very interesting to us. And we also spent a lot of money. What happened — the market — and this is really important to understand — in the last couple years, the stock market has probably — it’s always been a combination of a casino and a — and when I talk about Wall Street, I’m talking about the whole capital formation market — but the — and trading market, et cetera. But the market has been extraordinary. Sometimes it’s quite investment oriented. It’s not like it — it’s always what you’ve read about in the books and everything — what capital markets are supposed to do, and you study it in school and all that. And other times, it’s almost totally a casino, and it’s a gambling parlor. And that existed to an extraordinary degree in the last couple of years — encouraged by Wall Street because the money is in turning over stocks. I mean, people say how wonderfully you’ve done if you bought Berkshire in, you know, 1965 or something and held it. But your broker would’ve starved to death.

Wall Street makes money on — one way or another — catching the crumbs that fall off a table of capitalism and an incredible economy that, you know, nobody could’ve ever dreamed of a couple hundred years ago. But they don’t make money unless people do things (laughs) and if they get a piece of them. And they make a lot more money when people are gambling than when they’re investing. It’s much better to have somebody that’s going to trade 20 times a day and get all excited about it, just like pulling the handle on a slot machine. You know, that’s who you — you know — You may not say that you want that person. You’d like the other kind of person, too, maybe, but that’s where you make the money. (Laughs) And the degree to which the market got dominated by that is shown on a slide some — I have it here somewhere. Yeah. Here’s — on [slide] Oxy-one — if you’ll put up the Oxy-one.

That shows how we bought what became — well, we bought in two weeks, or thereabouts, 14% of Occidental Petroleum. And you’ll say, “Well, how can you buy 14% of a company in two weeks?” And it’s more extreme than that, because if you look at the Occidental proxy, you’ll see that — the standard names — BlackRock index funds, State Street index funds, basically, Vanguard index funds, and then one other firm, Dodge & Cox. If you take those four entities — and they’re not going to buy and sell stock — they may get their own little — so they own 40% of the company, roughly, those four firms. And they didn’t do anything during this period. So now you’re down to 60% of the Occidental Petroleum Company that’s even available for sale. Occidental’s been around for years, and years, and years. Big company, all kinds of things.

And with 60% of the stock outstanding, I go in and tell Mark Millard, this fellow that is 30 feet away from me or so, and I say in the morning to him, you know, “Buy 20% and take blocks, or whatever it may be.” And in two weeks, he buys 14% out of 60%. That’s not investment. (Laughter) I mean, you’re not buying from — I find it just incredible. You wouldn’t be able to do that with Berkshire. I mean, you can’t — literally buy it. You can say you want to buy 14% of the company. It’s going to take you a long, long time. But, overwhelmingly, large companies in America — well, all of them — they became poker chips. And people were buying and selling like three-day calls or two-day calls. And the more people — times people pull the handle on the machine, the more money the machine makes. I mean, it’s very clear. And overwhelmingly — I mean, where did the people go?

The investors just were sitting around and there weren’t very many, and the money was being made, essentially, by a bunch of people gambling on things. And that enabled us, in a two-week period, to buy 14% of a business that’s been around for decades. Imagine trying to buy 14% of the farms in two weeks in this country, 14% of the apartment houses, or 14% of the auto dealerships, or just anything, when already 40% were locked up some other place. It is — it defies anything that Charlie and I have seen, and we’ve seen a lot. But I’ve never seen that percentage of the American public — essentially, it was a gambling parlor. And the people that were making money were people that worked with gamblers. (Laughs) And then it declined very significantly a few weeks ago. You can feel it if you’re around it. So, when somebody asks a very good question, this, “Why weren’t you doing anything on February 20th, and why were you doing it on — starting, well, in the case of Occidental, on February 28th?”

— you know, it’s because things developed in a way — And in the case of Occidental specifically, they’d had an analyst presentation of some — I don’t know whether it was a quarterly one or what it was exactly — but I read it over a weekend — and that was the weekend when the annual report came out — I read it over a weekend. And what [CEO] Vicki Hollub was saying made nothing but sense. And I decided that it was a good place to put Berkshire’s money. And then I found out in the ensuing two weeks — it was there in black and white — there was nothing mysterious about it — but Vicki was saying what the company had gone through and where it was now and what they planned to do with the money. And she’ll do what — she says she doesn’t know the price of oil next year. Nobody does. But we decided it made sense. And two weeks later, we had 14% of the company. And we also already had a preferred stock and warrants.

And the story of the preferred stock is we paid 10 billion — preferred stock and warrants — we paid 10 billion for it — and at the end of the March quarter of 2020, we valued that 10 billion — for our 10-Q — we valued it at 5 1/2 billion. So, we had a 4 1/2 billion loss. And it would have — you know — The world changed. Oil sold for minus $37 a barrel (laughs) one day, and — Now it’s quite apparent, I think, that we want — we’re very happy — we should be very happy — that we can produce 11 million barrels a day, or something of the sort, in the United States, rather than being able to produce none and having to find 11 million barrels a day somewhere else (laughs) in the world to take care of keeping the American industrial machine working. Charlie, have you got any comments on that as to how something this crazy could’ve happened?

CHARLIE MUNGER: Well, it happened — it’s almost a mania of speculation that we now have. We have computers with algorithms trading against other computers. We’ve got people that know nothing about stocks being advised by stockbrokers, who know even less. (Laughter)

WARREN BUFFETT: They understand the commissions, though.

CHARLIE MUNGER: It’s just an incredible, crazy situation. And it’s weird that we ever got a system, where all this equivalent of a casino activity is all mixed up with a lot of legitimate long-term investment. I don’t think any wise country would’ve wanted this outcome. Why would you want your country’s stocks to trade on a casino basis to people who are just like the people that play craps and roulette in the casino? I think it’s crazy. But it happened. And it’s respectable. Not with me, but with other people. (Laughter)

WARREN BUFFETT: Yeah — well — and look at — look at what — the country — I mean, they formed the New York Stock Exchange in 1792 under a buttonwood tree. And it really didn’t seem like that was the eureka moment in America. But just look at what’s happened, using the system for less than — you know — well — you know — three of my lifetimes. I mean, (laughs) it’s unbelievable. So — It’s worked. Now, maybe it’s worked in spite of itself — maybe the country — but one way or another, America has worked in an incredible manner. Nobody could’ve dreamt it. Nobody. You know, they’d have hauled you away if you said — you know — in three lifetimes — you know — that — you know — this place where we’re meeting — I mean — it became a state in 1867. But in 1789, if you’d asked Ben Franklin or somebody that was walking out of the Constitutional Convention, “What do you think the prospects are for Nebraska?”

(Laughs) It’s just — it’s unbelievable what’s been accomplished. And it’s been accomplished — the people who encouraged the gambling — they would like to say it’s been accomplished because of the — we’ve got these liquid markets and all these wonderful things. Charlie would probably say it’s in spite of that. Who knows? (Laughter) But — The answer is that — well, there isn’t an answer. (Laughter) The — My wife — when we got married April 19th, 1952 — we got in my aunt’s car and we started driving west. And we ended up — we drove all over the west — but one night we ended up in Las Vegas. And there were three fellows out there. Eddie — it was Eddie Barrick, and Sam Ziegman, and Jackie Gaughan. And all three of these guys were from Omaha. And they’d bought little pieces of the Flamingo. Bugsy Siegel had had his career ended rather abruptly — (laughs) — a few years earlier.

CHARLIE MUNGER: By a bullet.

WARREN BUFFETT: But it was a stray bullet, undoubtedly. (Laughter) In fact, there were probably five or six stray bullets. But in any event, Bugsy was gone. And some people, including three guys from Omaha, were in the group. Sam Ziegman lived about two blocks from where I live now. He was Stan Lipsey’s uncle. Stan Lipsey ran — for those of you who follow Berkshire — ran The Buffalo News and was our partner for 40 or 50 years later on. So, all kinds of things intersect. But I walked into this casino, aged —the Flamingo — it was kind of a motel-like arrangement — and I was 21. And my bride was 19. And I looked around the room and there were all of these people — and they were better dressed then — it was a more dignified group than, perhaps, currently — but they had flown thousands of miles in some cases — you know — in planes that weren’t as fast as the current ones and were more expensive, probably, on a per-mile basis, adjusted, then.

They’d gone to great lengths to come out to do something that was mathematically unintelligent, and they knew it was unintelligent. And, I mean, they couldn’t do it fast enough, in terms of rolling the dice, you know, and trying to determine whether they were hot or whatever they may be. And I looked around at that group. And everybody there knew that they were doing something that was mathematically dumb, and they’d come thousands of miles to do it, and they were — And I said to my wife, I said, you know, I’m going to get rich. (Laughs) I mean, how can you miss? (Laughs) If people are willing to do this, you know, this is a land of opportunity. Well, it’s the way it still is, you know. And the Flamingo grew to be much bigger. And in Omaha, we’re very proud of Jackie and the things he did. He only died a year or two ago. He became sort of the leader — spiritual leader — of Vegas.

And, like I say, Sam Ziegman’s nephew went on to save my and Charlie’s investment that we made in Blue Chip and The Buffalo News. (Laughs) And it’s a very accidental society that occurs. But there’s nothing stranger than what has happened in finance. On the other hand, if you go back, perhaps the greatest chapter ever written on the operation of markets, particularly the stock market, is in a book, probably one of the most famous books in economic history, The General Theory, written by John Maynard Keynes. I think it was 1936. And I don’t know whether it’s chapter — I think it was chapter 12 — but whatever it is, he describes what markets are all about in 1936. And he describes something, in beautiful prose, that explains why the whole country in March of this year was sitting around trading Occidental in some crazy way that enabled us to buy a quarter of what wasn’t owned by four other institutions that weren’t going to sell. But we could buy a quarter of it. And we could’ve bought a lot more. I mean — you just wondered if there was anybody that really was thinking about investment.

If you — Going back to investing, I mean, investing is laying out money now with the hope of getting back more later on. It’s really laying out purchasing power now with the hope of getting more purchasing power back. But that’s the reason you’d — and, you know, that’s the way you learn in the textbooks, that you defer consumption now so you can consume more later on, so that you can take care of your family — all these things about how investment takes place. And that is what happens with farms. I mean, if somebody buys a farm and they, generally, they ultimately leave it to their kids or they got it from their parents. And, I mean, they don’t sit there every day and, you know, get quotes 15 times a day and say, you know, I’d like to get a call — I’d like to sell a put, you know, on the guy’s farm next to me. And you can have a call on mine. And then I’ll have something called a straddle or a strangle, or whatever it may be.

And, you know, they just — They go about making the farm worth more money. And they do the same thing if they’ve got an auto dealership. And they do the same thing, you know, if they’ve got an apartment house. They look to improve it and attract tenants, all those kind of things. And — Forty — what would it be? — 40 trillion at least, you know, of the ownership of all of the American business — people treat it as poker chips or pulling the handle. And they’ve got systems set up so that if you want to buy a three-day call on a stock, you can do it. And they make more money selling you calls than if you buy stocks. So, they teach you on calls. (Laughs) Nobody’s going around selling calls on farms or anything of the sort. But that’s why markets do crazy things. And occasionally, Berkshire gets a chance to do something. And it’s — It’s not because we’re smart.

It’s because we’re — the only thing I can say we’re qualified on — and sometimes I wonder about that — but I think we’re sane. You know, I mean, and that’s the main requirement in this business. And — Charlie?

CHARLIE MUNGER: Well, I don’t think we have ever had anything quite like what we have now, in terms of the volumes and pure gambling activity that go on daily, and the people lathering the gamblers up so they can rook them. And it’s not pretty. And I don’t find it rich in glory for capitalism or anything, anymore than a bunch of people throwing dice at a table. What good does that do the rest of the world?

WARREN BUFFETT: It’s a great way to become rich, though, just figure out ways to insert yourself into the system somehow. And, you know, jobs to some extent self-select. And many years ago — and I’ve got all kinds of friends on Wall Street — not as many as I had before I had started talking this way an hour or so ago. But I really do. I know — People make — they make lots of decisions in life. And the truth is that, overall, the American system has worked extremely well. It’s may be very unfair, in many ways. But it has produced incredible difference in the goods and services available to me versus what my grandfather had available, you know. I do not want to go back to pre-air conditioning and people pouring whiskey down me while they drill my teeth or something of the sort, or any of that. I mean, this is a lot better world. And —

CHARLIE MUNGER: Well, I think we’ve made more because of the crazy gambling. I think it’s made it easier for us, net, over the decades we’ve been operating.

WARREN BUFFETT: Well, I mean, and we’ve depended on it.

CHARLIE MUNGER: Yeah. (Laughter)

WARREN BUFFETT: I mean, we depend on mispriced businesses through a mechanism where we’re not responsible for the mispricing of them. And overall, we learned something a long time ago, that it doesn’t take a high IQ. It doesn’t take anything. It just takes the right attitude. We may talk more about that later, but I think we ought to prove that we’ve got an audience here by going to section one. (Laughs)

11. We’d like to buy businesses outside the U.S., but they’re harder to find

OLA POLEM: Good morning. My name is Ola Polem (PH). I live in Hanover, Germany. This is my first time in Omaha. My question is on Berkshire buying entire companies outside the U.S. There were a few, Iscar, probably the first one. Louis, in Germany. My question is, would you only answer calls from them if you’re interested in? Or would you proactively approach them if they would like to sell their company?

WARREN BUFFETT: I would — we actually made a few trips. I think maybe Charlie went with me on one of them. We tried to stir up interest and all that sort of thing in Berkshire around the world. We probably did that 20 years or 25 years ago. During that period — that I showed you — that burst of action we had, we probably spent — we probably at least 5 billion of that — yeah, maybe pretty — in the area of 5 billion of it — we bought three German securities. We bought two — well, we bought one — in Japan. We rounded up on some of the holdings we already had there. We would love them to buy, but we — they don’t think of us as quickly there. I mean, I don’t have somebody that’s going to send me an email about a company that I’ve been following for 60 years and I know I can see them in New York and, you know, I can name a number to them, and if he likes it, he can take it to his board and so on. It just doesn’t happen that way.

We haven’t had that experience in — well, anywhere outside the United States. Now, you can say with 40 trillion here, you know, we should be able to find something here (laughs) a little closer to home. But we don’t have any bias against doing it. We — There are companies, you know, we’d buy in 10 minutes if we had somebody on the other end that could do business in 10 minutes. It’s much more complicated in certain countries than in the United States to purchase businesses, and there are certain rules. But obviously this — you know, we got a call — whenever it was — many years ago, on our company in Germany. And actually, the two fellows that run it are probably here in the audience. I saw them yesterday. And they’re marvelous. And they run the business. And, you know — they’re as trustworthy as — well, all the pictures were up on the movie we showed before this meeting started here. You know — We have so much trouble finding good ideas that we can’t afford to ignore any. But they do have to be sizable now.

I mean, there really isn’t — there isn’t a lot of — I love the operation we bought in Germany, and it’s just a pleasure to be associated with the people there. I just wish we could add another zero to all the figures and it was a much larger deal. It’s not going to have an economic impact on Berkshire. But they love it. They care. You can see it. You can feel it. And that’s the kind of business we’d like to have, and we’re very happy we’ve got it in Berkshire. But we can’t do it one (unintelligible) of Louis at a time. And we would never, never sell an operation like that, ever. I’m looking at you, Greg. (Laughs) The — you know — but if — if we get a call tomorrow and we could make a deal that involves 10 or 20 billion dollars that was in Germany or France or Britain or Japan — or name a whole group of countries — we’d do it. We bought the interest in the five leading trading companies in Japan a couple years ago.

And I rounded them up a little bit. But I told them originally we weren’t going to but a lot of — we weren’t going to change our positions materially without their OK. So, we actually, I think, rounded the 5.85% — based on the latest figures we had then — of all five of them. And that was a good many hundreds of millions, or maybe a billion or two, to work. So, we will, you know — President Kennedy said we’ll pay any price, climb any hills, you know — (laughs) — whatever it may be — to find businesses. But we actually prefer it when they fall into our lap, like getting a letter from somebody you hadn’t heard from for a couple of years, and you know what you’d pay for the business. And you know if the board of directors of that company regards it as attractive, they’ll be happy to buy it. And they know you’re going to show up at the closing and that you’re not going to pile debt on it or change things or anything.

They’ve got an answer, and then you have to see if they’ve got the question in their mind is what’s the best thing for Alleghany Corp? And in that case, we had $11 billion less at the end of the day — or the end of the dinner — than we had at the start of the day. So, opportunity can be any place. And we do have a terrific operation, for example, in Israel, I mean, just terrific. And it’s pretty good size. Would we like to have another one like it? Yeah, I just don’t know where the other one is. Charlie?

12. Defense of stock repurchases, at the right price

CHARLIE MUNGER: Well, but think in the scheme of things, imagine buying in $60 billion worth of our own stock. We like the businesses. We like the price we’re paying. No overhead, no cost, no nothing, just more interest in what we already owned. It isn’t that we’re totally wasting our time.

WARREN BUFFETT: Yeah, and if you look at it, there are — you can read hundreds of thousands — maybe millions of words — written on stock repurchases, and what this is and what that is and all this kind of thing. It’s not very complicated. (Laughs) I mean, if you had a partner in a lemonade stand and they wanted to sell out — sell their interest — or two partners and one of them wanted to sell their interest — I mean — and the business had the money to buy it — our little lemonade stand — and they were offering at a price that was good for the other two people who are going to remain, you’d buy it. Now, the thing that’s fascinating to me is what you can accomplish, and still — people don’t pay any attention to it. We owned — in 1998, you know — this was more than 20 years ago — we owned about 150 million — I don’t know whether they’ve split — whatever it is — if they’ve split, it’s splitadjusted — but we owned 150 million shares of American Express.

I think we bought our last share in 1998 or something like that. And we then owned 11.2% of the American Express company — wonderful company. And since then, they’ve sent us a check every quarter as a dividend. And so, we’ve taken some cash a little bit as they’ve gone along. And now we own 20% of American Express. Now, that’s what’s happened because they repurchased shares. That happens to have worked out extremely well. If they overpaid for the stock and all that — it doesn’t solve every problem — but it’s a wonderful thing if you’ve got an asset you like and they take your ownership interest up. And like I say, we’ve gone from 11.2% to 20%. And if you’re using your American card — or whatever it may be — 20% of whatever earnings — contribute a little to our interest that used to be 11.2%, and we’ve done it without putting up any money.

Now, imagine — imagine if you owned a farm, and you had 640 acres, and you farmed it every year, and you made a little money on it, and you enjoyed farming. And somehow, 20 or so years later, it had turned into 11-hundred or 12-hunred acres. I mean, you’d say, you know, how long has this been going on? You know, what could possibly be? — you know, is this un-American? — or whatever it may be. I mean, is it, you know, sensible use of the (unintelligible) cost of capital? Blah, blah, blah, blah, blah. If you do it at the right price, there’s nothing better than buying in your own business. We owned — I mentioned and used Apple as an example of how our interest in Apple, you know — every time a company that earns a hundred billion a year — you know — it means that our interest in it goes up a tenth of a percent. You know, we’ve added another a hundred million to earnings. Well, I mean, it takes a lot of work (laughs) — a hundred million in earnings.

And, you know, in the first quarter they just reported — they’re on a fiscal year — but they just reported their March quarter — and, you know, they earned more money and they had fewer shares outstanding. And we actually bought a little more Apple, in the first quarter or so. We decided we wanted to own a greater interest. And on top of that, we knew that we would own an even greater interest if they kept buying in their shares, which — we didn’t have any insider information or anything — but certainly, it would seem the way to bet. And, you know, we feel better because we bought the shares we bought in the market. And we feel (laughs) just as good as the fact — by the fact — they used their cash to buy out some of the other people. It is the simplest thing in the world, and then I read all this stuff.

It is unbelievable how people can’t figure out something that, you know, if they owned a farm and the guy next to them had a farm and somehow you were getting more of his farm all the time without putting up any money while you farmed your own farm — that at least, you know, you’re using some of the earnings for that — you’d feel very good about it. Have you got any explanation for it, Charlie?

13. ‘Ridiculous’ to have to split chairman and CEO roles

CHARLIE MUNGER: Well, I have another thing that interests me in the present scene. We get all these suggestions from index funds, a letter saying we — the chairman and the chief executive officer are the same person, and that they have some professor somewhere that thinks that American business would work better if it had a separate — if Warren could split — we could split him in two and have each half work. And to me it’s the most ridiculous criticism I’ve ever heard. It would be like — it would be like — Odysseus would come back from winning the battle in Troy and so forth, and some guy would say, I don’t like the way you were holding your spear when you won that battle. (Laughter) And it’s some guy that’s never run any business and doesn’t know anything. I don’t think too much of this activity. (Applause)

WARREN BUFFETT: Well, let’s see. Somewhere in here — I may find it at some point. Ah, here it is. We wrote in the annual report — in the third paragraph of a nine-page report — we said, “We’re going to treat everybody the same.” It may be a crazy concept we have, but we really feel that somebody that gave us their savings in 1960 or 1970 or 1980 and just left them with us, and trusted us, we feel that they’re entitled to the same sort of respect and attention that somebody that, you know, is accumulating, like crazy, assets under management and gets paid based on assets under management, that knows that they just need to have policies that essentially are popular in Washington. The only thought they have is that Washington sometimes says that, you’re getting too damn big and we’re going to do something about you. So, they try to be very sure that they’re doing things that people will cheer. So anyway, I say, “Well, we’re going to treat you all alike.” We’ve got three million people — or shareholders — out there.

We’re going to treat you all alike. And on March 25th, about a month after I wrote that letter — it’s in the third paragraph, you’d think that they would get that far — that they had 101 million B shares — i mean, now, somebody ought to read to the third paragraph. But anyway, we get a letter that says, “We would like to meet with you in advance of Berkshire Hathaway’s 2022 Annual Meeting of Shareholders to discuss Berkshire Hathaway’s perspective on governance and sustainability.” Well, I have written probably more on that that’s been honestly written by the guy that runs the company. But why in hell would they think that we should meet with them and not you people all individually (laughs) that come here? (Applause) I grew up in a very, very, very Republican household, but I feel like, you know, some raving populist or something. But I just can’t imagine — well, anyway. You’ve heard it.

(Laughter) And, you know, somebody gets paid to — well, there’s a lot of people I’m sure in public relations and they hire advisors, because it looks better if they have advisors that tell them whether the chairman and the CEO should be the same person or not, and those people get paid for it. And then they discuss it at their board meeting and then, you know — In the end, believe me, if 90% of Congress for some reason felt it was better to have the chairman and the CEO be the same person, the index funds (laughs) would not be writing those letters, because all they have to worry about is whether for some reason people start wondering why some institution should have 10% of the votes in every major corporation in the country. And I like the idea of index funds. But it is interesting to watch where incentives and bureaucracy, and whatever it may be, lead people. The guy that wrote me the letter’s probably a very nice guy. That’s his job. Well, anyway, they didn’t get a special meeting. And you people are here, and we appreciate the fact you’re here. (Applause)

14. BNSF improvements will take time

WARREN BUFFETT: OK. Back to Becky.

BECKY QUICK: This question’s for Ajit and Greg. It comes from Ben Nall (PH), who’s a shareholder of 30 years. He’s a Nebraska native, and he says he’ll be attending the meeting here today. “BNSF and GEICO appear to be losing ground to their two primary competitors, Union Pacific and Progressive. “Over the past several years UP’s operating ratio has been about 400 basis points better than BNSF’s. “And Progressive has grown faster while maintaining a lower combined ratio than GEICO. On an operating basis, UP’s [Union Pacific] precision scheduled railroading and Progressive’s telematics appear to have jumped ahead of the Berkshire businesses.” He wants to know what Greg and Ajit are doing to address those business challenges.

GREG ABEL: Want me to go first? OK. Thank you, Becky. Let me just start by saying when we think of BNSF, we have an exceptional franchise here and a great business. And we do compete with other railways, and we’re very well aware of how they operate, including their operating ratios and the metrics they operate to and precision railroading. And it’s all part of it. But what I would share with is when I think of BNSF, we start with focusing on our customer, understanding how we can best service them, and, yes, we want to do it in an efficient and effective way that delivers great results back to our shareholders. And that will continue to be our focus. So, yes, we learn from all the metrics they report and how they operate their rail, and we observe it. But I would put our team up right beside them on any operating day. And we’re going to move our rail cars as well as any other rail company in America. And we’re going to do it on behalf of our customers.

So, we’re very proud, but we’re not ignoring the fact that there’s more to be done, both operationally and for our customers. So, we’ll continue to see improvement there. We’ve got a great leadership team there. We’ve got a great employee group within BNSF. And what I like is we’re just going to see long-term improvement there. We have an exceptional inner-modal franchise out of the west. It’s incredibly valuable to our shareholders long term, our partners. And that’s what our team is focused on, building that franchise out. So, couldn’t be more proud of where we’re at, but we also know we have a journey ahead of us. And we’re going to continue to get better and better.

CHARLIE MUNGER: Greg, if we were offered the opportunity, would you trade our operation for theirs?

GREG ABEL: Never. Never. And we love our-

CHARLIE MUNGER: He knows a lot about it, Phil. (Laughs)

GREG ABEL: We have a great franchise, and we have a great leadership team running it. So well said, Charlie. Thank you.

WARREN BUFFETT: And just before we go to Ajit — and Greg, you know, was a major partner for 20 years, more or less, a little over that, since we bought the energy company. And his boss was David Sokol. And the two of them, I mean, they knew how to run businesses. It isn’t like we don’t read what other numbers are and all that. But we’ve got the perfect person running in Katie Farmer. We’ve got the perfect person running BNSF. And, you know, she’ll do a great job. Changing around a railroad in various ways, you know — if you’ve got 21,000-or-something miles of owned track and all kinds of other — that doesn’t count sidings and double tracking — and you’ve got a lot of things to do from something that they started building a couple of hundred years ago — not quite a couple hundred — and you can’t move things around very (Laughter) easily. And towns grew.

You know, when you came into Omaha in 1862, well, the railroad didn’t even go across the river, I mean, even though we’d become a major rail center for the West, or the opening to the West. And we’re going to be here a hundred years from now. We will be an important, a really vital, asset of the country. And it will be a very big part — very important part — of Berkshire. And we will take what is an incredible assemblage, I think, of 300-and-some railroads or something over time. And, you know, the tracks got laid, and the routes laid out, you know, 150 years ago. The world changes, but we have to adapt to it. But you don’t put an order out to change a thousand miles of track in hours, or how it’s operated or anything of the sort. So, we’re running it to have that asset for Berkshire shareholders, and it will redound to the benefit of the country that we do it. No matter who ran it, it would be important — obviously enormously — to the country. And the UP will be here at that time, too.

And it’ll be a better railroad a hundred years from now than it is now. But I can’t promise you what will happen if we get flooding or something in the next few months. You know, it can wipe out a lot of the plans you have and disrupt lots of lives and disrupt lots of shipments. And there are no magic wands in railroading to make great changes. On the other hand, you ought to be working at it every day to make it better. I forget how many bridges we have, but some years ago we were spending 3 or 4 billion dollars a year on capital expenditures. And [former BNSF CEO] Matt Rose — I said, this is a lot of money to spend, you know, keeping up a railroad. And then he said, well, we’re going to have to do that more, and so on. And I said, well, I said, I can handle this part. I’m not sure if Charlie can. (Laughs) I have to explain these numbers to him. So, the next bridge they bought — they built — they called the Charles T. Munger Bridge.

So, you can actually (laughter) go see, our railroad has the Charles T. Munger Bridge, because Charlie kind of was asking similar questions 10 years ago.

15. GEICO adopting telematics to compete with Progressive

WARREN BUFFETT: Ajit?

AJIT JAIN: OK. Thank you, Becky. There’s no question that the personal automobile insurance business is a very competitive business. Having said that, both GEICO and Progressive are two very successful competitors in this segment. Each one of them have their plusses and minuses. But having said that, there’s no question that more recently, Progressive has done a much better job than GEICO, as you point out, both in terms of margins and in terms of growth rate. There are a number of causes for that, but I think the biggest culprit as far as Geico is concerned, and again, you rightly pointed out, is telematics. Progressive has been on the telematics bandwagon for, I don’t know, more than 10 years, probably closer to 20 years. GEICO, until recently, wasn’t involved in telematics. And it’s been only the last two years that they’ve made a very serious effort, in terms of using telematics for segmentation and for trying to match rate and risk. It’s a long journey. But the journey has started, and the initial results are promising.

It’ll take a while, but my hope and expectation is that hopefully in the next year or two, Geico will be in a position to catch up with Progressive, in terms of telematics. And hopefully that’ll then translate into both growth rate and margins.

WARREN BUFFETT: Charlie, you got anything? (Applause)

16. State Farm’s success refutes what they teach in business schools

WARREN BUFFETT: It’s very interesting. I mean, the auto insurance industry is a fascinating one to study, in that the largest auto insurance company now — and we’re talking 2022 — and, you know, Henry Ford — I mean, it was 1903, you know, or something when — when cars really got started. And it wasn’t too many years after that that he was turning out two million cars a year. Imagine that. You know, one guy, two million cars a year is a lot of cars. So, car insurance became very important after hundreds of years of when people thought about insurance, it was ships at sea and fire, where they had protective societies. And insurance is a product that’s been around a long time. But auto insurance has been pretty much the same thing since Leo Goodwin started GEICO in 1936. And we came along with a good idea, and lots of big companies and all that. But the largest auto insurance company in the United States was started over in Illinois by a guy that didn’t know anything about insurance, particularly. And it’s a mutual company. It’s not supposed to succeed in capitalism.

I mean, you know, if you go to business school, they teach you that only because you have incentives and compensation, and all kinds of things, can a company succeed. Well, nobody’s really gotten rich off State Farm. They’re just out there — And they are the largest insurance company. While Leo Goodwin started 80-some years ago, and he probably wanted to get rich. And probably at Progressive, you know, people wanted to get rich. And at Travelers and Aetna — and you can name off dozens and dozens of companies. And who wins? You know, a mutual company. In terms of present size, they still are the largest company. They have — if you leave out Berkshire — they’ve got the largest net worth, by far. I think they’ve got 140 billion or something like that of net worth. You know, and — Progressive had a very, very, very smart guy running it for a very long period of time. They got very smart people running it now. But they have a net worth that’s 1/6 that of what some people over in Illinois that nobody knows the name of (laughs) have after years.

And they’ve had the time to sell the same product, and they advertise like crazy. We spend $2 billion a year telling people the same thing we’ve been telling them for 70 or 80 years, you know. The policy doesn’t change. But when we get all through, State Farm’s still doing more business than anybody. And it shouldn’t exist under capitalism, you know. If you went there with a plan to start a State Farm today and have it compete with Progressive, you know, who would put up the capital? (Laughs) I mean, a mutual company that you’re not going to get the profits from? It doesn’t make any sense at all, except they’ve got 140 billion or something like that of net worth. And Progressive, I don’t know what their net worth is, but it must be somewhere around 20-orso billion, and I haven’t looked for a long time. Their net worth in the first — Incidentally, I mean, they are very, very, very disciplined in underwriting.

And of course, on the investment side, their net worth dropped in the first quarter, because they own a lot of bonds. And they say, well — probably everybody in the insurance business would say — that well, we own bonds because that’s what people do. (Laughs) And here’s half the business where you do what people do and the other times — the other half — the businesses, you spend all kinds of time trying to analyze in every county and every single way you can segregate and properly rate business and all of that. And, you know, basically [former Progressive chairman] Peter Lewis sat in my office 40 years — yeah, 40 years ago — and he’s smart as hell. And, you know, this guy was clearly going to be a major competitor of Berkshire’s. And he knew insurance backwards and forwards and very bright and everything. But he just ignored the investment side, and that was as important as (laughs) the underwriting side. And it is interesting how organizations function and have — what I would say are, to some extent — blind spots. And of course, Charlie and I know we’ve got all kinds of blind spots ourselves.

And so, we have to be kind of careful of criticizing other people for having them. (Laughs) It is — The auto insurance business ought to be studied in business school, because it essentially refutes so many of the things they’re presently teaching. So that’s my suggestion today to business schools. OK. (Laughs) And thanks, Ajit. You couldn’t — Ajit is responsible for adding more value to Berkshire than the total net worth of Progressive. That’s not to knock Progressive, I’m just saying one guy. (Applause)

17. “We haven’t ever timed anything”

WARREN BUFFETT: OK, station two.

RAJID ERDUWAL: Hello, Warren and Charlie. It is great to see you both and the wonderful Berkshire managers. Our thanks for everything that you do. My name is Rajid Erduwal (PH), and I am from New Jersey. My question is on market timing. You have always said that it is impossible to time the markets. Yet if we look at your track record, you have had amazing timings with some of your key decisions. You got out of the stock markets in 1969 and 1970. You got back in 1972, ’74, when the markets were really cheap. You did the same thing in ’87, ’99, 2000. And today we are sitting on a significant amount of cash when the markets are going down. My question is how do you time the big market moves so well?

WARREN BUFFETT: We’d like to offer you a job first. (Laughter)

RAJID ERDUWAL: I will take it. (Laughter)

WARREN BUFFETT: The interesting thing is, you know, obviously we haven’t the faintest idea what the stock market is going to do when it opens on Monday. We never have had. We have never made — Charlie and I — I don’t think in all the time we’ve worked together — and I’ll tell you something later on maybe about how learning takes place — but we have never — I don’t think we’ve ever made a decision where either one of us has either said or been thinking, we should buy or sell based on what the market’s going to do.

CHARLIE MUNGER: No.

WARREN BUFFETT: Or for that matter, on what the economy’s going to do. We don’t know. And the interesting thing is, sometimes I get some credit some place for the fact that, you know, how wonderful it was that we were optimistic in 2008 when everybody was down on stocks and all that sort of thing. You know, we spent a big percentage of our net worth at a very dumb time. (Laughs) I shouldn’t say we, it’s I. We spent about 15 or 16 billion dollars — which was a lot bigger to us then than it is now — we spent it in the last few weeks, over a period of three or four weeks — between Wrigley and Goldman Sachs and generally — at a terrible time, as it turned out. I mean, I didn’t know whether it was going to be a good time or a bad time, but it was a really dumb time. And I wrote an article for The New York Times, “Buy American,” and all these things.

Well, if I’d had any sense of timing and waited six months until — I think the low was in March — and in fact I think I was on CNBC maybe that day, or something. But I totally missed that opportunity. I totally missed, you know, in March of 2020. We have not been good at timing. We’ve been reasonably good at figuring out when we were getting enough for our money. And we had no idea when we bought anything — well, we always hoped it would go down for a while so we could buy more, and we hoped even after we were done buying and ran out of money that if it was cheap the company would keep buying, in effect, taking our interest up. I mean, that’s stuff you can learn it in fourth grade. But it’s not what’s taught in school. And so never give us any credit. Well, actually, give us all the credit. I mean, go out and tell everybody how smart we are, but we aren’t. (Laughter) We haven’t ever timed anything. We’ve never figured out insights into the economy.

I mean, when I was 11 years old, March 12th, I guess, 1942 — or March 11th — you know, I bought stock when the Dow was 90 — well, it was 101 in the morning — It was 99 at the end of the day I think — and, you know, now it’s 34,000, or maybe it’s 1,000 less than it was on Thursday. (Laughter) But, you know, it’s one decision that it’s a good thing to own American business. And, you know, if the Harvard endowment had come to see me as an 11-year-old, (laughs) you know, or General Motors’ pension fund or something and, you know, they say, well, no, but we have to have a balance. And we have to maybe have 60%. And then we have to sit around every three months and listen to a bunch of managers.

They’d have just done better if they’d just taken some darts and thrown them and just said, we’re going to be in America 50 years from now and 100 years from now, and we’ll do better in stocks than we will in bonds. It’s amazing how hard people make what a simple game it is. But of course, if they told everybody what a simple game it was then 90% of the income or more of the people that were speaking would disappear. So, it’s really a little too much of us to expect of human nature that people will explain why they really aren’t adding any value to what you can do by yourself. Or actually, you’re, you know — I hate to use the example — but you can have monkeys throwing darts at the page. And, you know, take away the management fees and everything, I’ll bet on the monkeys. But I don’t consider them a superior species. And I don’t want them to move next-door instead of my next-door neighbor or (laughs) anything, but it’s just the way it has to be.

Charlie, do you have anything cheerful to say? (Laughter)

18. “Capitalism is very peculiar in how it dishes out rewards”

CHARLIE MUNGER: Well, frequently in the wealth advisory business, the way it used to be, you go to your investment advisor, you say, what should I do to protect myself for the future? And he says, why don’t you give me $50,000 of your net worth now? That’s my contribution to your future. (Laughter) It’s a peculiar business. (Laughter)

WARREN BUFFETT: Yeah, and it’s a great play because you (unintelligible) rich. It’s still a — If you have a son or daughter that really wants to make money per point of IQ, and per erg of energy, and all of that, well, tell them to go to Wall Street. I mean, don’t have them enter the priesthood or anything. I mean, if that’s what they want. It self-selects. And it always will be the case. I mean, there’s no reason to despair about humanity because they behave in their self-interest. They may not actually be behaving in their self-interest over time, but they — you know, are they happier? Who the hell knows? But if they just want to make money — Well, people here in the auditorium saw a little session from the Salomon [Brothers] episode. And Gerry Corrigan was then the head of the New York Fed, and that same committee was grilling him. And they said, Mr.

Corr — they were giving him a hard time — and they said, who was the highest — they said something to this effect, that — who’s the highest paid guy at Solomon last year? And he said, well, and he named him — maybe he named him — and he just said he got — I forget whether it was 20 million last year — and we’re talking 1991 now, too — he said, maybe he got 20 million. And the guy says, well, how old is he? And, you know, he said, well, I think he’s — Corrigan said —something to the effect of, he’s, you know, 26, or something like that. And then Corrigan couldn’t resist saying, and he can’t even throw a football. (Laughter) And the truth was, you know — now, there’s a lot more money in throwing a football now than there used to be. You know, one of my heroes was Ted Williams. You know, I think he was making 20 or 25 thousand dollars a year.

You know, just imagine today some guy that bats .230 or .240, you know, and if he makes it to the bigs, I mean, the money flows in. And of course, those peoples should sit down and thank the fact that the stadium that could hold 30,000 or 40,000 people and was the source of revenue for the people who pay their paychecks, that stadium went from 30,000 to 40,000, because somebody first invented television and they came up with cable television and they came up with pay and all that sort of thing. And nobody knows the names of those people. But capitalism is very, very, very peculiar in how it dishes out rewards. And for a while it was better to be in Wall Street than be a .220 or .230 hitter in the bigs. And, you know, it is now reversed because of the development of TV, et cetera. So, it’s a crazy world. Rewards seem very, very, very, very capricious, and they are. And they don’t seem to any theologian, or even to Charlie and me in our spare time, the whole thing seems kind of crazy. But it’s worked awfully well.

And even the people who don’t take advantage — get shortchanged by the system — are doing far, far better than if the system hadn’t gotten changed. Doesn’t mean that you necessarily shouldn’t work for change, but you should recognize the limitations of what you can do with humans, put it that way. OK. Charlie, is there any way you’d like to close the sermon? (Laughs)

19. You should be a better person in the second half of your life

CHARLIE MUNGER: Well, I do think we have a very interesting phenomenon, in — I would argue that in a lot of the wealth advisory business, people are charging for skill and delivering closet indexization. In other words, nobody can stand being that different from the crowd and results. They’re afraid they’ll lose their fees. So, everybody does the same thing. It’s mildly ridiculous. The world is mildly ridiculous. (Laughter)

WARREN BUFFETT: Yeah. But as Charlie pointed out in the movie, which only the people here saw that, that before we were married, you know, we tried to convince a couple of young women that we were really more attractive than we were. I mean — (Laughs) You can’t expect people not to behave in their self-interest. And that was very important, that we didn’t disclose all of our weaknesses before the marriage. So —

CHARLIE MUNGER: Warren and I are trying to be a little better. (Laughter)

WARREN BUFFETT: Yeah, that was true-

CHARLIE MUNGER: We may fail a little. And I don’t know about you, but I’ve slightly improved since I was 17. (Laughter)

WARREN BUFFETT: Yeah, well — (Laughter) That’s a really interesting point, because if fortune has just showered you with all kinds of good things you ought to be a better person in the second half of your life than the first half. I mean, that really should not be asking too much of people. If they’ve won the ovarian lottery, and they’re born in the United States, and all kinds of good things have happened to them, and you’ve had a chance to see how stupid you were and all kinds of things you did, you know, why not have the second half of your life be better than the first half? I would say — working from a very low base — but, I mean, I’m not nearly, you know, by any intelligence test or ability to do any of that, you know, I haven’t learned anything. But you do learn certain things only by interacting with people.

And you don’t know, when you’re two years old, no matter how much you’re picking up all kinds of knowledge from the world, the learning machine that’s going on in a two-year-old’s head is just unbelievable. But it’s not the same as having 30 or 40 years of experience with actually how the human animal behaves, which is really, you know, you’re learning all the time about it. But that should make you a better person in the second half of your life than the first half. And I would say that if you say you’re a better person in the second half and have got reason to say it in the first half, you know, forget about the first half. (Laughs) Enjoy the second half. And both Charlie and I have had the luxury of A, living a long time so we get to play, what we would regard as the hopeful and respectable second half. And we have had enough sense to figure out — well, we figured out what makes us happy. And we’ve gotten somewhat more sensitive to what can make other people unhappy and all that sort of thing.

And I’d rather be judged by the second half of my life than the first half, and so would Charlie.

CHARLIE MUNGER: Yeah, of course.

WARREN BUFFETT: OK.

CHARLIE MUNGER: I’m very — I don’t even look at what I did when I was young because it would embarrass me. (Laughter)

WARREN BUFFETT: Yeah. OK. Any of you who wish to quiz Charlie on specifics can do so later. (Laughter)

20. Berkshire can’t protect against risk of nuclear weapons

WARREN BUFFETT: Becky.

BECKY QUICK: This question is, there’s a two-part question. It’s for Warren and Ajit on the first part and for Greg on the second. It comes from Roger Cleffman (PH). He says, “Several years ago Mr. Buffett was quoted that a nuclear attack is the greatest risk to Berkshire Hathaway Insurance. “Given the present circumstances, what would the fallout be on Berkshire Hathaway Insurance if a nuclear event occurred in the populated world? “And then secondly, for Greg, has Berkshire Hathaway Energy suffered any physical or cyberattacks? And irrespective of that, has any special hardening of security been put into place?”

WARREN BUFFETT: Yeah. Well, the first half, every day since August of 1945 — and accelerating dramatically when a second large country had the ability to kill millions of people — which has been magnified by an incredible factor through this, that there is a risk every day. It’s a very, very tiny risk. Nut as Ajit will, or anybody at this table could tell you, if you roll — well, they had a pair of dice out at the Desert Inn in Las Vegas for a while under a glass thing. And some guy had thrown 32 passes in a row. And I don’t know, maybe the odds are eight million to one against that or four million to one — four billion to one against it. But, you know, if you just keep rolling the dice, you know, everything will happen. I mean, if you get 330 million Americans out tomorrow, every American says, heads or tails, and they do it every day, after 10 days, you know, you’ve got 330,000 of them that have called the flip 10 times in a row.

And if you do it 10 more days, you’ve still got a bunch of people who’ve done it 20 times in a row. And they really think they have learned how to control the flip. Well, the answer is the world is flipping a coin every day as to whether people who can literally destroy the planet as we know it, you know, will do it. And unfortunately, the major problem is with people that have large stocks of nuclear weapons and ICBMs. And when they talk about using tactile [tactical] nuclear weapons because somebody will be upset because they’re losing a war, I mean, does anybody think that somebody that’s willing to kill, you know, hundreds of thousands of people with tactile weapons, you know, why do they stop? It is a very, very, very, very dangerous world. And —

CHARLIE MUNGER: But we don’t have any way of —

WARREN BUFFETT: No —

CHARLIE MUNGER: — protecting —

WARREN BUFFETT: There’s no way to pro —

CHARLIE MUNGER: — against a big nuclear attack. I know a man who said, I know what I’m going to do if there’s a nuclear war. I’m going to crawl under the table and kiss my ass goodbye. (Laughter)

WARREN BUFFETT: Well, yeah. And Charlie’s in charge of loss control at Berkshire. (Laughter) We have no solution for it.

CHARLIE MUNGER: No, we don’t.

WARREN BUFFETT: And there isn’t any solution for it. And, you know, it’s extraordinary when you think about it, in August of 1939 — September 1st is, you know, when Hitler moved into Poland — but nobody really knew that much about it here. I mean, you know, the news you got you got from the news reel you went to because the theater was air conditioned, you know, or something. So, if I went to the movies — which you wanted to do in the summer because it was air conditioned in August of — well, September 1st in the case of the actual movement into Poland — but, you know, it was a few people on a screen and some guy with an authoritative voice telling you that German forces just moved into Poland and a picture of a few tanks, maybe. And it was over in a minute. Now of course all day, every day you see people dying who you very much empathize with, and it could be you instead of them. And it’s just so different. But in August of 1939, there was a letter sent to President [Franklin] Roosevelt about a month ahead of time. And why did he get that letter?

He got the letter because Hitler was so anti-Semitic, basically. He drove all the Jews that could see it coming out of Germany. And among them were some great scientists. And Leo Szilard, who was obviously from Hungary, from somehow he got driven out. Einstein got driven out. And Leo Szilard lands eventually in the United States. And he writes a letter to tell the president of the United States, Franklin D. Roosevelt, that there’s a bunch of uranium moving different ways or whatever it may be. I don’t know anything about physics, zero. I don’t know about the off and on sign of it. But in any event, I know what the letter did. Because he writes a letter and says, you know, something big may happen in physics and America better get to it first. But then he has the problem of, how do I get it to Roosevelt? You know, Leo Szilard, who’s he to the president of the United States? So, he figures if he gets Einstein to cosign it that the president will pay attention. And he’s right. So (laughs) he goes and gets Einstein and the two of them send the letter.

And they send it to Roosevelt. And they wouldn’t necessarily have been in the United States if Hitler hadn’t had the crazy views about Jews, basically. And so anyway, that letter went, and we developed the atom bomb before anybody else did. And it was a very, very fortunate development that Leo Szilard and Einstein happened to end up in the United States rather than perhaps be someplace else. Who knows? But the accidents of history — and there’s going to be more accidents in connection with atomic weapons. You know, we’ve come close for various times. I mean, we had the geese flying over, you know, somewhere up north and NORAD gets a crazy signal. And we’ve had wrong training tapes placed over in the Soviet Union or some, you know, and it looks like things are going on. We can’t do anything about it. And that is one risk that Berkshire absolutely has no interest in, even though you can say everybody in the world should have an interest. But it doesn’t do us any good — you know, the feeling is that it doesn’t do us any good to think about it.

But that doesn’t stop the fact that there are two powers in the world that, through miscalculation of the other’s intentions, through all kinds of things, you know, have come close in the past. And Charlie and I lived through the Cuban Missile Crisis. And, you know, we knew there was some chance that weapons of mass destruction would be used. And believe me that there’s a lot more bad that can happen. And humanity has not really come up with a counterforce to technology. I mean, back in the caveman ages, if you were a sociopath or something, you threw a rock at the guy in the next cave, you know, or something. I mean, it was sort of proportional. And we kept developing, and there was this breakthrough where technology has totally outrun humanity. And we’ll see what happens. But so far so good. And Berkshire does not have an answer, though. There are certain things we don’t write policies on because we wouldn’t be able to make good on them anyway, you know, for that matter. And everybody would know we wouldn’t be able to make good on them.

You have that risk, and there’s nothing Berkshire can protect you against. And we’ve been very lucky so far. Ajit, do you ever get any questions, in terms of —

AJIT JAIN: In addition to all what Warren has said, in terms of the chance of something like this happening, the additional thing that concerns me about a nuclear situation is my — my lack of ability to really estimate what our real exposure is in the event of a nuclear event. When you’re talking about, you know, other big exposures we have: earthquake and hurricane and cyber, I can, with some reasonable degree of accuracy, have a point of view in terms of how large our exposures can be, and how big our loss can be. When it comes a nuclear thing, you know, I sort of surrender. You know, it’s very difficult for us to estimate how bad “bad” can be. Very many different lines of exposures will be affected by it. And even though, in almost all our kind of contracts, we try and exclude nuclear as a covered peril, nevertheless, if something like that were to happen, I’m fairly positive that the regulators and the courts will hold it against the insurers, and they’ll rewrite the contract and we’ll be required to pay.

For example, one thing which is already being talked about: we issue what are called “fire policies.” And these fire policies try and exclude nuclear as a covered peril. But there are several regulators who feel that, gee, if it’s a fire policy, and if the nuclear attack causes a fire, then how can you exclude fire? And you better include fire. So, you know, debates like that we will have to live with, and it’ll be very difficult for the insurance industry to fight back with the regulators and the court systems in terms of what is covered and what is not covered.

WARREN BUFFETT: And there won’t be any regulators or anybody else. So — (Laughter) We’ll leave it to a million years of reconstruction. (Laughs) Einstein said that, “I know not what the weapons will be for World War III. But I know the weapons for World War IV will be sticks and stones.” You know, there’s a lot of things that — I mean— If you’re worried about the effect of nuclear attacks, you got other things to worry about than the value of your Berkshire, I’ll put it that way. (Laughter) And what other cheerful things can we have? Station —

21. Berkshire is constantly working to block cyberattacks

GREG ABEL: Warren, do you want me to touch on the cyber?

WARREN BUFFETT: Oh, yeah, sure.

GREG ABEL: Yeah, I’ll just touch on the cyber because it was raised. And when you do think of Berkshire and they use Berkshire Hathaway Energy as a reference. But cyberrisk, and managing that risk, both at Berkshire, really falls across all of our subsidiaries. And it’s a constant risk that’s there. It’s one of our greatest risks we’re always evaluating and trying to literally defend against. And if we use Berkshire Hathaway Energy as an example, we would receive billions of attacks every day against our various operating systems. So that’s basically what our team is in place for: both-- they harden the assets to deflect it, and then evaluating the underlying attacks we have, you know, every second of the day. And, by the way, that would — we’d have a number of operating subsidiaries that experience that. But, obviously, it’s the rail, and the energy, and a few others that we spend a lot of time on, a lot of effort, a lot of resources. And the good news is that through to today, our teams have done an exceptional job, we really haven’t had a significant event.

We’ve had some minor events at small businesses, but across our major businesses, across our major operating systems, we’ve had the proper security protocol in place to avoid events. But, again, it never stops. Our team would tell you that, every day, that’s a risk they recognize and a risk they’re addressing within the businesses. So, a significant risk, but a significant priority for all of our operating teams.

WARREN BUFFETT: Yeah, and I would add one thing, I think. Greg knows way more about this than I do, but my impression, from everything I’ve seen, is that, you know, you always have — you know, historically, the private industry has always said the government can’t do anything right, and government always says that private industry is just thinking about itself, all these things. The truth is, from everything I’ve seen, is that the cooperation between government and business in terms of trying to minimize the threat of cyber problems, I think, has been magnificent, basically.

GREG ABEL: Yeah, excellent point. When it comes to cyber, the collaboration between a variety of U.S. agencies and our individual businesses, it’s incredibly strong. Including down to certain agencies will submit basically a lot of our operating data on a daily basis, where they’re helping us go through it to identify if we have a bad character, a bad individual who’s maybe penetrated into our system. So, it’s a strong collaboration. And Warren, you’re absolutely right, it’s very unique to see how both the industry and the government is working so closely. But I think we both recognize it as such a significant risk, we have to stay strongly aligned on the approach.

WARREN BUFFETT: It’s a real partnership. It’s a real partnership. And we can do better because the government is helping us, and the government can do better because we’re helping them, and there’s no lack of will on either side. And cyber, I mean, it blows your mind. And nuclear is the number one threat, but it’s a very, very, very low probability, you know? Someday, the sun will burn out, too, you know. But there’s really no place for two countries with large ICBM possibilities, and who knows what else and everything — but we haven’t figured that out yet. You know. It’s easy to go around and say, this is the solution or that’s the solution. But, you know, if you have two people with loaded guns facing each other, and, you know —

CHARLIE MUNGER: And not everybody is likely to be totally rational.

WARREN BUFFETT: Oh, we see so much irrational — irrationality in where people’s self-interest is involved, you know, they’re doing all kinds of things to destroy themselves, in terms of how they live their lives, and everything. And, you know, it doesn’t stop with — (laughs) — as you move up the ladder. You know, people — some people do terrible things. And you just have to very much hope that they aren’t in a position where they can do it all by themselves with the rest of the world as their supposed prize.

22. Best investment: “Be exceptionally good at something”

WARREN BUFFETT: OK. If station 3 will please ask something about motherhood and apple pie, or something like that. (Laughter)

DAPHNE: Dear Mr. Buffet and Mr. Munger. My name is Daphne, I’m from NYC, and this is my fifth annual shareholders meeting. (Applause)

WARREN BUFFETT: Well, we appreciate you coming. We do, sincerely.

DAPHNE: As you know, for the past four consecutive months, we’ve been going through inflation, with an inflation rate north of 7% for the first time since 1982. You both have experienced this before, from 1970 to 1975, at a time where your portfolio took paper losses and yet you made some of the best investment choices of your life. Reflecting on that, my question is, if you had to pick one stock to bet on — (Laughter)

WARREN BUFFETT: You kinda sneaked up on us there for a second. (Laughter)

DAPHNE: — and be resilient in the inflation, which would you choose? And what specifically enables that stock to do very well in what might very likely be a difficult market?

WARREN BUFFETT: Well, I’ll tell you something even better than that one stock. (Laughter) Maybe we’ll get to one stock. But the best thing you can do is to be exceptionally good at something. If you’re the best doctor in town, if you’re the best lawyer in town, if you’re the best whatever it may be, no matter whether people are paying you with a zillion dollars or paying with — they’re going to give you some of what they produce in exchange for what you deliver. And if you’re the one they pick out to do any particular activity, sing, or play baseball, or be their lawyer, whatever it may be, whatever abilities you have can’t be taken away from you, they can’t actually be inflated away from you. Somebody else will give you some of the wheat they produce, or the cotton, or whatever it may be, and they will trade you for the skill you have. So, the best investment by far is anything that develops yourself. And, again, it’s not taxed. (Applause) So that’s what I would do.

CHARLIE MUNGER: I got some advice for you, too. (Laughter) When you have your own retirement account, and your friendly advisor suggests you put all the money into bitcoin — (laughter) — just say no. (Laughter) (Applause)

WARREN BUFFETT: Yeah. Nobody can take away from you the talent you have. And the truth is that the world will always be willing. They’ll need to do something, and some people will not have skills, and they will get less of a the product of the society than somebody who has other skills. And sometimes that has something to do with education, but a good bit of the time it doesn’t have anything to do with education. But, just figure out what you’d like to be, and figure out how — and what you’d like to be is what you’re going to likely be good at, and, you know — The world will always need somebody on that tube to tell us what’s going on. So, you know, study Becky Quick or somebody and (laughs) figure out, you know, what makes her good. And what you sort of naturally bring to the game. I mean, I could have — who’s the guy that says you’ve got to spend 10,000 hours doing this or that, and then? Malcolm Gladwell.

Malcolm Gladwell, you know, would say, just spend 10,000 hours on something. Well, I could have spent 10,000 trying to become a heavyweight boxer, but (laughs) I don’t think would have felt very good at the end of the 10,000 hours. I mean — And, you know, you stumble into what you really like doing, what you’re good at, what is useful to society. And then it doesn’t make any difference what the dollar bill, you know, is now worth, in terms of the purchasing power, a cent, or a half-a-cent, or a hundredth of a cent. If you’re the best doctor in town, you know — they’ll bring you chickens, whatever they may do — but they can’t take it away from you. And my guess is that — if you’ve come to five meetings, you know, you’ve got a very good future ahead of you.

I mean, that shows — (Laughter) It self-selects, I mean — So, if you want to sell a piece of yourself, you know, we’ll buy that as the best investment we can make. We’ll take 10% of your future earnings, and we’ll give you a cash payment now. (Laughter) And, you know, we’ll have a terrific asset. And you can have 100% of your future earnings. And if you develop your talent — maybe you’ll be a great dancer — people pay money to watch great dancers. We had Fred Astaire and his sister, Adele, that came from Omaha, you know. Their name was Austerlitz then, but they could dance. And Adele did whatever she did with him, moved to England. And Fred Astaire went on to do a whole bunch of other things. And Ginger Rogers had to do it all the same, backwards, in high heels, and she didn’t get paid as much because she was a woman. But you’re going to do just fine. I’d bet a lot of money on you. (Laughs)

23. “Berkshire is built for forever. There is no finish point”

WARREN BUFFETT: OK. Becky?

BECKY QUICK: This question is for Warren and Ajit. And it comes from someone named Modi, in Israel, who writes, “My family and I are long-term shareholders of Berkshire and we plan to hold it forever. We like that the current management thinks in the long term to increase shareholder intrinsic value. “But we aren’t sure that, at the time of the management change, the new management will act the same way you do. “It might take risks in the insurance field where it’s hard to find on the balance sheet, and that might take years to realize. “We would like to know how we can assess the insurance risk today and in the future, or to know in time, when you and Ajit are not here anymore.”

WARREN BUFFETT: Well, I would say that the future, for a long time, is about as assured as you can have in the world. We don’t have an answer for the nuclear problem or anything, but we have a culture that a), has worked; b) has the shares, and the shareholders, that will carry it a long way. And, you know, the first year — let’s say I die tomorrow — the first year, you know, everybody says, you know, what’s going to happen? Are they going to spin it off? They can do all these things. You’ve got the shares held in a place that it can’t happen. You’ve got a board of directors that understands that our culture is 99.9% of running the business. They don’t think that having meetings of the committees, and bringing in outside experts, or anything like that, mean a thing. I mean, it’s a process that the world has adopted, and they’ve done it for reasons we understand. But Berkshire’s just plain different, you know. We are a business that exists for people to trust us.

And all we have to do to fulfill that trust is fairly simple things. We’ve got the people to do it. We’ve got unbelievable resources to do it. And it isn’t that difficult, as long as you’ve got the freedom, essentially, to do it. And the world will write stories a year after, “So a year later, what has happened at Berkshire?” You know, the railroad will be run the same way. The big worry, of course, is that somebody comes in, figures they can make billions if, as a group, or, you know, people that sell the businesses and say, it’s better to be private, you know, or it’s better to be ‘pure’ this, or something like that. Well, you know, we’re a pure partnership, is what we’re pure at. (Laughs) And we do have what we think is a special relationship with our owners. And I don’t think the relationship changes, and the ownership doesn’t change that much. And, true, there’s nobody can take us over for a long, long time.

And, by that point, we would hope that maybe the superiority of this culture might be somewhat better understood by the world. And we will be here— if we have the same culture, we’ll be 100 years from now — assuming that, you know, we haven’t had a nuclear exchange or something. But Berkshire is built for forever. There is no finish point. Nobody’s waiting to retire, or have their options vested, or thinking about — we don’t have anybody that’s thinking about, should I take another job? You know, they’re doing what they want to do in life. And it isn’t because, you know, we’re topping somebody else’s offer, or that headhunters come around and say, we want this person or that person, and what’ll it take to get him? Well, they can’t get him. Now, I don’t know whether we could build it again, but we’ve got it. And we didn’t know we were building it, exactly, when we took over. You know, we had a lousy textile mill.

I mean, it isn’t like Charlie and I sat down — he didn’t happen to be in Berkshire, but he was my partner and everything, and so we were mental partners — we didn’t sit down and work out some plan that said, well, we’ll run the dumb textile business for 20 years, and then we’ll finally have to fold it, and then we’ll do this and that and everything. We just kept putting one foot in front of the other. But we did know how we felt about running a public company. And one thing we wanted to do, always, was we wanted to have people that were in synch with us. We don’t really want that group I saw in the Flamingo, you know, in 1952. We wanted people who trusted us. And we started, in my case, in the partnership, we started with seven. And Charlie started a partnership, but this is the same thing. We didn’t go to institutions. And we didn’t pay fees to people to bring in money or anything like that. We sat down with people.

In my case, I handed them a little sheet of paper, and it set the ground rules. I wanted to be sure we were on the same page. I said, you don’t have to read the partnership agreement. I mean, there’s no way in the world I would be taking advantage of you. I shouldn’t be here if you think I’d take — But I do want you to be on the same page, and measuring me by the same yardsticks I measure myself. And those people stayed with me, and they’re still— they, or their children, or their children’s children are shareholders of Berkshire. But they’re partners. And it would be hard to do that again, but I would do it with — if I were going to be in this field, I would try and do the same thing. I would try to find people to trust me. And I don’t want to be with people that are saying, how’d you do versus the S&P, you know, last month? Or, you know, what’s your long/short position? Or anything like that. I sold securities for three years.

And I just didn’t want to be in that position, where essentially, they thought maybe that I could do things that I couldn’t do. So, I finally found a way to get a few people — I mean, I didn’t — actually, I stumbled into it — but a few people that trusted me, and they just gave me their money. And we’ve lived happily-ever-after. So, the new management — and the management after them, and the management after them — (coughs) — they’re just — excuse me — they’re just custodians of a culture that’s embedded. The owners believe in it. People that work there believe in it. And we’re not saying other things can’t do better, or anything of the sort. We’re just saying, this is what we’ve got. And we have got the directors, we’ve got the share ownership and all of that to — and the size that, essentially, can ward off any attempts to change the culture.

And, you know, it’s silly to talk about, if our board members did this, and did that, and they, you know — In the end, obviously, we’re always going to follow the law. We’re a Delaware company and we follow Delaware law. But that doesn’t mean that we have to do what every other Delaware corporation does, and how they look at the Delaware statues. We will follow the law, and then we’ll run it as a group of people who trust us. And we appreciate that trust. Charlie?

24. “Keep learning”

CHARLIE MUNGER: Well, I remember when you had a textile mill —

WARREN BUFFETT: Oh, god.

CHARLIE MUNGER: — and it couldn’t —

WARREN BUFFETT: I try to forget it. (Laughs)

CHARLIE MUNGER: — and the textiles are really just congealed electricity, the way modern technology works. And the TVA rates were 60% lower than the rates in New England. It was an absolutely hopeless hand, and you had the sense to fold it.

WARREN BUFFETT: Twenty-five years later, yeah. (Laughs)

CHARLIE MUNGER: Well, you didn’t pour more money into it.

WARREN BUFFETT: No, that’s right.

CHARLIE MUNGER: And, no — recognizing reality, when it’s really awful, and taking appropriate action, just involves, often, just the most elementary good sense. How in the hell can you run a textile mill in New England when your competitors are paying way lower power rates?

WARREN BUFFETT: And I’ll tell you another problem with it, too. I mean, the fellow that I put in to run it was a really good guy. I mean, he was 100% honest with me in every way. And he was a decent human being, and he knew textiles. And if he’d been a jerk, it would have been a lot easier. I would have probably thought differently about it. But we just stumbled along for a while. And then, you know, we got lucky that Jack Ringwalt decided to sell his insurance company [National Indemnity] and we did this and that. But I even bought a second textile company in New Hampshire, I mean, I don’t know how many — seven or eight years later. I’m going to talk some about dumb decisions, maybe after lunch we’ll do it a little. It is incredible how many dumb decisions we made. Charlie and I bought that — and Sandy Gottesman — we bought that department store, and that was in 1966. And, you know, we were working with our own money.

And why in the world did we think — And Charlie flew to Baltimore, and I’d fly — I mean, we used to really work in those days. (Laughs) And, there again, we had wonderful people. Louis Cohen couldn’t have been a better guy. But everybody in that business had a different reference point. You know, they wanted to expand their company. Well, who can blame them for that? And, you know, they were planning a couple of new stores. And each department — the shoe department said, well, we’ll do it better this time, and all that kind of thing. But the whole idea was crazy. And we got there for a little while, and we figured it out, finally. And —

CHARLIE MUNGER: We reversed course.

WARREN BUFFETT: Yeah. But why the hell did we do it in the first place? (Laughs)

CHARLIE MUNGER: Well, because we were stupid.

WARREN BUFFETT: Yeah, OK, well — (Laughter) That’s important to realize. We paid $6 a share for that stock, and if the department store had succeeded, it might be worth, you know, $30 a share now and we’d have — and it failed, so. But we did other things, and we merged it into Berkshire, and we’ll talk about that a little later. And, you know, now I don’t know whether it’s — $150,000 a share now, or something like that, from the six bucks. So, if it succeeded, we would have maybe made a few dollars. And because it failed, we made hundreds of thousands of dollars per share. But that’s the way life is. (Laughs) You just keep going. And —

CHARLIE MUNGER: And keep learning, that’s the secret.

WARREN BUFFETT: Keep learning.

CHARLIE MUNGER: Keep learning.

WARREN BUFFETT: Keep learning.

25. The “aha” moment for Buffett that changed everything

WARREN BUFFETT: And you can say, why would it take guys that long to learn? And — well, we’ve got a few minutes before lunch. We should — let’s address that problem. Because I did bring something along on that. I started buying stocks when I was 11. I’d been reading every book in the library on it. I loved it. My dad loved — you know, it was his business and I’d get to go down to his office and I’d read the books down there. And I saved the money, and finally, by the time I was 11, I could buy a stock. And I could tell you, at that time — I went to New York Stock Exchange when I was nine. My dad took us to New York — each kid to New York once — and he took me, and I went to the New York Stock Exchange, and I was in awe of it. I could tell you how the specialist system worked, and the odd lot arrangements, and I could tell you the history of finance, and all of these things.

And then I got very interested in technical analysis, and charted stocks, and did all kinds of crazy things. Hours and hours and hours. And saved money to buy other stocks. And tried shorting. And I just did everything. And then, when I was either 19 or 20, and I can’t remember exactly where I did it or something, I picked up a book someplace. It wasn’t a textbook at school, but it was in Lincoln, Nebraska. And I — you know, I looked at this book, and I saw one paragraph, and it told me I’d been doing everything wrong. (Laughs) I just had the whole approach wrong. I thought I was in the business of trying to pick stocks that would go up. And, in one paragraph, I saw that that was totally foolish. And I’ve brought something that is really interesting. Let’s put up — what did we call this chart? Oh, here we are, yeah. Let’s put up [slide] illusion one. Done. There we have it.

You know, now if you look at that, some people will see two faces, some people will see a vase, and some people will look a long time and only see two faces. But the mind flips from one side to another, and there’s some name for it that — they call it “ambiguous illusions” or something of the sort. There’s other things that talk about aha moments — or, in the old comic strips with Popeye, Wimpy would have a little balloon over his head, and the lightbulb would go on. There’s this point where all of a sudden you see something you haven’t seen. Well, it took me — I had an illusion that I was looking at, we’ll say in that one, two faces. Go to the — let’s go to the one labeled two. And if you’re looking at it from one side, it looks like a rabbit, and if you look the other way, it looks like you’re looking at a duck. And, you know, the mind is a very funny place.

And I think people call it an apperceptive mass, when you have all kinds of things going on in your mind. And they go on for years, and they sit there and get lost (laughs). And then, all of a sudden, you see something different than what you were seeing before. Now, it took me, in stocks, which I was intensely interested in, and I had a decent IQ, and I was reading and thinking, you know. And it was important to me to make some money on it. I had every motivation in the world. And then I read a chapter — I read a paragraph, actually — in chapter 8, I think it was, of the Intelligent Investor, and it told me that I wasn’t looking at the duck, I was looking, you know — now it was the rabbit — whatever it may be. And whether you call it a lightbulb” — whether you call it, you know, a moment of truth — whatever it may be — and that happened to me in Lincoln. I mean, it changed my life.

If I hadn’t read that book, I don’t know how long I would have gone on looking for head-andshoulders formations, and 200-day moving averages, and the odd lot ratios, and a zillion things. And I love that kind of stuff. Except it was the wrong stuff I was looking at. And I’ve had that happen — and Charlie’s had it happen, I’m sure. It happens a few times in your life. And all of a sudden, you see something important that, why in the hell didn’t I see this in the first place? Maybe it’s a week ago, maybe it’s a year ago, maybe it’s five years ago. Maybe it’s learning how to get along with people, you know. I mean, whether, actually, it’s better to be, you know, kind, or not, you know. Or whether —I mean, they’re just — learning how — if you want the world to love you, what you have to do, or whatever. You know it when you see it, but you didn’t see it for ten years before.

And I don’t know whether Charlie’s got some thoughts on that or not, but that’s happened in a few situations in business, where I’ve looked at a company for a decade. And then there’s something that just all gets rearranged in your mind, and, you know, you can say, well, why didn’t I see this five years ago? But I’ve had it happen a few times, obviously — and everybody here has — just in different areas of their lives. And you think, how could I have been so stupid? Well, that’s what Charlie’s — when he was in the law practice, he had a partner, Roy Tolles. And every smart guy that would get in trouble — usually it was guys, and usually it was with women — and, you know, they’d come into the office, and they’d look, you know, down-faced and everything. And they’d say, it seemed like a good idea at the time, you know. I mean — (Laughter) And their lives unraveled, you know, in many cases.

So, there is that apperceptive mass that’s sitting in there inside somehow, and every now and then it produces some insight. It’s better, actually, if it produces insight into your behavior than whether it produces insight to make money. And some people never get it. And they wonder why — you know, whether their kids hate them, or whether there’s nobody in the world that would give a damn whether they live or die. In fact, they prefer they die because they’ve been courting them for their art collection, or whatever it may be. It’s just — Charlie would say, you know, just write your obituary and reverse engineer it. And not a crazy idea, but, Charlie, I don’t know. What do you know about apperceptive masses? Which are (laughs) you know, optical illusions.

CHARLIE MUNGER: Well, I know that that’s the way the brain works. And that it’s easy to get it wrong. And part of the trick is to get so you correct your own mistakes. And we’ve done a lot of that.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: Frequently way too late.

WARREN BUFFETT: Yeah. We’ve done better with the mistakes than we have with the good — the reasonably good ideas.

26. Robinhood’s “unraveling” is God’s justice

CHARLIE MUNGER: Well, it’s so easy to overdo a good idea. That’s what’s going on now. You have a lot of good ideas that are being grossly overdone.

WARREN BUFFETT: Well, just tell me about one that hasn’t been, but tell me later, when the crowd isn’t listening. (Laughs) It — I mean, that’s where —

CHARLIE MUNGER: But look what happened to Robinhood, from its peak to its trough. Wasn’t that pretty obvious, that something like that was going to happen?

WARREN BUFFETT: Tell me again? What should —

CHARLIE MUNGER: Robinhood. Remember, it came out, and it went public, and —

WARREN BUFFETT: Oh.

CHARLIE MUNGER: — it lured everybody into all this short-term gambling, and big commissions, and hidden kickbacks, and so on and so on. It was disgusting.

WARREN BUFFETT: Yeah. And you said so last year, and they got mad at you, and they sold a bunch of their stock, and they’ve got the money, and —

CHARLIE MUNGER: Yeah, but now it’s unraveling. God is getting just.

WARREN BUFFETT: I love the insiders of great — no, but they’ve gotten a lot of money from it. I mean, they were big sellers, as I remember.

CHARLIE MUNGER: That may be —

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: — but there’s been some justice.

WARREN BUFFETT: Well, I happen to agree with that. (Applause) Whether it’s a good idea to go around making enemies of people, though, that — that’s another question, which we do. Is it wise to criticize people at all?

CHARLIE MUNGER: Probably not, but I can’t help it.

WARREN BUFFETT: (Laughs) (Applause) Well — and here’s the smartest guy I know, and he’s 98 and he hasn’t figured it out yet, so — (Laughter) Give up. Enjoy it. Well, with that we’ll go to lunch, and we’ll try to come back wiser at one o’clock.

Afternoon Session

1. The Jimmy Buffett pontoon boats are going fast

WARREN BUFFETT: OK, let’s reconvene. I think we sold 15 [Jimmy Buffett party pontoon] boats, so far, I was told that a while — a little a while ago out there — so get them while they last. We won’t have the first one available for delivery for about a year. But people are getting 10% off, whatever that means, who order one. And I’ve ordered one myself. And we’re – things are going well in the other room. And we only got seven questions, which is a new low, in the first half. So, we’ll try and move a little faster. I can’t imagine why it went that slowly. I mean, who’s — who’s doing all that talking? (Laughter) OK.

2. Buffett” I’ve “decidedly backed off” from expressing political views

WARREN BUFFETT: Station four.

JEFF VUVOLOY: Hi Warren and Charlie. I’m Jeff Vuvoloy (PH), shareholder from San Francisco. In recent years, American companies have taken on a more active role in the political realm. Whether it is speaking out against specific bills, or promoting various social causes, often at the behest of shareholder or employee groups. While the goals of these movements can be laudable, they risk alienating significant portions of customer and employee bases. How should CEOs decide which issues to take a stand on, or whether their companies should engage in the political realm at all? Thank you.

WARREN BUFFETT: That’s a terrific question, and that is one obviously I’ve had to think about plenty. And at one point I said, “I don’t put my citizenship in a blind trust when I take the job as CEO of Berkshire.” But I’ve also learned that — you can make a whole lot more people sustainably mad than you can make temporarily happy by speaking out on any subject. And on certain subjects, they will take it out on our companies, and that means that the people that are employed by us, some of them we would end up letting go. It means that the shareholders get hurt. And do I really think that it’s so important that I talk on every possible subject that people can get very upset about? Whether they should be asked to pay that price? And I’ve come to the conclusion, the answer is no. Why in the world do I want to hurt the people in that other room that do all kinds of things for Berkshire.

Why do I want to hurt you because I say something that 20% of the country is going to instantly disagree with, and sometimes they will be so upset about it that they will try and take it out. And since they can’t scream at me, they may have campaigns against our companies or anything else. So I think, as it applies to me, I’m not going to go around and take positions where instead of saying, “Warren Buffett says,” it will say, you know, “Berkshire Hathaway,” or “Warren Buffett of Berkshire Hathaway.” I get identified. And I do not want to make the lives of you — and I’ve just decided I’m not going to be doing that. And if I want to do that, I should quit my job. If I think my citizenship, speaking out is that important, I’ll give up what I love the most, which is having this job. (Laughs) I don’t want to do that.

So, I’ve decidedly backed off, I don’t want to say anything that’ll get attributed, basically to Berkshire, and have somebody else bear the consequences of what I talk about. So that’s where I stand. And I can tell you that at most companies, or many — that isn’t fair. But in the great many companies, you know, CEOs, they have to think about what their board says to them, and they’ve made a point of electing people to their boards, because it’s socially acceptable, who represent different constituencies, sometimes very strongly. And if they think their stakeholders, for this group and that group and that group, they’ll get pressured by their boards to take positions. And it’s just a territory that we’re not going to get into. Charlie, how do you feel about that?

CHARLIE MUNGER: Well, even more than you, I have to be very careful about what I say. (Laughter) Now — (Laughter)

MALE VOICE: Yeah. It’s — (Applause)

WARREN BUFFETT: And the difference between the two of us is I can’t resist saying a little more. (Laughter) I see headlines in papers, just time after time after time, that say, “Buffett’s buying such and such.” Well, I’m not buying such and such. Berkshire Hathaway is buying it, and it may be the work of two other people that work at Berkshire.” And people who write the articles don’t have the faintest idea whether it was at my instigation or whether I’d even heard of it. But the headline will attract more people if it says, “Buffett buying this,” than if it says, “Berkshire Hathaway, and we don’t know whether it’s the people that work for him or him.” The headline is designed to bring people into the story. So — The confusion is terrible. And the easiest thing to do is to basically shut up and not have a bunch of people fascinating questions that they didn’t ask for in the first place. But I’m glad you asked that question. That is a good question.

And I probably thought more about that question than I think about whether this stock or that stock is cheap.

3. Berkshire is not a “weapon” to be used politically

WARREN BUFFETT: And with that, we’ll go to — well, let’s see. That was station four. We’ll go back to Becky.

BECKY QUICK: On that note, let’s go to a question from David Cass. He writes in, “President Biden’s fiscal 2023 budget request would impose a 20% minimum tax on the unrealized capital gains for households worth at least $100 million. What are your views on this issue?” And if you don’t want to answer, maybe Charlie does. (Laughter)

WARREN BUFFETT: Well, we’ll find out. (Laughter) And in all honesty, we should both say that we would be affected by it. If it’s $100 million, we’d both be affected. So our point of view is — and I have no point of view. Charlie? I have no point of view that I would want attributed to —

CHARLIE MUNGER: I tend to stay out of the income tax things like this. My policy is I pay whatever taxes they pass, and I don’t want to engage in lobbying about taxes.

WARREN BUFFETT: Yeah. (Applause) And I would add one thing. Lobbying is really distasteful. I once did it for a candidate, and I ended up in a room with a bunch of lobbyists for cigarette companies. They didn’t care about Nebraska. They didn’t care about — and they didn’t have anything. They were there because they were handing over a contribution. And I was a convenient accessory. And, you know, it made you want to throw up, basically. On the other hand, we operate in the railroad business, energy business, insurance business, and they’re extensively regulated. And I don’t also want to be the only railroad that stays out of the railroad group. The only insurance company that stays out of the insurance group. So, you know, other people can rightly figure that we’re a free rider under those circumstances. So I tell the managers generally, you know, “Don’t spend Berkshire’s money on candidates that you like.

Don’t pressure suppliers to do —” Berkshire is not a weapon to use — and it’s been used by certain people in the organization. But don’t use it to muscle money out of anybody else for who you like or what school your wife went to or whatever it may be. And some of it goes on anyway. But I don’t tell our people to don’t belong to any trade associations. Charlie wrote one of the great letters of all time, and if you go to search, type in I think 1989 Munger savings and loan or something. We resigned from the U.S. Savings and Loan League, I guess it was. And we warned them. We said, “We just cannot stand, you know, what you’re doing to the country.” And when a bunch of very nice people get together, but they decided it’s in the interest of their savings and loan to do this or that. And we warned them, and finally Charlie wrote a letter, which is, like I say, available on search. And it should be one of the proudest letters — certainly one of the proudest letters that’s ever come out of Berkshire.

And he just said, “We can’t stand it anymore, and we’re resigning.” But that’s a very tough thing to do. It’s a tough way to live, to just go around criticizing (Laughs) the people you work with, and neighbors. And they’re perfectly decent people, but they’re running institutions that are doing things that are very distasteful to them. And we belong, support some of our subsidiaries in energy. And, you know, I don’t want to find people are doing it for personal reasons. I mean in that case, they’re in trouble. But I don’t say they can’t do it, because I don’t want their hands tied if something comes up, and essentially either their competitors within the industry or the industry (UNINTEL), we’re not going to stand alone and say, “Well, we’re morally superior, so you put your money up and buy it.” So that’s where I end up. Charlie?

CHARLIE MUNGER: I’ve got nothing to add.

WARREN BUFFETT: OK. Never bothers me when I don’t have anything to add, but he seems stuck on that. (Laughs) Anyway. Becky, did that come from you?

BECKY QUICK: It did.

WARREN BUFFETT: Yeah, OK.

4. It helps to know more than one discipline

WARREN BUFFETT: Then station five.

SONG YAO: Oh, thank you, Warren and Charlie. My name is Song Yao. I’m from China, and now studying in the University of Chicago. I really admire you two, especially Charlie. You are my idol since I was a child. And my question is also for Charlie. My question is how to practice the multi-disciplinary framework in making investment decisions and in life? Like, how to make it more practical. Thank you.

WARREN BUFFETT: Charlie? (Applause)

CHARLIE MUNGER: Well, obviously, it helps you to know more than one discipline. There’s an old saying, you know, that a man who carries only a hammer thinks everything else is a nail. And you may go on wrong decisions if you don’t have some command of all the disciplines. That’s all I ever said. But you do irritate people terribly when you come into their territory, you say, “I’m multi-disciplinary. You’re the expert, and I know better than you.” They hate you for it. I can attest to it. I’ve done it several times. (Laughter)

WARREN BUFFETT: And, you know, China — well, to a certain degree, and they have a culture that, to some extent, reveres age. So, Charlie’s got me beat. (Laughs) I don’t even try and compete with him on China. I can’t catch him on age. OK. I’m going to try to, though. Let’s see. We’ve got Becky coming next.

5. Inflation “swindles almost everybody”

BECKY QUICK: This question comes from Phillip King. He writes, “In the ’70s you wrote an article entitled, ‘How Inflation Swindles the Equity Investor.’ You said that stocks cannot keep pace with inflation, because companies cannot increase their return on equity. Do you believe that this is still the case? Yeah. And of course bonds can swindle the equity investor too. (Laughs) Inflation, I should say, swindles the bond investor too. And it swindles the person who keeps their cash under their mattress. It swindles almost everybody. And the problem, if you have a business that doesn’t take any capital, and let’s just say the dollar depreciates 90% or something, so things cost ten times as much. If it doesn’t take any capital you can charge ten times as much, and you’ve kept your relative position. But most businesses take some capital. If our utility business — just to say that the dollar is worth 1/10th some years hence from now, we have to have ten times the capital investment, basically.

And we get paid a return on that, but we have forced capital investment to essentially keep in the same place. And I wrote an article that related to that, and I will tell you one famous story, which you will all sympathize with. In that I wrote that story for Fortune, and when I finished it, it was about 7,000 words. And Fortune didn’t like publishing 7,000 words, and they had my friend Carol Loomis explain that to me, knowing that I would pay more attention to her than anybody else. But being stubborn and male, I said, you know, “Every word is precious,” and they can either run it or not. So then they sent an editor, a very nice guy, out to Omaha. And this guy explained to me that just wasn’t right to use that many words. And I said, “Well, that’s fine, but if you don’t do it, I’ll write it someplace else.” Very disgusting behavior on my part. And then it was beginning to bother me a little, so I sent it to my friend Meg Greenfield.

And Meg was a great, great, great editor at The Washington Post, and we were very, very good friends. Wonderful woman. And Meg, who was tough as nails with most writers, but she was kind of nice. She didn’t want to really hurt me too much. So I said, “Well, Meg, what do you think?” And she said, “Well, Warren,” she says, “You don’t have to tell everything you know in this article. (Laughter) And it made the point. And so I write that article shorter, and I say more or less the same thing. You know? And you’re better off — if you really could have a totally stable unit of monetary use for the next 100 years, it would be better for business and investors in general. Charlie? No? We will go to station six. Inflation — the question is how much. And the question is whether you can decide that 2% and keep it — the answer is nobody knows. You know? I mean you do not know, and nobody knows.

You can listen to all kinds of stuff, but nobody knows how much inflation there will be over the next ten years or 20 years or 50 years or next month. And people talk about it all the time, because you’re interested in knowing the answer to your question. And they don’t know the answer, but there are a lot of people that will tell you they know the answer if you pay them enough. And other people that will tell you for nothing, because they think it enhances their prestige and makes them more valuable and all that. But the answer is they don’t know. And we don’t know either. The best protection against inflation, though, still is your own personal earning bar. If you play the violin very well, you will do reasonably well during inflation. I mean play it better than other people, people will pay you for doing that. All kinds of things. So your skills will not be taken away, and your money may be. OK, station six. Oh, wait a second. Was that —? Is it Becky next? Becky?

BECKY QUICK: That’s right. It’s station six.

6. How a “culture of lying” can develop at a company

WARREN BUFFETT: Yeah. Station six. OK.

MARTIN WEGAND: My name is Martin Wegand. I live in Nashville, Tennessee. Mr. Buffett and Mr. Munger, thank you for your lifetime of teachings and for hosting us back in Omaha this year. (Applause)

WARREN BUFFETT: Well, thank you.

MARTIN WEGAND: You have mentioned that companies get the shareholders they deserve. And in this year’s letter, you mentioned a great satisfaction of yours is working for the individual long-term shareholders. With the growing influence of institutional index funds, how can management teams foster a shareholder culture like the one we have at Berkshire? Thank you.

WARREN BUFFETT: Well, fortunately we have it, and we know more about how to keep it than to institute one. And it’s very interesting. We have a 1,470,000 class A shares outstanding today. Fewer than we had a year ago. And those seats are filled. I mean you are the shareholders in place. We like the group we have. So why in the world, when we got a fixed number of seats, should we go out and recruit other people to replace you? You know? I mean the ideal shareholder group we can have is the group we have today. And, you know, if we had a church, we’d want the people to keep coming back week after week after week. If we had a limited number of seats, and we had some wonderful parishioners, we would not go out and recruit another 50 or 100 of them and have to throw out 50 or 100 of the ones we already had. We’ve got. And every company I know, virtually, you know, is wooing new people to come in. And whether they’re improving the group they get or not, I mean it strikes us as basically crazy.

We don’t want anybody different (Laughter) than we have now. And, you know, we’re not going to get rid of the index fund, so we have to get rid of people like you, and we don’t want to get rid of people like you. (Laughs) And I just don’t understand why if you had a neighborhood, and the size of the terrain or whatever it was would be such that you could have ten neighbors, and they were all great neighbors, why in the world would you go out and say to a whole bunch of people going up and down the street, you know, “Why don’t you buy the house of the guy next to me?” You know, (Laughs) it is weird, but there’s an awful lot of people that make their living by doing that, and they never really question. I would sort of ask any company that’s making analyst presentations every month or something, “Which of the present ones are you trying to get rid of?” You know, basically, because I hope you’re not going to have more shares outstanding at the end of the year than you have now.

And am I supposed to, you know, get out of the way so (Laughs) some other fund that is thinking about what your stock is going to do next week replaces me? It is a very, very, very weird situation. And of course, the really crazy process that has developed is people talking to, we’ll say, analyst group, you know, sort of the high priests of finance, you know, some companies are doing it more than once a month. Well, just imagine if you work for that company, you go to work for that company, and every month people are repeating these things about their company that, “It’s important that we have more services per customer at 6.2 and we got to get to seven,” or something like that. And they’d say that month after month after month, so it becomes a catechism. And CEO says it or his or her representative says it, and how do you go on the next month and say, “By the way, we were really wrong, and this is what we should be working on.” You don’t say that.

And it’s a terrible problem the new CEO has coming in after a previous CEO has said the important thing to do is to hit your earnings targets. Well, you know, he’s been meeting them, in all probability, by cheating from some time to time. And this guy hands you the baton, and are you going to come out and say, “Well, we’ve really been cheating a little and it’s really counterproductive to the development of the, you know, companies, not to make earnings projections and just to give you the results as they come, rather than making up a few things. And the accounting department, you know, they can’t do it. It’s not human nature, and besides, you wouldn’t get appointed the successor. But you just don’t go in and say, “We’ve been perpetuating these myths that we can always deliver 8% growth or we can do this or do that, or the most important thing is this.”

You can’t go in and change that if every month you’ve been preaching to people that this is what we stand for, and just ask another question and carry this message out to the masses, to the analysts and all that. And it’s a totally destructive policy. I mean, you know, I can, within gap accounting, I can play a lot of games with numbers. We’ve done a lot-ta dumb things at Berkshire. We have never told anybody that the number had to be this or that or to change anything. I mean once you start it, it’s all over. You can’t quit. It’s like taking $5 out of the cash register. You know, the first time you take the five bucks out, you’ll say, “Well, I’m going to put it back.” And then do it a few times, and you’ll never stop. In fact, do it once and you probably never stop. But if something is going to be destructive, the thing to do is not start it. And forecasting earnings, I can’t imagine anything more destructive.

I’ve got 360,000 people out there, and they know whether I’m lying or not. Many of them. And they know what they send in figures, and they get changed? You know, what message are you telling? We’ve got one dramatic illustration of that within Berkshire. And it’s just, you know, if you start lying you’ve got a big problem. It’s that simple. And if you start saying to your team that somehow you’ve got a job — you’ve got shareholder relations, your job is to go out and tell everybody that our stock is the best thing among thousands of choices to buy, every day. Well, that’s crazy. So what do you tell them? Well, they try to, you know, see which way the wind is blowing and figure out what they have to tell people. And that they go out and tell them, and then if you’re human, and you’ve said, “We’re going to earn $3.59 a share,” you can get to $3.59. And get there quite a while.

And, you know, you can have all these processes, but if you have a culture of lying, the processes really don’t — they just disappear. And Charlie and I have seen it, well, probably every time we’ve gone on a board. Charlie, tell them about it? (Laughs)

CHARLIE MUNGER: Well, I think Berkshire’s culture’s going to last a long time after we’re gone. And I think it should, and I think it’ll prosper pretty well. The rest of corporate America is quite different, and it gets more different, I think, with each passing decade. And it’s getting very peculiar. Pretty soon they’re going to hold all the shareholders’ meetings online, and the shareholders won’t even come. And it’s just it’s getting very peculiar. And the index fund’s getting more and more important than the voting. And it’s like everything else in life. It changes, and not always in ways you like.

WARREN BUFFETT: And it ends up for selecting different CEOs and all kinds of things. I mean, you’re not going to appoint a successor CEO that’s going to come in and say everything that’s been done before, you know, has been kind of fraudulent. You know? I mean if we needed to book an extra sale after the end of the quarter, if we needed to adjust the reserves, once you start lying, it’s all over. And I just don’t know any way around that, except to try every way you can to not — if you set the wrong example at the top, you’ve got a real problem. You know? And we’ve never told anybody to change a figure. And we never will. And if they had been changing figures, you know, we’d be in all kinds of trouble, because they know it and I’d know it and the next person would know it. And it just deteriorates. And we’ve really seen it time after time. The way boards operate, you know, it has to be process-oriented.

I mean I understand the problems that Delaware has in writing a statute that judges face when they look at things, but it’s just extraordinary what an emphasis on process can do to an organization, because they think they can do anything if it’s allowed. And, you know, eventually the foundation crumbles.

7. Buffet is buying Activision as merger arbitrage play

WARREN BUFFETT: OK. Oh, I should make a little news here, so you’ve all come and you may or may not see this, but it’s very possible — one of the things we bought, one of the things I bought, was bought for a different purpose by a different manager months earlier. They bought roughly 15 million shares of Activision. And I knew about the company, I would just see it at the monthly report. But then on January, I don’t know, 17th or 18th, something like that, Microsoft announced they were going to buy Activision for $95 a share. Now, when they announced that, at that point Activision becomes a different kind of security. It becomes what Charlie and I used to call — well, and everybody did 50 years ago. We’d call them workouts or something like that. And they become known as arbitrage. Well, they’re not really arbitrage, but they’re securities that are, in this case a common stock, whose value depends not on what the market price does, but whether a given corporate event occurs. An announced corporate event occurs.

Well, Microsoft wants to buy Activision, we’ll say — well, they said at $95 a share. And they’ve got the money, and obviously mergers, and big mergers, tech companies, all kinds of things, have got all kinds of problems with the world generally in terms of opinion. So you don’t know what the Justice Department will do or you don’t know what the EU will do and all kinds of things. But at that point it becomes a different security. And Charlie and I, 50 years ago, we used to do a lot of that sort of thing. And Gus Levy did it at Goldman Sachs. And we even went back one time I think on British Columbia power, didn’t we, Charlie?

CHARLIE MUNGER: Yeah. We certainly did.

WARREN BUFFETT: Yeah. (Laughs) A guy named Bennett was up there, and we were trying to figure out some takeover of the power business. I mean we spent a lot of time analyzing the probabilities of announced deals going through, and we called them workouts. Now, the term became arb. And it hasn’t worked overall too well in recent years. Now, every now and then I see something that I want do to in that field. But very seldom, because they’ve got to be big. The profit is limited. You know, if they say you’re going to get $95, you’re not going to get $96, and if the deal blows up, you may have a stock that’s at $40 or something. But we did it with Monsanto five or six years ago when Bayer was buying it, and we got very lucky, because it turned out to be a terrible acquisition for Bayer, but it did go through, because Bayer had the money and they went through with the deal, even though Monsanto came with a problem that nobody really understands the extent of. And we did it with Red Hat when IBM bought it.

So in any event, on January whatever it was, 17th, 18th, 19th, Microsoft announces it. And the stock, which had been at $60 — let’s see. I may have a slide here, which I’ll find. But in any event, the stock, which had been in the 60s, went up to $81 or $82. And that looked like not a big enough spread to me for a few days. And then it settled back a little. So anyway, we now own 9.5%, something like 9.5% of Activision. And if we went over 10% we would file a report. So in order that the news people don’t feel that there’s no news here, I can tell you that as of yesterday, we own about 9.5%. If we go past 10%, there’ll be a form filed with the SEC and so on. But it is my purchases, not the manager who bought it some months ago. (SNAPPING) And if the deal goes through we make some money, and if the deal doesn’t go through, who knows what happens.

But I just want to be sure that if we do file that report, people understand very clearly, because there’s been some very mixed up stories on that in the past. We want to be very clear that it was Warren Buffett’s decision in that particular case, and he doesn’t know what the Justice Department’s going to do. (Laughs) He doesn’t know what the EU’s going to do. He’s never talked to anybody at Microsoft about it. I think he’s just read a document. He’s made his own assessment. And it can change. And at one time I think we sold a few shares even when I thought it was a little higher than it should be. It turned out those sales were not a bad sale. And so I just want to create a little news for you. And I want to, if possible, head off stories which have been incorrect in the past, and which get then picked up by other media and corrections never get written. That all the corrections were written by one inaccurate story. And they apologized even to me. Both are reporter and the editor sent me a personal note of apology.

And they didn’t expect to make a mistake. But when the other publications picked up the story, they didn’t bother to pick up the correction. And millions of people were misinformed, and probably — literally by the time it gets spread around. And this one I will attempt to head off by telling you exactly what the facts are (Laughs) right now. And we’ll see whether we go beyond 10%. But, you know, it could easily be that if it went up a few dollars — it’s still a $95 deal. It’s still we don’t know what the Justice Department will do. We don’t know what the EU will do. We don’t know what 30 other jurisdictions will do. One thing we do know is Microsoft has the money. So that takes that one risk out of it. So anyway, Charlie, do you have any news to break? (Laughs)

CHARLIE MUNGER: No.

WARREN BUFFETT: Yeah. (Laughter) And incidentally, I don’t talk this over with Charlie. I mean, you know, he knows that occasionally I’ll see an arbitrage deal and do it. And, you know, 50 years ago we were doing it together, and his general feeling is, “Why is Warren fooling around with this kind of stuff, even.” But it’s the old fire horse that occasionally it looks like the odds are in our favor. But absolutely we can lose money on that company, and, you know, fairly large sums of money, depending on what happened if the deal blows up. And there will be a lot of people that want the deal to blow up. But Microsoft doesn’t want it to blow up, so we’ll just have to see what happens.

8. Index funds may be getting too much influence over corporate governance

WARREN BUFFETT: OK. Becky?

BECKY QUICK: You know, Charlie just mentioned index funds in passing, so let’s go to this question from Matt Figel. His question is related to the growth of passive investing through index funds and ETFs. He says, “Passive investment vehicles now control upwards of 50% of the United States stock market.”

BECKY QUICK: “The actual owners of these passive investment vehicles decided passive investing makes the most sense for them, yet, in doing so, passive investors have empowered the large index funds to become the biggest activists in the market. These passive managers now enjoy enormous, and, I would argue undue influence over corporate governance. Do Warren or Charlie see any benefit or logic to a rule that would prohibit passive investment vehicle managers from voting the shares they control for their passive investment clients?”

CHARLIE MUNGER: Well, I’ll take that. I think the guy’s right. I think the thing is out of control and counterproductive. And I don’t think it’s good for the country to have three passive investors, bright young men from Harvard or what all, telling them what proper governance of corporations is. It’s not a good development. (Applause) And I think indexing, if it gets to 90%, then it won’t work very well at all. But at the moment, it’s worked fine.

WARREN BUFFETT: Yeah. Well, the one thing you can count on too is that if it does look like it’s going to — if the public opinion shifts over to the idea that it really is a good idea to let three people decide the fate of every company in corporate America, the three people — and they won’t collaborate or do anything. It’s not that they’re evil people the least. I mean, they’re just doing what you and I would do. They would figure they don’t care that much about voting. What we do care about is keeping (Laughs) a lot of assets under management. But so we’ll figure out something that ends up reflecting public opinion, and then politicians won’t get mad at us. And our only threat, really, is the politicians get mad at us, and regulators in some ways. So we’ll head it off. And I would predict fairly confidently that if American public doesn’t like the idea of three people controlling things, the three people — and their organizations and everything, but the three, what they want to do is they want to get bigger.

(Laughs) And they wouldn’t be where they are in life if they hadn’t wanted to get bigger. Those things don’t happen by accident. That doesn’t mean that it’s the only thing they want. They want their investors to get good results and everything. But they are certainly not going to follow a policy which is going to cause a backlash that causes them to be a lot smaller there. They can figure out their self-interest. And it just so happens that in this case, it would achieve the right result, which is that they would not control America, but they’ll do what’s good for themselves. And what they have to do, what’s politically acceptable. The only thing that really can mess up what is a very good deal for them is to have Congress change the rules. And, you know, the rules were — the Investment Company Act of 1940 really changed how people behaved, and it’s governed things in a big way for a very long time. And anybody that takes on the federal government loses. You know?

And if you’re talking about trying to do that sort of thing — and they don’t need to do it. They just say, “Well, we’ll give up voting, or we’ll vote our shares as the rest of the people do.” And of course if you vote your shares as the rest of the people do, then if the index fund’s at 90% of the country, you could take over a company by somebody else buying 3% or 4%, because you just automatically get the funds to follow your very small little percentage. You’ll see it all play out. I mean it’s a big case, but it’s not an unusual case.

9. Berkshire’s relationship with its energy subsidiary

WARREN BUFFETT: OK. Station seven.

ERIC ERTA: Yeah. Eric Erta, and I live in Albuquerque, New Mexico. So I want to first say thank you so much for a lifetime of knowledge you’ve both graciously shared with all of us. You’ve contributed greatly to push our species forward. Moreover, you’ve taught all of us here, along with many, many millions not here, how to behave more rationally, treat one another with more love, and lead more fulfilling lives. And for that, I want to say a very sincere thank you. (Applause)

WARREN BUFFETT: Thank you.

CHARLIE MUNGER: Uh-huh (AFFIRM).

ERIC ERTA: As for my question, I want to ask about Berkshire Hathaway energy, and the unique structure that has evolved there, given that Berkshire doesn’t own 100% of the company. The first part of that question is related to Greg’s ownership and his corresponding incentive alignment with overall Berkshire.

ERIC ERTA: Now, there’s a wise man named Charlie that in 1995, at a speech to Harvard, taught us how important incentives are to human behavior. I would conservatively say that Greg’s stake in BHE is worth more than $500 million at present. And I’m curious if you can share any plans that you have to convert is Berkshire Hathaway energy ownership to Berkshire stock? And if there isn’t a plan to do this, can you please explain why we shouldn’t be concerned about Greg’s incentive structure going forward?

ERIC ERTA: The second part is about leverage at the entity. You have always said that BHE operates with an appropriate amount of leverage, given it’s earning power. With that said, it’s still a very, very large debt figure in relation to current earnings, especially with what we have become accustomed to at Berkshire. And I’m curious if Berkshire owed 100% of Berkshire Hathaway Energy, would you still operate the business with the same amount of leverage?

WARREN BUFFETT: OK. Thank you. The second part is the easiest one to answer, so I’ll take that. Then I’ll throw the first one back to Charlie. (Laughter) But Berkshire Hathaway Energy actually is required with it’s regulated utilities — and it basically started pretty much with regulated utilities, and still is dominated by that. And we’re interested in buying more regulated utilities. It’s required in different ways by different states and by different regulatory authorities to have a large amount of debt, because, in Iowa or to pick any state, the regulatory authorities are going to say you can get debt money cheaper than you can get equity money, which historically has largely almost always been true. And they say that since we’re going to allow you a return on equity — we’ll say, just pick a figure. But let’s say they allow us a return on equity of 9%, and we can borrow a lot of capital at 3%, they say it’ll result in higher rates to customers if you put in all equity.

We would love to have all equity (Laughs) in our utilities, but the regulator wouldn’t stand for it, because under the trad system it would result in higher prices to consumers. So that’s built into the system. And well, our regulator wouldn’t allow us, essentially, to get the same return on equity and have an all equity structure. And the answer is, you know — well, you actually saw in the film earlier, which the people that are hearing the webcast didn’t see. But just in Iowa, you know, we recently got approval to spend three and a fraction billion dollars, but they want us — Iowa has a history, and like every other state in the union — except Nebraska, which is all public power. But every private power, you know, they have a history of wanting X percent to be in debt. They want you to raise a lot of money in debt because it means cheaper power for the consumer. So the answer is if we owned 100% of Berkshire Energy, we would absolutely be following the same. We would be operating pursuant to what the utility commissions tell us they want us to do that. They represent the people of those states. Now Charlie, do you want —

CHARLIE MUNGER: Well, the other one’s simple too. It’s a historical accident. It’s not causing any big tension or breaches of fiduciary duty. We had the same problem with Walter Scott, who was the director for years and years, and owned stock in the same company, also an historical accident. I just don’t think it’s a big problem at all. I see no behavior from Greg ever that isn’t in the best interests of Berkshire. Yeah. And we’ve had various percentages of Berkshire Hathaway Energy ever since we bought it in around 2000. And it happened, my sister, who’s here, we were at our house, and there was a party going on. And 20 or 30, probably 30 people. And Walter said to me, “Have you got a minute or two? I’d like to talk to you about something.” So we went in the library or someplace, and Walter says, “You know, we’ve got this company and it doesn’t seem to fit the public mold very well. And would you want to buy it and go private?”

And I said, “Sure.” You know? (UNINTEL) the price. And when we got back to Omaha — it was out on the West Coast. We got back to Omaha and we met with David Sokol, who was the big holder, beside from Walter. And we agreed on a price. And I remember Walter saying to Dave, “Don’t negotiate with Warren. (Laughs) You know, he’ll tell you to forget and he’ll do something else.” And we bought it. So it was kind of a weird structure from the start, and we had a public utility holding up any (UNINTEL) deal with and all kinds of things. And it’s evolved, and it now has us with 91% roughly, and it has Walter’s estate — and I don’t know where that goes at all. And Walter never talked to me about it, and I never asked him about it. But it’s, one way or another, interest connected with him, and the estate now. Close to eight, I guess. And Greg’s got one.

And, you know, from our standpoint, if we made a deal with — if they ever came to us and (UNINTEL) just wanted to do something, you know, we’d say, “Fine.” We’ll do the same thing with Greg if he wanted to, and he probably would want to, I mean. But from our standpoint, I’ve never seen any decision remotely — if I thought that would make a difference, you know, he just wouldn’t be the right kind of person to run Berkshire. And the problem, of course, is that you’ve got lots of process that can be involved with insiders and everything. And as long as I’m alive, you know, my interests are 100% with Berkshire. And the board, and probably and to some extent a little reluctantly, but they’d just say, “Well, Warren thinks the deal’s OK. It must be OK.” Which is true. (Laughs) So I could make a deal with anybody and it doesn’t get all messed up with process.

But on the other hand, if I’m not around, you know, the pressures are to directors to do whatever the lawyers tell them to do, and the lawyers tell them to do this and that. And then they want to bring in investment bankers to make evaluations. And the whole thing is a game from that point forward. And it’s expensive. It takes a lot of time. So it would be better if it happened while I’m alive and around, but there’s no reason — we’d rather have 100% than 91%, obviously, because more earnings for Berkshire. But there’s no reason to try and do anything with either the Scott interests or Greg, unless they want to do it. And the logical thing is if anything happened with the Scotts, we’d certainly offer it to Greg. But who knows what happens in the future. The one thing I can guarantee you, Berkshire Hathaway holders will never be taken advantage of, and, you know, you can sue my estate or something like that (Laughs) if anybody felt differently about that. It isn’t going to happen.

But it’s a lot easier if it’s done while I’m around, actually, than if it’s done later. But —

CHARLIE MUNGER: I wish we had 20 more conflicts of interest just like it.

WARREN BUFFETT: Yeah. (Laughter) Yeah. That’s exactly true. Yeah. No, it’s a perfectly logical question. But it was not a problem. And any answer that’s arrived at will be good for all concerned. And right now, I’ve got no feeling that — I have no knowledge at all of where the stock that the Scotts have goes or how they feel about it or anything. And that’s up to them. You know, Walter was our partner. As far as we’re concerned, we treat anybody connected with him as our partner. And they know that and they don’t have to worry about us taking advantage of them. And if they don’t do anything, we can understand that. If they want to do something, we can understand that. It’s a good question, though. Thank you.

10. Munger: I’m willing to risk investing in China

WARREN BUFFETT: OK. Becky?

BECKY QUICK: This question comes from Steve Blackmore in Bozemon, Montana. This is to Charlie. He says, “In the past you’ve made favorable statements about investing in China, in part based upon valuation metrics. What is your opinion now, and how much weight do you put on the actions of the government in your analysis?”

BECKY QUICK: “Do the recent communist party activities in China, including human rights violations, blatant cyber theft from U.S. companies and others, crackdowns on speech from business and media, et cetera, cause you to change your opinion on investing in China? And how do you evaluate the clear dangers of investing under authoritarian regimes, as recently evidenced by Russian atrocities in Ukraine?”

CHARLIE MUNGER: Well, those are good questions, and there’s no question about the fact that the government of China has worried the investors from the United States who invest in China. More in recent months in years than he did in the earlier periods. So there’s been some tension. And it’s affected the prices of some of the Chinese stocks, particularly internet stocks. Just in the last day or two the Chinese leader has sort of reversed course on that, and said he went too far and he’s going to pull way back and so on and so on. So we’re having some hopeful signs. But yes, there are more difficulties investing in, I mean, dealing with a regime in China than there are in the United States. And it’s different. It’s a long way away, and they’ve got their own culture and their own loyalties and so on and so on. And the reason that I invested in China is I could get so much better companies at so much lower prices, and I was willing to take a little bit of a risk to get into the better companies at the lower prices. Other people might reach the opposite conclusion.

And everybody is more worried about China now than they were two or three years ago. So that’s just the way it is.

WARREN BUFFETT: I have nothing to add. (Laughter) (Applause)

11. The benefits of Berkshire’s insurance float

WARREN BUFFETT: OK. Station eight.

TOM RINGE: Hi Warren and Charlie, my name is Tom Ringe. I’m from Wayne, Pennsylvania. It’s great to be back here after two years. Thank you very much.

WARREN BUFFETT: Thanks for coming.

TOM RINGE: In this year’s letter, you talked about insurance float, the evolution of float, the per share float, the effect on repurchase to increase the per share float. And in regard to the repurchase, I would say thank you as your partner for your careful repurchase, as well as careful issuance of our shares.

TOM RINGE: My question is about your expectation for the likelihood that float will be stable and the cost will be zero or close to that over time, with adverse years from time to time. What about Berkshire’s insurance businesses give you the confidence to make that statement when your competitors are trying to do the same thing, but haven’t been able to come close to achieving Berkshire’s record in cost and growth of float? Thank you.

WARREN BUFFETT: Yeah, well, they really aren’t trying to do the same thing, which is kind of interesting. The answer to your question is we wouldn’t be in the business unless it was my judgment that the likelihood, the weighted probabilities are higher that the float will be useful to us rather than costly to us. And nobody will know the answer to that for a very long time. So far, so good, but it is a judgment. And absolutely I could be wrong about it. But, you know, I think both Charlie and I would say that we think the odds are that it’s weighing better, and the odds are pretty good, and that we’re quite well-positioned to do it if anybody does it. But, you know, did we know 9/11 was coming? Or, you know, I mean, it is not a sure thing.

CHARLIE MUNGER: Just think of what the potential is, though, when you’re reviewing it. If we could buy common stocks we were virtually sure would give us 8% after taxes with our whole float, that would be a hell of a lot of money.

WARREN BUFFETT: Yeah, $11 billion. I can tell you what it’d be. (Laughs) $11 billion or $12 billion.

CHARLIE MUNGER: Yes, and it’s an enormous amount of money.

WARREN BUFFETT: Annually.

CHARLIE MUNGER: Yes. And the float has been growing, so relax. (Laughter) But we’re glad to have the float.

WARREN BUFFETT: But Charlie’s talking a couple of ifs there, if we could earn it, and if we could. The answer is, you know, it’s our job and we think we can do it as well as anybody, or we wouldn’t be doing it. But it’s our job to figure out what businesses we want to be in, and when they don’t make sense, reluctantly, occasionally, to give up on them, like the textile business. But those are the hard decisions. And insurance, I didn’t have the faintest idea back in 1967 when Jack Ringwalt stopped by the office at about a quarter of 12:00. And Charlie or I set him up. And Jack, about once a year, he’d get mad at the regulators. He just didn’t like being regulated. And he’d say to himself, you know, “I’m going to sell this damn thing.” And Charlie caught him one day and he said, “Jack was in heat.” You know, I said, “Bring him around.”

So he came up quarter of 12:00, and Jack said he wanted to get rid of this damn business. The regulators were driving him nuts or something. And I said, “Fine, I’ll buy it.” And I said, “What price do you want?” And he said, “Like, $50 a share then.” I said, “Fine, we’ve done it. We don’t need an audit, we don’t need anything.” And then Jack started, and then he says, “Well.” Immediately he really changed his mind, but he was too honorable to back out. So he said, “Well, I suppose you’ll want me to sell you the agencies.” And I said, “No.” And, of course if I’d said yes, then he’d say, “Well, then we can’t do it.” So I just said, “No, you keep them, Jack,” you know.

And he says, “I suppose you’ll want me to do,” and I said, “No, no, I won’t want you to do that.” He was hoping I would just give him an out. But after doing that for 15 or 20 minutes, he saw that I was going to agree to everything he said, and he said he’d sell it to me at $50. So he forward through. And that was that. And, (CHEER) you know, it was pure luck. And Jack —

CHARLIE MUNGER: Now, but Warren, we really like our float, don’t we?

WARREN BUFFETT: Pardon me?

CHARLIE MUNGER: We really like our float.

WARREN BUFFETT: Oh, yeah.

CHARLIE MUNGER: We love it.

WARREN BUFFETT: No, we’ve made the most of it, but we didn’t make the most of it until Ajit came along. (Laughs) And, you know, who knew that the guy was going to walk into my office in 1986 and, you know, I would decide that he was the guy to make this damn thing work that I hadn’t been able to make work the way I wanted it to? And who knew that GEICO would come along later? There’s just all kinds of things. The one thing you have to do is be prepared when opportunity comes. You really do have to just move. And fortunately I operate in an environment, and I wouldn’t operate in any other environment, I’d get out of there, but I operate in an environment where I can do it. And it would be crazy of the board to say, “We want to set up a committee to review every acquisition,” and all that. And I would say, “That’s fine, but you can work with somebody else because (Laughs) I just don’t like to go through all that stuff.”

You know, I’ve got other things to do with the rest of my life. There’s so much luck, but you do have to be mentally prepared to do something when it makes sense, and do it big time, and do it instantly. And then you’ve got to be sure you’ve got the resources to do it.

CHARLIE MUNGER: The relative absence of bureaucracy at Berkshire —

WARREN BUFFETT: Unbelievable.

CHARLIE MUNGER: —has made the company a lot of extra money for a very, very long time.

WARREN BUFFETT: And it’s made my life happier.

CHARLIE MUNGER: And yes, that’s ideal. (Applause)

WARREN BUFFETT: Yeah, but in the end, we are extraordinarily well-positioned to do exactly what we want to do with float, while at the same time never putting ourselves in the position, never coming close to making a promise we can’t keep. We had two small insurance subsidiaries well before Ajit, with two companies I had bought. One I really didn’t know that much about, the other one I did it all by myself. And they were disasters. And left alone, which they could’ve been, they’d have gone bankrupt. And we just didn’t want to do it. So, you know, we could pay the liabilities if the parent company got involved, or we put it in another insurance company or something, and we did it.

12. “I look at Berkshire as a painting”

WARREN BUFFETT: I mean, Berkshire, you know, in a crazy way, I look at Berkshire as a painting. You know, and it’s unlimited in size. It’s got an ever-expanding canvas and I get to paint what I want. And if somebody wants to paint something else, then I’ll (Laughs) get a smaller little thing and I’ll paint away. And, you know, I actually, you know, I don’t know anything about paintings. Take me to an art museum, and you know, all I really want to know is where the men’s room is. But, (Laughter) you know, I’m just not interested. And other people look at paintings and they see something. And then they see something additionally later on. I mean, they really have a different sort of perception ability in relation to that. And to me Berkshire’s a painting and I get to paint. And, you know, the object, obviously I want my partners to come out well in it. But the real thing I like is the painting.

And as long as, you know, it’s in my head and I see different things in it as I go along, and you know, it’s, you know, the closest thing I can come to enjoying myself every minute of the day. And I don’t prescribe it for other people. And occasionally I, well, not so occasionally, but I see things in the painting, you know, I think, “Well, I should’ve done that differently.” And I go back and paint it over. And it’s satisfying. And who knows why human beings react in that manner. But I do know what makes me happy and what doesn’t make me happy. And I found what makes me happy. So why in the world would I change it? (Laughs) So that’s a short answer to a question that I can’t remember what it was. (Laughter)

13. Economic stimulus was needed, but it has fueled inflation

WARREN BUFFETT: OK. Becky?

BECKY QUICK: This question comes from Andrew Kesaw (PH) from Minneapolis, Minnesota. He says, “Last year Warren mentioned that inflation had noticeably impacted the prices that Berkshire’s businesses were paying and charging. Given those inflationary trends have continued, and in some cases accelerated since last year’s meeting, could you comment on how this particular inflationary period ranks among previous such periods in the United States, like the 1970s and 1980s? And what can American businesses and citizens do to reduce the negative impacts that inflation brings about?”

WARREN BUFFETT: Well, we’ve sort of attacked them, what you do yourself, and then, you know, you develop the skills that people are willing to pay for in the future, regardless of what the unit of exchange is. But in terms of inflation in our own businesses it’s extraordinary how much we’ve seen. You know, I think you interviewed Irv Blumkin at the Furniture Mart, and two years, you know, the prices have just kept coming in higher for these things. And we sell them for higher prices, and people have more money than they’ve had before. And they like to buy. And there are certain things they can buy. It’s like during World War II, you had a lot of money created, and people couldn’t buy cars, and they couldn’t buy refrigerators, and they couldn’t even buy as much sugar or coffee or things as they wanted. And they had little stamps for gasoline and all kinds of things. Well, eventually if you get a lot of money in people’s hands and you don’t have very many goods, prices go up.

You can do all kinds of things to, you know, try and talk it down. And, of course, inflation is never the same. Nothing in economics is the same the second time after it happens than the first, because the first affects people’s attitudes in the second, and their attitudes always influence the activity itself. I mean, it is an interesting phenomenon. People write a textbook, and they write it based on the last experience. And people read the textbooks, so they behave differently next time. And then they wonder why they’re getting a different result than they got the time before. So anyway, we have sent out lots and lots and lots, and when I say “we” I mean the United States government, the government has sent out lots of money to people. And at some point, you know, the money can’t be worth as much as it was when there was less money out. Here’s an interesting figure that I think probably will astound you. It astounds me, anyway. The Federal Reserve, every Thursday, puts out a balance sheet. And the Federal Reserve and Treasury, they’re complicated institutions.

But they do put out this kind of consolidated statement of all the various Federal Reserve banks, all these things that have entered into legislation over the years. But there’s a balance sheet. And 15 years ago, roughly, if you look, you know, the Federal Reserve issues those notes I talked about a while back. And there’s the current one. (Laughs) And they print these pieces of paper. And they, one way or another, they get into the hands of people. Well, the interesting thing is, people said cash is dead and all that sort of thing, you know, cashless society. Well, there were $800 billion, go back ten or 15 years, about $800 billion of currency in circulation. And if you look at last Thursday’s report, you’ll see there’s something like, now, $2.2 trillion of currency in circulation. $2.2 trillion. Now, there’s about 330 million people in the United States. Let’s look at it that way.

And with 330 million people, and you have almost $2.3 trillion of currency in circulation, that’s $7,000 per person, every man, woman, and child, in theory, has $7,000 worth of currency. Well, you know, that isn’t right. But you do know that the Federal Reserve’s bookkeeping is essentially right. They’ve got that much that’s out there. I don’t know where it is. I mean, I don’t know whether it’s in Russia. I don’t know whether it’s in South America. I don’t know where, you know, I don’t know whether Charlie’s got it all. I mean, (Laughter) it’s a staggering sum, you know? Cash is dead, and yet we, on average, have $7,000 for every person in the United States. Now, while you’re absorbing that, think for a moment what would happen if the U.S.

government said, well, they work it out in private and they decide that they’re going to send, the Federal Reserve, and I’m not going to blame the Federal Reserve for this, someone back in Washington decides they’re going to send out $1 million to every household in the United States. And there are 130 million households in the United States or something like that, you know? And they’re going to mail you $1 million in cash. And there were a couple provisions attached to it. One is if you talked about it in the next 30 days, the money disappeared. So just like in one of those old TV shows or something, and poof, disappears. And after 30 days you could spend it. Well, all of a sudden, the household wealth of the United States, the Federal Reserve puts out an estimate, is $130 trillion or something like that. So basically, you’ve doubled the household wealth. And all you’ve done is mailed out people, but then you don’t tell them you’re doing it with everybody. You just say they won the lottery, or whatever it may be.

And now you’ve got an amount equal to household wealth. On average people have doubled. They’ve got this extra $130 trillion of wealth. And in a month, they can spend it. Well, what’s going to happen? Well, prices are going to go up. But are they going to go up immediately? Well, you don’t know the other guy got it, you just know you’ve got it, so you don’t really feel like you’ve got to rush out and buy things. But as soon as word gets around, well, we’ve mailed out, if you look at the amount we’ve distributed, the federal government, I’m just talking about the distribution of resources, we’re talking numbers like that. And it affects prices. It has to affect prices. If you had ten times as much, if you went home and you found out you had ten times the net worth you had yesterday but everybody else has the same thing, it doesn’t increase the amount of bread in the economy or the number of cars. It just means that the price, the value of this is going to go down.

And it’s purchasing power. You can’t buy more than exists. So it’s a very strange period where we have lots of money sent out to people, who one way or another were getting it, that they didn’t find as many things to buy as before. And we had supply chain disruption. And you have all these things happen. But the end of it is they go into the Nebraska Furniture Mart and they just start buying things. And they do it with our other companies. And they do it in very peculiar ways. And now they’re buying, I mean, one thing, jewelry stores were, generally speaking, not a very good business. And two years ago, every landlord that had a jewelry store, or multiple jewelry stores in their mall, you know, was wondering how they were going to get their rent. And now every jewelry store virtually is doing incredibly better than they ever dreamt with way less inventory, because people just come in and buy. They don’t wait for sales. You know, when they walk in the store they’re going to walk out and they’re going to have bought something. And they paid for it.

They’ve got the money. So we are seeing an unleashing of the fact that we’ve just mailed a lot of money to people, one way or another. It’s very indirect, and it all gets complicated when you talk about a big system. But this is what’s happened. And I will guarantee you that if we mail out $1 million to every household in the United States, and you don’t know that it’s happened, you know, you don’t really expect much to happen in behavior tomorrow. But somehow, at some point, and then if you start doing that every month, we’ll say, and people really know you’re doing it, then they start anticipating it and buying ahead of time and forward. I mean, there’s a million things that happen in economics. But the answer is we’ve had a lot of inflation and it was almost impossible not to have, if you’re going to mail out the kind of money we’ve mailed out. And it’s probably a good thing we did it.

In fact, I think there was one point when the Federal Reserve, which in fact creates the money, if they hadn’t done it your lives would be a lot worse, a whole lot worse now. And that was an important decision. And that’s why you’ve had inflation. And heaven knows, I mean, it could end. You can throw the country into recession. You can do all kinds of things. The country’s going to have recessions, incidentally, and it’s going to have depressions periodically. And things will happen differently. And you’ll read a newspaper today and you’ll wonder a year from now, “Why was I reading the newspaper a year ago?” I mean, it’s just the way it works. When I bought the first stock in 1942, did I know everything was going to happen afterwards? Of course not. I didn’t know a damn thing. But I just needed to have one idea. And that idea wasn’t really well-formed, it was just probably the way practically every kid felt about the country when we’d just gone into a war, you know?

We thought America was going to win. And if America was going to win then, it was going to win just generally. And savings bonds were paying 2.9%. I learned that because we bought them. They called them war bonds originally, and then they called them defense bonds, and then they called them savings (Laughs) bonds. But they were the same thing. And you print loads of money and money’s going to be worth less. Not worthless. I got in trouble doing that one time at CNBC, because I said it was going to be worth, separately, less. But it got contracted down to “worthless”. (Laughter) So it took me a few years to learn to separate those words somehow. Anyway, that’s everything I know about economics and more. And Charlie can probably improve on it.

CHARLIE MUNGER: Well, it happened on a scale which would never seen before. Those checks are just mailed out to everybody who claimed to have a business and claimed to have employees. They’ve probably drowned the country in money for a while. And as you say, they probably had to do it. But it was something that had never been done on that scale before.

WARREN BUFFETT: But we had a problem we hadn’t had before.

CHARLIE MUNGER: Yes, oh (Laughs) no, I’m not saying it wasn’t a good idea.

WARREN BUFFETT: I mean, in my book, [Federal Reserve Chairman] Jay Powell is a hero. I mean, it’s very simple. I mean, he did what he had to do, you know? If he had done nothing, I mean, he would be, you know, it’d be very easy to engage in what you would call thumb sucking then. And plenty of, I shouldn’t say plenty of, but there are other Fed chairmen that would’ve been sucking their thumbs. And the world would’ve fallen around them. And nobody would’ve exactly blamed them, they would’ve blamed the virus and the Chinese and all kinds of things.

CHARLIE MUNGER: Well, the really interesting company is Japan, where first they bought back all the debt, then they started buying back all the common stocks. Now, that’s really weird. And what did they get? Twenty five years of stasis. Who would’ve predicted that?

WARREN BUFFETT: Well, nobody predicted anything. I mean, (Laughs) there’s nobody’s predictions that we’re interested in, including our own. I mean, it’s very simple. What we do know is that we can deserve your trust, and there’s no reason to do things that don’t deserve it. And we can’t tell, but basically we think we’re trying to build a Berkshire that can’t withstand a nuclear exchange, but it can withstand as much as anything that we can do anything about. And that leaves us feeling good. It doesn’t leave us feeling perfect. We’d like to even promise you more than that, but we can’t promise more than that. So it’s very simple.

14. Should GAAP accounting rules be changed?

WARREN BUFFETT: And with that one we’ll move on to 18. Let’s see, that’s station nine.

ELI ABUSHAKAR: Dear Mr. Buffet and Mr. Munger, I’m Eli Abushakar (PH) from Montreal, Canada. I would like to thank you for everything you’ve done for us, your fellow shareholder. My question is regarding the GAAP rules. If you were to change it, what would you change? What would it look like? Thank you.

WARREN BUFFETT: Well, I would resign the job. What would you do, Charlie? (Laughter) No, it’s an impossible problem. Because first of all you have to decide what GAAP is supposed to reflect. And it doesn’t reflect value. But in certain cases, of course, it is important to say that this is value and so on. I mean, it’s a convention and it is done so that the auditor generally is protected, because otherwise everybody sues everybody in this country for anything. And it’s designed to cause people who want to report a given amount of whatever is desired by the market to largely be able to do it. And I don’t know how I would write the rules. I mean, I’ve watched people who I would be delighted to have live next to me, you know, if I was going away for two weeks and my kids were to stay at somebody’s house, it’d be fine with me if they stayed there. If I lost my wallet someplace and they found it, they’d return it to me. But they’d play games with any number that came to them.

And, of course, it’s a very awkward thing to be on the audit committee of a company where people are playing around with the numbers. And they don’t want you, if you raise a stink you’ve got all kinds of problems. And I actually wrote something some years ago. I was kind of anticipating your question about 15 years ago, I guess. And I wrote four suggestions for questions to be asked of the audit committee. And I don’t know whether I was on the audit committee then of Coke or whatever. But anyway, I mean, it was just clear to me what was happening. But you really had to follow the charade, or you got in all kinds of trouble for doing that too. And so, I just put four questions out that I would want to know. And they were perfectly logical questions. And then nobody adopted them. I mean, (Laughs) and the system was fine as it was. The auditors got sued, but not that often. And the SEC had lots of rules, and I admired the SEC enormously. I think the country’s better off because of the SEC.

But it is a hopeless question, or problem to devise rules that people can’t get around. My friend that was a writer said, “It’s not the illegal things that are outrageous, it’s the legal things.” It’s very hard. You try and it’s worthwhile. You need an SEC. But the SEC can’t really stop stuff that, you know, you would find outrageous if explained. And the auditors have the same question. I mean, the auditors, they want rules, and they want processes, and they want it to be so they can operate. Charlie, he was on the audit committee of Salomon, and we had probably literally millions of contracts where people put numbers in and he found that $20 million, we had the largest auditing firm in the country then, Arthur Andersen, as I remember Charlie —

CHARLIE MUNGER: They’re gone now.

WARREN BUFFETT: Yeah, they’re gone now. But they were (Laughter) the largest. And Charlie found a $20 million error I think one time in an audit.

CHARLIE MUNGER: They called it a plug. When your accountant starts talking about a plug, it’s not good. (Laughter)

15. Salomon’s “floating plug”

WARREN BUFFETT: Well, I’ll tell you a story I haven’t told before. (Laughs) You saw in that movie, people over here saw me testify in August before a subcommittee who were out, you know, to get their way. And I just decided, you know, I was just going to answer every question honestly, and I was not going to try and draw up everything. And then so I just sat in front of them, and said what I knew and didn’t know. And one of the things I said, which was absolutely true, is that I’d only been there ten days or so at Salomon, but I said, “I really haven’t seen anything yet that strikes me as terrible in accounting.” But I’ve been there ten days. But this guy who got us in all this trouble, so far he’s the only thing I’ve found. I don’t know what else is going to be found, how in the hell could I know what was going on in a place that was doing, you know, incredible numbers of transactions and everything?

Well, I said, you know, “What I’m seeing, the accounting strikes me as legit.” About a month later, I was so happy I’d testified earlier and not later, a very fine CFO, and these are decent people. They’re very decent people. And he comes in and he said, “Warren, there’s probably something you should know.” And I said, “Well, what’s that?” And he said, well, 12 years earlier, or whatever it was, Salomon had merged with Phibro, which was a huge trading company. Salomon was a huge investment banking company. And they became this huge powerhouse. And he said that 12 years ago when we merged with them, we sort of couldn’t find exactly, they were on a trade basis and we were on a settlement basis. And then he said we never really figured out how to put the books together. This was the largest audit company in the United States, Arthur Andersen, that’s responsible for signing this thing. So, we had this number and every day it moves around.

And it’s just put in there to make assets equal liabilities. (Laughter) And, you know, today it’s $173,412,000, you know, and down to the penny. And tomorrow it’ll be something different, you know? And I thought to myself, “I am sure glad I testified before Congress a month ago, because I did not know then.” But if they ever ask me again, I’m going to tell them exactly what happened. “We’ve just got this number that floats around every day, and we haven’t found it in 12 years, and Arthur Andersen doesn’t know where it is.” (Laughter) And, you know, you’ve got to make the assets equal to the liabilities, right? So what else do you do? And that’s exactly what happened. And strange things happen in this world. This one guy —

CHARLIE MUNGER: I think the name was the floating plug. (Laughter)

WARREN BUFFETT: Yeah, you know, yeah. And Charlie’s on the audit committee. (Laughter) Yeah, the one thing I’ve always suggested, nobody ever wants to do this, and I can understand why, but you’ve got trillions of dollars worth of contracts and everything that people are putting down little numbers for every day at banks and investment banks and all over the world. I mean, commodity traders, and at Berkshire we stick down, you know, there’s certain hedging the even the regulators want us to do in terms of giving utilities. And we put a little number in. And I made this suggestion once or twice that if you really want to do something sort of interesting, you know, just get some young guy that, give them a couple of weeks and pick the hundred most kind of complicated, long-term, you know, lots of wording derivative contracts. And look at what one side who promises to do something values it at, and look at what the other side, who also reports. You know, and just let them do it for 100 operations at random.

I’d just like to know if we’re valuing a contract at $28 million, the other guy’s valuing it at $33 million. You know, and you’ve got the same auditing firm in both cases. And they’re signing their name to it. I don’t think anybody’s ever done anything (Laughs) with that suggestion. And, you know, that would be the first thing I would do, actually, if I really wanted to sort of dig into what was happening in accounting. But there’s a lot of things in life you can’t change. And nobody is going to go looking for ways to create lawsuits and newspaper stories, (Laughs) and all kinds of things. And I don’t blame them.

16. How to get a fairness opinion at a discount

WARREN BUFFETT: Listen, I had brought one thing I just couldn’t resist. I was hoping I’d get a question, so I’ll ask it myself. (Laughter) I was hoping to get a question that how could some guy be so idiotic as to propose a price of $848.02 or whatever it was, or is, for Alleghany Corp? I mean, isn’t that getting a little scientific, you know? (Laughs) And, of course, I did provide, when I made the offer, that it be $850, less whatever was paid to whatever investment banker they wanted to select, Alleghany in this case, and they’re bound to have to do it because Delaware law is developed in such a way that the directors are protected if they get expert opinions, all that sort of thing. So, I don’t fault anybody in the system. But I just thought it might be useful, actually, maybe to Delaware judges someday, Delaware statute makers, maybe people that are writing papers, who knows.

But I suggested that we just, since I’m willing to pay $850 a share for the place as is, you know, if the advisory fees are $10 million or $40 million, that it makes a difference to someone. And it’s always made a difference to us as the buyer, but that’s just the way the game was. Well, there’s a little history to that. And I went back and there’s been twice, and nobody’s ever paid any attention to this, but there’s been twice in the history of Berkshire Hathaway, 57 years, twice that Berkshire was required to get a fairness opinion. And it was perfectly logical that we be required to get a fairness opinion in those two cases, because in one case Diversified Retailing, which was a company I was invested in, in both of them that came out of our partnership, but one had a group of shareholders that were different than the other group of shareholders at Berkshire, and the two wanted to merge, so you have two companies, with me being the biggest beneficiary between.

And it really wasn’t up to me to determine the ratio, I mean, even though I am the most involved. But I had a little more of one company than the other. So anyway, a fairness in opinion was required. And this has only been twice in the history of Berkshire that one was required. So naturally I went to Charlie, and I said, “Charlie,” you know, “We do have,” I mean, Charlie told me, he knew it better than I did, “We need a fairness opinion in this case.” And I said, you know, “I know what’s fair, you know what’s fair, Sandy knows what he thinks is fair.” If the three of us owned it, in ten minutes we could’ve worked out a deal that all three of us regarded as fair. But because there were public shareholders and everything, it wasn’t right to do it that way. And the first one, we have two of these, but the first one was November 27th, 1978.

And I told the shareholders, essentially, that my personal belief is that both Diversified and Berkshire shareholders will benefit from the merger, but I will vote for the merger only if a majority of the shares, which are voted by other shareholders of each company, are voted to support, which was fine. I committed myself, you know, to let the people decide whether this was fair. But on top of that, we needed to get a fairness opinion from an investment bank with a big name and everything. And so I said to Charlie, “You know, these things are going for $1 million or $2 million,” where they get some guy that they hired last week and he writes up a little thing, and then we get a bill for $1 million or $2 million. They really haven’t done anything, they don’t know either company and, you know, there’s a million things they’re not going to know about it, but they’re going to write an opinion. And we need the opinion. I said, “So what do I do?” And I go to Charlie with these kind of problems.

And Charlie said, “Warren, it’s very simple.” He said, “Pick out ten prestigious investment banks and do exactly what I say.” (Laughs) So, “OK Charlie, what do I do when I get these ten?” And he says, “Well, put them in order, one through ten.” And he said, “Call the guy at the top of the list and tell him you’ll pay him $60,000 for doing a fairness opinion. And you know that it’s an insulting price and it’s ridiculous for him to do it because it’ll affect what he can get from other people down the line that will look back and say, ‘Well, Buffett only paid $60,000, why should I pay $2 million?’” And he says, “Just tell them that that’s what you’ll pay. And if they’re insulted by it, which they probably should be, that you’ll go to number two and offer them the same deal, and you’ll just keep going down till you get to number ten.

And if you don’t have anybody by number ten, you’ve told the other people, you’ll come back to number one again and you’ll say, ‘Well, I’ll pay $80,000,’ and then you’ll go down the list and example.” Well, (Laughter) so I picked ten names out and number one name was Jack Shad. And Jack Shad was a friend of Tom Murphy’s, he was a friend of Bill Ruane’s, and he was running E.F. Hutton. And he was a very, very, very successful investment banker. I didn’t know him as well as the others, but I’d met him through my friends. So, I called him up and I said, “Jack,” I said, “I’ve got this crazy request.” And he says, “Only because everybody admires you so much and my friends are your friends,” and blah, blah, blah, and E.F. Hutton is so well-regarded.

I said, “I’m going to ask you something that is totally against your interest, and I fully understand the fact that you’re going to say, ‘You’re an idiot to call me on this,’ and slam down the phone.” But I said, “Jack, here’s our procedure.” And I described this procedure that he gets called first, and if he turns it down then I go to Paine Webber, and then I go to, and (UNINTEL). And I tell him, “There’s these ten people. And if we don’t get any yeses, I’m going to come back to you again and I’ll offer you $75,000, and we’ll do the same thing till somebody says yes.”

And I said, “Jack, you know, but you are the first call, so $60,000 and it’s going to screw up your business if you do this, because every client you get in the future is going to say, ‘Well, you did it for Diversified Retailing and Berkshire, and why in the world should we pay you $2 million when he paid you $60,000?’” And Jack said, “Don’t worry about it Warren. (Laughs) I can take care of that.” He says, “We’re in.” And so we got a fairness opinion written for one side. And now the next call I made was to Paine Webber, and I gave them the same story. And I said, “E.F. Hutton was dumb enough to take the one side for $60,000.” You know, “I don’t know why the hell they’re doing it, they’re destroying their reputation and all that.” And Paine Webber said, “We’ll take the other side for $60,000.”

(Laughter) So we have a thing that describes the whole process.

CHARLIE MUNGER: They got (UNINTEL). They sent out an amiable alcoholic that they had to do something with. Well, what they did (Laughter) was they each billed us for $60,000 and we paid it. That’s what you get for $60,000.

WARREN BUFFETT: No, no, no. (Laughter) We got the same thing everybody else got, Charlie.

CHARLIE MUNGER: Yeah, I know.

WARREN BUFFETT: And, of course, Jack Shad, this was 1978, he was appointed chairman of the SEC (Laughs) for seven years. I mean, but Jack liked to do business. And it was true, it didn’t hurt him. They paid us $60,000 and then they went back and charged somebody else $2 million, you know, the next week. And it’s all play money. And so we did the same thing when we got to Blue Chip Stamps, where we were similarly conflicted four or five years later. We went back to the same two guys. And there had been a lot of inflation and everything like that. So we said $110,000 then. I’ve got the prospectus for that. And both of them said, you know, “Send it in, don’t worry about our other clients, we’ll figure out some story to tell them,” you know, and whatever it may be. But I just thought it would be interesting to, at some point, have people realize that it’s not play money. Somebody pays it. And it’s a game.

And, you know, but it’s what passes muster in Delaware, and the directors will have it explained to them by the lawyers that they’re not going to get sued if they do it in a certain kind of way. And, you know, so I just decided that somebody at some point ought to (Laughs) point out what actually is happening in this situation. And that’s why we did it that way. And, you know, it may go down with our earlier attempts to educate the world on the realities of finance and its various interactions, and why it’s better to teach your son to be an investment banker than to be an electrician, you know, or something. But you’ve got an eccentric chairman and that’s what he did. (Laughs) Charlie, how do you feel about this whole matter? It was your idea originally.

CHARLIE MUNGER: Well, we’re a little peculiar. (Laughter) And all the peculiarities are not bad.

17. Charlie gets an insurance claim paid

WARREN BUFFETT: I didn’t talk to Charlie before I did this this time. But Charlie has given me four ideas together on extremely practical matters, I mean, they just changed everything. I think you really ought to tell them about the experience with the fraud company, (Laughs) Charlie.

CHARLIE MUNGER: About what?

WARREN BUFFETT: About the fraud claim, you know, the Fidelity claim with the guy, you know, he had the very well-known insurance company that, we don’t have to name names. But, you know, when you basically told him, “Just raise the stakes to make the game fair.” This was back in the 1960s. Do you remember that?

CHARLIE MUNGER: I don’t remember.

WARREN BUFFETT: Oh, well I remember.

CHARLIE MUNGER: Well, tell it then. (Laughter)

WARREN BUFFETT: Charlie had this tiny little operation which he ran his fund, also had a seat on the Pacific Coast Stock Exchange. The firm was called Wheeler and Munger. It was called Wheeler and Munger at first, later it changed itself to Munger Wheeler, and Jack Wheeler said, “Well, pretty soon it’ll be Munger and Company, but that’s OK.” Jack Wheeler was a very interesting guy, and he had the specialist position in General Motors and a few things. And some employee stole, like, I don’t know, $12,000 or something like that from the firm.

CHARLIE MUNGER: Yeah. Well, I remember, he had the trading tickets.

WARREN BUFFETT: Yeah. Some guy steals some money, and Charlie’s firm, Wheeler and Munger, was required to have a Fidelity bond and all these things that governed dishonest employees and all of that sort. So this guy’s clearly dishonest. He’s clearly stolen the money. So Charlie puts in a claim for $12,000 or something like that, whatever the loss was, and sends it to this very big and prestigious insurance company. And, of course, the insurance company denies this claim. They say, you know, “The guy really wasn’t employed, he doesn’t exist, you don’t have a dog,” you know, I mean, the whole thing. And Charlie gets this letter back and they’re not going to pay the claim. And so Charlie writes a letter to this very well-known big name person that runs the insurance company. And he said, “Look,” he said, “We have this $12,000 claim.”

And he said, “That guy stole the money and we thought we had an insurance policy against people stealing, and paid us if people stole money.” And he said, “We’re in this very interesting position, because you’ve got a bunch of people on the payroll, and they’re going to get their weekly check or monthly check, whatever they do, so they just say, ‘We’re not going to pay,’ and life goes on. “Whereas I’m sitting here and I’ve got my time, I’ve got work on this thing, and it isn’t worth the $12,000 for me to fool around with this claim against the company, and they’ll appeal it,” and all these things. So he said, “I know that you would be offended by the thought that you might be using this inequality of bargaining position to avoid paying the claim. “That never could be your intention.

So, what I suggest in order to really live up to your code of behavior is why don’t we make the $12,000 claim, we’ll just multiply it by ten and call it $120,000 either way. And if you lose, you pay me $120,000. If I lose, I’ll pay you $120,000, and now it’s worth my while.” And (Laughter) he addresses the letter to the chairman and says that to the guy. He gets a $12,000 check by return mail. (Laughter) It’s not a bad lesson. He’s told me two others, but the tricks are too good. I don’t even want to share them now, I may use them myself someday.

18. Why Buffett wouldn’t buy all the bitcoin for $25

WARREN BUFFETT: OK, let’s go to Becky.

BECKY QUICK: We got a lot of questions on this topic. I’ll ask this one that came from Raj. He says, “Have you changed your views on bitcoin and/or cryptocurrency in any (Laughter) respect? I’m conflicted about this,” because his own views have slightly evolved during the past two years from bitcoin is a fraud and waste to bitcoin is in a speculative bubble but might have some uses.

WARREN BUFFETT: Well, (Laughs) I shouldn’t answer any question on the subject, but I will. You know, there’s all kinds of people watching this that are long bitcoin and there’s nobody that’s short, and nobody wants their windpipe stepped on. And I don’t blame them, I don’t like people to step on my windpipe. But I would say this, that if the people in this room owned all of the farmland in the United States, and you offered me a 1% interest in it, and you said for a 1% interest in all the farmland in the United States, pay our group, well, let’s see ten, 20, pay us this bargain price, $25 billion, I’ll write you a check this afternoon, $25 billion, now I own 1% of the farmland.

If you tell me you own 1% of the apartment houses in the United States and you offer me a 1% interest, so I’ll have a 1% interest in all the apartment houses in the country, and you want whatever it may be for it, call it another $25 billion or something, I’ll write you a check. You know, it’s very simple. Now, if you told me you owned all of the bitcoin in the world, and you offered it to me for $25, I wouldn’t take it, because what would I do with it? I have to sell it back to you one way or another. I mean, maybe not these same people, but it isn’t going to do anything. The apartments are going to produce rental, and the farms are going to produce food, and if I’ve got all the bitcoin I’m back where whatever his name was, who may or may not have existed was, you know, 15 years ago. If I’ve got it all he could create a mystery about it. But everybody knows what I’m like.

I mean, so (Laughs) if I’m trying to get rid of it, you know, people will say, “Well, you know, why should I buy some bitcoin? Why don’t you call it Buffett Coin, you know, and make your own or something? Do something. But I’m not going to give you anything for it.” And you’d be right, incidentally. But that explains the difference between productive assets and something that depends on the next guy paying you more than the last guy got. Now, net, if you look at it, a lot of commissions have been paid and, I mean, there’s all kinds of fictional costs that are very real that somebody has paid to a bunch of people who facilitate this game. But whatever one group of the public has taken out, or one group of owners, has come in from other people. I mean, other people have entered the room and they move money around. But there’s no more money in the room, it just changed hands with a lot of maybe fraud and costs involved and, you know, a whole bunch of things. You lose, you know, you forget the numbers or forget the equation.

You can do that with a lot of things. I mean, it’s been done throughout history. Certain things have value that don’t produce something tangible. I mean, you can say a great painting, you know, probably will have some value 500 years from now. It may not, but the odds are pretty good that if it was a big enough name at some point. There will be a few things. I mean, you know, you can find somebody to pay. If somebody wants to sell you a pyramid or something, and you can charge the viewers, you know, it’ll be around a long time and it would produce anything, but people will find it interesting to go there, because they’ve heard about the pyramids. But basically assets, to have value they have to deliver something to somebody. And there’s only one currency that’s acceptable in the United States. I mean, you can come up with all kinds of things. We can put out Berkshire Coins or, you know, we can put out Berkshire Money or anything like that. But we’d get in trouble, I guess, if we call it money.

But in the end, this is money and there’s no reason in the world why the United States government, whose currency people prefer. I mean, literally there’s just under $2.3 trillion just of these little pieces of paper floating around someplace, $7,000 for every man, woman, and child in the United States, even though most of them probably aren’t in the United States. Who knows. But this is the only thing that’s money. And anybody that thinks the United States is going to change to where they let Berkshire Money replace theirs, you know, is out of their mind. So anyway, with those few deficiencies, you know, whether it goes up or down in the next year or five years, ten years, I don’t know. But the one thing I’m pretty sure of is that it doesn’t multiply, it doesn’t produce anything. It’s got a magic to it and people have attached magics to lots of things. I mean, it’s a goal in Wall Street, you know, to create magic, you know? We are not an insurance company, we’re a tech company.

Well, they’re an insurance company. But a dozen people or so have raised a lot of money, they just say, “Just don’t pay any attention to the fact that we sell insurance. We are a tech company.” Well, in the end they wrote insurance and overwhelmingly they’ve lost a lot of money since then. You can make up things that work well in getting money from other people and that’s why —

CHARLIE MUNGER: I have a slightly different way of looking at it. (Laughter)

WARREN BUFFETT: I’ll sell you some then.

CHARLIE MUNGER: Well, (Laughs) in my life I try and avoid things that are stupid and evil and make me look bad in comparison with somebody else. And bitcoin does all three. (Laughter) And in the first place, it’s stupid because it’s very likely to go to zero. In the second place, it’s evil because it undermines the Federal Reserve system and the national currency system, which we desperately need to maintain its integrity and government control and company on. And third, it makes us look foolish compared to the communist leader in China. He was smart enough to ban bitcoin in China, and with all of our presumed advantages of civilization — (applause) — we are a lot dumber than the communist leader in China.

WARREN BUFFETT: Yeah, and when 25% of the people of the country get mad because we’ve said what we said today, just remember Charlie spoke last, and was the most — (Laughter)

19. Increased tribalism is dangerous

WARREN BUFFETT: The one development that I really do think is actually important, but I don’t know any way to do anything about it, but my general sense, and there’s no way to prove it, but I essentially believe people are now behaving somewhat more tribal than they have for a long time. And, I mean, people are always going to be partisan, and they’re going to have religious beliefs, they’re going to have all kinds of things. But it gets pretty tribal. And I speak from experience because I’ve been tribal. And, you know, we’re confessing today, and, you know, Nebraska football is tribal. And when I watch a television set, and I see our guy, Nebraska, step out of bounds by a foot, but somehow the ref misses it and calls it “in,” and then they show six replays, I’ll continue to believe it was “in” even though it’s right in front of my eyes that they stepped out. You know, that’s tribal behavior. And it’s fun. I mean, (Laughs) to participate in.

But it can get very dangerous when one group of people say, “Two plus two is five,” and the other say, “Two plus two is three,” you know, and they’re going to give you those answers if you call them. And the interesting thing is, to me at least, and partly because of my age. But I actually think, just from memory, that the last time that the country was seen as tribal was actually when I was a kid and Roosevelt was in: Either you hated Roosevelt or you loved him. I mean, nobody cared about the fact Alf Landon was running, or Wendell Wilkie was running against him. They just had these feelings: They either had Roosevelt’s picture on the wall, and named their kids after Roosevelt, or they hated him and they thought he was going to, you know, “Oh, a third term?” and, you know, a million things. And the country was very, very tribal in the ’30s, but Roosevelt’s tribe was bigger. And, in my opinion, they did some wonderful things.

But I happened to grow up in a household where we didn’t get served dessert until we said something nasty about Roosevelt. I mean, and, believe me, if you don’t get dessert, you’re going to say something nasty about Roosevelt. (Laughs) And so you trained them young, and did, you know, all kinds of things. And so, I think I’ve seen a period that wasn’t that way, when Eisenhower was running against Stevenson, or whatever it might be. I mean, you know, people had a partisan behavior, and they had a certain amount of “tribal” always. But I don’t think it’s a good development for society generally when people get tribal, regardless. (Applause) Charlie, what tribes are you a member of? (Laughs)

CHARLIE MUNGER: Well, in California, we have a legislature which is completely jerrymandered so nobody can ever be thrown out by the voters. And, therefore, the only people in the legislature are insane rightist and insane leftists. And they get together every ten years, and there’s usually six moderates somewhere in the legislature, and so they re-jigger all the districts to throw them out, because neither part can stand them. Now, that is government in California. (Laughter)

WARREN BUFFETT: Yeah? And you live there and you have to go back? (Laughs)

CHARLIE MUNGER: Yes, yes.

WARREN BUFFETT: I’m sure you’ll —

CHARLIE MUNGER: And I prefer living there to living in Russia. (Laughter) (Applause)

WARREN BUFFETT: OK. Who haven’t we gotten in trouble with yet? (Applause) Who was it, Lennie Bruce, that used to say, “Is there anyone I’ve forgotten to offend?”

20. Buffett’s favorite boss

WARREN BUFFETT: Yeah. Section 10, I believe.

SAHEJ: Hello, Mr. Buffet and Mr. Munger. My name is Sahej, I am from New Jersey. And I’m currently a freshman at Rutgers University. You knew quite early on that you wanted to be investors, and you’ve obviously been amazing at it. What advice would you have for someone who’s still trying to figure out what they want to focus on and find their calling?

WARREN BUFFETT: Well, that is a very interesting question. Because I was very, very lucky. In that I found what I wanted to do because my dad happened to be in a business that he wasn’t interested in, but they had some books down there, and I loved my dad, and I’d go down and read the books and they interested me. And, you know, I’m glad he wasn’t a professional boxer or something, or, you know, I wouldn’t have any teeth left or anything else. (Laughs) It was accident, just totally accident, but I do think you know it when you see it. And it doesn’t mean you can follow. I would tell the students, as I wrote in the report, I mean, you know, “Find out what you love doing.” I mean, you spend most of your life doing it, and why in the world would you want to be around for a lifetime working with people that you didn’t like? Unless you had to, which sometimes happens. Just work for whomever you admire the most. I gave a talk at Stanford one time.

And somebody showed up at Tom Murphy’s office, I think, a couple of days later. That person was right. And, of course, it’s what I did when I got out of school. I wanted to work for Ben Graham. I mean, I didn’t care what I got paid, it didn’t make any di — you know, I just knew that that’s what I wanted to do. And then I pestered him for three years and he finally hired me. And then I found somebody else that I’d even rather work for than Ben, who happened to be myself. (Laughter) And so I’ve been working for myself ever since. But I had about four bosses in my life. You know, I went down to The Lincoln Journal. Name slips my mind at the moment, he was a wonderful boss. And it was Coopersmith at J.C. Penney’s here in Omaha, and they all were wonderful people. But I still preferred working for myself. And, of course, Charlie and I both worked for my grandfather, and we just didn’t find it that interesting.

I don’t remember, why’d you ever decide to go to work at the store, Charlie? Charlie worked there in 1940, I worked —

CHARLIE MUNGER: Well, I worked just for the experience of working, I didn’t need the money. My father gave me an ample allowance and I also had a private business. So, I was kind of working as a lark in your grocery store.

WARREN BUFFETT: Twelve hours a day?

CHARLIE MUNGER: Yes.

WARREN BUFFETT: At — for a lark?

CHARLIE MUNGER: Yeah, as a lark, yes.

WARREN BUFFETT: Do you consider that a good investment of your time? (Laughs) I mean, just looking back on it?

CHARLIE MUNGER: Well, I’d never done it before, and I wanted to have a little of that experience. And I wasn’t going to do it very long.

WARREN BUFFETT: Hmm. (Laughter) That sure as hell wasn’t the reason I worked. (Laughs)

CHARLIE MUNGER: Well — you know, I could give that young lady the advice. Figure out what you’re bad at and avoid all of it.

WARREN BUFFETT: Yeah. (Laughter)

CHARLIE MUNGER: That’s the way Warren and I found our profession.

WARREN BUFFETT: Absolutely. You know, we —

CHARLIE MUNGER: We failed at everything else.

WARREN BUFFETT: We worked at everything till we found the ideal employers: ourselves. (Laughs) You know? And that was something we really admired.

CHARLIE MUNGER: I know: Warren said, “Work for somebody you admire.” (Laughter) The only one he knew was the one he was shaving.

WARREN BUFFETT: I think he was self-employed.

CHARLIE MUNGER: Because he and I were shaving.

WARREN BUFFETT: But it isn’t bad advice. It isn’t bad advice. I mean, if they’ve got an option. I mean, Charlie went into the service in whatever year it was, in the ’40s, and he didn’t really have a choice of who he was going to work for. And, as I remember, it didn’t really work out that well (Laughs) who you worked for, Charlie, did it?

CHARLIE MUNGER: Well — if you stop to think about it, there are two things that neither one of us has ever succeeded at: One, we’ve never succeeded at anything that didn’t interest us, right?

WARREN BUFFETT: Right.

CHARLIE MUNGER: And we’ve never succeeded at anything that was really hard where we didn’t have much aptitude for it.

WARREN BUFFETT: Yeah. And we’ve been doing whatever we pleased for 60 years.

CHARLIE MUNGER: Yeah, we did.

WARREN BUFFETT: And, you know, we have fun in our way, and —

CHARLIE MUNGER: I’m just amazed. You’d think, if you’re smart, you could do things that don’t interest you well. But you can’t.

WARREN BUFFETT: Well, I’ve certainly got a lot of examples in my own case. But we won’t get into them here.

21. Munger likes having big U.S. oil reserves

WARREN BUFFETT: And we will go to Becky.

BECKY QUICK: This question comes from Foster Taylor, in Tulsa, Oklahoma. He said he recently listened to the Berkshire Hathaway 2008 Annual Meeting, where you talked about global oil production. At the time you talked about major ramifications if global oil production went below 85 million barrels in 25 years. We are at the 14-year mark, and global oil production looks to be 79 million barrels. At the same time, we’re depleting our strategic oil reserves. Should the United States be doing something differently, and do you see consequences to these actions in the next ten years if we do not become more proactive?

WARREN BUFFETT: Well, Charlie’s the expert on oil.

CHARLIE MUNGER: Well, but — (Laughs)

WARREN BUFFETT: Only compared to me. (Laughter)

CHARLIE MUNGER: Samuel Johnson said, “It’s hard to determine the order of precedency between a louse and a flea.” And it’s hard to tell which of us is more incompetent in oil. (Laughter)

WARREN BUFFETT: We’re still competing. (Laughs)

CHARLIE MUNGER: I have a different view on this subject. I like having big reserves of oil. If I were running the benevolent despot of the United States, I would just leave most of the oil we have here, and I’d pay whatever the Arabs charge for their oil and I’d pay it cheerfully and conserve my own. I think it’s going to be very precious stuff over the next 200 years. And nobody else has my view, so it doesn’t bother me, I just think they’re all wrong.

WARREN BUFFETT: Yeah. (Laughter) Well —

CHARLIE MUNGER: But at any rate, that is not the normal view.

WARREN BUFFETT: And we’ve been pretty flexible on our own view. I mean, actually, the Federal Government is serving up however many billion barrels of the stuff into the economy. And, you know, it wasn’t that long ago that, you know, the idea that anybody produced a barrel of oil was somehow something terrible. I mean, just try doing without 11 million barrels a day and see what happens tomorrow. It is something that everybody has a feeling on, immediately. And, you know, this gets into a whole bunch of different tribes of sorts, and you offend an awful lot of people if you talk in any way about it. But, in the end I think, at the moment at least, most people feel that it’s nicer to have some oil in this country than not have it. And we’re using a lot of it. And if we were to try and change over, in three years, or five years, nobody knows what would happen, but the odds that it would work well are extremely low, it seems to me. Charlie, why don’t you say something more dramatic so you’ll be the one that offended the most people? (Laughter)

CHARLIE MUNGER: Well, if you stop to think about it, the oil industry is being so vilified now, I can hardly think of a more useful industry, and I don’t know about wildcatters, but certainly the petroleum engineers I know, and the people who design our oil refineries, and pipelines, are some of the finest and most reliable people I know. And I see very little trouble (Applause) with the oil supply thing in the United States. So I’m basically in love with Standard Oil. And I don’t have this feeling that it’s an evil, crazy place. I wish the rest of the world worked as well as our big oil companies.

22. Deciding whether to buy back Berkshire stock isn’t that hard

WARREN BUFFETT: Well, we better move on to station 11. (Laughs) I’m not sure whether station 11 is operative?

GLEN TONGUE: Well, we’re here. Greetings from the Overflow Room. My name is Glen Tongue, I’m a shareholder from New York. This is my 20th Berkshire Annual Meeting, and I’m delighted that we’re able to, once again, be here in person. You two have brought tremendous joy to all of us through the years, and, speaking personally, your wisdom has not only made me a better investor, but, more importantly, a better, happier person. It’s a privilege and honor to thank you. So, Warren and Charlie, thank you. (Applause)

CHARLIE MUNGER: Well, that’s my kind of a question.

WARREN BUFFETT: Yeah, that — that’s fine.

CHARLIE MUNGER: Let’s have more of those. (Laughter)

WARREN BUFFETT: Yeah, or you can say it again. (Laughs)

CHARLIE MUNGER: Maybe you could sing it. (Laughter)

GLEN TONGUE: Maybe I should quit at this point.

WARREN BUFFETT: Glen go to it.

GLEN TONGUE: My question relates to share repurchases. Since you started buying back Berkshire shares, in size two years ago, the repurchases have ranged between $1 billion and $3 billion per month. By my estimate, it appears that the buyback rate is about $3 billion per month when Berkshire’s trading at a 20% or so discount to intrinsic value, $2 billion per month at about a 10% discount, and a billion per month at a zero to 10% value. Do I have that approximately right? And do any other factors influence the rate of share repurchases?

WARREN BUFFETT: Well, after you were so nice in your introduction, I have to say that (Laughs) you’re actually wrong in that. If somebody had offered us $50 billion worth of stock at a certain point in the last three or four, five months, we’d have taken it. You know, it’s that simple. And, as I mentioned earlier, we haven’t bought any stock in April. It’s something that, when we can do it, and we know, at least we think the probabilities are very high, we certainly believe it in terms of our own evaluation and our own investment, if we think that we’re improving things for the remaining shareholder, we’ll buy it back. And if we don’t, we don’t buy it back. And if we have the choice of buying businesses that we like, or buying back stock — the controlling factor’s how much money we have, we’d rather buy businesses. And so, you know, we don’t stay awake at night working out formulas, or anything of the sort.

But we don’t ever do it if we think that we’re not doing something at the time. If we had a lemonade stand, and Charlie and I and you owned it, and the lemonade stand was making us about a buck a week or something, and we divided it up. And then you said you wanted to get out. And if you said one number, and we’d have the funds in our little lemonade company, we’d buy you out. And if we didn’t like the price, we wouldn’t buy you out. And that’s the same we feel. But we do feel an obligation to do things that we think are intelligent and in no way risk — absolutely no way present any risk, of financial problems under any circumstances, we can envision, except maybe something like nuclear war, you know, we will do it. But it never can be that big a factor. Charlie, I think, spoke the other day, in connection with Henry Singleton. I think he bought back 89% of the company over time.

And he’d sold stock like crazy, or issued it, much earlier when it was overpriced, and he bought it back underpriced. But the key to that, of course, if having people think you’re wrong in doing it, so he was able to buy a ton of it. And there are some other companies that have bought a ton of it, and Berkshire isn’t going to get the chance to do that. Because we’ve got sensible shareholders is what it amounts to. If we had the same group of shareholders that own two-day puts, and they were our shareholders, we could buy back the whole company, you know, in a very short period of time. But it’s such an easy concept to assess. I mean, the second stock I bought — I bought City Service Preferred, that was the first one. The second stock I bought was a company called “Texas Pacific Land Trust.” And that came out of the bankruptcy of the Texas and Pacific Railroad back in the 1880s, or something like that. And they had three million-some acres, and they owned the minerals, and they owned the surface, and everything else.

But it was terrible land in the 1880s. But they had some kind of a charter that said that they could use the proceeds from land sales, whatever it was they were going to buy in stock every year. And, you know, I sat there, when I was 13 or 14, and I figured, “If I live to be a hundred, I would own the whole place.” Well, I haven’t lived to be 100 yet, and I wouldn’t have bought the whole place. So both calculations are, so far, imperfect. But it’s been a remarkable company, just plain remarkable. Because they would talk about grazing fees of $6,000 a year, or something like that, you know, maybe, when they had three million acres. And then they kept finding oil, and more oil, and more oil. And they’ve changed the form, and all kinds of things, but they bought stock week after week after week. And I sat there and figured out how long it would take until I owned the whole company. And I obviously made some improper (Laughs) calculations because it wouldn’t have worked that way.

But it still was apparent to me that it would be a very good idea, if they had three million acres down there, that if they got all through with it, and they kept their mineral rights, and all kinds of things, which they were doing, you know, at a very cheap price it ought to work out well for anybody that sat around for a long time. And it has worked out extremely well for anybody who sat around a long time. But nobody knew that they were going to find a lot of oil, and that eventually El Paso would grow out far enough so that the surface lands became worth some money, that were somewhat near El Paso. And you had to go a couple hundred more miles to find the next person, but (Laughs) that was another problem. So, some of this stuff is so simple, you know? But, you know, if people want to get their Ph.D. or something, so they work out hundreds of pages, and have lots of Greek letters in it, and all that soft of thing, and either you’re buying out your partner at an attractive price, or you’re not buying him out at an attractive price.

And if you’ve got the money around to do it, and the price is attractive, and you don’t have some other opportunities, you know, why not do it? You’ve got to come out ahead by doing it. And if you’ve got other things that are more intelligent, you don’t do it. And if it isn’t intelligent on an absolute basis, you also don’t do it. Charlie, have you got anything to add to the — what were you doing in 1943? (Laughs) You were in the Service?

CHARLIE MUNGER: Well, Warren, we’d be crazy if we didn’t rather enjoy having come a considerable distance from small beginnings. And to do that in good company, it’s a favored life. We’ve been very fortunate.

WARREN BUFFETT: Yeah. And, tomorrow — (Applause) — Monday — I can tell you, it’s almost certain that, if anybody offers us — well, there will be shares traded of Berkshire, and we won’t buy any. But it’s also a pretty fair chance someday a lot of shares — we’ll add a few shares — not a lot. Berkshire’s got the — our shareholders are too smart, that’s one of our problems (laughs) if we want to repurchase shares. But we really don’t want to squeeze out anybody. But we also are here to do things that increase the value for the people who stick with us. I mean, it’s not very complicated, and there’ll be times when we’ll do it, and there’ll be times when we won’t. There won’t be any formula, but there will be the principles that I’ve just expressed. And my guess is that my successor, and their successor, will have a similar calculation, because we’re looking for people that are rational and devoted to Berkshire.

So, Glen, thanks for coming.

23. “Independent” board directors aren’t really independent

WARREN BUFFETT: And, Becky, you’re next.

BECKY QUICK: This question was sent in by Dave Shane (PH) from Brooklyn, New York. He’s responding to something he heard earlier today. He said: “In the future, will Greg be able to act with the same spontaneity that you mentioned earlier? And make immediate, multibilliondollar decisions without board approval?”

WARREN BUFFETT: Well, my guess is that the board will respond as people do. They’ll put some more restrictions, or they’ll have some more consultation on a lot of matters, or some matters, than they do with me. I mean, they won’t “need” to, but they’ll feel that they haven’t had the experience, they haven’t seen him as long, and a whole bunch of things. And they’ll feel that the Delaware laws protects him better. And, incidentally, they don’t have directors and officers liability insurance. I mean, virtually every company on the New York Stock Exchange has it. And we just don’t buy it. I mean, I’m on the board, and you’re a trustee for a whole bunch of people with trusts, you and me — I’m talking about the directors and me. You know, fine. But it’s very interesting: People go out on museum boards, you know, and they’re expected to contribute. People go on college boards, and they’re expected to contribute money.

And they say, “It’s a great honor to be on a university board,” or a museum board, or whatever, “It’s a great honor, and therefore you should raise money for us.” Well, frankly, I think our board’s more interesting than being on a university board, or, you know, a hospital board or something. I wouldn’t know what they were talking about anyway, on a museum board or an art board. But people have found that they can make $300,000 a year, you know, which is enormously important to some people, and is meaningless to others. And, I mean, the chances are, if somehow, they’d arranged it so that directors didn’t get paid at all, there’d be plenty of people wanted to be directors, and that’d be a prestigious sort of thing, and all that. But, in effect it’s money that comes very easily. The whole idea of the “independent director,” frankly, is it just doesn’t really make any sense.

CHARLIE MUNGER: You don’t think a director is independent who needs $300,000 to be here?

WARREN BUFFETT: He needs the money, yeah. I mean —

CHARLIE MUNGER: He’s “independent” the way a slave is independent.

WARREN BUFFETT: I am going to read a few sentences which are absolutely the case, except I’m doctoring it. I don’t want anybody to be identified obviously with this. But these are wordfor-word excerpts. And I’m not telling whether it’s a woman or a man, I’m going to use a male pronoun just because it’s easier. But I picked out a few sentences from a letter I received many years ago. And this letter said: “I’m writing to you with a great deal of reluctance, and a sense of personal embarrassment. I’ve tried all of the conventional means of raising the money.” This person needed a couple million dollars, and I wouldn’t have known the person if I saw him on the street, you know, but he wrote this letter and said, “I need a couple million dollars.” And then this is the item that I think you might find interesting, and I’ve kept the letter. “My income is composed 100% of my board fees.” Well, I just looked him up.

At the time and he was a director of five prestigious companies, and had been directors of others, and was going to be a director of a whole bunch of things. But he was desperate for money, and he says he’s “getting 100% of it from board fees.” And he was an independent director, classified as “an independent director” at every one of these companies. And it’s just astounding to me. You know, we’re going to have a shareholders meeting in just a couple of minutes, or we’re going to start it, and it’s just astounding to me that in 2006 we owned 9% of the Coca-Cola Company. I mean, maybe they gave me a free Coke. But we owned 9% at Berkshire Hathaway, we obviously cared about the views of the Coca-Cola Company. And it just so happened in that era CalPERS and a few others had recommended that we be voted against for something or other. And at one time there were two big institutional investors that voted because they didn’t think I was independent because Dairy Queen bought some Coca-Cola. Or, actually, the people that had our franchise bought some Coca-Cola.

I mean, do they think I can’t add things in my head? If we’ve got billions and billions and billions of dollars, that I’m going to be compromised? But it’s just nutty. And so, one year, my vote fell from 96%, maybe it was 98%, voter approval, to 84%. Because — I forget whether it was 2004 or 2006: Somewhere along the line they just decided that I wasn’t the right sort of person to be able to handle these responsibilities. (Laughs) And, you know, the idea that it’s an important part of their income, I mean, what they want. They may want to do a lot of other good things, it doesn’t mean they’re terrible people. But if the difference is how you live, and in this case whether the person might go broke: How in the world you can call somebody like that “independent,” and then say that anybody who owns a lot of st — you know, and whether Walter Scott’s you know, “not independent,” it’s just ridiculous. But it’s the way the rules are, and we follow the rules.

CHARLIE MUNGER: Well, they don’t want them just “independent” now. They want one horse, one rabbit, one cow, one whatever. (Laughter)

WARREN BUFFETT: You know, I feel like Galileo —

CHARLIE MUNGER: Independence is not enough. You’ve got to have a very diverse kind of independence.

WARREN BUFFETT: Yeah, yeah. And if they desperately need the money, in this case 100% of the income coming from it; and you’re on five of the most prestigious boards in the country; and classified as “independent” on each; and all you’re hoping is that your CEO gets called by another CEO and says, “Is this guy OK?” And you say, “Of course, he’s OK.” Which means, “Because he doesn’t cause trouble,” and so he gets on a sixth board. Anyway.

CHARLIE MUNGER: All I can say is it’s not our idea of an “independent director.”

WARREN BUFFETT: No. No. It’s all a little crazy. Which brings us to the fact that we’re not going to have our annual meeting here in about 15 minutes. We’ll reconvene at 3:45 and then we’ll do the business of the meeting that is required.