2017 Annual Meeting2017 年度股东大会

2017 meeting

Morning session

1. Welcome and introductions

WARREN BUFFETT: Thank you, and good morning.

That’s Charlie. I’m Warren. (Laughter)

You can tell us apart because he can hear and I can see. That’s why we — (laughter) — work together so well. We each have our specialty.

I’d like to welcome you to — we’ve got a lot of out-of-towners here, and I’d like to welcome you to Omaha. It’s a terrific — (Applause)

Thank you.

It’s a terrific city. And Charlie’s lived in California now for about 70 years, but he’s still got a lot of Omaha in him.

Both of us were born within two miles of this building that you’re in. And Charlie — as he mentioned [in the pre-meeting movie] in his description of his amorous triumphs in high school — Charlie graduated from Central High, which is about one mile from here. It’s a public school.

And my dad, my first wife, my three children and two of my grandchildren have all graduated from the same school.

In fact, my grandchildren say they’ve had the same teachers that my dad — (Laughter)

The — but it’s a great city. I hope you get to see a lot of it while you’re here.

And in just a minute we will start a question period — hopefully a question and answer period that will last till about noon, and then we’ll take a break for an hour or so. We’ll reconvene at one. And then we’ll go — continue with the question and answer period till 3:30.

And then we’ll break for 15 minutes or so. And then we’ll convene the annual meeting of Berkshire, which I — we have three propositions that people wish to speak on, so that could last perhaps as long as an hour.

Before we start, I’d like to make a couple of introductions, the first being Carrie Sova, who’s been with us about seven years. And can we have a light on Carrie? I think she — Carrie, are you there? (Applause)

Carrie. Stand up, Carrie, come on. (Laughter and applause)

Carrie puts on this whole program. She came to us about seven years ago and a few years ago I said, “Why don’t you just put on the annual meeting for me?” And she handles it all. And she has two young children.

And she has dozens and dozens and dozens of exhibitors that she works with and, as you can imagine, with all of what we put on and all of the numbers of you that come, the hotels and the airlines and the rental cars and everything, she does it as if, you know, she could do that and be juggling three balls at the same time.

She’s amazing, and I want to thank her for putting on this program for us. And — (Applause)

I also would like to welcome and have you welcome our directors.

They will be voted on later, so I’ll do this alphabetically. They’re here in the front row. And if we could just have the spotlight drop on them as they’re introduced.

And alphabetically, is Howard Buffett, Steve Burke, Sue Decker, Bill Gates, Sandy Gottesman, Charlotte Guyman, we have Charlie Munger next to me, Tom Murphy, Ron Olson, Walter Scott, and Meryl Witmer. Yeah. (Applause)

One more introduction I’m going to make, but I’ll save that for just a minute.

2. First quarter earnings

WARREN BUFFETT: And our earnings report was put out yesterday.

The — as we regularly explain, the realized investment gains or losses in any period really mean nothing. I mean, they —

We could take a lot of gains if we wanted to. We could take a lot of losses if we wanted to. But we don’t really think about the timing of what we do at all, except in relation to the intrinsic value of what we’re buying or selling. We are not —

We do not make earnings forecasts. And we have — on March 31st, we have over $90 billion of net unrealized gains. So if we wanted to report almost any number you can think of and count capital gains as part of the earnings, we could do it.

So in the first quarter — and I would say that we have a very, very, very slight preference this year, if everything else were equal — well, it’s true in any year, but it’s a little more so this year — we would rather take losses than gains, because of the tax effect if two securities were equally valued.

And there’s probably just one touch more of emphasis on that this year, because we are taxed on gains at 35 percent, which means we also get the benefit — the tax benefit — at 35 percent of any losses we take.

And I would say that there’s some chance of that rate being lower, meaning that losses would have less tax value to us after this year than they would have this — after this year than this year.

That is not a big deal, but it would be a very slight preference. And it may get to be more of a factor in deferring any gains, and perhaps accelerating any losses, as the year gets closer to December 31st, assuming — and I’m making no predictions about it — but assuming that there were to be a tax act that had the effect of reducing the earnings.

So in the first quarter, insurance underwriting was the swing factor. And the — there’s a lot more about this in our 10-Q, which you can look up on the internet.

And you really, if you’re seriously interested in evaluating our earnings or our businesses, you should go to the 10-Q, because the summary report, as we point out every quarter, does not really get to a number of the main points of valuation.

I would just mention two factors in connection with the insurance situation, which I love.

In the first four months — not the first three months — but the first four months, GEICO’s had a net gain of 700,000 policy holders, and that’s the highest number I can remember.

There may have been a figure larger than that somewhere in the past. I did not go back and look at them all. But last year I believe that figure was like 300,000.

And this has been a wonderful period for us at GEICO, because several of our major competitors have decided — and they publicly stated this — in fact one of them just reiterated it the other day — although they’ve now changed their policy — but they intentionally cut back on new business because new business carries with it a significant loss in the first year. There’s just costs of acquiring new business.

Plus the loss ratio, strangely enough, on first-year business tends to run almost 10 points higher than on renewal business. And so not only do you have acquisition costs, but you actually have a higher loss ratio.

So when you write a lot of new business, you’re going to lose money on that portion of the business that year.

And we wrote a lot of new business, and at least two of our competitors announced that they were lightening up for a while on new business, because they did not want to pay the penalty of the first-year loss.

And, of course, that’s made to order for us, so we just put our foot to the floor and tried to write as much business — good business — as we can. And there are costs to that.

A second factor — well, it was not a factor in the P&L — but an important event in the first quarter is that we increased our float.

And on the slide, I believe it shows that year-over-year, 16 billion. Fourteen billion of that came in the first quarter of this year, so we had a $14 billion increase in float.

And for some years I’ve been telling you it’s going to be hard to increase the float at all, and I still will tell you the same thing.

But it’s nice to have $14 billion or more, which is one reason, if you look at our 10-Q, you will see that our cash and cash equivalents, including Treasury bills, now has come to well over 90 billion.

So I think I feel very good about the first quarter, even though our operating earnings were down a little bit.

One quarter means nothing. I mean, over time, what really counts is whether we’re building the value of the businesses that we own.

And I’m always interested in the current figures, but I’m always dreaming about the future figures.

3. Tribute to Vanguard’s Jack Bogle

WARREN BUFFETT: There’s one more person I would like to introduce to you today, and I’m quite sure he’s here. I haven’t seen him, but I understood he was coming. There’s a — I believe that he’s made it today. And that is Jack Bogle, who I talked about in the annual report.

Jack Bogle has probably done more for the American investor than any man in the country. (Applause)

And Jack, would you stand up? There he is. (Applause)

Jack Bogle, many years ago, he wasn’t the only one that was talking about an index fund, but he — it wouldn’t have happened without him.

I mean, Paul Samuelson talked about it. Ben Graham even talked about it.

But the truth is, it was not in the interest of invest — of the investment industry of Wall Street. It was not in their interest, actually, to have the development of an index fund — the index fund — because it brought down fees dramatically.

And, as we’ve talked about some in the reports, and other people have commented, index funds, overall, have delivered for shareholders a result that has been better than Wall Street professionals as a whole.

And part of the reason for that is that they’ve brought down the costs very significantly.

So when Jack started, very few people — certainly Wall Street did not applaud him, and he was the subject of some derision and a lot of attacks.

And now we’re talking trillions when we get into index funds, and we’re talking a few basis points when we talk about investment fees, in the case of index funds, but still hundreds of basis points when we talk about fees elsewhere.

And I estimate that Jack, at a minimum, has saved — left in the pockets of investors, without hurting them overall in terms of performance at all — gross performance — he’s put tens and tens and tens of billions into their pockets. And those numbers are going to be hundreds and hundreds of billions over time.

So, it’s Jack’s 88th birthday on Monday, so I just say happy birthday, Jack, and thank you on behalf of American investors. (Applause)

And Jack, I’ve got great news for you.

You’re going to be 88 on Monday, and in only two years you’ll be eligible for an executive position at Berkshire. (Laughter)

Hang in there, buddy. (Laughter)

4. Q&A begins

WARREN BUFFETT: OK. We’ve got a panel of expert journalists on this side, and expert analysts on that side, and expert shareholders in the middle. And we’re going to rotate, starting with the analysts. And some who are here I have a — here we go. And we will — we’ll do this through the afternoon.

After we — if we get through 54 questions, which would be six for each journalist, six for each analyst, and 18 more for the audience, then we will go strictly to the audience.

I don’t think I’ve got any information as to what the situation is on overflow rooms. But we’ll go to at least one of them.

But let’s start off with Carol Loomis of Fortune Magazine, the longest serving employee in the history of Time Inc., I believe, with 60 years. And Carol, go to it. (Applause)

5. Loomis asks for Berkshire-related questions

CAROL LOOMIS: Thank you. Thanks from all of us journalists up here.

I know that there are many, many people out there who have sent us questions that aren’t going to get answered. And I just want to say that it’s very hard to get a question answered.

The one thing I could suggest is that you follow Warren’s thought in the annual report, that he wants everybody to go away from this meeting more educated about Berkshire than they were when they came.

And one way you can do that is keep your questions quite directly Berkshire-related or relating to the annual letter. Even then it will be hard to get your question answered.

The three of us only have 18 questions in total, but I encourage you to think in the Berkshire-related direction when you’re submitting a question next year.

6. Wells Fargo didn’t act quickly enough to stop bad behavior

CAROL LOOMIS: Now, my first question. It’s about Wells Fargo, which is Berkshire’s largest equity holding — 28 billion at the end of the year. And this question comes from a shareholder who did not wish to be identified.

“In the wake of the sales practices scandal that last year engulfed Wells Fargo, the company’s independent directors commissioned an investigation and hired a large law firm to assist in carrying it out.

“The findings of the investigation, which were harsh, have been released in what is called the Wells Fargo Sales Practices Reports.” You can find it on the internet.

“It concludes that a major part of the company’s problem was that, and I quote, ‘Wells Fargo’s decentralized corporate structure gave too much autonomy to the community banks’ senior leadership,′ end of quote.

“Mr. Buffett, how do you satisfy yourself that Berkshire isn’t subject to the same risk, with its highly decentralized structure and the very substantial autonomy given to senior leadership of the operating companies?”

WARREN BUFFETT: Yeah, it’s true that we at Berkshire probably operate on as — we certainly operate on a more decentralized plan than any company of remotely our size.

And we count very heavily on principles of behavior rather than loads of rules.

It’s one reason at every annual meeting you see that Salomon description. And it’s why I write very few communiqués to our managers, but I send them one once every two years and it basically says that we’ve got all the money we need. We’d like to have more, but we’re — it’s not a necessity.

But we don’t have one ounce of reputation more than we need, and that our reputation at Berkshire is in their hands.

And Charlie and I believe that if you establish the right sort of culture, and that culture, to some extent, self-selects who you obtain as directors and as managers, that you will get better results that way in terms of behavior than if you have a thousand-page guidebook.

You’re going to have problems regardless. We have 367,000, I believe, employees. Now, if you have a town with 367,000 households, which is about what the Omaha metropolitan area is, people are doing something wrong as we talk here today. There’s no question about it.

And the real question is whether the managers at — [audio drops out] — are in a better — are worrying and thinking about finding and correcting any bad behavior, and whether, if they fail in that, whether the message gets to Omaha, and whether we do something about it.

At Wells Fargo, you know, there were three very significant mistakes, but there was one that dwarfs all of the others.

You’re going to have incentive systems at any business — almost any business. There’s nothing wrong with incentive systems, but you’ve got to be very careful what you incentivize. And you can’t incentivize bad behavior. And if so, you better have a system for recognizing it.

Clearly, at Wells Fargo, there was an incentive system built around the idea of cross-selling and number of services per customer. And the company, in every quarterly investor presentation, highlighted how many services per customer. So, it was the focus of the organization — a major focus.

And undoubtedly, people got paid and graded and promoted based on that number — at least partly based on that number.

Well, it turned out that that was incentivizing the wrong kind of behavior.

We’ve made similar mistakes. I mean any company’s going to make some mistakes in designing a system.

But it’s a mistake. And you’re going to find out about it at some point. And I’ll get to how we find out about it.

But the biggest mistake was that — and I don’t know — obviously don’t know all the facts as to how the information got passed up the line at Wells Fargo.

But at some point, if there’s a major problem, the CEO will get wind of it. And that is — at that moment, that’s the key to everything, because the CEO has to act.

That Salomon situation that you saw happened because of — on April, I think, 28th, the CEO of Salomon, the president of Salomon, the general counsel of Salomon, sat in a room and they had described to them, by a fellow named John Meriwether, some bad practice, terrible practice, that was being conducted by a fellow named Paul Mozer, who worked for them.

And Paul Mozer was flimflamming the United States Treasury, which is a very dumb thing to do. And he was doing it partly out of spite, because he didn’t like the Treasury and they didn’t like him. So he put in phony bids for U.S. Treasurys and all of that.

So on April 28th, roughly, the CEO and all these people knew that they had something that had gone very wrong, and they had to report it to the Federal Reserve Board in New York — the Federal Reserve Bank of New York.

And the CEO, John Gutfreund, said he would do it, and then he didn’t do it. And he undoubtedly put it off just because it was an unpleasant thing to do.

And then on May 15th, another Treasury auction was held, and Paul Mozer put in a bunch of phony bids again.

And at this point, it’s all over, because the top management had known ahead of time, and now a guy that was a pyromaniac had gone out and lit another fire. And he lit it after they’d been warned that he was a pyromaniac, essentially.

And it all went downhill from there. It had to stop when the CEO learns about it.

And then they made a third mistake, actually, but again, it pales in comparison to the second mistake.

They made a third mistake when they totally underestimated the impact of what they had done once it became uncovered, because they — there was a penalty of 185 million. And in the banking business, people get fined billions and billions of dollars for mortgage practices and all kinds of things.

The total fines against the big banks, I don’t know whether the total’s 30 or 40 or a billion or whatever the number may be.

So, they measured the seriousness of the problem by the dimensions of the fine. And they thought $185 million fine signaled a less offensive practice than something involved 2 billion, and they were totally wrong on that.

But the main problem was they didn’t act when they learned about it. It was bad enough having a bad system, but they didn’t act.

At Berkshire, we have — the main source of information for me about anything that’s being done wrong at a subsidiary is the hotline. Now, we got 4,000 or so hotline reports — or that come — we get communications on the hotline — perhaps 4,000 times a year.

And most of them are frivolous. You know, the guy next to me has bad breath or something like that. I mean it’s — (laughter) — but there are a few serious ones, and the head of our internal audit, Becki Amick, looks at all those. People — a lot of them come in anonymous, probably most of them.

And some of them, she refers back to the companies, probably most of them. And — but anything that looks serious, you know, I will hear about, and that has led to action — well, put it, more than once.

And we’ve spent real money investigating some of those. We put special investigators, sometimes, on them. And, like I say, it has uncovered certain practices that we would not at all condone at the parent company.

I think it’s a good system. I don’t think it’s perfect. I don’t know what — I’m sure they’ve got an internal audit at Wells Fargo, and I’m sure they’ve got a hotline.

And I don’t know the facts, but I would just have to bet that a lot of communications came in on that, and I don’t know what their system was for getting them to the right person. And I don’t know who did what at any given time.

But that was — it was a huge, huge, huge error if they were getting — and I’m sure they were — getting some communications and they ignored them, or they just sent them back down to somebody down below.

Charlie? You’ve followed it. What are your thoughts on it?

CHARLIE MUNGER: Well, put me down as skeptical when some law firm thinks they know how to fix something like this.

If you’re in a business where you have a whole a lot of people under incentives very likely to cause a lot of misbehavior, of course you need a big compliance department.

Every big wirehouse stock brokerage firm has a huge compliance department. And if we had one, we would have a big compliance department too, wouldn’t we, Warren?

WARREN BUFFETT: Absolutely.

CHARLIE MUNGER: Absolutely, but doesn’t mean that everybody should try and solve their problems with more and more compliance.

I think we’ve had less trouble over the years by being more careful in whom we pick to have power and having a culture of trust. I think we have less trouble, not more.

WARREN BUFFETT: But we will have trouble from time to time.

CHARLIE MUNGER: Yes, of course. We’ll be blindsided someday.

WARREN BUFFETT: Charlie says an ounce of prevention — he said when Ben Franklin, who he worships, said, “An ounce of prevention is worth a pound of cure,” he understated it. An ounce of prevention is worth more than a pound of cure.

And I would say a pound of cure, promptly applied, is worth a ton of cure that’s delayed. It — problems don’t go away.

John Gutfreund said that problem, originally, was — he called it a traffic ticket. He told the troops there at Salomon it was a traffic ticket. You know, and it almost brought down a business.

Some other CEO, that they described the problem that he’d encountered as a foot fault. You know, and it resulted in incredible damage to the institution.

And so you’ve got to act promptly. And frankly, I don’t know any better system than hotlines and anonymous letters to me. I get anonymous letters. And I’ve gotten three or four of them probably in the last six or seven years that have resulted in major changes.

And very, very occasionally they’re signed. Almost always they’re anonymous, but it wouldn’t make any difference, because there were — will be no retribution against anybody, obviously, if they call our attention to something that’s going wrong.

But I will tell you, as we sit here, somebody is doing — quite a few people — are probably doing something wrong at Berkshire, and usually, it’s very limited. I mean maybe stealing small amounts of money or something like that.

But when it gets to some sales practice like was taking place at Wells Fargo, you can see the kind of damage it would do.

7. Driverless vehicles would hurt BNSF and GEICO

WARREN BUFFETT: We will now shift over to the analysts and Jonny Brandt.

JONATHAN BRANDT: Hi, Warren. Hi, Charlie. Thanks for having me.

You’ve addressed the risk of driverless cars to GEICO’s business. But it strikes me that driverless trucks could narrow the cost advantage of railroads, even if the number of crew members in a locomotive eventually declines from two to zero.

Is autonomous technology more of an opportunity or more of a threat for the Burlington Northern?

WARREN BUFFETT: Oh, I would say that driverless trucks are a lot more of a threat than an opportunity — (laughs) — to the Burlington Northern.

And I would say that if driverless cars became pervasive, it would only be because they were safer. And that would mean that the overall economic cost of auto-related losses had gone down, and that would drive down the premium income of GEICO.

So, I would say both of those — and autonomous vehicles — widespread — would hurt us if they went — if they spread to trucks, and they would hurt our auto insurance business.

I think my personal view is that they will certainly come. I think they may be a long way off, but that will depend. It’ll probably, frankly, depend on experience in the first early months of the introduction in other than test situations.

And if they make the world safer, it’s going to be a very good thing, but it won’t be a good thing for auto insurers.

And similarly, if they learn how to move trucks more safely, there’s a — tends to be driver shortages in the truck business now — it obviously improves their position vis-à-vis the railroads.

Charlie?

CHARLIE MUNGER: Well, I think that’s perfectly clear. (Laughter)

WARREN BUFFETT: Finally, approval. All these years. (Laughter)

8. Buying See’s Candies from someone who preferred “girls and grapes”

WARREN BUFFETT: OK. Station 1. The shareholder.

AUDIENCE MEMBER: Hi, Warren and Charlie. My name is Bryan Martin and I’m from Springfield, Illinois.

In the HBO documentary, “Becoming Warren Buffett,” you had a great analogy comparing investing to hitting a baseball and knowing your sweet spot.

Ted Williams knew his sweet spot was a pitch right down the middle. When both of you look at potential investments, what attributes make a company a pitch in your sweet spot that you’ll take a swing at and invest in?

WARREN BUFFETT: Well, I’m not sure I can define it in exactly the terms you would like, but the — we sort of know it when we see it.

And it would tend to be a business that, for one reason or another, we can look out five, or 10, or 20 years and decide that the competitive advantage that it had at the present would last over that period.

And it would have a trusted manager that would not only fit into the Berkshire culture, but that was eager to join the Berkshire culture. And then it would be a matter of price.

But the main — you know, when we buy a business, essentially, we’re laying out a lot of money now based on what we think that business will deliver over time. And the higher the certainty with which we make that prediction, the better off — the better we feel about it.

You can go back to the first — it wasn’t the first outstanding business we bought, but it was kind of a watershed event — which was a relatively small company, See’s Candy.

And the question when we looked at See’s Candy in 1972 was, would people still want to be both eating and giving away that candy in preference to other candies?

And it wouldn’t be a question of people buying candy for the low bid. And we had a manager we liked very much. And we bought a business that was — paid $25 million for it, net of cash, and it was earning about 4 million pretax then. And we must be getting close to $2 billion or something like that, pretax, that was taken out of it.

But it was only because we felt that people would not be buying, necessarily, a lower-price candy.

I mean it does not work very well if you go to your wife or your girlfriend on Valentine’s Day — I hope they’re the same person — (laughter) — and say, you know, “Here’s a box of candy, honey. I took the low bid.” You know, it doesn’t — it loses a little as you go through that speech.

And we made a judgment about See’s Candy that it would be special and — probably not in the year 2017 — but we certainly thought it would be special in 1982 and 1992. And fortunately, we were right on it. And we’re looking for more See’s Candies, only a lot bigger.

Charlie?

CHARLIE MUNGER: Yeah, well, but it’s also true that we were young and ignorant then. And —

WARREN BUFFETT: Now we’re old and ignorant. Yeah. (Laughter)

CHARLIE MUNGER: And yes, that’s true, too.

And the truth of the matter is that it would have been very wise to buy See’s Candy at a slightly higher price. You know if they’d asked it, we wouldn’t have done it, so we’ve gotten a lot of credit for being smarter than we were.

WARREN BUFFETT: Yeah, and to be more accurate, if it had been 5 million more, I wouldn’t have bought it. Charlie would have been willing to buy it, so, yeah.

Fortunately, that we didn’t get to the point where we had to make that decision that way. But he would’ve pushed forward when I probably would’ve faded.

It’s a good thing that a guy came around — actually the seller was the — well, he’s the grandson of Mrs. See, wasn’t he, Charlie? He was Larry See’s son. Am I correct? Or Larry See’s brother.

But he was not interested in the business. And he was interested in — more interested in girls and grapes, actually. And he almost changed his mind. Well, he did change his mind about selling.

And I wasn’t there, but Rick Guerin told me that Charlie went in and gave a — an hour talk on the merits of girls and grapes over having a candy company. (Laughter)

This is true, folks. And the fellow sold to us, so that — (laughter) — I pull Charlie out in emergencies like that. He’s — (Laughter)

CHARLIE MUNGER: We were very lucky that, early, the habit of buying horrible businesses because they were really cheap. It gave us a lot of experience trying to fix unfixable businesses as they headed downward toward doom.

And that early experience was so horrible, fixing the unfixable, that we were very good at avoiding it, thereafter. So, I would argue that our early stupidity helped us.

WARREN BUFFETT: Yeah, yeah. We learned we could not make a silk purse out of a sow’s ear.

CHARLIE MUNGER: No, we learned —

WARREN BUFFETT: So, we went out looking for silk after that.

CHARLIE MUNGER: But you have to try it for a long time and fail and have rub — have your nose rubbed in it to really understand it.

9. “There are going to be marauders” at the moat

WARREN BUFFETT: OK, Becky? Becky Quick.

BECKY QUICK: This question comes from a shareholder named Mark Blakley in Tulsa, Oklahoma, who says, “There has been more news than usual in some of Berkshire’s core stock holdings.

“Wells Fargo in the incentive and new account scandal, American Express losing the Costco relationship and playing catch-up in the premium card space, United Airlines and customer service issues, Coca-Cola and slowing soda consumption.

“How much time is spent reviewing Berkshire’s stock holdings? And is it safe to assume, if Berkshire continues to hold these stocks, that the thesis remains intact?”

WARREN BUFFETT: Well, we spend a lot of time think — those are very large holdings. If you add up American Express, Coca-Cola, and Wells Fargo, I mean, you’re getting up, you know, well into the high tens of billions of dollars. And those are businesses we like very much. There’re different characteristics.

In the case of — you mentioned United Airlines, we actually are the largest holder of all four of the — we’re the largest holder of the four largest airlines. And that is much more of an industry thought.

But all businesses have problems. And some of them have some very big plusses.

I personally — you mentioned American Express. If you read American Express’s first quarter report and talk about their Platinum Card, the Platinum Card is doing very well.

The gains around the world. You know, I think there were 17 percent or something like that in billings in the U.K. and 15 percent is original currency — or the local currency — Japan, Mexico, and very good in the United States.

There’s competition in all these businesses. If we thought — we did not buy American Express or Wells Fargo or United Airlines, Coca-Cola, with the idea that they would never have problems or never have competition.

What we did buy — why we did buy them — is we thought they had very, very strong hands. And we liked the financial policies in the cases of many of them. We liked their position.

We’ve bought a lot of businesses. And we do look to see where we think they have durable competitive advantage.

And we recognize that if you’ve got a very good business, you’re going to have plenty of competitors that are going to try and take it away from you. And then you make a judgment as to the ability of your particular company and product and management to ward off competitors.

They won’t go away, but the — we think — I’m not going to get into specific names on it — but those companies generally are very well-positioned.

I’ve likened essentially — if you’ve got a wonderful business, even if it was a small one like See’s Candy, you basically have an economic castle. And in capitalism, people are going to try and take away that castle from you.

So, you want a moat around it, protecting it in various ways that can protect it. And then you want a knight in the castle that’s pretty darn good at warding off marauders. But there are going to be marauders. And they’ll never go away.

And if you look at — I think Coca-Cola was 1886. American Express was 18 — I don’t know — ’51 or ’52 — starting out with an express business.

Wells Fargo was — I don’t know what year they were started. Incidentally, I — American Express was started by [Henry] Wells and [William] Fargo as well.

So these companies had lots of challenges. And they’ll have more challenges. And the companies we own have had challenges.

Our insurance business has had challenges. But, you know, we started with National Indemnity’s $8 million purchase in 1968. And fortunately, we’ve had people like Tony Nicely at GEICO. And we’ve had Ajit Jain, who’s added tens of billions of value.

And we’ve got some smaller companies that you probably don’t even know about, but really have done a terrific job for us.

So there’ll always be competition in insurance, but there’ll always be things to do that a really intelligent management with a decent distribution system, various things going for him, can do to ward off the marauders.

So I — there was a specific question, “How much time is spent reviewing the holdings?” I would say that I do it every day. I’m sure Charlie does it every day.

Charlie?

CHARLIE MUNGER: Well, I don’t think I had anything to add to that, either. (Laughter)

WARREN BUFFETT: We’ll cut his salary if he doesn’t participate here. (Laughter)

10. “We think we’ll do well” with AIG reinsurance deal

WARREN BUFFETT: OK, Jay Gelb.

JAY GELB: This question is on Berkshire’s retroactive reinsurance deal with AIG, which was the largest ever of its kind.

Based on AIG’s track record of reserve deficiencies and the opportunity for Berkshire to invest the float, what is your level of confidence that this contract covering up to $20 billion of AIG’s reserves in return for $10 billion of premiums will ultimately be profitable for Berkshire?

WARREN BUFFETT: Well, at the time we do every deal, I think it’s smart. And then sometimes — (laughs) — I find out otherwise as we go along.

The deal, that Jay knows, but might be unfamiliar to many people, is that AIG transferred to us the liability for 80 percent of 25 billion — excess — of 25 billion.

In other words, they had to pay the first 25 billion. And then on the next 25 billion, we had to pay 80 percent of what they paid up to a limit of 20 billion, 80 percent of 25. And we got paid $10.2 billion for that.

And we had — and this applies to their losses in many classes of business written — or earned — before December 31st, 2015.

So Ajit Jain, who has made a lot more money for Berkshire than I — for you — than I have, but he evaluates that sort of transaction.

We talk about it a fair amount ourselves. I just find it interesting. I particularly find the 10.2 billion that they’re going to give us interesting.

And the — we come to the conclusion that we think we’ll do well by getting 10.2 billion today with a maximum payout of 20 billion over some — I mean, between now and judgment day — on this large piece of business.

AIG had very good reasons for doing this, because their reserves had been under criticism. And this essentially — probably — and should have, I think — put to bed the question of whether they were underreserved on that business. And we get the 10.2 billion.

And the question is how fast we pay out the money and how much money we pay out. And Ajit does 99 percent of the thinking on that. And I do one percent. And we project out what we think will happen.

And we know whatever our projection is, that it will be wrong, but we try to be conservative.

And we’ve done a fair amount of these deals. This is the largest. The second largest was a creature that was formed out of Lloyd’s of London some years ago.

And we’ve been wrong on one transaction that involved something over a billion of premium. I mean clearly wrong.

And there are a couple of others that may or may not work out depending on what you assume we have earned on the funds. But they’re OK.

But they probably didn’t come out as well as we thought they would, though. But overall, we’ve done OK on this.

It’s less OK when we’re sitting around with 90-plus billion of cash. So the incremental 10.2 billion we took in in the first quarter is earning us peanuts at the moment. And peanuts is not what fits into the formula for making this an attractive deal.

So we have — we do have to assume we’ll find uses of the money, but the money will be with us quite a while. And I think our calculations are on the conservative side. They are not the identical calculations that AIG makes. I mean, we come up with our own estimate of payouts and all of that.

And I think it — actually, I think it was quite a good transaction from AIG’s standpoint. Because they did take 20 billion of potential losses off for 10.2 billion.

And I think they satisfied the investing community that they were quite unlikely to have adverse development in the period prior to 2015 that was not accounted for by this transaction.

Charlie?

CHARLIE MUNGER: Well, I think it’s intrinsically a dangerous kind of activity. And — but that’s one of its attractions. I don’t think there are any two people in the world that are better at this kind of transaction than Ajit and Warren.

And nobody else has had the experience we’ve had. Just get me in a lot more of those businesses and I’ll accept a little extra worry.

WARREN BUFFETT: There’s one thing I should mention, too, that we actually were the only insurance operation in the world that would write that sort of a contract and that — where it would be satisfactory to the other party.

I mean, when somebody hands you $10.2 billion and says, “I’m counting on you to pay 20 billion back, even if it’s 50 years from now, on the last dollar,” there are very few people that they’d want to hand 10.2 billion to. And there —

So it’s a — there’s limited people on the other side. I mean, there’s not that many people remotely that have that kind of size deal. But —

CHARLIE MUNGER: “Very few” is a good expression. He means “one.” (Laughter)

WARREN BUFFETT: Yeah.

11. “A life properly lived is just learn, learn, learn”

WARREN BUFFETT: OK. We’ll go to station 2.

AUDIENCE MEMBER: Hello, Mr. Buffett, Mr. Munger. My name’s Grant Gibson (PH). I’m from Denver, Colorado, and this is my fifth consecutive year here. So thank you for having us.

WARREN BUFFETT: Thanks for coming.

AUDIENCE MEMBER: Appreciate it. With all due respect, Mr. Buffett, this question is for Mr. Munger. (Laughter)

In your career of thousands of negotiations and business dealings, could you describe for the crowd which one sticks out in your mind as your favorite or is otherwise noteworthy?

CHARLIE MUNGER: Well, I don’t think I’ve got a favorite. But the one that probably did us the most good as a learning experience was See’s Candy.

It’s just the power of the brand, the unending flow of ever-increasing money with no work. (Laughter)

AUDIENCE MEMBER: Sounds nice. (Laughter)

CHARLIE MUNGER: It was. And I’m not sure we would have bought the Coca-Cola if we hadn’t bought the See’s.

I think that a life properly lived is just learn, learn, learn all the time. And I think Berkshire’s gained enormously from these investment decisions by learning through a long, long period.

Every time you appoint a new person that’s never had big capital allocation experience, it’s like rolling the dice. And I think we’re way better off having done it so long. And —

But the decisions blend, and the one feature that comes through is the continuous learning. If we had not kept learning, you wouldn’t even be here.

You’d be alive probably, but not here. (Laughter)

WARREN BUFFETT: There’s nothing like the pain of being in a lousy business — (laughs) — to make you appreciate a good one.

CHARLIE MUNGER: Well, there’s nothing like getting into a really good one that’s a very pleasant experience and it’s a learning experience.

I have a friend who says, “The first rule of fishing is to fish where the fish are. And the second rule of fishing is to never forget the first rule.” (Laughter)

And we’ve gotten good at fishing where the fish are.

WARREN BUFFETT: Yeah, that’s only metaphorically.

CHARLIE MUNGER: There’re too many other —

WARREN BUFFETT: I went to fish with Charlie one time. He didn’t get —

CHARLIE MUNGER: There are too many other boats in the damn water. (Laughter)

But the fish are still there.

WARREN BUFFETT: Yeah, we bought a department store in Baltimore in 1966. And there’s really nothing like being in an experience of trying to decide whether you’re going to put a new store in a area that hasn’t really developed yet enough to support it, but your competitor may move there first.

And then you have the decision of whether to jump in. And if you jump in, that kind of spoils it. Now you’ve got two stores where even one store isn’t quite justified.

How to play those games — those business games — is — you learn a lot by trying. And what you really learn is which ones to avoid.

I mean, it — you just stay out of a bunch of terrible businesses, you’re off to a very great start, as far as — because we’ve tried them all.

CHARLIE MUNGER: But you can really learn, because the experience is a lot like eating cuttle (PH) burgers. And it really gets your attention. (Laughter)

WARREN BUFFETT: Well, we won’t expand on that. (Laughter)

12. Making mistakes with IBM, Google, and Amazon

WARREN BUFFETT: Andrew Ross Sorkin.

ANDREW ROSS SORKIN: Good morning, Warren.

This question comes from a long-time shareholder who I should tell you accosted me last night in the lobby of the Hilton Hotel with this question.

“Warren, for years, you stayed away from technology companies, saying they were too hard to predict and didn’t have moats. Then you seemed to change your view about technology when you invested in IBM, and again when you recently invested in Apple.

“But then on Friday you said IBM had not met your expectations and sold a third of our stake.

“Do you view IBM and Apple differently? And what have you learned about investing in technology companies?”

WARREN BUFFETT: Well, I do view them differently. But, you know, obviously, when I bought the IBM — started buying it six years ago — I thought it would do better in the six years that have elapsed than it has.

And Apple — I regard them as being in quite different businesses. I think Apple is much more of a consumer products business, in terms of the — in terms of sort of analyzing moats around it, and consumer behavior, and all that sort of thing.

It’s obviously a product with all kinds of tech built into it. But in terms of laying out what their prospective customers will do in the future, as opposed to, say, IBM’s customers, it’s a different sort of analysis.

That doesn’t mean it’s correct. And we’ll find out over time. But they are two different types of decisions.

And I was wrong on the first one, and we’ll find out whether I’m right or wrong on the second. But I do not regard them as apples and apples, and I don’t quite regard them as apples and oranges, but they’re — it’s somewhat in between on that.

Charlie?

CHARLIE MUNGER: Well, we avoided the tech stocks, because we felt we had no advantage there and other people did. And I think that’s a good idea not to play where the other people are better.

But, you know, if you ask me, in retrospect, what was our worst mistake in the tech field, I think we were smart enough to figure out Google. Those ads worked so much better in the early days than anything else.

So I would say that we failed you there. And we were smart enough to do it and didn’t do it. We do that all the time, too.

WARREN BUFFETT: Yeah. We were their customer very early on with GEICO, for example. And we saw — I don’t — these figures are way out of date, but I — as I remember, you know, we were paying them 10 or 11 dollars a click or something like that.

And any time you’re paying somebody 10 or 11 bucks every time somebody just punches a little thing where you’ve got no cost at all, you know, that’s a good business, unless somebody’s going to take it away from you.

And so we were close up, seeing the impact of that.

And incidentally, if any of you don’t have anything to do in your hotel rooms tonight, just keep punching Progressive or something. And — (Laughter)

Don’t really do that. (Laughter)

The thought just happened to cross my mind. The — (Laughter)

But, you know, that is — and you’ve never seen a business — almost never seen a business — like it, where —

And I think for LASIK surgery and things like that, I think the figures were, you know, 60 or 70 bucks a click with no incremental — no cost.

So — and I knew the guys. I mean, they actually designed their prospectus. They came to see me. And they — a little bit after the original one, when they went public, a little bit after Berkshire even. And so I had plenty of ways to ask questions or anything of the sort, educate myself. But I blew it — (laughs) — and —

CHARLIE MUNGER: We blew Walmart, too. When it was a total cinch, we were smart enough to figure that out and we didn’t.

WARREN BUFFETT: Yeah, figuring out — execution is what counts. So — (Laughs)

Anyway, we’ll — and I could be making two mistakes on IBM. I mean, the — you know, they’re — they —

It’s harder to predict, in my view, the winners in various items, or how much price competition will enter in to something like cloud services and all of that.

I will — I made a statement the other day, which it’s really remarkable, and I was — I asked Charlie whether he could think of a situation like it — where one person has built an extraordinary economic machine in two really pretty different industries, you know, almost simultaneously, as has happened —

CHARLIE MUNGER: From a standing start at zero.

WARREN BUFFETT: From a standing start at zero, with other — with competitors with lots of capital and everything else.

To do it in retailing and to do it with the cloud, like Jeff Bezos has done, I mean, I —

People like the Mellons invested in a lot of different industries and all of that. But he has been, in effect, the CEO, simultaneously, of two businesses starting from scratch that if — you know, Andy Grove used to use — at Intel — used to say, you know, “Think about if you had a silver bullet and you could shoot it at — and get rid of one of your competitors, who would it be?”

Well, I think that both in the cloud and in retail, there are a lot of people that would aim that silver bullet at Jeff.

And he’s done — it’s a different sort of game — but he’s, you know, at The Washington Post, he’s played that hand as well as anybody I think possibly could.

So it’s a remarkable business achievement, where he’s been involved, actually, in the execution, not just bankrolling it, of two businesses that are probably as feared by their competitors, almost, as any you can find.

It’s — Charlie, you got further thoughts?

CHARLIE MUNGER: Well, we’re sort of like the Mellons, old-fashioned people who done all right. And Jeff Bezos is a different species. (Laughter)

WARREN BUFFETT: And we missed it entirely, incidentally. We never owned a share of Amazon. (Laughs)

13. Buffett defends investing in competitive airline industry

WARREN BUFFETT: OK, Gregg Warren.

GREGG WARREN: Warren, my question relates to some recent stock purchases as well.

Unlike the railroads, which benefit from colossal barriers to entry due to their established, practically impossible to replicate, networks of rail and rights of way, the airline industry seems to have few, if any advantages.

Even with the consolidation we’ve seen during the past 15 years, the barriers to entry are few and the exit barriers are high.

The industry also suffers from low switching cost and intense pricing competition, and is heavily exposed to fuel costs, with rising fuel prices being difficult to pass on, and declining fuel prices leading to more price competition.

Compare this with rail customers who have few choices and thus wield limiting buying power, and where fuel charges allow the industry to mitigate fuel price fluctuations.

While you’ve noted several times since the airline stock purchases were announced that the two industries are quite different and that comparisons should not be made to Berkshire’s move into railroads a decade ago, could you walk us through what convinced you that the airlines were different enough this time around for Berkshire to invest close to $10 billion in the four major airlines?

Because it would seem to me that UPS, which you have a small stake in, and FedEx, both of which have wider economic moats built on more identifiable and durable competitive advantages, would be a better option for long-term investors.

WARREN BUFFETT: Yeah, the decision in respect to airlines had no connection with our being involved in the railroad business.

I mean, you can classify them, you know, maybe in — as transportation businesses or something. But it had no connection, had no more connection than the fact we own GEICO or, you know, any other business.

You couldn’t pick a tougher industry, you know, ever since Orville [Wright] went up and I said, you know, that if anybody’d really been thinking about investors, they should have had Wilbur [Wright] shoot him down and save everybody a lot of money for a hundred years.

You can go to the internet and type in “airlines” and “bankrupt,” and you’ll see that something like a hundred airlines — in that general range, you know, gone bankrupt in the last few decades.

And actually, Charlie and I were directors for some time of USAir. And people write about how we had a terrible experience in USAir. It was the — one of the dumbest things I’d ever done. And there’s a lot of —

CHARLIE MUNGER: You made a fair amount of money out of it, too.

WARREN BUFFETT: Yeah, and we made a lot of money out of it. (Laughs)

CHARLIE MUNGER: It was undeserved.

WARREN BUFFETT: But we made a lot of money out of it, because there was one little brief period when people got all enthused about USAir. And after we left as directors and after we sold our position, USAir managed to go bankrupt twice in the subsequent period.

I mean, you’ve named all of the — not all of them — but you’ve named a number of factors that just make for terrible economics.

And I will tell you that if capacity — you know, it’s a fiercely competitive industry. The question is whether it’s a suicidally competitive industry, which it used to be.

I mean, when you get virtually every one of the major carriers, and dozens and dozens and dozens of minor carriers going bankrupt, you know, it ought to come upon you, finally, that maybe you’re in the wrong industry.

It has been operating for some time now at 80 percent or better of capacity — being available seat miles — and you can see what deliveries are going to be and that sort of thing.

So if you make — I think it’s fair to say that they will operate at higher degrees of capacity over the next five or 10 years than the historical rates, which caused all of them to go broke.

Now the question is whether, even when they’re doing it in the 80s, they will do suicidal things in terms of pricing, remains to be seen.

They actually, at present, are earning quite high returns on invested capital. I think higher than either FedEx or UPS, if you actually check that out.

But that doesn’t mean — tomorrow morning, you know, if you’re running one of those airlines and the other guy cuts his prices, you cut your prices, and as you say, there’s more flexibility when fuel goes down to bring down prices than there is to raise prices when prices go up.

So the industry, you know — it is no cinch that the industry will have some more pricing sensibility in the next 10 years than they had in the last hundred years. But the conditions have improved for that.

They’ve got more labor stability than they had before, because they’re basically all going to — they’ve been through bankruptcy.

And they’re all going to sort of have an industry pattern bargaining, it looks to me like. They’re going to have a shortage of pilots to some degree. But it’s not like buying See’s Candy.

Charlie?

CHARLIE MUNGER: No, but the investment world has gotten tougher with more competition, more affluence, and more absolute obsession with finance throughout the whole country. And we picked up a lot of low-hanging fruit in the old days, where it was very, very easy. And we had huge margins of safety.

Now we operate with a less advantageous general climate. And maybe we have small statistical advantages, where in the old days it was like shooting fish in a barrel.

But that’s all right. It’s OK if it gets a little harder after you get filthy rich. (Laughter)

WARREN BUFFETT: Yeah. Charlie’s more philosophical than I am on that point. (Laughter)

CHARLIE MUNGER: Well, I can’t bring back the low-hanging fruit, Warren. You’re just going to have to keep reaching for the higher branches.

WARREN BUFFETT: Gregg, the — I don’t — I think the odds are very high that there are more revenue passenger miles five years from now or 10 years from now.

If the airlines — if the airline companies are only worth, five or 10 years from now, what they’re worth now, in terms of equity, we’ll get a pretty reasonable rate of return, because they’re going to buy in a lot of stock at fairly low multiples.

So if the company’s worth the same amount at the end of the year and there’s fewer shares of stock outstanding, over time we make decent money. And all four of the major airlines are buying in stock at a —

CHARLIE MUNGER: You’ve got to remember that the railroads were a terrible business for decades and decades and decades and then they got good.

WARREN BUFFETT: Yeah, it — we like — I like the position. Obviously, by buying all four, it means that it’s very hard to distinguish who will do the — at least in my mind — it’s hard to distinguish who will do the best.

I do think the odds are quite high that, if you take revenue passenger miles flown five or 10 years from now, it will be a higher number. And that will be —

There’ll be low-cost people who come in. And, you know, the Spirits of the world and JetBlues, whatever it may be. But the — my guess is that all four of the companies we have will have higher revenues. The question is what their operating ratio is.

They will have fewer shares outstanding by a significant margin. So even if they’re worth just what they’re worth today, we could make a fair amount of money. But it is no cinch, by a long shot.

14. Coca-Cola and Buffett get “Black Planet Award”

WARREN BUFFETT: OK, station 3.

AUDIENCE MEMBER: Good morning, everybody. My name is Savilla Aliance (PH). I’m from Germany. And I’m member of board of Ethecon Foundation Ethics and Economy.

I’m very happy that I can put my question here. And maybe you are not as happy as I am to listen to it.

WARREN BUFFETT: (Laughs) Well, we’ll try to stay happy. Thank you for coming. (Laughter)

AUDIENCE MEMBER: Thank you. Mr. Buffett, a few years ago, I saw a movie in which you proclaimed that the print on the dollar bill — “In God We Trust” — does not really express your philosophy. In your opinion, only cash counts. And your credo is, “in the dollar I trust.” You obviously thought —

WARREN BUFFETT: I don’t think I’ve ever said that actually. But —

AUDIENCE MEMBER: Well, I can show you the movie. (Laughs) That will prove.

WARREN BUFFETT: Oh, well, I — send me a clip. I —

AUDIENCE MEMBER: Well, maybe it was just joking. But always behind a joke there is also a truth. So — well, you laughed heartily at that moment.

You, as one of the most richest men in — of all times on this Earth, are you not a good-humored, friendly, elderly gentleman?

Whatever motivated those who designed the dollar notes, they certainly wanted to say that there is something higher than the value of this printed paper.

Regrettably, you have shown many times in your life that you see this differently. You have accumulated billions of dollars — (applause) — showed extraordinary cleverness and skill, and you knew — you knew better to pick up than many others who, like you, used the rules which are inherent to capitalism for their own intentions.

But have you ever given a thought to what troubles and sacrifices, slavery and destruction of Mother Earth, and even diseases and deaths stick to the dollar bills which you gather so eagerly? (Booing)

Let’s take Coca-Cola. (Booing)

Ethecon Foundation Ethics and Economy from Germany has awarded the Black Planet Award to the members of the board of directors as well as to the large shareholders, Warren Buffett and Allen — and Herbert Allen —because you are co-responsible for all of what makes these group make so much money, isn’t it?

Among other things, Coca-Cola deprives people —

WARREN BUFFETT: Well, I —

AUDIENCE MEMBER: — of their drinking water —

WARREN BUFFETT: — at some point, yeah, I —

AUDIENCE MEMBER: — in drought-prone areas of the world.

WARREN BUFFETT: Well, are you asking a question?

AUDIENCE MEMBER: And many (inaudible) contaminate the groundwater in these areas.

WARREN BUFFETT: I don’t want to interrupt you, but are you — (applause) — making a speech or asking a question?

AUDIENCE MEMBER: Well, I put my question right now.

WARREN BUFFETT: OK, good.

AUDIENCE MEMBER: Will you give up your Coca-Cola shares if the destruction of the environment, the monopolization of the right to healthy drinking water, and the shameless exploitation of the workers continue?

CHARLIE MUNGER: Well, that’s more of a speech than a question.

WARREN BUFFETT: Yeah. (Applause)

I don’t think that quote you had earlier — I have — I’ve said once or twice that it should say “In the Federal Reserve We Trust” because they print the money. And if they print too much of it, it could decline in value.

But I’ve never — to my knowledge, I’ve never said anything like you originally said.

And I would say this. I think I’ve been eating things I like to eat all my life. And Coca-Cola — this Coca-Cola’s 12 ounces, I drink about five a day. (Laughter) It has about 1.2 ounces of sugar in it.

And if you look at what people — different people — get their sugar and calories from, they get them from all kinds of things. I happen to believe that I like to get 1.2 ounces with this. And it’s enjoyable.

Since 1886, people have found it pleasant. And I would say that if you pick every meal in terms of what somebody in some recent publication has told you is the very best for you, I offer you that. I say, “Go to it.”

But if you told me that I would live one year longer. And I don’t even think that — that I would live one year longer if I’d eaten nothing but broccoli and asparagus and everything my Aunt Alice wanted me to eat all my life or I could eat everything I enjoyed eating, including chocolate sundaes, and Coca-Cola, and steak, and hash browns, you know, I would rather eat what — in a way I enjoy for my whole life than — and — than, you know eat some other way and live another year. (Applause)

And I do think that choice should be mine, you know? If somebody decides sugar is harmful, you know, there — maybe you’d encourage the government to ban sugar. But sugar in Coca-Cola is not different than eating sugar, you know, put on my Grape-Nuts in the morning or whatever else I’m having.

So I think Coca-Cola’s been a very, very positive factor in America for — and the world — for a long, long time. And you can look at a list of achievements of the company. (Applause)

And I really don’t want anybody telling me I can’t drink it.

Charlie?

CHARLIE MUNGER: Well, I’ve solved my Coca-Cola problem by drinking Diet Coke. And I swill the stuff like other people swill I don’t know what. And I’ve been doing it for just as long as you’ve been taking all those Coca-Colas that — I’ve had breakfast with Warren when he has Coca-Colas and nuts. (Laughter)

WARREN BUFFETT: And pretty damn good too. (Laughter)

CHARLIE MUNGER: If you keep doing that, Warren, you may not make a hundred.

WARREN BUFFETT: Well — (laughter) — I think there’s something in longevity to feeling happy about your life, too. It’s not —

CHARLIE MUNGER: Absolutely. (Applause)

15. Intrinsic value projections depend on interest rates

WARREN BUFFETT: OK, Carol?

CAROL LOOMIS: This question is from Franz Tramberger (PH) of Austria. And it concerns intrinsic value, which is neither — Warren may rather — he may amend this, my definition here, but — which is neither a company’s accounting value nor its stock market value, but is rather its estimated real value.

So the question is, “At what rate has Berkshire compounded intrinsic value over the last 10 years? And at what rate, including your explanation for it please, do you think intrinsic value can be compounded over the next 10 years?”

WARREN BUFFETT: Yeah. Intrinsic value, you know, can only be calculated — or gains — you know, in retrospect.

But the intrinsic value pure definition would be the cash to be generated between now and Judgment Day, discounted at an interest rate that seems appropriate at the time. And that’s varied enormously over a 30 or 40-year period.

If you pick out 10 years, and you’re back to May of 2007, you know, we had some unpleasant things coming up. But we’ve — I would say that we’ve probably compounded it at about 10 percent.

And I think that’s going to be tough to achieve, in fact almost impossible to achieve, if we continued in this interest rate environment.

That’s the number one — if you asked me to give the answer to the question, if I could only pick one statistic to ask you about the future before I gave the answer, I would not ask you about GDP growth. I would not ask you about who was going to be president.

I would — a million things — I would ask you what the interest rate is going to be over the next 20 years on average, the 10-year or whatever you wanted to do.

And if you assume our present interest rate structure is likely to be the average over 10 or 20 years, then I would say it’d be very difficult to get to 10 percent.

On the other hand, if I were to pick with a whole range of probabilities on interest rates, I would say that that rate might be — it might be somewhat aspirational. And it might well — it might be doable.

And if you would say, “Well, we can’t continue these interest rates for a long time,” I would ask you to look at Japan, you know, where 25 years ago, we couldn’t see how their interest rates could be sustained. And we’re still looking at the same thing.

So I do not think it’s easy to predict the course of interest rates at all. And unfortunately, predicting that is embedded in giving a good answer to you.

I would say the chances of getting a terrible result in Berkshire are probably as low as about anything you can find. Chance of getting a sensational result are also about as low as anything you can find. So if I — I would — I —

My best guess would be in the 10 percent range, but that assumes somewhat higher interest rates — not dramatically higher — but somewhat higher interest rates in the next 10 or 20 years than we’ve experienced in the last seven years.

Charlie?

CHARLIE MUNGER: Well, there’s no question about the fact that the future, with our present size is, in terms of percentages of rates of return, is going to be less glorious than our past. And we keep saying that. And now we’re proving it. (Laughter)

WARREN BUFFETT: Do you want to end on that note, Charlie? Or would you care to — (Laughter)

CHARLIE MUNGER: Well, I do think Warren’s right about one thing. I think we have a collection of businesses that on average has better investment values than, say, the S&P average. So I don’t think you shareholders have a terrible problem.

WARREN BUFFETT: And I would say we probably — well, I’m certain — we have — we do have more of a shareholder orientation than the S&P 500 as a whole. I mean, for — you know, the —

This company has a culture where decisions are made for — as an owner, as a private owner would make them. And frankly, that’s a luxury we have that many companies don’t have. I mean, they’re under pressures today, sometimes, to do things.

One of the questions I ask the CEO of every public company that I meet is, “What would you be doing differently if you owned it all yourself?” And the answer, you know, is usually this, that, and a couple of other things.

If you would ask us, the answer is, you know, we’re doing exactly what we would do if we owned them all — all the stock ourselves. And I think that’s a small plus over time.

Anything further, Charlie? (Applause)

CHARLIE MUNGER: I think we have one other advantage. A lot of other people are trying to be brilliant. And we’re just trying to stay rational. And — (laughter and applause) — it’s a big advantage. Trying to be brilliant is dangerous, particularly when you’re gambling.

16. Who benefits from corporate tax cut varies by industry

WARREN BUFFETT: OK, Jonathan?

JONATHAN BRANDT: If corporate tax rates are reduced meaningfully, Berkshire will enjoy a one-time boost to book value because of its sizable deferred tax liability, and its go-forward earnings should be higher, too, at least in theory.

How much of the reduced tax rate will be passed along to Berkshire’s customers through, for instance, lower electricity rates or lower railroad shipping rates? And how much will go to Berkshire shareholders?

WARREN BUFFETT: Yeah, the question is, in the case of our utility businesses, all benefit of lower tax rates goes to customers. And it should be, because we are allowed a return on equity — in general — I mean, I’m simplifying a little bit. But the —

We’re allowed a return on equity that’s computed on an after-tax basis. And the utility commissions would, if taxes were raised, would presumably give us higher rates to compensate for that.

And if taxes are lowered, they would say, “You’re not entitled to make more money just because tax rates — on equity — because tax rates have been lowered.” So forget about the utility portion of the deferred taxes.

The deferred taxes that are applicable to our unrealized gains in securities, we would get all the benefit of. Because I mentioned we had 90 billion-plus of unrealized gains. And if the rates were changed on those in either direction, our owners, dollar for dollar, will participate in that.

And then you get into the other businesses. You mentioned the railroad, but it can be all of our other businesses.

To some extent, if tax rates are lowered, to different degrees in different industries, depending on the number of players, the competitive conditions, some of it may — some if it almost certainly gets competed away. And some of it would likely not be competed away.

And that’s — you know, economists can argue about that a lot. But I’ve seen it in action in a lot of cases.

You got a big decline in rates, for example, in the U.K. And we’ve had them over my lifetime. We had 52 percent corporate rates. You know, we’ve had a lot of different numbers.

So I have seen how behavior — economic behavior — works. And I would say that it’s certain that some of any lower rate would be competed away. And it’s virtually certain that some would enure to the benefit of the shareholders. And it’s very industry and company specific in how that plays out.

Charlie?

Well, we — dollar for dollar, I mean, there’s 90 or 95 billion, if the rate were to drop 10 percent, that 9 1/2 billion is — by 10 percentage points — that 9 1/2 billion’s real.

On the other hand, if it goes up as it did — went up from 28 to 35 percent, they can take it away from us, too.

CHARLIE MUNGER: Well, I think it’s true that we’re peculiar in one way. If things go to hell in a handbasket and then get better later, we’re likely to do better than most others.

And we don’t wish for that. And we don’t want our company to have to suffer through it. And we fear what might happen if the country went through the ringer like that.

But if that real adversity comes, we’re likely to do better in the end. We’re good at navigating through that kind of stuff.

WARREN BUFFETT: Yeah, and occasionally, there will be —

CHARLIE MUNGER: A lot — in fact, we’re quite good at it. (Laughter)

WARREN BUFFETT: There will be occasional hiccups in the American economy. Doesn’t have much to do with who’s president or anything like that. Those people may get blamed or given credit for different things.

But it’s just — it is the nature of market systems to occasionally go haywire in one direction or another. And it’s been ever thus, you know, and it’ll be ever thus.

It’s not — it does not have a — there’s not a — it’s not a — on a regular sine wave-type picture or anything of the sort. But it’s certain to happen from time to time.

And we will probably have a fair amount of money and credit at that time. And we certainly —

We’re not affected. When the rest of the world is fearful, we know America’s going to come out fine. And we will not have a trouble — any trouble — psychologically, acting at all.

And then the question is how much do we have in the way of resources? We’ll also never put the company in any kind of risk just because we see a lot of opportunities. We’ll grab all the ones we can that we can handle. And not lose a day of sleep.

(Someone shouts in the audience)

I didn’t quite get that. But —

17. Why Buffett sold his used Cadillac for a profit

WARREN BUFFETT: In any event, we will now go to station 4. And if the person yelling — are we up there in station — are you on station 4?

AUDIENCE MEMBER: Yes, Dr. Bruce Hertz from Glenview, Illinois. I wanted to thank you for allowing me to attend. I feel both honored and blessed.

My question for Mr. Buffett is, you’ve always advised us to purchase equities that appreciate in value. Yet a few years ago you sold your used Cadillac at a tremendous profit. (Laughter)

How can you justify selling a depreciating asset for a significant profit? Thank you.

WARREN BUFFETT: Yeah, well — (laughter) — actually I gave it to Girls Inc. And they sold it. And it was kind of an interesting — (Applause)

A very nice guy bought it for a hundred and some thousand dollars. And I did not — and Girls Inc. got the money. And he got in the — he came later, actually, with his family.

And he drove it away without any plates. He was driving back to New York. And he got picked up by the police — (laughter) — in Illinois. And he said, “Well” — he started giving this explanation about how he’d given this money to Girls Inc. and was driving the car back. And he had this nice looking family with him.

And the cops were quite skeptical. But fortunately, I’d signed the dashboard for him as part of the deal when he — and so they looked at that. And then they just said, “Well, did he give you any stock tips?” And they let him go. (Laughter)

I can’t recall ever selling a used car at a profit. But we — I don’t think I’ve sold any personal possession. Well, I’ve got a house for sale.

CHARLIE MUNGER: You don’t have any personal possessions. (Laughter)

WARREN BUFFETT: Yeah. No, I — anything you see with a figure attached like that —

CHARLIE MUNGER: You’re a fatter version of Mahatmas Gandhi — (laughter) — Mahatma Gandhi.

WARREN BUFFETT: The guy was a very nice guy that bought it. And, you know, his check cleared. So we were fine. (Laughter)

18. Why Buffett wants his wife to own an index fund after he dies

WARREN BUFFETT: Becky?

BECKY QUICK: I’d like to ask a question that can serve as a follow-up to the question that Carol had asked. And Charlie, in that response, said that he thinks that Berkshire’s businesses on the whole will do better than the S&P 500.

Clark Cameron (PH) from Birmingham, Alabama, who owns 281 shares of Berkshire B, writes in and asks, “Why have you advised your wife to invest in index funds after your death rather than Berkshire Hathaway? I believe Munger has counseled his offspring to quote, ‘Not be so dumb as to sell.’”

WARREN BUFFETT: Yeah. (Laughter)

She won’t be selling any Berkshire to buy the index funds. All of my Berkshire, every single share, will go to philanthropy.

So the — I don’t even regard myself as owning Berkshire, you know, basically — (applause) — it’s committed.

And so far, about 40 percent has already been distributed.

So the question is, somebody who is not an investment professional will be, I hope, reasonably elderly by the time that the estate gets settled.

And what is the best investment, meaning one that there would be less worry of any kind connected with and less people coming around and saying, “Why don’t you sell this and do something else?” and all those things. She’s going to have more money than she needs.

And the big thing, then, you want is money not to be a problem. And there will be no way that if she holds the S&P — or virtually no way, absent something happening with weapons of mass destruction — but virtually no way that she won’t — she’ll have all the money that she possibly can use.

She’ll have a little liquid money so that if stocks are down tremendously at some point, there’s — they close the stock exchange for a while, anything like that — she’ll still feel that she’s got plenty of money.

And the object is not to maximize. It doesn’t make any difference whether the amount she gets doubles or triples or anything of the sort. The important thing is that she never worries about money the rest of her life.

And I had an Aunt Katie here in Omaha, who Charlie knew well, and worked for her husband, as did I. And she worked very hard all her life. And had lived in a house she’d paid, I think, I don’t know, $8,000 for at 45th and Hickory all her life.

And because she was in Berkshire, she ended up — she lived to 97 — she ended up with, you know, a few hundred million. (Laughter)

And she would write me a letter every four or five months. And she said, “Dear Warren, you know, I hate to bother you. But am I going to run out of money?”

And — (laughter) — I would write her back. And I’d say, “Dear Katie, it’s a good question because, if you live 986 years, you’re going to run out of money.” And — (laughter) — then about four or five months later, she’d write me the same letter again.

And I have seen there’s no way in the world, if you’ve got plenty of money, that it should become a minus in your life. And there will be people, if you’ve got a lot of money, that come around with various suggestions for you, sometimes well-meaning, sometimes not so well-meaning.

So if you’ve got something as certain to deliver — you know, it was all in Berkshire, they’d say, “Well, if Warren was alive today, you know, he would be telling you to do this.” I just don’t want anybody to go through that.

And the S&P will be a — I think actually what I’m suggesting is what — a very high percentage of people should do something like that. And I don’t think they will have as — I think there’s a chance they won’t have as much peace of mind if they own one stock.

And they’ve got neighbors and friends and relatives that are trying to do some — like I say, sometimes well-intentioned, sometimes otherwise, to do something else. And so I think it’s a policy that’ll get a good result and is likely to stick.

Charlie?

CHARLIE MUNGER: Well, as Becky said, the Mungers are different. I want them to hold the Berkshire.

WARREN BUFFETT: Well, I want to hold the Berkshire, too. (Laughter)

CHARLIE MUNGER: No, but I mean I don’t like the — I recognize the logic of the fact that that S&P algorithm is very hard to beat. You know, diversified portfolio of big companies. It’s all but impossible for most people. But, you know, it’s — I’m just more comfortable with the Berkshire.

WARREN BUFFETT: Well, it’s the family business.

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: Yeah. But it — I’ve just — I’ve seen too many people as they get older, particularly, being susceptible and just having to listen to the arguments of people coming along.

CHARLIE MUNGER: Well, if you’re going to protect your heirs from the stupidity of others, you may have some good system. But I’m not much interested in that subject.

WARREN BUFFETT: OK. (Laughter)

19. Berkshire probably would have put $15B into failed Unilever deal

WARREN BUFFETT: OK. Jay?

JAY GELB: Berkshire reportedly partnered with 3G and Kraft Heinz’s attempt to acquire Unilever for $143 billion.

How much was Berkshire willing to invest in this deal? And does this mean Berkshire’s next large acquisition is likely to be in partnership with 3G?

WARREN BUFFETT: Yeah, well, Kraft, I — you’d have to distinguish between two situations. Kraft Heinz was a widely-owned company in which we and 3G act as a control group and have a little over 50 percent of the stock.

But as originally contemplated — no certainty that this exactly is what would have happened — we would have invested an additional 15 billion and 3G would have invested an additional 15 billion if a friendly agreement could have been reached.

So if the deal had been made, if the independent directors of Kraft Heinz had approved the transaction, the likely — well, then the likelihood is that we would have invested 15 billion. But it would’ve required the approval of the independent directors as well.

Now Kraft Heinz, in going forward with making that offer, wanted to be sure that there would be enough equity capital, in addition to the debt that would be incurred, to make the deal. And so, informally, we had basically committed the 15 billion.

It only was approved on the basis that it be a friendly deal with Unilever. And initially, we thought they would be at least possibly interested in such a deal.

And when we found out otherwise, we withdrew the offer. So it would have been 15 billion of additional money, in all probability.

20. Speculation is inevitable in China and the U.S.

WARREN BUFFETT: OK, station 5?

AUDIENCE MEMBER: Dear Honorable Mr. Buffett and Mr. Munger, I’m Tian Du Hua (PH) from China. My company (Inaudible) Holdings is spreading value investing philosophy in Asia.

My business partner Ken Chi (PH), Cho Quy Ying (PH), and I are committed to awake 100 million Chinese people to return to rational way of investing.

The hardest thing in this world is to change people’s values or belief system. And we should like to awake investors to change from speculate in the market to investing in the market. It’s not changing the speculator’s values or belief system.

May I ask you, Mr. Buffett, can you kindly advise us what we should do to spread your value investing philosophy? Or is there any word of encouragement? Thank you.

WARREN BUFFETT: Yeah, the — when — in any system — Keynes wrote about this in 1936 — I think it was, in “The General Theory,” or ’35. I think it’s Chapter 12. It’s — great chapter on investing.

And he talked about investment and speculation and the propensity of people to speculate and the dangers of it.

And worded eloquently, there’s always the possibility of, I mean, there’s always some speculation, obviously, and there’s always some value investors and all that sort of thing in the market. But there’s —

When speculation gets rampant, and when you’re getting what I guess Charlie would call “social proof” — that it’s worked recently — people can get very excited about speculating in markets. And we will have it from time to time in this market.

There’s nothing more agonizing than to see your neighbor who you think has an IQ about 30 points below you getting richer than you are by buying stocks. And whether it’s internet stocks or whatever. And it — and people succumb to it. And they’ll succumb in this economy just as elsewhere.

There’s also a point which gets to your question. I would say that early on in the development of markets — there is probably a — there’s some tendency for them, I think, to be more speculative than markets that have been around for a couple hundred years because the — it has a — invest —

Markets have a casino characteristic that has a lot of appeal to people, particularly when they see, like I say, people getting rich around them. And those that haven’t been through cycles before are probably a little more prone to speculate than people who have experienced the outcome of wild speculation.

So I — you know, basically in this country, Ben Graham was, in the book I read in 1949, was preaching investment. And that book continues to sell very well.

But if the market gets hot, new issues are doing well and people on leverage are doing well, a lot of people will be attracted to, not only speculation, but what I would call gambling. And I’m afraid that that will be true in the United States.

And I think that China, being a newer market, essentially, in which there’s widespread participation, is likely to have some pretty extreme experiences in that respect. We will have some in this country, too.

Charlie?

CHARLIE MUNGER: Well, I certainly agree with that. (Laughter)

The Chinese will have more trouble. They’re very bright people. They have a lot of action and, sure they’re going to be more speculative.

And it’s a dumb idea. And to the extent you’re working on it, why, you’re on the side of the angels. But lots of luck. (Laughter)

WARREN BUFFETT: Well, it will offer the investor more opportunities actually — (laughs) — if they can keep their wits about them — if you have wild speculation. I mean, we —

Charlie just mentioned earlier, you know, that if we get into periods that are very tough, Berkshire certainly will do reasonably well because it won’t — we won’t be — we won’t get fearful. And fear spreads like you cannot believe until you’ve seen a few examples of it.

At the start of September 2008, you had 35 million people with their money in money market funds with $3 1/2 trillion in them. And none of them were afraid that that dollar wasn’t going to be a dollar when they went to cash in their money market fund.

And three weeks later, they were all terrified, and 175 billion flowed out in three days. And so the way the public can react is really extreme in markets. And that actually offers opportunities for investors.

You’ll never — people like action and they like to gamble. And if they think there’s easy money to be made, a lot of them, you’ll get a rush to it. And for a while it will be self-fulfilling and create new converts until the day of reckoning comes. They’ll —

Just keep preaching investing, and if the market swings around a lot, you’ll keep adding a few people here and there to a group that recognizes that markets are there to be taken advantage of, rather than to instruct you as to what is going on. OK. Andrew?

Anything more on that, Charlie?

CHARLIE MUNGER: We’ve done a lot of preaching, Warren, without much effect.

WARREN BUFFETT: Right. And that’s probably good, from our standpoint.

21. We don’t do anything differently due to tax law changes

WARREN BUFFETT: OK. Andrew?

ANDREW ROSS SORKIN: Thank you, Warren. This question comes from Ryan Prince (PH).

“President Donald Trump and his advisors have talked about proposing a substantial investment tax credit to provide incentives for long-term corporate fixed capital investment.

“In BNSF, Berkshire owns a sprawling infrastructure portfolio requiring regular routine maintenance investment of substantial scale.

“What impact would an investment tax credit have on BNSF’s capital investment decision-making, from a return on investment capital perspective, as well as in terms of timing?

“And just as importantly, given the current economy and employment picture, would such a tax credit amount to a subsidization of otherwise mandatory maintenance capital investment or a proper incentive to stimulate investment?”

WARREN BUFFETT: Yeah, well, it would all depend on how it was worded — you know, because — we’ve had investment tax credits in this country, and we’ve had bonus depreciation. It’s another form of it. We — and we do get extra first-year depreciation. That does not enter into our calculation very much.

You know, in fact — certainly at the Berkshire level, I’ve never instructed anybody to do anything different because of investment tax credits or accelerated depreciation. There may be some calculations done down at the operating company level.

It’s certainly true in something like wind projects and solar projects. They are dependent on the tax law, currently. There may come a time when they aren’t, but they wouldn’t have been done without some subsidization through the tax law.

But I would say, if you change the depreciation schedules and, you know, double depreciation — triple depreciation, for — that — we’re going to do what we need to do at the railroad to make it safer and more efficient if we just had ordinary depreciation.

And I doubt if there’d be any dramatic differences. Obviously, if you were going to, say, buy a bunch of planes and the law was going to change on December 31st, and the math made it better to wait till January 1st or do it this December 31st, you make that kind of calculation.

But I can’t recall, in all the years, that I’ve ever sent out anything to our managers saying, “Let’s do this because the tax law is being changed or might be changed,” or something of the sort.

As I mentioned earlier, it changes just a little bit if you think there’s going to be a change in capital gains rates at a given time. Obviously if it’s going to — the rate’s going to be lowered, you would take losses ahead of time and defer gains, maybe, a little.

And that’s why it’s useful, actually, if the tax committees in the Senate and the House are working on something, it might be useful if the chairmans would say that, “If we do make any changes, we’re likely to use this effective date,” or something of the sort. And I think they’ve done that a few times in the past.

We are not, the big tax-driven item — is — in wind and solar. And that is a specific policy, because the government has decided they want to move people — or society has decided — they want to move people toward those forms of electric generation. And the market system wouldn’t do it.

And there may come a time when the market system will do it all by itself.

We won’t make big changes. And it’s so speculative anyway, in terms of even what the law would be.

But beyond that, if it becomes less speculative as the law and it really looks like something is going through, it doesn’t change us big time at all.

Charlie?

CHARLIE MUNGER: Nothing to add. We’re not going to change anything at the Berkshire — at the railroad — for some little tax jiggle.

WARREN BUFFETT: Yeah, if we need a bridge repaired, we’re going to repair the bridge, you know. And if need — we need a lot of track maintenance all the time and that sort of thing. And it just, I don’t think [BNSF’s] Matt [Rose] and I have ever had a talk about it since we’ve owned the railroad, but —

22. Coal shipment revenues will drop for BNSF

WARREN BUFFETT: Gregg?

GREGG WARREN: Warren, my question also relates to Burlington Northern.

Despite the current administration’s belief that they can bring the coal industry back, market forces continue to lead to the industry’s demise.

While 90 percent of U.S. coal consumption is driven by electricity generation, natural gas has been both cheaper and cleaner burning, and renewable electricity generation has remade parts of the market as wind and solar have gained scale and become cheaper alternatives.

This has created problems for Burlington Northern, with coal shipments accounting for just 18 percent of volume and revenue for the railroad last year, down from an average of 24 percent for both measures the previous 10 years.

While some of this was due to large buildup of coal supplies the past couple of winters, which finally seem to be working their way out, what are your expectations for the contribution coal can make to BNSF longer term?

And I know that the railroad currently handles some export shipments going through Canada’s Pacific Coast ports, but will there be enough growth there to offset domestic demand? Or will BNSF need to rely more heavily on segments like intermodal to offset lost coal volumes?

WARREN BUFFETT: Yeah, the answer is coal’s — coal is going to go down over time. I don’t think there’s much question about that.

The specifics of any given year relate very importantly to the price of natural gas. I mean, right now there are — there —

Demand is somewhat up — fair amount up — from last year because natural gas is at 3.15 or 3.20, and the utilities can produce electricity, in many cases, quite a bit cheaper with coal than with natural gas. Whereas, with a $2, it would all be — it would be natural gas.

But over time, coal is — in my mind — is essentially certain to decline as a percentage of the revenue of the railroad.

The speed at which it does, you know, it — you don’t build — create generation plants overnight. And so it —

You can’t predict the rate. And if natural gas is cheap enough, it’s going to be a — you’ll see a big conversion back to natural gas.

So coal is a — coal is going to go down, as a percentage of revenues, significantly.

You know, certainly over 10 years it’ll be quite significant, and who knows exactly, year by year. We are looking for other sources of growth than coal. If you’re tied to coal, you got problems.

Charlie?

CHARLIE MUNGER: Well — you go out over the extremely long term, I think that all hydrocarbons will be used, including all the coal.

So I think that, in the end, these hydrocarbons are a huge resource for humanity, and I don’t think we’ve got any good substitute.

And I’ve never minded saving them for the next generation. I don’t like using them up very fast. So, I’m often on a road on my own on this one.

And people think that all this hydrocarbons are going to be stranded and the whole world’s going to change. I think we’re going to use every drop of the hydrocarbon sooner or later. We’ll use them as chemical feed stocks. It’s —

I regard all these things as very hard to predict. And I’m not at all sure that — I would eventually expect natural gas to be pretty short in supply.

WARREN BUFFETT: A change in storage would make a big difference.

We will produce, within a few years, as much electricity in Iowa — or virtually as much — electricity in Iowa from wind as our customers use. But the wind only blows about 35 percent of the time or something like that. And sometimes it blows too hard.

But the storage, you know, having it 24 hours a day, seven days a week, is a real problem, even if we’ve got the capability of producing, like I say, a self-sufficient amount, essentially, in Iowa before very long.

Coal — our shipments of coal are up fairly substantially this year on the BNSF. But they were very low last year, and as you said, stockpiles grew and have come down somewhat. They’re still on the high side.

But in my mind — Charlie’s got a longer-term outlook on this — in my mind, we’re going to be shipping a whole lot less coal 10 or 20 years from now than we are now.

On the other hand, I think there’s some decent prospects in other long hauls.

I mean, it’s a pretty cheap way to move bulk commodities long distance. Rail is. And I think it’s a good business, but the coal aspect of it’s going to diminish.

23. Big change: You don’t need money to run America’s biggest companies

WARREN BUFFETT: OK. Station 6.

AUDIENCE MEMBER: Good morning. It’s Marcus Burns from Sydney, Australia.

My question, Mr. Buffett, is, you used to buy capital-light, cash-generative businesses, but now buy lower-growth, capital-consumptive businesses.

I realize Berkshire generates a lot of cash flow, but would shareholders have been better off if you had continued to invest in capital-light companies?

WARREN BUFFETT: Well, we’d love to find them. I mean, there’s no question that buying a high-return-on-assets, very light-capital-intensive business that’s going to grow beats the hell out of buying something that requires a lot of capital to grow.

And this varies from day to day, but I believe — and I don’t think it’s sufficiently appreciated. I believe that probably the five largest American companies by market cap — and some days we’re in that group and some days we aren’t — let’s assume we’re not in that group on a given day — they have a market value of over $2 1/2 trillion, and that 2 1/2 trillion is a big number.

I don’t know whether the aggregate market cap of the U.S. market is, but that’s probably getting up close to 10 percent of the whole market cap of the United States. And if you take those five companies, essentially, you could run them with no equity capital at all. None.

That is a very different world than when Andrew Carnegie was building a steel mill and then using the earnings to build another steel mill and getting very rich in the process, or Rockefeller was building refineries and buying tank cars and everything.

Generally speaking, over — for a very long time in our capitalism, growing and earning large amounts of money required considerable reinvestment of capital and large amounts of equity capital, the railroads being a good example.

That world has really changed, and I don’t think people quite appreciate the difference.

You literally don’t need any money to run the five companies that are worth collectively more than $2 1/2 trillion, and who have outpaced any number of those names that were familiar, if you looked at the Fortune 500 list 30 or 40 years ago, you know, whether it was Exxon or General Motors or you name it.

So we would love — I mean, there’s no question that a business that doesn’t take any capital and grows and has, you know, almost infinite returns on required equity capital, is the ideal business.

And we own a couple of businesses — a few businesses — that earn extraordinary returns on capital, but they don’t grow.

We still love them, but if they had — if they were in fields that would grow, believe me, we wouldn’t — you know, they would be number one on our list.

We aren’t seeing those that we can buy and that we understand well.

But you are absolutely right that that’s a far, far, far better way of laying out money than what we’re able to do when buying capital-intensive businesses.

Charlie?

CHARLIE MUNGER: Yeah. The chemical companies of America, at one time, were wonderful investments.

Dow and DuPont sold at 20-some times earnings, and they kept building more and more complicated plants and hiring more Ph.D. chemists, and it looked like they owned the world.

Now, most chemical products are sort of commoditized and it’s a tough business being a big chemical producer. And in comes all these other people like Apple and Google and they’re just on top of the world.

I think the questioner’s basically right that the world has changed a lot, and that the people who have made the right decisions in getting into these new businesses that are so different from the old ones have done very well.

WARREN BUFFETT: Yeah, Andrew Mellon would be absolutely baffled by looking at the high-cap companies now. I mean, the idea that you could create hundreds of billions of value essentially without assets — without tangible assets —

CHARLIE MUNGER: Fast.

WARREN BUFFETT: Fast, yeah. But that is the world. I mean, there is —

When Google can sell you something that — where GEICO was paying 11 bucks or something every time somebody clicked something — that is a lot different than spending years finding the right site and developing, you know, iron mines to supply the steel plants and, you know, railroads to haul the iron to where the steel is produced and distribution points, and all that sort of thing.

Our world was built — you know, when we first looked at it, our U.S. — our capitalist system, basically, was built on tangible assets, and reinvestment, and all that sort of thing, and a lot of innovation and invention to go with it.

But this is so much better, if you happen to be good at it, to essentially be able to build hundreds of billions of market value without really needing any capital.

That is a different world than existed in the past. And I think, listen, I think it’s a world that is likely to continue. I mean, the trend is, I don’t think the trend in that direction is over by a long shot.

CHARLIE MUNGER: A lot of the people who are chasing that sort of thing very hard now in the venture capital field are losing a lot of money. It’s a wonderful field, but not everybody’s going to win big in it. A few are going to win big in it.

24. Benefits of Berkshire’s “management by abdication”

WARREN BUFFETT: OK. Carol?

CAROL LOOMIS: This question is from a shareholder in California, in the Silicon Valley area, who didn’t want his name mentioned because he said he wasn’t looking for publicity, but whose picture makes him appear to be a millennial.

“Every Berkshire shareholder knows about the stock market value of Berkshire, but my question is about the value of Berkshire to the world.

“For instance, the value of Apple to the world has been iPhones. The value of GEICO is cost-effective auto insurance. The value of 3G,” and I will tell you that there are some shareholders who would be arguing about it here, but “the value of 3G is improved operations.”

“But about Berkshire, I just don’t know. In managing Berkshire’s subsidiaries, as Mr. Munger once famously said, you practice ‘delegation just short of abdication.’ So, hands-on management can’t be the answer.

“That means the majority of Berkshire’s subsidiaries would do just as well if they were to stay independent companies. So that’s my question. What is the value of Berkshire to the world?”

WARREN BUFFETT: Yeah, well, the — I would say the question about — I’m with him to the point where he says that our — which he accurately describes as “delegation to the point of abdication.”

But I would argue that that abdication, actually, in many cases, will enable those businesses to be run better than they would if they were part of the S&P 500 and the target, perhaps, of activists or somebody that wants to get some kind of a jiggle in the short term.

So I think that our abdication actually has some very positive value on the companies. But that, you know, you’d have to look at it company by company.

We’ve got probably 50 managers in attendance here. And naturally, they’re not going to say anything, probably, on television or anything where they knock a certain thing.

But get them off in a private corner and just ask them whether they think their business can be run better with a “management by abdication” from Berkshire, but with also all the capital strengths of Berkshire, that when any project that makes sense can be funded in a moment without worrying whether the banks are still lending, like in 2008, you know, or whether Wall Street will applaud it or something of that sort.

So I think our very — our hands-off style, actually, I think can add significant value in many companies, but we do have managers here you could ask about that.

We certainly don’t add to value by calling them up and saying that we’ve developed a better system, you know, for turning out additives at Lubrizol, or running GEICO better than Tony Nicely can run it or anything of the sort.

But we do take a — we have a very objective view about capital allocation.

We can free managers up. I would say that we might very well free up at least 20 percent of the time of a CEO in the normal public — who would have — otherwise have a public company — just in terms of meeting with analysts, and the calls, and dealing with banks, and all kinds of things that, essentially, we relieve them of so that they can spend all of their time figuring out the best way to run their business.

So I think we bring something to the party, even if it — even if we’re just sitting there with our feet up on the desk.

Charlie?

CHARLIE MUNGER: Yeah. We’re trying to be a good example for the world. I don’t think we’d be having these big shareholders meetings if there weren’t a little bit of teaching ethos in Berkshire.

And I’ve watched it closely for a long time. I’d argue that that’s what we’re trying to do, is set a proper example. Stay sane. Be honest. Yeah. (Applause)

So I’m proud of Berkshire, and I don’t worry too much if we sell Coca-Cola. (Laughter)

WARREN BUFFETT: We — I would say, you know, GEICO is an extraordinarily well-run company and it would be extraordinarily well-run if it were public.

But it has gone from 2-and-a-fraction percent of the auto insurance market to 12 percent.

And part of the reason, a small part — the real key is GEICO and Tony Nicely — but part of the reason is that when other — at least two of our competitors — and big competitors — said that they would not meet their profit objectives if they didn’t lighten up their interest in new business, eight or 10 months ago, I think our business decision to step on the gas is a better business decision.

But I think that GEICO, as a public company, would have more trouble making that decision than they do when they’re part of GEICO [Berkshire].

Because we are thinking about nothing but where GEICO’s going to be in five or 10 years, and if that requires having new— we want new business cost to penalize our earnings in the short-term.

And other people have different pressures. I’m not arguing about how the —how they behave, because they have a different constituency than GEICO has with Berkshire and what Berkshire has with its shareholders, in turn.

And I think in that case, our system’s superior. But it’s not because we work harder. Charlie and I don’t do hardly anything. (Laughter)

25. Structured settlements interest rate

WARREN BUFFETT: Jonathan?

JONATHAN BRANDT: Could you please talk about your periodic payment annuity business? The weighted average interest rate on these contracts is 4.1 percent, which doesn’t sound particularly attractive given the current interest rate environment.

Is the duration of these liabilities long enough to make that an attractive cost of funds? Or were these contracts executed primarily when rates were higher?

WARREN BUFFETT: Well, those contracts — these are what are called structured settlements, primarily.

And when somebody young has a terrible auto accident or whatever it may be — perhaps urged by the court, urged by family members who really do have the interest of the injured party at heart, or — they may convert what could be a large sum settlement, probably against the insurance company — you know, maybe a million dollars, maybe $2 million — into periodic payments for the rest of the life of the injured party.

And we issue those for other insurance companies.

In fact, sometimes the court directs that Berkshire — or hints strongly — that Berkshire should be the one to issue those, because you’re talking about somebody’s life 30 or 40 or 50 years from now.

And the court, or the lawyer, or the family, they want to be very, very sure that whoever makes that promise is going to be around to keep it. And Berkshire has a preferred position in that.

We look — to get to your question, Jonny — we look for taking the longer maturity situations. We always have.

And we have to make assumptions about mortality, and we have to make — and then we have to decide at what interest rate we’ll do it.

The 4.1 is a mix of a lot of contracts over a lot of years, obviously. We write maybe 30 million of these, 20 to 30 million a week, looking for the long maturities.

And so, if you take an average of 15 years, or something of the sort, that’s how we come up with that sort of a figure. We adjust them to interest rates at all times.

And when doing that, we’re making an assumption that we’re going to earn more money that — than is inherent in the cost of these structured settlements. It’s a business we’ve — I think we’ve got six or seven billion up now. And we’ll keep doing them.

And incidentally, probably a significant percentage of the six or seven billion, we’re not yet paying anything on. Somebody else may have the earlier payments. And they’re certainly weighted far out. So it’s a business that we’ll be in 10 or 20 years from now.

We’ve got some natural advantage, because people trust us more than any other company to make those payments. And the test is whether we earn, over time, a return above that which we’re paying to the injured party.

And that’s a bet we’re willing to make. But if interest rates continued at present levels for a long time — we would, assuming we kept the money in fixed-income instruments — we would — we’d have some loss in that.

We’ve got an allowance in there for the expenses, incidentally, because we do make monthly payments to these people, eventually.

And we have to keep track of whether they’re still alive or not. Because you cannot count on the relatives of somebody that’s deceased when a check is coming in every month to notify you promptly that the person has become deceased. But it’s — it’ll —

That number will go up over time. If interest rates stay where they are, that 4.1 will come down a little bit as we add new business.

26. USG investment not “great,” but not a “disaster”

WARREN BUFFETT: OK. Station 7.

AUDIENCE MEMBER: Thank you, Mr. Buffett and Mr. Munger, for all you’ve done and the opportunity to learn even more from your approach to investing and life.

My name’s Harry Hong, and I’m a respirologist from Vancouver, British Columbia.

The question involves, back in 2001, you made an initial investment in USG, shortly before the company declared bankruptcy due to the mounting asbestos liability.

You held those shares through the bankruptcy process, even though standard wisdom says that the equity in Chapter 11 is usually worthless. Can you explain why USG’s equity was a safe investment?

WARREN BUFFETT: Well, I don’t really remember all the details then.

CHARLIE MUNGER: It was very cheap. (Laughter) Very cheap. (Laughter)

WARREN BUFFETT: Yeah, but I would say this. USG, we own — I’m not sure what percent, but it’s very significant percentage. I don’t know what —

CHARLIE MUNGER: Twenty percent, or something.

WARREN BUFFETT: Probably 30 percent or something like that. But USG, overall, has just been disappointing because the gypsum business has been disappointing.

And I think — I may be wrong — I think they went bankrupt twice, first from asbestos going back and then, subsequently, because they just had too much debt. So it has not been a brilliant investment.

Now if gypsum prices were at levels that they were in some years in the past, it would have worked out a lot better.

CHARLIE MUNGER: But it hasn’t been terrible.

WARREN BUFFETT: No, it hasn’t been terrible, but it — gypsum took — has taken a real dive several times, and there has been too much gypsum capacity.

And then when it comes back, the managements have been — not necessarily at USG, but including USG perhaps — they’ve gotten more optimistic about future demand than they should have. And it —

And they like — going back historically a way — they like to build new plants. And it’s a business where the supply has been significantly — potential supply — has been significantly greater than demand in a lot of years. I mean, it —

You’ve seen housing starts in — since 2008 and 2009 — not come back anywhere near as much as people anticipated. So gypsum prices have moved up but not dramatically.

So just put that one down as not one of our great ideas. Not one of my great ideas. Charlie wasn’t involved in that. It’s no disaster, though.

CHARLIE MUNGER: No it isn’t. It’s —

27. “Terrific” insurance operations are even better with Ajit Jain

WARREN BUFFETT: Becky?

BECKY QUICK (off microphone): This question — this question —

WARREN BUFFETT: Oh.

BECKY QUICK: Hello? Oh, there we go.

WARREN BUFFETT: OK.

BECKY QUICK: This question comes from Axel Meyersiek in Germany who writes, “If Ajit Jain were to retire, God forbid, be promoted, what would be the impact on the insurance operations, both with regards to underwriting profit as well as the development of float?”

WARREN BUFFETT: Well, nobody will — could possibly replace Ajit. I mean, it just — you can’t come close.

But we have a terrific operation in insurance. We really do, outside of Ajit, and it’s terrific-squared with Ajit.

There are things only he can do. But there are a lot of things that are institutionalized, a lot of things in our insurance business, where we’ve got extraordinarily able management, too.

So Ajit, for example, bought a company that nobody here has heard of, probably, called Guard Insurance a few years ago, based in worker’s comp, primarily. It’s based in — improbably — in Wilkes-Barre, Pennsylvania.

And it’s expanding like crazy in Wilkes-Barre. And it — it’s been a gem. And Ajit oversees it, but we’ve got a terrific person running it.

And we bought Medical Protective some years ago. Tim Kenesey runs that. Ajit oversees it, but Tim Kenesey can run a terrific insurance company, with or without Ajit. But he’s smart enough to realize that, if you got somebody like Ajit that’s willing to oversee it to a degree, that’s great.

But Tim is a great insurance manager all by himself, and Medical Protective has been a wonderful business for us. Most people don’t know we own it. The company goes back into the 19th century, actually.

We’ve got a lot of good operations. If you look at that section of the annual report called “Other” — insurance company, I mean that is — in aggregate, that is a wonderful insurance company. There’s very few like it. GEICO is a terrific company.

So, Ajit has made more money for Berkshire than I have, probably. But we’ve still got what I would consider the world’s best property-casualty insurance operation, even without him. And with him, you know, it — nobody, I don’t think anybody comes close.

Charlie?

CHARLIE MUNGER: Well, a few years ago, California made a little change in its workmen’s compensation law, and Ajit saw instantly that it would cause the underwriting results to change drastically.

And he went from a tiny percent of the market, (inaudible) 10 percent of the market, which is big, and he just grasped a couple billion dollars, at least, out of the air, like it was snapping his fingers. And when it got tough, he pulled back.

We don’t have a lot of people like Ajit. It’s hard to just snap your fingers and grab a couple billion dollars out of the air. (Laughter)

WARREN BUFFETT: Well, we’ve — actually, the California Workers’ Comp (inaudible), Guard has moved into that. I — we have got a lot of terrific insurance managers. I mean, I don’t know of a better collection any place. And Ajit has found some of those.

I’ve gotten lucky a few times. I mean, Tom Nerney at U.S. Liability, that goes back, what, 15, 16 years. He has a terrific operation. It’s not huge, but it is so well-managed.

And people don’t even know we own these things. But if you look at that last line — and now we’ve added Peter Eastwood with Berkshire Hathaway Specialty. And these are really good businesses, I got to tell you. (Laughs)

When you can produce underwriting prowess, and on top of that just hand more float — we don’t have many businesses like that. Those are great businesses.

We’ve got a hundred — you know, whatever it is — a hundred billion-plus of money that we get to earn on, while at the same time, overall, you know, on balance, we’re likely to make some additional money for holding it.

And if you can get somebody to hand you $104 billion and pay you to hold it while you get to invest and get the proceeds, it’s a good business.

Now, most people don’t do well at it. And, you know, the problem is that what I just described tempts lots of people to get into it.

And recently, people have gotten into it, really, just for the investment management. It’s a way to earn money offshore. And we don’t do that, but it can be done for small companies with investment managers.

So there’s a lot of competition in it. But we have some fundamental advantages, plus we have — in certain areas — plus we have absolutely terrific managers to maximize those advantages. And we’re going to make the most of it.

28. Promo for Kraft Heinz Philadelphia Cream Cheese product

WARREN BUFFETT: I’ve just been handed something Kraft Heinz came out with. They just came out with it commercially a couple days — a few days ago, maybe a few weeks ago. At the directors’ meeting they had this. I had three of these.

I’m sure that there’s a member or two of the audience that may not approve of it, but they — (laughter) — I got to tell you folks, it’s good.

It’s a cheesecake arrangement with topping and Philadelphia Cream Cheese (Inaudible), so you create your own cheesecake.

And I thought that I can eat it while Charlie’s talking. And — (laughter) — you’ll be able to get it at the halftime. It’s selling very well.

And I think, just so you don’t feel too guilty, I think it’s 170 calories for this cherry one. Like I say, I had three of these here. I don’t mind having five- or 600 calories for dessert, you know. (Laughter)

I’ll let somebody else eat the broccoli and I’ll have the dessert. (Laughter)

So we’ll be eating this, but you, too, at halftime — I think they brought 8- or 9,000 of these. I’ll be disappointed if we don’t run out. Actually, I’ll be disappointed in you, not them. (Laughter)

29. Subsidiary managers aren’t competing for Buffett’s job

WARREN BUFFETT: OK. Jay?

JAY GELB: This question is on the topic of succession planning.

Warren, there seem to be fewer mentions, by name, of top-performing Berkshire managers in this year’s annual letter. Does this mean you’re changing your message regarding the succession plan for Berkshire’s next CEO?

WARREN BUFFETT: Well, the answer to that’s no. And I didn’t realize there were fewer mentions by name.

I write that thing out and send it to Carol [Loomis], and she tells me, “Go back to work.” (Laughs)

I don’t actually think that much about how many personally get named.

I would say this. And this is absolutely true. We have never had more good managers — now, it’s because we’ve got more good companies — but we have never had more good managers than we have now, so I — but it has nothing to do with succession.

Charlie?

CHARLIE MUNGER: Well, I certainly agree with that. We don’t seem to have a whole lot of 20-year-olds. (Laughter)

WARREN BUFFETT: Certainly not at the front table. (Laughter)

No, we’ve got an extraordinary group of good managers, which is why we can manage by abdication.

It wouldn’t work if we had a whole bunch of people who were — had come with the idea of getting my job. I mean, if we had 50 people out there, all of who wanted to be running Berkshire Hathaway, it would not work very well. And —

But they have the jobs they want in life. Tony Nicely loves running GEICO. You know, it — then you go down the line. They have jobs they love.

And that’s a lot better, in my view, than having a whole bunch of them out there that are kind of doing their job there kind of hoping the guys competing with them will fail so that, when I’m not around, that they’ll get the nod.

It’s a much different system than exists at most American corporations.

Charlie, got anything?

30. Berkshire’s buying advantage: “There just isn’t anyone else”

WARREN BUFFETT: Well, we’ll go to Station 8.

AUDIENCE MEMBER: Hi, Warren and Charlie. My name’s Vicky Wei. I’m an M.B.A. student from the Wharton School of Business.

This is my first time to be in the first — in the annual meeting. I’m really excited about it. Thanks for having us here. My —

WARREN BUFFETT: Thanks for coming.

AUDIENCE MEMBER: My question is, where do you want to go fishing for the next three to five years? Which sectors are you most bullish on, and which sectors are you most bearish on? Thank you.

WARREN BUFFETT: Yeah. Charlie and I do not really discuss sectors much. Nor do we let the macro environment or thoughts about it enter into our decisions.

We’re really opportunistic. And we — we, obviously, are looking at all kinds of businesses all the time. I mean, it’s a hobby with us, almost — probably more with me than Charlie.

But we’re hoping we get a call, and we’ve got a bunch of filters.

And I would say this is true of both of us. We probably know in the first five minutes or less whether something is likely to — or has a reasonable chance of happening.

And it’s just going to go through there, and it’s going to — first question is, “Can we really ever know enough about this to come to a decision?” You know, and that knocks out a whole bunch of things.

And there’s a few. And then if it makes it through there, there’s a pretty good — reasonable chance we’re going to — we may do something. But it’s not sector specific. It —

We do love the companies, obviously, with the moats around the product long — where consumer behavior can be, perhaps, predicted further out. But I would say it’s getting harder to — for us, anyway — to anticipate consumer behavior than we might’ve thought 20 or 30 years ago. I think that it’s just a tougher game now.

But we’ll measure it and we’ll look at it in terms of returns on present capital, returns on prospective capital. We may have — we can —

A lot of people give you some signals as to what kind of people they are, even in talking in the first five minutes, and whether you’re likely to actually have a satisfactory arrangement with them over time. So a lot of things go on fast, but it —

We know the kind of sectors we kind of like to — or the type of business we’d kind of like to end up in. But we don’t really say, “We’re going to go after companies in this field, or that field, or another field.”

Charlie, you want to?

CHARLIE MUNGER: Yeah. Some of our subsidiaries do little bolt-on acquisitions that make sense, and that’s going on all the time. And, of course we like it when —

But I would say the general field of buying whole companies, it’s gotten very competitive. There’s a huge industry of doing these leveraged buyouts. That’s what I still call them.

The people who do them think that’s a — kind of a bad marker, so they say they do private equity. You know, it’s like (inaudible) a janitor call himself the chief of engineering or something. (Laughter) And —

But at any rate, the people who do the leveraged buyouts, they can finance practically anything in about a week or so through shadow banking. And they can pay very high prices and get very good terms and so on.

So, it’s very, very hard to buy businesses. And we’ve done well, because there’s a certain small group of people that don’t want to sell to private equity. And they love the business so much that they don’t want it just dressed up for resale.

WARREN BUFFETT: We had a guy some years ago, came to see me, and he was 61 at the time. And he said, “Look, I’ve got a fine business. I got all the money I can possibly need.” But he said, “There’s only one thing that worries me when I drive to work.”

Actually, there’s more than one guy’s told me that that’s used the same term.

He said, “There’s only one thing that bothers me when I go to work. You know, if something happens to me today, my wife’s left.

“You know, I’ve seen these cases where executives in the company try to buy them out cheap or they sell to a competitor and all the people —”

He says, “I don’t want to leave her with the business. I want to decide where it goes, but I want to keep running it, and I love it.”

And he said, “I thought about selling it to a competitor, but if I sell it to a competitor, you know, their CFO’s going to become the CFO of the new company, and there, you know, on down the line.

“And all these people who helped me build the business, you know, they’re — a lot of them are going to get dumped. And I’ll walk away with a ton of money, and some of them will lose their job.” He said, “I don’t want to do that.”

And he says, “I can sell it to a leveraged buyout firm, who would prefer to call themselves private equity, but they’re going to leverage it to the hilt and they’re going to resell it. And they’re going to dress it up some, but in the end, it’s not going to be in the same place. I don’t know where it’s going to go.”

He said, “I don’t want to do that.” So he said, “It isn’t because you’re so special.” He says, “There just isn’t anyone else.” (Laughter)

And if you’re ever proposing to a potential spouse, don’t use that line, you know. (Laughter)

But that’s what he told me. I took it well, and we made a deal.

So, logically, unless somebody had that attitude, we should lose in this market. I mean, you can borrow so much money so cheap. And we’re looking at the money as pretty much all equity capital.

And we are not competitive with somebody that’s going to have a very significant portion of the purchase price carried in debt, maybe averaging, you know, 4 percent or something.

CHARLIE MUNGER: And he won’t take the losses if it goes down. He gets part of the profit if it goes up.

WARREN BUFFETT: Yeah, his calculus is just so different than ours. And he’s got the money to make the deal.

So, if all you care about is getting the highest price for your business, you know, we are not a good call.

And we will get some calls in any event. And we can offer something that — wouldn’t call it unique, but it’s unusual.

The person that sold us that business and a couple of others that have — actually it’s almost, word for word, the same thing they say. They are all happy with the sale they made, very happy.

And, you know, they are — they have lots and lots and lots of money, and they’re doing what they love doing, which is still running the business. And they know that they made a decision that will leave their family and the people who work with them all their lives in the best possible position.

And that’s — in their equation, they have done what’s best. But that is not the equation of many people, and it certainly isn’t the equation of somebody who buys and borrows every dime they can with the idea of reselling it after they, you know, maybe dress up the accounting and do some other things.

And — but there — when the disparity gets so wide between what a heavily debt-financed purchase will bring as against an equity-type purchase, it gets to be tougher. There’s just no question about it. And it’ll stay that way.

CHARLIE MUNGER: But it’s been tough for a long time, and we’ve bought some good businesses.

WARREN BUFFETT: Yeah. Yeah.

31. “If the board hires a compensation consultant after I go, I will come back”

WARREN BUFFETT: OK. Andrew?

ANDREW ROSS SORKIN: Warren. This comes from a shareholder who I think is here, who asked to remain anonymous.

Writes: “Three years ago, you were asked at the meeting about how you thought we should compensate your successor. You said it was a good question, and you would address it in the next annual letter. We’ve been patiently waiting. (Laughter)

“Can you tell us now, at least philosophically, how you’ve been thinking about the way the company should compensate your successor, so we don’t have to worry when the pay consultants arrive on the scene?”

WARREN BUFFETT: Yeah. Well, that — unfortunately, at my age I don’t have to worry about things I say — said three years ago, but this guy, obviously much younger, remembers. (Laughter)

I’m not — well, I’ll accept his word that I said that. But the — there’s a couple possibilities, actually.

I don’t want to get into details on them, but you may have — and I, actually, would hope that we would have somebody, A) who’s already very rich — which they should be if they’ve been working a long time and have got that kind of ability — that’s very rich, and really is not motivated by whether they have 10 times as much money that they and the families can need or a hundred times as much.

And they might even wish to perhaps set an example by engaging for something far lower than actually what you could say their true market value is. And that could or could not happen, but I think it’d be terrific if it did. But I can’t blame anybody for wanting their market value.

And then — if they didn’t elect to go in that direction, I would say that you — would probably pay them a very modest amount and then have an option which increased in value by — or increased in striking price — annually.

Nobody does this, hardly. The Washington — Graham Holdings has done it, The Washington Post Company did a little bit — but would increase because it’s assuming that there were substantial retained earnings every year.

Because why should somebody retain a bunch of earnings and then claim they’ve actually improved the value, simply because they withheld the money from shareholders?

So it’s very easy to design that, and in private companies people do design it in that way. They just don’t want to do it in public companies, because they get more money the other way.

But they might have a very substantial one that could be exercised, but where the shareholder’s — the shares had to be held for a couple years after retirement, so that they really got the result over time that the majority of the stockholders would be able to get, and not be able to pick their spots, as to when they exercised and sold a lot of stock.

It’s — it would — it’s not hard to design. And it really depends who you’re dealing with, in terms of actually how much they care about money and having money beyond what they can possibly use.

And most people do have an interest in that, and I don’t blame them.

But I don’t know. What do you think, Charlie?

CHARLIE MUNGER: Well, I — one thing I think is that I have avoided, all my life, the compensation consultants. To me it’s a — I hardly can find the words to express my contempt. (Laughter)

WARREN BUFFETT: I will say this. If the board hires a compensation consultant after I go, I will come back. (Laughter)

CHARLIE MUNGER: Mad. Mad.

So I think there’s a lot of mumbo jumbo in this field, and I don’t see it going away.

WARREN BUFFETT: Oh, it isn’t going to go away. No, it’s going to get worse. It — I mean, the — if you look at, I mean, the way compensation gets handled, I mean, it — you know, everybody looks at everybody else’s proxy statement and says, “We can’t possibly hire a guy that hasn’t been — ”

CHARLIE MUNGER: It’s ridiculous.

WARREN BUFFETT: —so on. And the human relations department, you know, who work for the CEO, come in and suggest a consultant.

What consultant is ever going to get another assignment if he says, “You should pay your CEO below the — down in the fourth quartile because you’re getting a fourth quartile result?” It —

I mean, it just, you know — it isn’t that the people are evil or anything. It’s just the nature of the situation just — it produces a result that is not consistent with how representatives of the owners should behave.

CHARLIE MUNGER: It’s even worse than that. Capitalism is the golden goose that we all live on. And if people generally get so they have contempt for it because they don’t like the pay arrangements in the system, your capitalism may not last as well. And that’s like killing the golden goose.

So I think the existing system has a lot wrong with it.

WARREN BUFFETT: I think there is something coming in pretty soon — I may be wrong about this — where companies are going to have to put in their proxy statement the CEO’s pay to the average pay, or something like that. That isn’t going to change anything. I mean —

CHARLIE MUNGER: It won’t change a thing.

WARREN BUFFETT: It won’t change a thing. And, you know, it’ll cost us virtually —

CHARLIE MUNGER: By the way, it won’t get any headlines, either. It’ll be tucked away.

WARREN BUFFETT: It’ll cost us a lot of money, with 367,000 people employed around the world. And, I mean, we’ll hope to get something that makes it somewhat simpler so we can use estimates or something of the sort.

But to get the median income or mean income or whatever, however the rules may read, you know, and —

CHARLIE MUNGER: That’s what consultants are for, Warren. (Laughter)

WARREN BUFFETT: It — it’s, you know, it is human nature that produces this. And, you know, the most —I write in this letter to the managers every two years, I said, “The only excuse I won’t take on something is that everybody else is doing it.”

But of course, “everybody else is doing it,” is exactly the rationale for why people did not want to count the costs of stock options as a cost — I mean, it was ridiculous.

All these CEOs went to Washington and they got the Senate, I think, to vote 88 to 9 to say that stock options aren’t a cost. And then a few years later, you know, it became so obvious that they finally put it in so it was a cost. You know, it reminded me of Galileo or something, I mean, all these guys.

CHARLIE MUNGER: Worse. It was way worse. The pope behaved better to Galileo in the —and he was —

WARREN BUFFETT: Well, anyway, it’s — it — I would hope, you know, like I say, somebody — well — and it doesn’t even have to be, I’m not talking about the current successor or anybody else.

I mean, successors down the line are probably going to have gotten very wealthy by the time they’re running Berkshire. And the incremental value of wealth gets very close to zero at some point. And there is a chance to use it as a different sort of model.

But I don’t have any problem, if it’s — a system is devised that recognizes retained earnings. Nobody wanted — I’ve never heard anybody talk about it, you know, in the 20 boards I’ve been on.

You know, if you and I were partners in a business, you know, and we kept retaining earnings in the business and I kept having the value to buy a portion of you out at a constant price, you’d say, “This is idiocy.”

But of course that’s the way all option systems are designed, and it’s better to be — for the CEO and for the consultants. And of course, usually if there’s — there’s some correlation between what CEOs are paid and what boards are paid.

If CEOs were getting paid at the rate that they got paid 50 years ago, adapted to present dollars, director pay would be lower. So it’s — you know, it’s got all these built-in things that, to some extent, sort of kindle the —

CHARLIE MUNGER: No Berkshire director is in it for the money.

WARREN BUFFETT: Well, they are if they own a lot of stock. And they bought it in the market just like the —

CHARLIE MUNGER: Yeah, it’s —

WARREN BUFFETT: — shareholder did.

CHARLIE MUNGER: It’s a very old-fashioned system.

WARREN BUFFETT: I looked at one company the other day, and seven of the directors had never bought a share of stock with their own money. Now they’d been given stock, but not one of them — I mean, I shouldn’t say not one — seven of the directors had never actually bought a share of stock.

And there they are, you know, making decisions on who should be CEO and how they should be paid and all that sort of thing. But, you know, they never felt like shelling out a dollar themselves. Now they’d been given a lot of stock.

And it’s, you know, we’re dealing with human nature here, folks. (Laughs) And that — what you want is to have a system that works well in spite of how human nature’s going to drive it.

And we’ve done awfully well in this country in that respect. I mean, American business has — overall has done very well for the Americans generally. But not every aspect of it is exactly what you want to teach your kids.

32. BNSF is a “good” business, but probably won’t grow much

WARREN BUFFETT: OK. Gregg?

GREGG WARREN: Warren.

WARREN BUFFETT: Yeah.

GREGG WARREN: Between 2010 and 2015, intermodal rail traffic enjoyed double-digit rates of revenue growth as shorter-haul freight converted from truck to rail.

During the past year or so, though, cheaper diesel prices and more readily available truckload capacity have made trucking more competitive, leading to a decline in intermodal rail traffic.

While carload growth is expected to be solid longer term, helping to offset weakness in other segments like coal, what impact do you expect the widening of the Panama Canal, which was completed last year, to have on the West Coast port shipments that BNSF has traditionally carried through to exchange points for the Eastern U.S. railroads, as shippers elect to have goods unloaded at ports in the Gulf of Mexico or up the Eastern seaboard?

And while loss of volumes is never a good thing, could there be a small trade-off here as the bottleneck in Chicago, where most East-West cargo is handed off, eases a bit over time, if some of the current traffic gets rerouted?

WARREN BUFFETT: Well, you know — I — Chicago has got lots of problems, and it’s going to continue for a while. I mean, that requires a good solution.

When you think of how the railroads developed, I mean, they — Chicago was the center and, you know, they laid the rails — and there were a whole bunch of different railroads — you know, a hundred years ago. And the city grows up around them and everything. So Chicago is a — can be a huge problem.

But getting to intermodal, I think intermodal will do very well. But you are correct that car loadings actually hit a peak in 2006, so here we are 11 years later.

And the investment of the five big Class I railroads — four of the biggest — if you look at their investment beyond depreciation, it’s tens and tens of billions of dollars, and we’re carrying less freight before, in aggregate, than we were in 2006. And coal will continue to decrease.

It’s a good business, and it has big advantages over truck in many respects. Truck gets much more of a free ride in terms of the fact that their right of way, which is the highway system, is subsidized to a much greater degree beyond the gas tax — you know, we — than the railroad industry.

But it has not been a growth business, in physical volume, to any great degree. I think it’s unlikely to be. I think it’s likely to be a good business. I think we’ve got a great territory.

I like the West better than the East, and as you mention, you know, there will be some intermodal traffic that gets diverted to Eastern ports perhaps or so on.

Overall, I —we’ve got a terrific system in that respect. And we will do well.

It would be more fun if we had something where you could expect aggregate car loadings to increase two or three or four percent a year, but I don’t think that’s going to happen.

I do think our fundamental position is terrific, however. I think we’ll earn decent returns on capital. But that’s — I think that’s the limit of it.

Charlie?

CHARLIE MUNGER: Nothing to add.

33. Berkshire’s next CEO needs a “money mind”

WARREN BUFFETT: OK. Station 9.

AUDIENCE MEMBER: I’m from — Shankar Anant from Gurnee, Illinois. Thank you for doing everything you do for us. I have a question.

The two of you have largely avoided capital allocation mistakes by bouncing ideas off of one another.

Will this continue long into Berkshire’s future? And I’d like to — I’m interested in both at headquarters and at subsidiaries.

CHARLIE MUNGER: It can’t continue very long.

WARREN BUFFETT: I — (Laughter)

Don’t get defeatist, Charlie. (Laughter)

Any successor that’s put in at Berkshire, capital allocation abilities, and proven capital allocation abilities, are certain to be uppermost in board’s minds or in, in the current case — in terms of my recommendation, Charlie’s recommendation, for what happens after we’re not around.

Capital allocation is incredibly important at Berkshire. Right now we have 280 or -90 billion, whatever it may be, of shareholders’ equity. If you take the next decade alone, you know, nobody can make accurate predictions on this.

But in the next 10 years, if you just take — and depreciation right now is another seven billion a year, something on that order.

The next manager in the decade is going to have to allocate, maybe, 400 billion or something like that, maybe more. And it’s more than already has been put in.

So 10 years from now, Berkshire will be an aggregation of businesses where more money has been put in in that decade than everything that took place ahead of time. So you need a very sensible capital allocator in the job of being CEO of Berkshire. And we will have one.

It would be a terrible mistake to have someone in this job where, really, capital allocation might be — might even be their main talent. It probably should be very close to their main talent.

And of course, we have an advantage at Berkshire, in that we do know how important that is and there is that focus on it.

And in a great many companies, people get to the top through ability, and sales sometimes, if they come from the legal side, something like that — all different sides — and they then have the capital allocation, sort of, in their hands.

Now, they may not establish strategic thinking divisions. And they may listen to investment bankers and everything, but they better be able to do it themselves.

And if they’ve come from a different background or haven’t done it, it’s a little bit, as I put in one of my letters, I think — it’s like getting to Carnegie Hall playing the violin, and then you walk out on the stage and they hand you a piano.

I mean, it is something that — Berkshire would not do well if somebody was put in who had a lot of skills in other areas but really did not have an ability to capital allocation.

I’ve talked about it as being something I call a “money mind.” I mean, people can have 120 IQs or 140 IQs or whatever it may be, very similar scoring abilities in terms of intelligence tests. And some of them have minds that are good at one kind of thing and some of them another.

I’ve known very bright people that do not have money minds, and they can make very unintelligent decisions. They can do all kinds of other things that most mortals can’t do. But it just doesn’t, it isn’t the way their wiring works.

And I’ve known other people that really would not do that brilliantly. They do fine, but on an SAT test or something like that. But they’ve never made a dumb money decision in their life. And Charlie, I’m sure, has seen the same thing.

So we do want somebody — and hopefully they’ve got a lot of talents — but we certainly do not want somebody that — if they lack a money mind.

Charlie?

CHARLIE MUNGER: Well, there’s also the option of buying in stock, which — so, it isn’t like it’s some hopeless problem. One way or another, something intelligent will be done.

WARREN BUFFETT: And a money mind will recognize when it makes sense to buy in stock and doesn’t. You know, and —

In fact, it’s a pretty good test for some people, in terms of managements, how they think about something like buying in stock, because it’s not a very complicated equation if you sort of think straight about that sort of a subject.

But some people think that way and some don’t, and they’re probably miles better at something else. But they say some very silly things when you get to something that seems so clear as whether, say, buying in stock makes sense.

Anything further, Charlie?

CHARLIE MUNGER: No.

34. Most financial advisors don’t deserve their fees

WARREN BUFFETT: OK, Carol?

CAROL LOOMIS: This question comes from Steve Haverstroll (PH) of Connecticut.

“Warren, you have made it very clear in your annual letter that you think the hedge fund compensation scheme of ‘2 and 20’ generally does not work well for the fund’s investors.

“And in the past, you have questioned whether investors should pay, quote, ‘financial helpers,’ unquote, as much as they can. But financial helpers can create tremendous value for those they help.

“Take Charlie Munger, for instance. In nearly every annual letter and on the movie this morning, you describe how valuable Charlie’s advice and counsel has been to you and, in turn, to the incredible rise in Berkshire’s value over time.

“Given that, would you be willing to pay the industry standard, quote ‘financial helper’ fee of one percent on assets to Charlie? Or would you perhaps even consider ‘2 and 20’ for him? What is your judgment about this matter?”

WARREN BUFFETT: Yeah. (Laughter)

Well, I’ve said in the annual report that I’ve known maybe a dozen people in my life — and I said there are undoubtedly hundreds or maybe thousands out there.

But I’ve said that I’ve known, personally, a dozen where I would have predicted or did predict — in a fair number of those 12 cases — I did predict that the person involved would do better than average in investing over a long period of time.

And obviously, Charlie is one of those people. So would I pay him? Sure. But would I take financial advisors as a group and pay them one percent with the idea that they would deliver results to me that were better than the S&P 500 by one percent, and thereby leave me breaking even against what I could have done on my own? You know, there’s very few.

So it’s just not a good question to ask whether, you know, I’d pay Charlie one percent. That’s like asking, you know, whether I’d have paid Babe Ruth, you know, 100,000 or whatever it was to come over from the Red Sox to the Yankees. I mean, sure I would have, but there weren’t very many people I would have paid 100,000 to in 1919, or whatever it was, to come over to the Yankees.

And so, the — it’s a fascinating situation, because the problem isn’t that the advisors are going to do so terrible. It’s just that you have an option available that doesn’t cost you anything that is going to do better than they are, in aggregate.

And it — it’s an interesting question. I mean, if you hire an obstetrician, assuming you need one, they’re going to do a better job of delivering the baby than, you know, if the spouse comes in to do it, or if they just pick somebody up off the street.

And if you go to a dentist, if you hire a plumber, in all of the professions, there is value added by the professionals as a group, compared to doing it yourself or just randomly picking laymen.

In the investment world, it isn’t true. I mean, they, the active group, the people that are professionals, in aggregate, are not, cannot do better than the aggregate of the people who just sit tight.

And if you say, “Well, in the active group there’s some person that’s terrific,” I will agree with you. But the passive people can’t all pick that person. And they wouldn’t — they don’t know how to identify them. So I —

CHARLIE MUNGER: It’s even worse than that. The (inaudible) — the expert who’s really good, when he gets more and more money in, he suffers just terrible performance problems.

WARREN BUFFETT: Yeah. Yeah.

CHARLIE MUNGER: And so you’ll find the person who has a long career at “2 and 20,” and if you analyze it, net, all the people who’ve lost money because some of the early people have had a good record but more money coming in later and they lose it.

So, the investing world is just, it’s a morass of wrong incentives, crazy reporting, and I’d say a fair amount of delusion.

WARREN BUFFETT: Yeah, if you asked me whether I — those 12 people I picked would do better than the S&P working with a hundred billion dollars, I would answer that probably none of them would. I mean, they — that would not be their prospective performance.

They’re not, but when I was talking of them, I — you know, or referencing them — and when they actually worked in practice, they dealt, generally, with pretty moderate sums. And as the sums grew, their relative advantage diminished.

It — I mean, it’s so obvious from history. The example I used in the report — I mean, the guy who made the bet with me, and incidentally all kinds of people didn’t make the bet with me because they knew better than to make the bet with me.

You know, there were hundreds, at least a couple hundred underlying hedge funds. These guys were incented to do well. The fund of fund manager was incented to pick the best ones he could pick. The guy who made the bet with me was incented to pick the best fund of funds.

You know, and tons of money, and just in with those five funds, a lot of money went to pay managers for what was subnormal performance over a long period of time. And it can’t be anything but that.

And it’s an interesting — you know, it’s an interesting profession when you have tens of thousands, or hundreds of thousands of people, who are compensated based on selling something that, in aggregate, can’t be true: superior performance. So —

But it’ll continue, and the best salespeople will tend to attract the most money. And because it’s such a big game, people will make huge sums of money, you know, far beyond what they’re going to make in medicine or you name it. I mean, you know, repairing the country’s infrastructure, I think.

I mean, the big money — huge money — is in selling people the idea that you can do something magical for them.

And if you have — if you even have a billion-dollar fund, you know, and get two percent of it — for terrible performance, you make — that’s $20 million.

In any other field, you know, it would just blow your mind. But people get so used to it, you know, in the Wall — in the field of investment that it just sort of passes along. And $10 billion, I mean, $200 million fees?

We’ve got two guys in the office, you know, that are managing $11 billion. Well, no they’re not. I’m sorry. Yeah, they’re managing 20 billion, you know, between the two of them, 21 billion maybe.

And, you know, we pay them a million dollars a year, plus the amount by which they beat the S&P. They have to actually do something to get contingent compensation, which is much more reasonable than the 20 percent.

But how many hedge fund managers in the last 40 years have said, “I only want to get paid if I do something for you?” You know, “Unless I actually deliver something beyond what you can get yourself, you know, I don’t want to get paid.” It just doesn’t happen.

And, you know, it get back — it’s get back — it gets back to that line that I’ve used, but when I asked a guy, you know, “How can you, in good conscience, charge ‘2 and 20?’” And he said, “Because I can’t get 3 and 30.” You know — (Laughter)

Any more, Charlie? Or have we used up our —

CHARLIE MUNGER: I think you’ve beaten up on them enough.

WARREN BUFFETT: Yeah, well. (Laughter)

35. “I love the fact we bought Precision Castparts”

WARREN BUFFETT: Jonathan.

JONATHAN BRANDT: Precision Castparts represents the second largest acquisition Berkshire has ever made. There wasn’t much qualitative or quantitative information about it in the 2016 annual.

Would you be willing to update us here with how it is doing currently, what excites you about its prospects, and what worries you most about it?

I’m also curious if there were any meaningful purchase price adjustments beyond intangible amortization that negatively impacted Precision’s earnings in 2016, as was the case with Van Tuyl in 2015?

And finally, are there any opportunities in sight for bolt-on acquisitions?

WARREN BUFFETT: Yeah, we’ve actually made acquisitions, and we will make more that fit there, because we’ve got an extraordinary manager. And we’ve got a terrific position in the aircraft field.

So there will be sensible — there will be the chance for sensible acquisitions. And we’ve already made two, anyway. And we will make more over time. The — it’s —

The amortization of intangibles is the only big purchase price adjustment. That’s something over $400 million a year, nondeductible. In my mind, that’s 400-and-some million of earnings.

I do not regard the economic goodwill of Precision Castparts being diminished at that rate annually. That is a — and, you know, I’ve explained that in some degree. The —

As a very long-term business, you can worry about 3-D printing. I don’t think you have to worry about aircrafts being manufactured. But aircraft deliveries can be substantially altered in relation to any given backlog in most cases.

So the deliveries can be fairly volatile, but I don’t think the long-term demand is anything I worry about.

And the question is, whether anybody can do it better or cheaper, or like I say, whether 3-D printing at least takes away part of the field in some respects.

But overall, I would tell you I feel very good about Precision Castparts. It is a very long-term business. I mean, we have contracts that run for a very long time, and like I say, the initiation of a new plane may be delayed or something of the sort.

But if you take a look at the engine that’s in the other adjoining room here and in our exhibition hall, you would, if you were putting that engine together for the 20 or 25-year life or whatever it may have, carrying hundreds of people, you would care very much about your supplier.

And you’d care not only in the quality, you know — which would be, absolutely you’d care — of the work being done. But you also, if you were an engine manufacturer or an aircraft manufacturer further down the line, you would care very much about the reliability of delivery on something.

Because you do not want a plane that — or an engine — that’s 99 percent complete while somebody’s dealing with a problem of faulty parts or anything else that would delay delivery.

So, the reliability is incredibly important. And I don’t think anybody has a reputation better than Mark Donegan for — and the company — for delivery.

So I love the fact we bought Precision Castparts.

Charlie?

CHARLIE MUNGER: Yeah, well, what’s interesting about them, too, is that it’s a very good business purchased at a fair price under — but this is no screaming bargain like the old days.

WARREN BUFFETT: No.

CHARLIE MUNGER: For quality businesses, you pay up now a lot more than we used to.

WARREN BUFFETT: Yeah, that’s absolutely true, and we — you don’t get a bargain price.

The 400-plus million incidentally, you know, goes on for quite a while, too.

And we’ll explain it in the report just like — just as we’ll explain that the depreciation charge at a railroad would not be adequate. I mean, it’s the way accounting works.

36. A “really stupid” accounting rule change

WARREN BUFFETT: And starting — I don’t even want to tell you about this one — but starting the first of next year, accounting is going to become sort of a nightmare in terms of Berkshire and other companies because they’re going to have us mark our equities to market just like we were a Wall Street trading firm or something.

And those changes in the value of Coca-Cola, or American Express, or everything, are going to run through the income account every quarter. In fact, they run through it every day in this theory, so that it really will get confusing.

Now, it’s our job to explain things so that you aren’t confused when we report GAAP earnings, but GAAP earnings, as reported, will become even more meaningless, if looking only at the bottom line, than they are now, and —

CHARLIE MUNGER: That was not necessarily a good idea.

WARREN BUFFETT: No, I think it’s a terrible idea, but we’ll deal with it. And we’ll — and, I mean, it’s my job to explain to what extent GAAP accounting is useful to you in evaluating Berkshire, and the times when it actually distorts things.

Accounting isn’t supposed to — it’s not supposed to describe value.

On the other hand, it’s a terribly useful tool, if understood, in order to estimate value if you’re analyzing businesses. And so, you know, certainly, you can’t blame the auditing profession for doing what they think is their job, which is not to present value. Although, by using these market values —

CHARLIE MUNGER: But you can blame the audit —

WARREN BUFFETT: What’s that?

CHARLIE MUNGER: You can blame the audit profession for that one.

WARREN BUFFETT: OK, well.

CHARLIE MUNGER: That was really stupid. (Laughter)

WARREN BUFFETT: Well, I agree with that actually. (Laughter)

But we will do our best to give you — we’re always going to give you the audited figures.

And then we’re going to explain their shortcomings in either direction and how they — how what you should use and what you probably should ignore in looking at those numbers and using them to come to a judgment as to the value of your holdings.

And I’ll explain it to you the same way I would explain it to my sisters or anybody else that — you know, we want you to understand what you own. And we try to cover the details that are really important in that respect.

I mean, there’s a million things you can talk about that are just of minor importance when you’re talking about a $400 billion market value.

But they’re the things that, if Charlie and I were talking about the company, that they’d be the figures or the interpretations or anything that we would regard as important in sort of coming to an estimate of the value of the business. But it’s going to be —

You can’t knock the media. I mean, they’ve only got a few paragraphs to describe the earnings at Berkshire every quarter. But if they simply look at bottom line numbers, what can be silly this year will become absolutely ludicrous next year because of the new rule that comes into effect for 2018.

37. Munger: China’s stock market is cheaper than U.S.

WARREN BUFFETT: OK. Station 10.

AUDIENCE MEMBER: Hello Warren. This is a question from China.

VOICE: (Inaudible)

WARREN BUFFETT: Pardon me?

AUDIENCE MEMBER: I am Jeff Chan (PH), a pension fund manager from China, Shanghai. My question is quite simple.

What is the probability of duplicating your great investment track record in China’s stock market the next decades or two in terms of a (inaudible)? That’s all.

And I thank my friends from (FOREIGN LANGUAGE) Fund Management House for guiding me in writing this question. Thank you.

WARREN BUFFETT: Charlie, you’re the expert on China. (Laughter)

CHARLIE MUNGER: It’s like determining the order of precedency between a louse and a flea. Yeah.

I do think that the Chinese stock market is cheaper than the American market. And I do think China has a bright future. And I also think that there’ll be growing pains, of course. And —

But —

WARREN BUFFETT: Well —

CHARLIE MUNGER: We have this opportunistic way of going through life. We don’t have any particular rules about which market we’re in or anything like that.

WARREN BUFFETT: Well, Charlie’s delivered a headline anyway, now: “Munger Predicts China Market Will Outperform U.S.” (Laughter)

Afternoon session

1. Berkshire and 3G’s different approaches to job cuts

WARREN BUFFETT: Panel all here? OK. We’re back for action. And we’ll go right to Becky.

BECKY QUICK: All right. This question comes from Anne Newman (PH). She says that she’s a shareholder of the Class B stock.

And her question is, “The primary investment strategy of 3G Capital is extreme cost-cutting after the purchase of a company. This typically includes the elimination of thousands of jobs.

“With the current U.S. president focusing on retention of U.S. jobs, will Berkshire Hathaway still consider future investments with 3G Capital if those investments result in the purchase of U.S. companies and the elimination of more U.S. jobs?”

WARREN BUFFETT: Now, the, essentially, 3G management — and I’ve watched them up very close at Kraft Heinz — is — basically, they don’t — they believe in having a company as productive as possible.

And, of course, the gains in this world, for the people in this room, and people in Omaha, and people throughout America, have come through gains in productivity.

If there had been no change in productivity, we would be living the same life as people lived in 1776.

Now, the people — the 3G people — do it very fast. And they’re very good at making a business productive with fewer people than operated before.

But that — they’ve been, you know, we’ve been doing that in every industry, whether it’s steel, or cars, or you name it. And that’s why we live as well as we do.

We prefer at Berkshire — I wrote about this a year ago — we prefer to buy companies that are already run efficiently because, frankly, we don’t enjoy the process at all of getting more productive. I mean, it’s not pleasant.

But it is what has enabled the country to progress. And nobody has figured out a way to double people’s consumption per capita without, in some way, improving productivity per capita.

It’s a good question in the — whether it’s smart overall if you think you’re going to suffer politically because political consequences do hit businesses. So I don’t know that I can answer the question categorically.

But I can tell you that they not only focus on productivity and do it in a very intelligent way, but they also focus, to a terrific degree, on product improvement, innovation, and all of the other things that you want a management to focus on.

And I hope that, at the lunchtime, if you had the Kraft Heinz cheesecake, you’ll agree with me that product improvement and innovation there is a — is just as much a part of the 3G playbook as productivity. I don’t —

Personally, we have been through the process of buying into a textile business that employed a couple thousand people and went out of business over a period of time, or a department store, a business that was headed for oblivion.

And it is just not as much fun to be in a business that cuts jobs rather than one that adds jobs.

So, Charlie and I would probably forego, personally, having Berkshire directly buy businesses where the main benefits were come — would come from increasing productivity by actually having fewer workers.

But I think it’s pro-social to think in terms of improving productivity. And I think that people at 3G do a very good job at that.

Charlie?

CHARLIE MUNGER: Well, I agree. I don’t see anything wrong with increasing productivity. On the other hand, there’s a lot of counterproductive publicity to doing it. Just because you’re right doesn’t mean you should always do it.

WARREN BUFFETT: Yeah. I’d agree with that.

2. Pressure to deploy Berkshire’s cash grows as it nears $100B

WARREN BUFFETT: Jay?

JAY GELB: Berkshire’s cash and Treasury bill holdings are approaching $100 billion.

Warren, a year ago, you said Berkshire might increase its minimum valuation for share buybacks above 1.2 times book value if this occurred. What are your latest thoughts on raising the share repurchase threshold?

WARREN BUFFETT: Yeah, the — when the time comes — and it could come reasonably soon, even while I’m around — but [if] we really don’t think we can get the money out in a reasonable period of time into things we like, we have to reexamine then what we do with those funds that we don’t think can be deployed well.

And at that time, we’d make a decision. And it might include both, but it could be repurchases. It could be dividends.

There are different inferences that people draw from a dividend policy than from a repurchase policy that, in terms of expectations that you won’t cut a dividend and that sort of thing. So you have to factor that all in.

But if we really — if we felt that we had cash that was unlikely to be used — excess cash — in a reasonable period of time, and we thought repurchases at a price that was still attractive to continuing shareholders was feasible in a substantial sum, that could make a lot of sense.

At the moment, we’re still optimistic enough about deploying the capital that we wouldn’t be inclined to move to a price much closer where there’s only a narrow spread between an intrinsic value and the repurchase price. But at a point, the burden of proof is definitely on us.

I mean, that — I — the last thing we like to do is own something at a hundred times earnings where the earnings can’t grow.

I mean, we’re — as you point out, we’ve got almost a hundred billion — it’s $90-plus billion invested in a business, we’ll call it a business, where we’re paying almost a hundred times earnings. And it’s kind of a lousy business.

CHARLIE MUNGER: It’s more after after-tax earnings.

WARREN BUFFETT: Yeah. So, it — you know, we don’t like that. And we shouldn’t use your money that way for a long period of time. And, then, the question is, you know, are we going to be able to deploy it?

And I would say that history is on our side, but it’d be more fun if the phone would ring instead of just relying on history books.

And, you know, I am sure that sometime in the next 10 years — and it could be next week or it could be nine years from now — there will be markets in which we can do intelligent things on a big scale.

But it would be no fun if that happens to be nine years off. And I don’t think it will be, but just based on how humans behave and how governments behave and how the world behaves.

But like I say, at a point, the burden of proof really shifts to us, big-time. And there’s no way I can come back here three years from now and tell you that we hold 150 billion or so in cash or more, and we think we’re doing something brilliant by doing it.

Charlie?

CHARLIE MUNGER: Well, I agree with you. The answer is maybe. (Laughter)

WARREN BUFFETT: He does have a tendency to elaborate. (Laughter)

3. CTB and animal rights

WARREN BUFFETT: Station 11.

AUDIENCE MEMBER: Thank you, Mr. Buffett and Mr. Munger. I am Anil Daron (PH) from Short Hills, New Jersey and New Delhi, India.

This is my 18th time to this wonderful event, and profoundly thank you for your extraordinary wisdom, generosity, and time.

As I’m involved with sustainable investments that also do not directly harm animals, I would appreciate your perspective, if any, on the practices of your CTB subsidiary, which is somewhat involved in pig, poultry, and egg production.

Somewhat indirectly related, as you share your concern on nuclear war extensively at the last annual meeting, I would love to pick your brain on Albert Schweitzer’s Nobel Peace Prize acceptance speech, shortly after the first nuclear bombs were detonated, that compassion can attain its full breadth and depth if it is not limited to humans only. Thank you.

WARREN BUFFETT: Well, that’s a pretty broad question. I would say on your first point, we have a subsidiary, CTB, run by Vic Mancinelli. And I sit down with him once a year. And he’s a terrific manager. He’s one of our very best. You don’t hear much about him.

And they do make the equipment for poultry growers. And I would — I can’t answer your question specifically, but I would be glad to have you get in contact with Vic directly because I know that what — question you raised is a — it’s a major factor in what they do.

I mean, they do care about how the equipment is used, in terms of poultry and egg production. And, as you know, a number of the largest purchasers and the largest producers are also in the same camp. But I can’t tell you enough about it directly that I can give you a specific answer.

But I can certainly put you in touch with Vic. And I think you would find him extremely well-informed and doing some very good things in the area that you’re talking about.

In terms of the nuclear weapon question, I’m very pessimistic on weapons of mass destruction, generally. Although, I don’t think that nuclear, probably, is quite as likely as either biological — primarily, biological — and maybe cyber. I don’t know that much about cyber.

But I do think that’s the number one problem with mankind. But I don’t think I can say anything particularly constructive on it now.

Charlie?

CHARLIE MUNGER: Well, I don’t think we mind killing chickens. (Laughter)

And I do think we’re against nuclear war, so — (Laughter)

WARREN BUFFETT: Yeah. (Applause)

We are not actually a poultry producer, but we do — they use our equipment. And that equipment has been changed substantially in the last 10 or 15 years.

But, again, I’m not that good on the specifics that I can give them to you. But I can certainly you put you in touch with Vic.

4. Giving Weschler and Combs more to manage wouldn’t help them

WARREN BUFFETT: Andrew ?

ANDREW ROSS SORKIN: Warren. Since Todd [Combs] and Ted [Weschler] joined Berkshire, the market cap of the company has doubled, and cash on hand is now nearly a hundred billion dollars.

It doesn’t look like Todd and Ted have been allocated new capital on the same relative basis. Why?

WARREN BUFFETT: Well, actually, I would say they have been.

I think we started out with two billion. That could be wrong, but my memory was two billion with Todd when he came with us. And so, there have been substantial additions.

And, of course, their own capital has grown just because — say, in a sense, they retain their own earnings.

So yeah, they are managing a proportion of Berkshire’s capital — also measured by marketable securities — I think they’re managing a proportion that’s pretty similar, maybe even a little higher than when each one of them entered. And Ted entered a year or two after Todd.

You know, they — I think they would agree that it’s tougher to run 10 billion than it is to run one or two billion. I mean, your expectable returns go down as you get into larger sums.

But the decision to bring them on has been terrific. I mean, they have — they’ve done a good job of managing marketable securities. They made more money than I would’ve made with that same, what is now 20 billion, but originally was two billion.

And they’ve been a terrific help in a variety of ways beyond just money management. So that decision, I’ll — you know — that’s been a very, very good decision.

And they are — they’re smart. They have money minds. They are good, specifically, at investment management. But they’re absolutely first-class human beings. And they really fit at Berkshire. So, that was —

Charlie gets credit for Todd. He met Charlie first. And I’ll claim credit for Ted. And I think we both feel very good about the decisions.

Charlie?

CHARLIE MUNGER: Well, I think the shareholders are very lucky to have them because they both think like shareholders.

WARREN BUFFETT: Totally.

CHARLIE MUNGER: After all, it came up that way. And that is not the normal way headquarters employees think. It’s a pretense that everybody takes on, but the reality is different.

And these people really, deeply think like shareholders. And they’re young, and smart, and constructive. So we’re all very lucky to have them around.

WARREN BUFFETT: Yeah. Their mindset is a hundred percent, “What can I do for Berkshire,” not, “What can Berkshire do for me?” And, believe me, you can spot that over time with people.

And on top of that, you know, they’re very talented.

But, you know, it’s hard to find people young, ambitious, very smart, that don’t put themselves first. And I would — every experience we’ve had, they did not put themselves first. They put Berkshire first.

And believe me, I can spot it when people are extreme in one direction or another. Maybe I’m not so good around the middle, but you’ve got —

You couldn’t have two better people in those positions.

But — and you say, “Well, why don’t you give them another 30 billion each or something?” I don’t think that would improve their lives or their performance.

They may be handling more as they go along, but the truth is, I’ve got more assigned to me than I can handle at the present time, as proven by the fact that we’ve got this 90 billion-plus around.

I think there are reasonable prospects for using it. But if you told me I had to put it to work today, I would not like the prospect.

Charlie, anything?

CHARLIE MUNGER: Well, I certainly agree with that. It’s a lot harder now than it was at times in the past.

5. Private transactions not needed now for Class A shares

WARREN BUFFETT: Gregg?

GREGG WARREN: Warren, plans for your ownership stake, which is heavily concentrated in Class A shares, are fairly well known, with the bulk of the stock going to the Bill and Melinda Gates Foundation and four different family charities over time.

Your annual pledges to these different charities involve the conversion of Class A shares, which hold significantly greater voting rights than the Class B shares.

As such, the voting control held by your estate will diminish over time, with a whole layer of super-voting shares being eliminated in the process.

While the voting influence of Class B shareholders are expected to increase over time, it will not be large enough to have a big influence on Berkshire’s affairs.

With that in mind, and recognizing the great importance on having Berkshire buy back and retire Class A shares in the long run, I was just wondering if the firm has compiled a pipeline of potential future sellers from the ranks of the company’s existing shareholders.

Given the limited amount of liquidity for the shares, privately negotiated transactions with these sellers, like the one you negotiated in December of 2012, would end up being in the best interest of both parties.

WARREN BUFFETT: Well, again, it would depend on the price of Berkshire.

So, in terms of what I give away annually, you know, it’s — the last two years, it’s been about 2.8 billion per year. That can be — you know that’s one day’s trading in Apple.

I mean, the amount I’m giving away is, in terms of Berkshire’s market cap, I mean, you know, you’re down to seven-tenths of one percent of the market cap. So, it’s not a big market factor, and it really wouldn’t be that illiquid.

So, I know a few big holders that, you know, might have 8- or 10,000 shares of A. But the market can handle it now.

When we bought that block of — I think it was 12,000 shares of A, I mean, we bought it because we thought it increased the intrinsic business value of Berkshire by a significant amount. And we paid the seller what the market was at the time.

And, you know, we’re open to that up to 120 percent. And who knows? If it came along at a time and it was 124 percent or something, it was a very large block and the directors decided that that was OK, it still was a significant discount, we might very well buy it.

But in terms of the orderly flow of the market or anything like that, there will be no problems just as there haven’t been, you know, when I’ve given away — I do it every July — when I’ve given away the last two years.

Some of the foundations may keep it for a while. But they have to spend what I give them. And they may build up a position in B for, you know, a fairly significant dollar amount. But they’re going to sell it.

And it is true that for a period after I die, there’ll be a lot of votes still in the estate and later in a trust.

But, you know, that will get reduced over time. I see no problem with our capitalization over time.

You know, I like the idea of a fair number of votes being concentrated with people that believe in the culture strongly and, you know, would be thinking about whether they’d get a 20 percent jump in the stock if somebody came along with some particular plan.

But, eventually, that’s going to get diminished. It continues to get diminished. And I think, in terms of — you know, there’s a very good market in Berkshire shares.

And if we can buy them at a discount from intrinsic business value and somebody offers some sum — a big piece — and it may be at a hundred — stock may be selling at 122 percent, 124 percent, you know, I would pick up the phone and call the directors and see if they didn’t want to make a change.

And we did it once before. And if it made sense, I’m sure they’d say yes. And if it didn’t make sense, I’m sure they’d say no. So, I don’t think we have any problem in terms of blocks of stock or anything.

I don’t think people that own it have a problem selling it. And I don’t think we have a problem in terms of evaluating the desirability of repurchasing it.

Charlie?

CHARLIE MUNGER: Nothing to add.

6. Deciding whether to exercise Bank of America warrant

WARREN BUFFETT: OK. Station 1.

AUDIENCE MEMBER: Hello. My name is Erin Byer. And I was born and raised in Pasadena, California, and I currently live in New York City.

It’s been a dream of mine to come here today. I’ve been a proud BH shareholder for almost 20 years.

I asked my dad for stock for Christmas when I was 15. And I kept thinking at the opportunity to ask you a question today that I should make it one that would change my life.

Well, that question is, do you know any eligible bachelors living in the New York City area? (Laughter and applause)

WARREN BUFFETT: Well, you certainly have the approach toward life that Charlie and I would. (Laughs)

AUDIENCE MEMBER: But the question that might make my Monday, back in the office: back in 2011, you purchased Bank of America preferred stock with a warrant. You had the opportunity, at a later date, to exercise and convert those into common shares.

When you’re looking at evaluating that decision to exercise that position, which would increase all of our Berkshire holdings — or the value of the Berkshire holdings — what are you going to consider when you’re looking at that?

WARREN BUFFETT: Well, it’s almost — well, if the price of the stock is above seven dollars a share, which seems quite likely, whether we were going to keep it or not, it would still make sense for us to exercise the warrant shortly before it expired, because it would be a valuable warrant, but it’s only a valuable warrant if it’s converted — or if exercised — and exchanged into common. And that warrant does expire.

So, as I put in the annual report, our income from the investment would increase if the Bank of America ever got to where it was paying 11 cents quarterly.

We get 300 million off the — a year — off the preferred. And for us to use the preferred as payment in the exercise of the warrant, we would need to — we would want to feel we were getting more than 300 million a year by — and that would take 11 cents quarterly.

They may or may not get to where they pay that amount before the warrant expires in 1921 — or 2021.

If we — if it does get to there, we’ll exercise the warrant. And then, instead of owning the five billion of preferred and the warrant, we’ll have 700-plus million shares of common.

Then that becomes a separate decision. Do we want to keep the 700 million shares of common?

I — if it were to happen today, I would definitely want to keep the stock. Now, who knows what other alternatives may be available in 2021 or —

But as of today, if our warrant were expiring tomorrow, we would use the preferred to buy 700 million-plus shares of common. And we would keep the common.

If they get to 11 cents quarterly dividend, we’ll convert it. And we’ll very likely keep the common.

And if we get to 2021, if the common’s above seven dollars, which I would certainly anticipate, we will exercise.

So that’s all I can tell you on that. But I certainly wish you success on your other objective. (Laughter)

And I think, probably, the fellow will be using very good judgment, too.

OK. Charlie?

CHARLIE MUNGER: Well, I think it’s a very wise thing for a woman that owns Berkshire stock and is a good looking woman to put her picture up like that. (Laughter and applause)

WARREN BUFFETT: It does give me a thought, though. We might actually start selling ads in the annual report. And — (Laughter)

OK. That — incidentally, that BofA purchase, it literally was true that I was sitting in the bathtub when I got the idea of checking with the BofA, whether they’d be interested in that preferred.

But I’ve spent a lot of time in the bathtub since, and nothing’s come to me. So — (Laughter)

Clearly, I either need a new bathtub or we got to get in a different kind of market.

7. Defending 3G’s job cuts

WARREN BUFFETT: Carol?

CAROL LOOMIS: This is a question from George Benaroya. And it adds a layer to the discussion about 3G a little bit ago.

He says, “I am a very happy, long-term shareholder. But this is a concern I have regarding Berkshire Hathaway’s Kraft Heinz investment.

“This investment has done well in economic terms. The carrying value is 15 billion, and the market value was 28 billion in 2016.

“But the DNA of 3G is quite different from ours. We do not make money by buying companies and firing people. 3G fired 2,500 employees at Kraft Heinz. That is what private equity firms do, but we are not a private equity firm.

“Our values have worked for us for over four — 50 years. There is a risk that as 3G continues to deviate from our principles, they will, eventually, harm both our value and our values. How do we prevent that from happening?”

WARREN BUFFETT: Well, that’s interesting. I mentioned earlier that it was very gradual. But it would’ve been, probably, a better decision. We fired 2,000 people over time — and some retired and left and all of that — but at the textile operation [Berkshire Hathaway]. You know, it didn’t work.

And at Hochschild Kohn, the successor — we fortunately sold it to somebody else — but eventually, they closed up the department stores because department stores, at least that particular one and a good many, actually, including our competitors in Baltimore, could not make it work.

Walmart came along with something — and, now, Amazon’s coming along with something — that changed the way people thought they knew. You —

We mentioned our poultry with CTB, which is a lot of different farm equipment.

The farm equipment, often, that CTB develops, the idea is that it’s more productive than what already is out there, which means fewer people are employed on farms.

We had 80 percent of the American public — population, working population — working on farms a couple of hundred years ago.

And if nobody had come up with things to make it more productive — farming — we’d have 80 percent of people working on farms now to feed our populace. And it means that we’d be living in a far, far more primitive way.

So there — you know — if you look at the auto industry, it gets more productive. If you look at any industry, they’re trying to get more productive. Walmart was more productive than department stores, and —

That will continue in America. And it better continue or we won’t live in — or our kids won’t live any better than we do.

Our kids will live better than we do, because America does get more productive as it goes along. And people do come up with better ways of doing things. The —

When Kraft Heinz finds that they can do whatever amount of business — $27 billion worth of business or something — and they can do it with fewer people, they’re doing what American business has done for a couple hundred years and why we live so well. But they do it very fast.

They’re more than fair, in terms of severance pay and all of that sort of thing. But they don’t want to have two people doing the job that one can do.

And I, frankly, don’t like going through that, having faced that.

I faced that down at Dempster in Beatrice, Nebraska. And it really needed change. But the change is painful for a lot of people. And I just would rather spend my days not doing that sort of thing, having had one or two experiences.

But I think that it’s absolutely essential to America that we become more productive because that is the only way we have more consumption per capita, is to have more productivity per capita.

Charlie?

CHARLIE MUNGER: Well, I — you’re absolutely right. We don’t want to go back to subsistence farming. I had a week of that when I was young on a western Nebraska farm. And I hated it. (Laughter)

And I don’t miss the elevator operators who used to sit there all day in the elevator, run the little crank, you know.

So, on the other hand, it — as you say it’s terribly unpleasant for the people that have to go through it and why would we want to get into a — the business of doing that over and over ourselves?

We did it in the past when we had to, when the businesses were dying.

I don’t see any moral fault in 3G at all, but I do see that there’s some political reaction that doesn’t do anybody any good.

WARREN BUFFETT: Milton Friedman, I think it was, used to talk about the time — probably apocryphal — he would talk about the huge construction project in some communist country. And they had thousands and thousands and thousands of workers out there with shovels digging away on this major project.

And, then, they had a few of these big, earth-moving machines behind — which were idle — and which could’ve done the work in one-twentieth of the time of the workers.

So the economists suggested to the local party worker or whoever it was that, you know, why in the world didn’t they use these machines to get the job done in one-tenth or one-twentieth the time instead of having all these workers out there with shovels?

And the guy replied, “Well, yeah. But that would put the workers out of work.” And Friedman said, “Well, then, why don’t you give them spoons to do it instead,” you know? (Laughter)

8. Berkshire’s $20B cash cushion is an “absolute minimum”

WARREN BUFFETT: Jonathan?

JONATHAN BRANDT: I understand that Berkshire is much more liquid than is ideal right now with a 113 billion of consolidated cash and bonds versus policyholder float of 1-0 — 105 billion. But I have trouble calculating how much incremental buying power Berkshire has at any point in time.

You’ve talked about having a minimum of 20 billion in cash on a consolidated basis.

But for regulatory, risk control, or liquidity purposes, is there some minimum amount of float beyond the 20 billion that has to be in cash bonds or, say, preferred stocks?

Or can all but 20 billion be put into either common stocks or invested into wholly-owned businesses if you found attractive opportunities?

WARREN BUFFETT: Yeah.

JONATHAN BRANDT: What does the balance sheet look like if you were fully invested? And where does additional debt fit into the equation, if at all?

WARREN BUFFETT: Yeah. The — I wouldn’t conflate the cash and the bonds. I mean, when we talk about 20 billion in cash, we can own no bond beyond that. Twenty billion would be the absolute minimum. As a practical matter, I never —

Since I’ve set 20 billion as a minimum, I’m not going to operate with 21 billion any more than I’m going to see a highway, a truck sign that says maximum load 30,000 pounds or something and, then, drive 29,800 across it. So, we won’t come that close.

But the answer is that, A, we could use — we’re not inclined to use debt. Obviously, if we found something that really lit the — lit our fire — we might use some more debt, although that’d be a — it’s unlikely under today’s circumstances. But we can —

Twenty billion’s an absolutely minimum. You can say that because I say 20 billion’s an absolute minimum, it probably wouldn’t be below 24 or 25.

And we could do a very large deal if we thought it was sufficiently attractive. I mean, we have not put our foot to the floor on anything for really a very long time. But if we saw something really attractive —

We spent 16 billion back when we were much smaller in a period of two or three weeks — probably three weeks maybe — in the fall of 2008. And we never got to a point where it was any problem for me sleeping at night. And now, we, obviously, have a lot more money to put out.

So, if a good — Charlie, at what point, if I called you, would you say, “I think that’s a little bit big for us today?”

CHARLIE MUNGER: I would say about $150 billion.

WARREN BUFFETT: Well, in that case, I’ll call you. (Laughter)

Don’t — I’m a little more conservative on that than, actually, Charlie. But we both would do a very, very big deal if we —

CHARLIE MUNGER: We don’t have to agree perfectly.

WARREN BUFFETT: Yeah. It’d have to be —

But, if we find a really big deal that makes compelling sense —

CHARLIE MUNGER: Now, you’re talking.

WARREN BUFFETT: — we’re going to do it. (Laughter)

9. Very unlikely Jorge Paulo Lemann would succeed Buffett as CEO

WARREN BUFFETT: OK. Station 2.

AUDIENCE MEMBER: Hello, Mr. Buffett, Mr. Munger.

My name is Felipe Kioni (PH). I’m 19 years old from Brazil.

And your partnership with Jorge Paulo Lemann and his associates at 3G has been very successful, taking into account great outcome of transactions such as the Kraft Heinz merger.

Even though you and Jorge Paulo have different investment methods, would you and Charlie consider him to be your — a member of your board, or even your successor?

WARREN BUFFETT: I don’t think that will happen, but I — but then, I think it would complicate things, in terms of the board membership.

But we love the idea of being their partner. And I don’t think — I think there’s a good chance that we will do more, and perhaps even bigger, things together.

But the — we’re probably unlikely to be doing much change in the board, certainly in the next few years.

And there will be a successor, and the successor could very well be while I’m alive.

But that will be — there’s a very high probability that will be from somebody that’s been in our company for some time. I mean, the world could change in very strange ways, you know. But that’s a very, very high probability.

Charlie?

CHARLIE MUNGER: All I can say is that my back hurts when I come to these functions because I want to indicate to the — my fellow shareholders — that they probably got seven more good years to get out of Warren. (Laughter and applause)

WARREN BUFFETT: Charlie’s inspiring me. I got to tell you that.

But we’ve been very, very lucky in life. And so far, our luck seems to be holding.

10. Online competition hasn’t yet affected Berkshire retailers

WARREN BUFFETT: OK. Becky?

BECKY QUICK: This question comes from Drew Estes in Atlanta, Georgia.

And he asks, “Is Fruit of the Loom experiencing difficulties related to the distribution channel shift towards online and the troubles in the brick and mortar retail world? If so, do you believe the difficulties are short term in nature?”

And, then, Drew goes on to add, “I’m hoping millennials haven’t bucked the underwear trend, too.” (Laughter)

WARREN BUFFETT: Yeah. Well, he may know more about that than I do. (Laughter)

The answer is essentially no, so far. But anybody that doesn’t think that online isn’t changing retail in a big way, and that anybody who thinks they’re totally insulated from it is correct —

I mean, the world is changing big time. And like I say, at Fruit of the Loom, I don’t — it really hasn’t changed. And at our furniture operation, which is setting a record so far again this year for the shareholder’s weekend. You know, I mentioned it in the report, but I think we did $45 million in one week.

And our furniture operations — it’s hard to see any effect from online, outside of our own online operations. It had really good same-store gains.

You can take, you know, whether it’s the Nebraska Furniture Mart, but RC Willey, whether it’s in Sacramento, or Reno, or Boise, or Salt Lake City, or Jordan’s, which, in Boston, has done very well on a same-store basis.

So, we don’t really see it, but there were a lot of things we didn’t see 10 years ago that then materialized.

One thing you may find interesting is that the Furniture Mart here in Omaha, which is an extraordinary operation — the online has grown very substantially.

And I may be wrong on this, but I think it’s getting up to — I’d like to check this with the Blumkins before I say it, but I think it’s getting pretty close to 10 percent or so of volume. But it’s a very significant percentage of those people still go and pick the product up at the Furniture Mart.

So apparently, they — it’s the time spent entering the store or maybe at check-out lines or whatever it may be. I’m surprised that it gets to be that percentage.

But the one thing about it is we keep looking at the figures and trying to figure out what they’re telling us.

So far, I would not say that it’s affected Fruit of the Loom in a significant manner. I would not say it’s affected the furniture operation in a significant manner. But I have no illusions that 10 years is going to look — from now — is going to look anything like today.

If you think about it, you know, if you go back a hundred years to the great department stores, what did they offer? They offered incredible selection.

You know, if you had a big department store in Omaha, you had the thousand bridal dresses. And if you lived in a small town around, the local guy had two or something of the sort.

So the department store was the big, exciting experience of variety and decent prices and convenient transportation, because people took the street cars to get there.

And, then, along came the shopping center. And they took what was vertical before. And they made it horizontal. And they changed it into multiple ownerships.

But they still kept incredible variety, and assortments, and convenience of going to one place, and accessible transportation because, now, the car was the method. And now you go to — and, you know, and then, we went for the discount stores and all of that.

But now you’ve got the internet. And you’ve got the ultimate, in terms of assortments. And you’ve got people that are coming in at low prices. And the transportation is taken care of entirely, so the evolution that has taken place —

The department store is online now, basically, except much expanded in assortment, much more convenient, and lower prices.

So the world has evolved, and it’s going to keep evolving. But the speed has increased dramatically.

And what’ll happen with — the brands are going to be tested in a variety of ways that — and they have to make decisions as to whether they try to do an online themselves, or work through an Amazon, or whether they try to hang onto the old methods of distribution while embracing new ones.

There’s a lot of questions in retail and in branding that are very interesting to watch. And you’ll get some surprises in the next 10 years, I can promise you that.

Charlie?

CHARLIE MUNGER: It’s — it would be certainly — be unpleasant if we were in the department store business. Just think of what we avoided, Warren.

WARREN BUFFETT: Yeah, we got very lucky, actually, because we were in the department store business, and our business was so lousy that we recognized it. If it had been a little bit better, we would’ve hung on.

And we owe a tremendous gratitude to Sandy Gottesman, our director who’s here in the front row, because he got us out of the business when Charlie and I, and Sandy, were partners in that.

And something we paid six dollars a share for, I think it’s worth about $100,000 a share now, because we got out of the business.

And if it had been a somewhat better business, you know, it might be worth 10 or $12 a share now. So, sometimes you get lucky.

We don’t miss it either, do we, Charlie? Hochschild Kohn.

CHARLIE MUNGER: No. We don’t miss it.

11. Book value a “whole lot less” relevant to Berkshire

WARREN BUFFETT: Jay.

JAY GELB: This question is on Berkshire’s intrinsic value. A substantial portion of the company’s value is driven by operating businesses rather than the performance of the securities portfolio.

Also, the values of previously acquired businesses are not marked up to their economic value, including GEICO, MidAmerican, and Burlington Northern.

Based on these factors, is book value per share still a relevant metric for valuing Berkshire?

WARREN BUFFETT: Well, it’s got some relevance, but it’s got a whole lot less relevance than it used to. And that’s why — I don’t want to drop the book value per share factor, but the market value tends to have more significance as the decades roll along.

It’s a starting point. And clearly, our securities aren’t worth more than we’re carrying for — carrying them for — at that time. And, on the other hand, we’ve got the kind of businesses you’ve mentioned.

But we’ve got some small businesses that are worth 10 times or so, you know, what would — could carry it for. We’ve also got some clunkers, too.

But I think the best method, of course, is just to calculate intrinsic business value. But it can’t be precise.

We know — we think the probability’s exceptionally high that 120 percent understates it. Although, if it was all in securities, you know, 120 percent would be too high.

But as the businesses have evolved, as we built in unrecognized value at the operating businesses — unrecognized for accounting purposes — I think it still has some use as being kind of the base figure we use.

If it were a private company and 10 of us here owned it, instead we’d just sit down annually and calculate the businesses one by one and use that as a base value.

But that gets pretty subjective when you’ve got as many as we do. And so, I think the easiest thing is to use the standards we’re using now, recognizing the limitations in them.

Charlie?

CHARLIE MUNGER: Yeah. I think the equities in the insurance company offsetting shareholders equity in the company are really not worth the full market value because they’re locked away in a high-tax system.

And so I, basically, like it when our marketable securities go down and our own businesses go up.

WARREN BUFFETT: Yeah, we’re working to that end. We’ve been working that way for 30 years now or something like that.

CHARLIE MUNGER: We’ve done a pretty good job, too.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: We have a lot of — we’ve replaced a lot of marketable securities with unmarketable securities that are worth a lot more.

WARREN BUFFETT: Yeah. And it’s actually a more enjoyable way to operate, too, beyond that, but —

CHARLIE MUNGER: Yeah. We know a lot of people we wouldn’t otherwise —

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: — be with. Good people.

12. I don’t know tech, but I know consumer behavior

WARREN BUFFETT: OK. Station 3.

AUDIENCE MEMBER: Hello.

WARREN BUFFETT: Hi.

AUDIENCE MEMBER: My name is Michael Monahan (PH). And I’m from Long Island, New York.

I don’t know if this question qualifies as investment advice. So I have a short, different question if you don’t want answer this one. (Laughter)

Unlike the last shareholder from zone 3, this will not be a stump speech, nor a protest.

One of your most well-known pieces of investment advice is to buy what you know. Additionally, you said earlier, one of the main criteria for buying is if you could ever understand the business.

Ever since I came to my first meeting in 2011, you were not known for being a tech guy. You have said smart phones are too smart for you, you don’t have a computer at your desk, and you’ve only tweeted nine times in the last four years. (Laughter)

WARREN BUFFETT: It was either that or going to a monastery. (Laughter)

AUDIENCE MEMBER: Despite this, you’ve recently been investing, looking, and talking more about tech companies.

My question to you and also to Charlie to comment is, what you turned you from the Oracle of Omaha to the Tech Maven of Omaha?

WARREN BUFFETT: (Laughs) Well, I don’t think I would — I don’t think I’ve talked that much about tech companies.

But the truth is, we made a large investment in IB — I made a large investment in IBM, and — which has not turned out that well. We haven’t lost money. But in terms of the bull market we’ve been in, it’s been a significant laggard.

And, then, fairly recently, we took a large position in Apple, which I do regard as more a consumer goods company, in terms of certain economic characteristics. Although, that —

You know, it has a huge tech component in terms of what that product can do, or what other people might come along to do, to leapfrog it in some way.

But I’ve — I think I’ll end up being — no guarantees — but I think I’ll end up being 1- for-2 instead of 0- for-2. But we’ll find out.

Charlie?

I make no pretense whatsoever of being on the intellectual level of some 15-year-old that’s got an interest in tech. I think I may know — have some insights into consumer behavior.

I, certainly, can get a lot of information on consumer behavior and, then try to draw inferences about what that means about what consumer behavior is likely to be in the future. But we will find with —

The one — the other thing I’ll guarantee is I’ll make some mistakes on marketable securities, and I’ve made them in other areas than tech. So it — you’ll not bat a thousand, you know, no matter what industries you stick — you try to stick by.

I know insurance pretty well. But I think we probably lost money on an insurance stock, perhaps, you know, once or twice over the years. So it — you don’t bat a thousand.

But I have gained no real knowledge about tech in the last — well, since I was born, actually. (Laughter)

Charlie?

CHARLIE MUNGER: I think it’s a very good sign that you bought the Apple. It shows either one of two things. Either it is you’ve gone crazy or you’re learning. (Laughter)

I prefer the learning explanation.

WARREN BUFFETT: Well, so do I, actually. (Laughter)

13. Artificial intelligence impact is hard to predict

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: Hi, Warren. This one’s a fun one. Thomas Kimay (PH) is here. He’s a 27-year-old shareholder from Kentfield, California.

And I should preface this question by saying that he was here 17 years ago at 10 years old, asked you a question from the audience asking you if the internet might hurt some of Berkshire’s investments.

At the time, you said you wanted to see how things would play out. He’s now updated the question. (Buffett laughs)

“What do you think about the implications of artificial intelligence on Berkshire’s businesses, beyond autonomous driving and GEICO, which you’ve talked about already? In your conversations with Bill Gates, have you thought through which other businesses will be most impacted?

“And do you think Berkshire’s current businesses will have a significantly — will have significantly more or less employees a decade from now as a function of artificial intelligence?”

WARREN BUFFETT: Well, I —

ANDREW ROSS SORKIN: I mixed a couple questions together.

WARREN BUFFETT: Yeah. I certainly have no special insights on artificial intelligence, but I will bet a lot of things happen in that field in the next couple of decades, and probably a shorter timeframe.

They should lead, I would certainly think — but again, I don’t bring much to this party. But I would certainly think they would result in significantly less employment in certain areas. But that’s good for society.

And it may not be good for a given business, but let’s take it to the extreme. Let’s assume one person could push a button and, essentially, through various machines and robotics, all kinds of things, turn out all of the output we have in this country.

So, everybody’s — there’s just as much output as we have. It’s all being done by, you know, instead of 150-some million people being employed, one person.

You know, is the world better off or not? Well, certainly we’d work a lot less hours a week — of work per week and so on.

I mean, it would be a good thing, but it would require enormous transformation in how people relate to each other, what they expect of government, you know, all kinds of things. And, of course, as a practical matter, more than one person would keep working.

But pushing the idea that way is one of the — you’d certainly think that’s one of the consequences of making great progress in artificial intelligence.

And that’s enormously prosocial, eventually. It’s enormously disruptive in other ways. And it can have huge problems, in terms of a democracy and how it reacts to that.

It’s similar to the problem we have in trade where trade is beneficial to society, but the people that see the benefits day by day of a — of trade — don’t see a price at Walmart on socks or whatever they’re importing, that says, you know, “you’re buying — you’re paying X, but you would pay X-plus-so-many-cents if you bought this domestically.”

So they’re getting these small benefits and invisible benefits. And the guy that gets hurt by it, who’s the roadkill of free trade, feels it very specifically. And that translates into politics.

And so, you can — it gets very uncertain as to how the world would adjust, in my view, to great increases in productivity.

And without knowing a thing about it, I would think that artificial intelligence would have that hugely beneficial social effect, but a very unpredictable political effect if it came in fast, which I think it could.

Charlie?

CHARLIE MUNGER: Well, you’re painting a very funny world where everybody’s engaged in trade. And the trade is, I give you golf lessons and you dye my hair. And that would be a world kind of like the royal family of Kuwait or something.

And I don’t think it would be good for America to have everything produced by one person and the rest of us just engaged in leisure.

WARREN BUFFETT: How about if we just got twice as productive?

CHARLIE MUNGER: What?

WARREN BUFFETT: How about if we got twice as productive in a short period of time, so that 75 million people could do what 150 million people are doing now?

CHARLIE MUNGER: I think you’d be amazed how quickly people would react to that.

WARREN BUFFETT: In what way?

CHARLIE MUNGER: Favorably.

WARREN BUFFETT: I —

CHARLIE MUNGER: That’s what happened during the period when there — I’m sure everybody remembers with such affection — back in the Eisenhower years, five percent a year or something — people loved it.

Nobody complained that they were getting air conditioning and they didn’t have it before. Nobody wanted to go back to stinking, sweating nights in the South and —

WARREN BUFFETT: Well, if you cut everybody’s hours in half, it’s one thing. But if you fire half the people and the other people keep working, I just think it gets very unpredictable. I mean, I think we saw some of that in this election because I think that —

CHARLIE MUNGER: Well, we’ve adjusted to an enormous amount of it. It just came along a few percent per year.

WARREN BUFFETT: Well, and the question, then, is —

CHARLIE MUNGER: Don’t think you have to worry — I don’t think you have to worry about coming out at 25 percent a year. You know, I think you have to worry about it — you’re going to get less than two percent a year. That’s what’s worrisome.

WARREN BUFFETT: OK. We’ll move on. But it will be, you know, it’s an absolutely fascinating subject to see what happens with this. But it’s very, very hard to predict.

If — in some way, you know, we’ve got 36,000 people, say, employed at GEICO, you know.

And if you could do the same — perform all the same functions, virtually all the same functions even, and do it with five- or 10,000 people, and it came on quickly, and the same thing was happening in a great many other areas, you know, I don’t think we’ve ever experienced anything quite like that.

And maybe we won’t experience anything like it in the future. I don’t know that much about AI, but —

CHARLIE MUNGER: I don’t think you have to worry about that.

WARREN BUFFETT: Well, that’s because I’m 86. (Laughter)

CHARLIE MUNGER: It’s not going to come that quickly.

14. We have a “huge appetite” for both wind and solar projects

WARREN BUFFETT: OK. Gregg.

GREGG WARREN: Warren, during the past five years, Berkshire Energy’s investments in solar and wind generation have been about equal, with around 4.7 billion dedicated to capital projects in each segment.

Based on the company’s end-of-year capital spending forecast for 2017 through 2019, investments in wind generation were expected to be more than seven times greater than investments in solar generation the next three years, with just over $4.5 billion going into wind generation.

Just wondering how much of that future spending is tied to PacifiCorp’s recently announced $3.5 billion expansion plan, which is heavily weighted towards improving and expanding the subsidiary’s existing wind fleet, and whether the economics for wind are that much better than solar given that MidAmerican has also been spending heavily on wind investments?

Or is this disparity between the two segments being driven more by genuine capacity needs, which would imply that you have much more solar capacity than you need?

WARREN BUFFETT: Yeah. It is — we don’t look at it as having more solar capacity than we need or anything like —

It’s really a question of what comes along. I mean, and these — the projects, they’re internally generated, they’re externally offered to us, and we’ve got a big appetite for wind or solar. We have seen — you know — just based on those figures, we’ve seen more wind lately.

But we have no bias toward either one. I mean, if we saw five billion of attractive solar projects we could do and didn’t happen to see any wind during that period, it wouldn’t slow us down from doing the five billion or vice versa.

So we are — we have an appetite, a huge appetite, for projects in either area. We’re particularly well situated, as I think I’ve explained or talked about in the past, because we pay lots of taxes.

And therefore, solar and wind projects all involve a tax aspect to them. And we can handle those much better than many other — certainly, electric utilities.

Most electric utilities really, A, don’t have that much money left over after dividends and these — frequently, the taxes aren’t that significant.

At Berkshire, we pay lots of taxes, and we’ve got lots of money. So it’s really just a question of doing the math on the deals as they come along.

We’ve been very fortunate in Iowa, in finding lots of projects that made sense. And as a result, we’ve had a — we’ve got a much lower price for electricity than our main competitor in the state. We’ve got a lower price than in any states that touch us.

We’ve told the people of Iowa we won’t — they won’t have a price increase for many, many, many years — guaranteed that. So this worked out extremely well.

But if somebody walks in with a solar project tomorrow and it takes a billion dollars or it takes three billion dollars, we’re ready to do it. There’s no specific —

And the more, the better. There’s no specific preference between the two. Obviously, it depends where you are in the country.

I mean, Iowa’s terrific for wind. And, obviously, California’s terrific for sun. And there are geographical advantages to one or the other. But from our standpoint, we can do them anyplace. And we will do them anyplace.

15. I “underestimated the brilliance” of Jeff Bezos at Amazon

WARREN BUFFETT: OK. Station 4.

AUDIENCE MEMBER: Hi. My name is Joey (PH). And I’m an MBA candidate at Wharton. Thank you for having us.

Amazon has been hugely disruptive, due to the brilliance of Jeff Bezos, whom Charlie earlier called the business mind of our generation.

What is your current outlook and — on Amazon? And why hasn’t Berkshire bought in?

WARREN BUFFETT: Well, because I was too dumb to realize what was going to happen — (laughs) — even though I admired Jeff. I’ve admired him for a long, long time and watched what he was doing.

But I did not think that he could succeed on the scale he has. And I certainly didn’t — I didn’t even think about the possibility of doing anything with Amazon Web Services or the cloud.

So if you’d asked me the chances that, while he was building up the retail operation, that he would also be doing something that was disrupting the tech industry, you know, that would’ve been a very, very long shot for me. And I’ve underestimated — I’ve really underestimated the brilliance of the execution.

I mean, it’s one thing to dream about doing this stuff online, but it takes a lot of ability. And, you know, you can read his 1997 annual report. And he laid out a roadmap. And he’s done it, and done it in spades.

And if you haven’t seen his interview on Charlie Rose three or four months ago — CharlieRose.com — go to it and listen to it because you’ll learn a lot. At least, I did. So, I just plain —

It always looked expensive. And I really never thought that he would be where he is today. I thought he would do — I thought he was really brilliant. But I did not think he would be where he is today when I looked at it three, five, eight, 12 years ago — whenever it may have been.

Charlie, how did you miss it? (Laughter)

CHARLIE MUNGER: It was easy. (Buffett laughs)

What was done there was very difficult, and it was not at all obvious that it was all going to work as well as it did.

I don’t feel any regret about missing out on the achievements of Amazon. But other things were easier. And I think we screwed up a little.

WARREN BUFFETT: No. We won’t pursue that line. (Laughs)

CHARLIE MUNGER: Well, I meant Google.

WARREN BUFFETT: Well, we missed a lot of things.

CHARLIE MUNGER: Yes.

WARREN BUFFETT: We missed a lot of things.

CHARLIE MUNGER: And we’ll keep doing it.

WARREN BUFFETT: Yeah. (Laughter) And we’ll have a two —

CHARLIE MUNGER: Luckily, we don’t miss everything, Warren. That’s our secret. We don’t miss them all. (Laughter)

WARREN BUFFETT: OK. We better move on, I think. (Applause)

He may start getting specific.

16. “If I died tonight, I think the stock would go up tomorrow.”

WARREN BUFFETT: Carol?

CAROL LOOMIS: The creator of this question, Jim Keifer (PH) of Atlanta, has even higher expectations for Warren’s longevity than Charlie does.

“Mr. Buffett, we all hope you win the record as mankind’s oldest living person. But at some point, you and/or Charlie will go, and Berkshire stock may then come under selling pressure.

“My question is, if Berkshire stock falls to a price where share repurchase is attractive, can we count on the board and top management to repurchase shares?

“I ask this question both because of past comments you have made about not wanting to take advantage of shareholders and because some of the passages in the owner’s manual lead me to believe this might be an instance when the board does not choose to repurchase shares.

“Can you clarify what course of action we might expect about repurchases in the circumstances I have outlined?”

WARREN BUFFETT: Yeah. Well, as far as I’m concerned, they’re not taking advantage of shareholders if they buy the stock when it’s undervalued. That’s the only way they should buy it. And they should —

But in doing so — there were a few cases back when Charlie and I were much younger — where there were very aggressive repurchases — or the equivalent of repurchases — by people. And the repurchases, incidentally, made a lot more sense than they do now.

But they were done by people who either — for various techniques — tried to depress the shares. And if you’re trying to encourage your partners to sell out at a depressed price by various techniques, including misinformation — but there’s other techniques — you know, I think that’s reprehensible. But our board wouldn’t be doing that.

I’ll take exception to the first part of it, but I’ll still answer the second. I think the stock is more likely to go up. If I died tonight, I think the stock would go up tomorrow. And there’d be speculation about break ups and all that sort of thing.

So, it would be a good Wall Street story that, you know, this guy that’s obstructed breaking up something that — where some of the parts might sell for more than the whole.

They wouldn’t necessarily be — probably be worth less than the whole — but might sell for — temporarily — for more than the whole. And it would happen. So I would bet in that direction.

But if, for some reason, it went down to a level that’s attractive, I don’t think the board is doing anything in the least that’s reprehensible by buying in the stock at that point. No false information, no nothing. It should —

And their buying means that the seller would get a somewhat better price — if there are a lot of sellers — they’d get a mildly better price than if they weren’t buying. And the continuing stockholders would benefit.

So I think that — I think it’s obvious what they would do. And I would think it’s obvious that it’s pro-shareholder to do it. And I think they would engage in pro-shareholder acts as far as the eye can see. I mean, we’ve got that sort of board.

Charlie?

CHARLIE MUNGER: Well, I think you or I might suddenly get very stupid very quickly, but I don’t think our board is going to have that problem. (Laughter)

WARREN BUFFETT: Well, I want to think about that one. (Laughter)

17. We try to explain material accounting issues to shareholders

WARREN BUFFETT: OK. Jonathan.

JONATHAN BRANDT: Warren, in the past, you’ve enjoyed discussing accounting for options grants.

So I’m curious, what’s your view of the new accounting standard which mandates that companies report lower tax provisions, based on so-called excess tax benefits enjoyed when share-based compensation ends up being more profitable for the grantees than when it’s initially modeled?

These so-called benefits — excess benefits — used to go through the shareholder’s equity line on the balance sheet. Which accounting method makes more sense to you, the old method or the new?

WARREN BUFFETT: Jonny, I think you know a lot more about it than I do. So, if I were asked to answer that question, I’d probably call you up and say, “What should I say?” (Laughter)

It’s not a factor that will enter into Berkshire, so I really have not — I mean, I’ve heard just a little bit about that accounting standard. But I really don’t know anything about it.

Charlie?

CHARLIE MUNGER: It’s not a big deal, Warren.

WARREN BUFFETT: Yeah. Well, I know that. (Laughter)

Yeah. We — there are few things in accounting we really disagree with and whether they might be material to somebody trying to evaluate Berkshire. And, you know, that primarily gets into amortization of intangibles.

It will certainly — it certainly gets into realized capital gains and that sort of thing. And we will go to great lengths to try to tell our partners, basically, not all of whom, you know, are accounting experts or anything.

And we will try to make clear to them, at least, what our view is. You know, the same way as if I had a family business and I was talking to my sisters or something about it.

But unless it’s material, we’ll probably stay away from trying to opine on any new accounting standards. If it’s material to Berkshire, we’ll go to great lengths to, at least, give our view.

Charlie?

CHARLIE MUNGER: Well, I certainly agree with that.

WARREN BUFFETT: OK —

CHARLIE MUNGER: That is, that what he’s talking about is not very material to Berkshire.

WARREN BUFFETT: No. It isn’t. And it really won’t be. You know, and —

CHARLIE MUNGER: No.

WARREN BUFFETT: Some of these others are, though, and we will bring those up as they come up. The — yeah.

We are reporting 400-and-some million dollars less in our earnings than if Precision Castparts had remained a public company.

Well, is Precision Castparts — I mean, are the earnings less real? Is the cash less real? Is anything — because it’s moved, the ownership? I don’t think so.

And I want to convey that belief to shareholders. And they can debate whether it’s right or wrong. But I think it’s a mistake not to comment if — and just assume that the owners understand that because it, you know, it’s a fairly arcane point. And so, we point it out. But we also point out if we think depreciation is inadequate.

As for valuation purposes, the depreciation is inadequate at a very capital-intensive business like BNSF, which we, I must say, still love anyway.

Charlie, any more?

CHARLIE MUNGER: No.

18. “Valuation … is not reducible to any formula”

WARREN BUFFETT: OK. Section 5.

AUDIENCE MEMBER: Thank you, and good afternoon. I’m Adam Bergman with Sterling Capital in Virginia Beach, Virginia.

Earlier today, Mr. Munger commented on the valuation of China versus the U.S. market.

My question for you is, are market cap to GDP and cyclically adjusted P/E still valid ways to consider market valuation? And how do those influence Berkshire’s investment decisions? Thank you.

WARREN BUFFETT: Charlie, I think — well, I expect that I guess Charlie’s overall valued in China.

I would say that both of the standards you mention are not paramount at all in our valuation of securities. It’s harder —

People are always looking for a formula. And there is an ultimate formula, but the trouble is you don’t know what to stick in for the variables. But the —

And, you know, that’s the value of anything, being the present value of all the cash it’s ever going to distribute. But the P/E ratios — I mean, every number has some degree of meaning, means more sometimes than others.

Valuation of a business is — it’s not reducible to any formula where you can actually put in the variables perfectly.

And both of the things that you mentioned get — themselves, get bandied around a lot.

It’s not that they’re unimportant. But sometimes they’re — they can be very important. Sometimes they can be almost totally unimportant. It’s just not quite as simple as having one or two formulas and, then, saying the market is undervalued or overvalued or a company is undervalued or overvalued.

The most important thing is future interest rates. And, you know, and people frequently plug in the current interest rate saying that’s the best they can do. After all, it does reflect a market’s judgment.

And, you know, the 30-year bond should tell you what people who are willing to put out money for 30 years and have no risk of dollar gain or dollar loss at the end of the 30-year period.

But what better figure can you come up with? I’m not sure I can come up with a better figure. But that doesn’t mean I want use the current figure, either. So, I would say that —

I think Charlie’s answer will be that he does not come up with China versus the U.S. market based on what you’ve mentioned as yardsticks. But, no, Charlie, you tell them.

CHARLIE MUNGER: All I meant was that — I said before that the first rule of fishing is to fish where the fish are — is that a good fisherman can find more fish in China if your — if fish is the stock market. That’s all I meant.

WARREN BUFFETT: Yeah. One — I’m going to go back to one —

CHARLIE MUNGER: It’s a happier hunting ground.

19. Lessons from running a “lousy business”

WARREN BUFFETT: This doesn’t really directly relate. Just going — I want to go back to one question that was mentioned earlier.

I really think if you want to be a good evaluator of businesses — an investor — you really ought to figure out a way, without too much personal damage, to run a lousy business for a while.

I think you learn a whole lot more about business by actually struggling with a terrible business for a couple of years than you run by — than you learn by getting into a very good one where the business itself is so good that you can’t mess it up.

I don’t know what — I don’t know whether Charlie has a view on that or not. But it’s certainly — it’s — it was a big part of our learning experience. And I think a bigger part, in a sense, than running — being involved — with good businesses was actually being involved in some bad businesses and just seeing —

CHARLIE MUNGER: How awful it was.

WARREN BUFFETT: — how awful it is, and how little you can do about it, and how IQ does not solve the problem, and a whole bunch of things.

It’s a useful experience. But I wouldn’t advise too much of it. Would you think so, Charlie? Or —

CHARLIE MUNGER: It was very useful to us. There’s nothing like personal, painful experience if you want to learn. And we certainly had our share of it.

20. Weapons of mass destruction pose biggest risk to Berkshire

WARREN BUFFETT: OK. Becky.

BECKY QUICK: This question comes from Tom Spanfelner (PH). And he’d like to be called Tom Span from Pennsylvania.

He says, “In life, business, and investing, strategies often work until they don’t work. Other than a massive insurance loss, any thoughts on what could cause the Berkshire enterprise to not work?”

WARREN BUFFETT: I think the only —

CHARLIE MUNGER: Good question.

WARREN BUFFETT: Yeah. Well, if there were some change, if we got some infection — outside agent of some sort that changed the culture in some major way, an invasion of different thought.

But as a practical matter, I don’t think anything — you know, and it’s the things you can’t think of — but I can’t think of anything that can harm Berkshire in a material, permanent way except weapons of mass destruction. But I don’t regard that as a low probability.

It would take a recession, a depression, a panic, you know, hurricanes, earthquakes. They all would have some effect. And in some cases, it might even be that we would do better because of them.

But if there were a successful — as measured by the aggressor — nuclear, chemical, biological, or cyber-attack on the United States — and there are plenty of people that would like to pull that off or organizations and maybe even a few countries — it could disrupt society to such an extent that it would harm us.

But I think — with the variety of earning streams, with the asset positions, with the general philosophy at play — the culture — I think that we would be close to the last one affected.

But if somebody figures out how to kill millions of Americans and totally disrupt society, then, you know, then all bets are off.

Charlie?

CHARLIE MUNGER: Well, I agree. It would take something really extreme.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: And just take the question like — British Petroleum took a huge loss with one oil well blowing.

And Berkshire has all these independent subsidiaries. And they really are independent. And the parent company is not (inaudible) if there’s one horrible accident somewhere.

We would tend to pay, of course, maybe more than our legal liability, but we are not — one accident in one subsidiary that caused a big lot of damage, we’re better protected than most companies.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: In every way, Berkshire is structured to handle stresses.

WARREN BUFFETT: It’s the kind of thing we think about all the time. We’ve thought about it ever since we started. But I really don’t know any company that can take more general adversity or even some specific adversities.

But if you get into the “what could happen with weapons of mass destruction?” that is something we can’t predict about. But if that ever happens, there’ll be more to worry about than the price of Berkshire.

21. Buffett confident about growth for property-casualty business

WARREN BUFFETT: Jay?

JAY GELB: Berkshire Hathaway Specialty Insurance generated $1.3 billion of premium volume in 2016. This business is on the smaller end of commercial property-casualty insurers in terms of scale, although its volume did grow 40 percent last year.

In a highly competitive commercial P&C environment, what gives you confidence that Berkshire Hathaway Specialty is destined to become one of the world’s leading commercial P&C insurers, as you said in this year’s annual letter?

WARREN BUFFETT: Yeah. I think it will be. And I think how fast it grows depends very — it does depend very much on the market.

I mean, we’re, you know, we are not interested in trying to be a price-cutter in a market where the prices already aren’t that attractive.

But we have built the scale, worldwide. And a lot of this has just been added in, you know, recent months and just over the past year. We have —

We will grow a lot. But if the market should turn hard for any reason, we would grow a lot faster. But we are destined, at Berkshire Hathaway Specialty, to be one of the leading PC firms in the world, just as we were destined to have — when Ajit [Jain] came in, even though we had nothing — we were destined to become a very important reinsurer throughout the world and, in certain ways, almost the only reinsurer for certain types of risks in the world.

And we’ve got the people. We’ve got the capital. We’ve got the reputation. There is no stronger company in the insurance world — and there won’t be — than the Berkshire Hathaway insurers. We’ve got the talent there.

So it will grow. It may grow slowly some years. It may have big jumps just like the reinsurance operation did many years ago. But it’s a very important addition to Berkshire that brought that on. I wish — just wish we could’ve started a little earlier.

But we had to have to right people. And they came to us. And, as you say, we wrote whatever it was, a billion-three or a billion-four last year, and we’ll write more this year. But we won’t write as much as if we were in a hard market.

22. “My God, we’re still learning”

WARREN BUFFETT: Station 6?

AUDIENCE MEMBER: Good afternoon. My name Sally Burns. I’m from Australia. But I currently reside in Austin, Texas.

My question, Mr. Buffett, I have heard that Mr. Munger says your greatest talent is that you’re a learning machine, that you never stop updating your views.

What are the most interesting things you’ve learned over the last few years?

WARREN BUFFETT: Well, it is fun to learn. I would say Charlie is much more of a learning machine than I am. I’m a specialized one, and he’s a much — he does as well as I do in my specialty. And, then, he’s got a much more general absorption rate than I have about what’s going on in the world.

But, you know, it’s a world that gets more fascinating all the time. And a lot of fun can occur when you learn you were wrong on something. It — you know, that’s when you really learn that the old ideas really weren’t so correct. And you have to adapt to new ones. And that, of course, is difficult.

I don’t know that I would pick out — well, I think, actually, what’s going on, you know, in America is terribly, terribly interesting, you know, and politically, all kinds of things. But just the way the world’s unfolding, it’s moving fast.

I do enjoy trying, you know, to figure out not only what’s going to happen, but what’s even happening now. But I don’t think I’ve got any special insights that would be useful to you. But maybe Charlie does.

CHARLIE MUNGER: Well, I think buying the Apple stock is a good sign in Warren. (Laughter)

And he did run around Omaha and ask if he could take his grandchildren’s tablets away. (Buffett laughs)

And he did market research.

And I do think we keep learning. And more important, we keep — we don’t unlearn the old tricks. And that is really important.

You look at the people who try and solve their problems by printing money and lying and so forth.

Take Puerto Rico. Who would’ve guessed that a territory of the United States would be in bankruptcy? Well, I would’ve predicted it because they behave like idiots. (Laughter) And so —

WARREN BUFFETT: And we did not buy any Puerto Rico bonds. (Laughs)

CHARLIE MUNGER: No. And if you go to Europe — you go to Europe, you should look at the government bond portfolios we’re required to hold in Europe. There’s not only no Greek bonds, they’re the bonds of nobody but Germany.

Everywhere you look in Berkshire, somebody is being sensible. And that is a great pleasure. And if you combine that with being very opportunistic so that when something comes along like a panic, why, it’s a nice — it’s like playing with two hands instead of one on a game that requires two hands.

It helps to have a fair-sized repertoire.

And, Warren, we’ve learned so damn much. There are all kinds of things we’ve done over the last 10 years we would not have done 20 years ago.

WARREN BUFFETT: Yeah. That’s true, although if you take — it’s interesting. I’ve mentioned this before. But one of the best books on investment was written, I think, in 1958. I think I read it around 1960, by Phil Fisher, called Common Stocks and Uncommon Profits. And he told —

CHARLIE MUNGER: All the countries went — companies went to hell eventually.

WARREN BUFFETT: But it talked about the importance, I mean, or the usefulness of, what do you call, the “scuttlebutt method.” And, you know, that was something I didn’t learn from [Benjamin] Graham.

But every now and then, it’s turned out to be very useful. Now, it doesn’t solve everything. And, I mean, there’s a whole lot of more —

CHARLIE MUNGER: I saw you do it with American Express in the Salad Oil scandal.

WARREN BUFFETT: Yeah, yeah.

CHARLIE MUNGER: You’re still doing at Apple, you know, decades later.

WARREN BUFFETT: Yeah. It — in certain cases, you actually can learn a lot just by asking a lot of questions. And I give Phil Fisher credit. That book goes back a lot of years.

But as Charlie said, some of the companies he picked as winners forever did sort of peter out on him.

But the basic idea, that you can learn a lot of things just by asking in some cases — I mean, I used to —

I mean, if I got interested in the coal industry — just say to pick one out of the air — you know, when I was much younger, more energetic, if I went and talked to the heads of 10 coal companies and I asked each one of them — way later into the conversation, after they got feeling very — they felt like talking.

And I would just, you know, I’d just say, “If you had to go away for 10 years on a desert island and you had to put all of your family’s money into one of your competitors, which one would it be and why?”

And then, you know, and then I’d ask them if they had to sell short one of their competitors for 10 years, all their family money, why?

And they — everybody loves talking about their competitors. And if you do that with 10 different companies, you’ll probably have a better fix on the economics of the coal industry than any one of those individuals has.

I mean, the — it — there’s ways of getting at things. And sometimes they’re useful. Sometimes, they’re not. But sometimes, they can be very useful.

And, you know, the idea of just learning more all the time about —

I’m more specialized in that by far than Charlie. I mean, he wants to learn about everything. And I just want to learn about something that’ll help Berkshire.

But — (laughs) — it’s a very, you know, it’s a very useful attitude toward — have toward — the world.

And, of course, I don’t know who said it. But somebody said the problem is not in getting the new ideas but shedding the old ones. And there’s a lot of truth to that.

CHARLIE MUNGER: We would never have bought ISCAR if it had come along 10 years earlier. We would never have bought Precision Castparts if it had come along 10 years earlier. We are learning. And, my God, we’re still learning.

23. “We’re getting too much medicine”

WARREN BUFFETT: OK. Andrew?

ANDREW ROSS SORKIN: Hi. Warren, this is my final question.

In 2012, you were quoted as saying, “I think the health care problem in — is the number one problem of America and of American business. We have not dealt with that yet.”

Do you believe that the current administration’s plan to repeal and replace ACA will ultimately benefit the economy and Berkshire or not?

WARREN BUFFETT: Yeah. Well, I’ll answer — I’ll give you two answers here, the first one being that if you go back to 1960 or thereabouts, corporate taxes were about four percent of GDP. I mean, they bounced around some.

And, now, they’re about two percent of GDP. And at that time, health care was five percent of GDP. And now, it’s about 17 percent of GDP.

So when American business talks about taxes strangling our competitiveness or that sort of thing, they’re talking about something that, as a percentage of GDP, has gone down from four to two while medical costs, which are borne to a great extent by business, have gone from five to 17 percent.

So medical costs are the tapeworm of economic — American economic competitiveness, I mean, if you’re really talking about it.

And that — and business knows that. They don’t feel they can do much about it, but it is not —

The tax system is not crippling Berkshire competitiveness around the world or anything of the sort. Our health costs have gone up incredibly and will go up a lot more. And if you look at the rest of the world, there were a half a dozen countries that were around our five percent if you go back to the early years.

And while we’re at 17, now, they’re at 10 or 11. So they have gained a five or six point advantage — the world — even in these countries with fairly high medical costs.

CHARLIE MUNGER: And that’s with socialized medicine.

WARREN BUFFETT: Yeah. So it’s a huge — whatever I said then goes and is accentuated now. And that isn’t a problem —

I mean, that is a problem this society is having trouble with and is going to have more trouble with, and — regardless of which party’s in power or anything of the sort. It almost transcends that.

In terms of the new act that was passed a couple days ago versus the Obama administration act, it’s a very interesting thing.

All I can tell you is the net effect of that act on one person is that my taxes — my federal income taxes — would’ve gone down 17 percent last year, if the act — if what was proposed went into effect.

So, it is a huge tax cut for guys like me. And you’ll have to figure out the effects of the rest of the act.

But the one thing I can tell you is if it goes through the White House — put in, I mean, it — anybody with $250,000 a year of adjusted gross income and a lot of investment income is going to have a huge tax cut. And when there’s a tax cut, either the deficit goes up or they get the taxes from somebody else.

So, as it stands now, it is — that is the one predictable effect, if it should pass, as it — and it — the Senate will do something different and hold a conference. And who knows what happens? But that is in the law that was passed a couple days ago.

Charlie?

CHARLIE MUNGER: Well, I certainly agree with you about the medical care. What I don’t like about the medical care is that a lot of — we’re getting too much medicine.

There’s too much chemotherapy on people that are all but dead, and all kinds of crazy things go on in Medicare and in other parts of the health system.

And every — there are so many vested interests that it’s very hard to change.

But I don’t think any rational person looking objectively from the outside of the American system of medical care — we all love all the new life-saving stuff, and the new chemotherapies, and the new drugs, and all that.

But, my God, the system is crazy. And the cost is just going wild. And it does put our manufacturers at a big disadvantage with other people where the government is paying the medical bills. And so, I agree with Warren totally.

WARREN BUFFETT: If you had to bet, 10 years from now, we’ll be higher or lower than 17 percent of GDP?

CHARLIE MUNGER: Well, if present trends continue, it’ll get more and more. There are huge vested interests in having this thing continue the way it is. And they’re very vocal and active. And the rest of us are indifferent. So, naturally, we get a terrible result.

And I would say that on this issue, both parties hate each other so much that neither one of them can think rationally. And I don’t think that helps, either.

WARREN BUFFETT: It’s — (Applause)

It is kind of interesting that, you know, with — the federal government spends — or raises, we’ll say — 3 1/2 trillion or something like that — I mean, the degree of concern everybody has about that — although that’s stayed fairly steady in the 18 percent or so of GDP plus or minus a couple points — but three trillion-plus is spent on health care.

And everybody wants the best. And it’s perfectly understandable. But it’s a very, very — it’s a big number compared to the whole federal budget. I mean, there’s some overlap and all of that. But it’s —

If you talk about world competitiveness of American industry, it’s the biggest single variable where we keep getting more and more out of whack with the rest of the world.

And it’s very tough for political parties to attack it. Yet, it’s, you know, it — basically, it’s a political subject.

CHARLIE MUNGER: A lot of it is deeply immoral. If you have a group of hospital people and doctors that are feasting like a bunch of jackals on the carcass of some dying person, it’s not a pretty sight.

WARREN BUFFETT: Tell them about that group out — (applause) — in California that —

CHARLIE MUNGER: Oh yes.

WARREN BUFFETT: Perfect — this is —

CHARLIE MUNGER: This is Redding. This is one of my favorite stories. There are a bunch of very ambitious cardiologist and heart surgeons in Redding.

And they got the thought that, really, what a heart was was a “widowmaker.” So everybody — every patient that came in, they said, “You’ve got a widowmaker in your chest. And we know how to fix it.” And so they recommended heart surgery for everybody.

And, of course, they developed a huge volume of heart surgery. And they got very wonderful results because nobody comes through heart surgery better than the man who doesn’t need it at all. (Laughter)

And they made so much money that the hospital chain, which was Tenet, brought all its other hospitals — why can’t you be more like Redding? And this is a true story. And it went on and on and on.

And finally, there was some beloved Catholic priest. And they said, “You’ve got a widowmaker in your chest.” And he didn’t believe them. And he blew the whistle.

WARREN BUFFETT: He was a priest. You could see why he didn’t believe them. (Laughter)

CHARLIE MUNGER: At any rate — well, when you get a routine, you just keep using it, you know. A heart is a widowmaker. It’s a widowmaker.

Later, I met one of the doctors who threw these people out of the medical profession. And I said to him, “In the end, did they think they were doing anything wrong?”

He said, “No, Charlie. They thought that what they were doing was good for people.” That is why it’s so hard to fix these things. The self — the delusion that comes into people as they make money and get more successful by doing God-awful things should never be underestimated. And it’s — there’s a lot — (Applause)

A lot of that goes on. And you’re (inaudible) such gross craziness. And you thought little Wells Fargo looks like innocence. He only has a little trouble with his incentive system.

But the heart surgery rate was 20 times normal or something. You’d think you’d notice if you’re running a hospital. And — but they did notice. They wanted the other hospitals to be more like it.

WARREN BUFFETT: They had a terrific success ratio.

24. Buffett expects Berkshire will own more utilities

WARREN BUFFETT: OK. Gregg? (Laughs)

GREGG WARREN: Thank you, Warren.

As you look forward, in taking into consideration some of the headwinds faced in the U.S.-based utilities, including weaker electricity demand growth as increasing energy efficiency impacts demand, distributed generation, which hits vertically integrated utilities doubly hard as they face both declining energy sales revenue and increased network cost to support reliable delivery and, third, higher interest rates, which would increase borrowing costs, what are the key attributes that Berkshire Energy would be looking for in future acquisition candidates? In —

WARREN BUFFETT: Yeah. Oh, excuse me. I’m sorry.

GREGG WARREN: I’m sorry. In particular, are there advantages or disadvantages attached to, say, transmission assets relative to generation assets that would make you favor one over the other?

WARREN BUFFETT: Yeah. Well, generation assets, you can say, have inherently more risk because that — some of them are going to —

CHARLIE MUNGER: Be stranded.

WARREN BUFFETT: — stranded, yeah, and obsoleted. Now the question is how they treat stranded and all of that sort of thing.

We — on the other hand, more of the capital investment is in the generating assets. So that tends to be where a good bit of the capital base is.

We like the utility business OK. I mean — electric — electricity demand is not increasing like it was, as you point out. They’re going to be stranded assets. They —

If they’re stranded because of rank foolishness, you know, they will probably be less inclined — or the utility commissions — will be less inclined to let you figure that in your rate base as you go forward as opposed to things that are — where societal demands are just changing.

But we still think the utility business is a very decent asset. The prices are very high, but that’s what happens in a low interest rate environment. I would be —

I’d be surprised if 10 years from now, we don’t have significantly more money in not only wind and solar, but probably — we’ll probably own more utility systems than we own now.

We’re a buyer of choice with many utility commissions. In fact, if we can put up the slide, there’s a slide which shows something about our pricing compared to other utilities.

And Greg Abel and his group have done an extraordinary job. They’ve done it in safety. They’ve done it in reliability. They’ve done it in price. They’ve done it in renewables. It’s hard to imagine a better run operation than exists at MidAmerican Energy.

And people want us — with that record — people want us to come to their state in many cases.

But when prices get to the level they have, I mean, some utilities have sold at extraordinary prices. And we can’t pay them and have it make sense for Berkshire shareholders.

But just because we can’t do it this year doesn’t mean it won’t happen next year or the year after. So I think we’ll get a chance.

CHARLIE MUNGER: And our utilities are not normal. The way Greg has run those things, they’re so much better run in every way than normal utilities. They’re better regarded by the paying customers. They’re better regarded by the regulators. They have better safety records. They charge —

It’s just everything about it is way the hell better. And it’s a pleasure to be associated with people like that and to have assets of that quality.

And it’s a lot safer. If somebody asked Berkshire to build a $50 billion nuclear plant, we wouldn’t do it.

WARREN BUFFETT: Yeah. And we have public power here in Nebraska. I mean, it’s been sort of the pride of Nebraska for many decades. It’s all — there are no privately-held utility systems, and totally public power. And, you know, those utilities have no requirements for earnings on equity. They have —

They can borrow at tax-exempt rates. We have to borrow at taxable rates. And Nebraska — you know, the wind — it’s not that much different than Iowa. And we’re selling electricity across the river, a few miles from here, you know, at lower prices than exist in Nebraska. So it’s an extraordinary utility.

And it was lucky when we got involved in it. I thank Walter Scott, our director, for introducing me to it almost 17 or 18 years ago or so. And —

But I don’t think the utility business, as such — I mean, if I were putting together a portfolio of stocks, I don’t think there would be any utilities in that group now. But I love the fact we own Berkshire Hathaway Energy.

CHARLIE MUNGER: But it’s different —

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: — radically different —

WARREN BUFFETT: A lot —

WARREN BUFFETT: — and better.

WARREN BUFFETT: A lot better, actually.

25. McLane: lots of revenue, but very thin profit margin

WARREN BUFFETT: Station 7.

AUDIENCE MEMBER: Hi.

WARREN BUFFETT: Hi.

AUDIENCE MEMBER: My name’s Grant Misterly from beautiful, historic Saint Augustine, Florida.

I’ve been a fan of yours and of Berkshire since I was a kid, looking through the stock pages and seeing one crazy stock that traded for $10,000 a share.

Unfortunately, I wasn’t able to convince my parents to buy it at that point. But now I’m a shareholder as an adult. And I’m here with my daughters, Mabel, who’s seven and Willa, who’s one year old, my wife.

I voraciously read the letter every year. And I love the stories of — from the different companies, GEICO and See’s, BNSF, that kind of teach investing lessons.

And this year, when I was looking through the accounting information in the back, I noticed that one company, McLane, contributes a lot of revenue, a large portion of Berkshire’s revenue and, to a lesser extent, earnings. But I don’t ever see much about it in the annual report.

So I’m curious why we don’t hear more about that company? And are there any investing lessons like we get from See’s and GEICO that you can share about that company?

WARREN BUFFETT: Yeah, McLane — the reason you see their figures separately is because the SEC has certain requirements that are based on sales. And McLane is a company that has an extraordinary amount of sales in relation to intrinsic value or to net income.

It, basically, is a distributor of — well, it’s a huge customer, for example, of the food companies, the candy companies, the cigarette companies, it — go up and down the line of anything that goes into convenience stores.

But we bought it from Walmart. And Walmart is our biggest customer. I can’t tell you the precise volume, but — well, if you get Walmart’s and Sam’s together, you know, you’re getting up to 20 percent-plus.

But it’s nationwide. But in the end, it operates on about six percent gross margins and five percent operating expenses, so it has a one percent pre-tax margin.

And, obviously, a one percent pre-tax margin only works in terms of return on capital if you turn your equity extraordinarily fast. And that’s what McLane does. Being a wholesaler, it’s moving things in, moving things out very fast, very efficiently. And it does this —

It also has a few liquor distribution subsidiaries that have wider margins. But the basic McLane business is, you know, 45 billion-plus, makes one percent pre-tax on sales.

But the return on capital is very decent. But it sort of has an outsized appearance simply because of this huge volume of sales that go through it.

Grady Rosier, who runs it, is exceptional. He was there when we bought it from Walmart, whenever it was, a dozen years ago.

And I’ve been there once. We’ve got thousands and thousands of trucks, big distribution centers all over the country. It is a major factor in moving goods at wholesale.

I mean, if you’re a Mars Candy or something of the sort, I mean, we — we’re — we’ll be the biggest customer.

But that pretty well describes the business. You know, it’s a business that earns good returns in relation to invested capital and in relation to our purchase price.

But, you know, every tenth of a cent is important in the business. In collect — moving your receivables exceptionally fast, and consequently you have — you know, you have payables moving big time.

So the sales are 30 times receivables and 30 times payables, you’ve got — and maybe, yeah, 35 or so times inventory. I mean, this is a business that’s moving a lot of goods. But, in terms of its —

It’s an important subsidiary but not remotely as important as would be indicated by the sales. It’s still very important making the kind of money that shows up in the 10-K.

Charlie?

CHARLIE MUNGER: You said it all. (Buffett laughs)

WARREN BUFFETT: That was an interesting thing. Walmart wanted to sell it. They came to see us, and we made a deal. And the CFO came. We talked for a while. He went into the other room and called the CEO and came back and said, “You have a deal.”

And Walmart has told me subsequently that they never had a deal that closed as fast as the one with Berkshire. I mean, they — you know, we said what we would pay. It was cash. And we got it done very promptly. And they were terrific on their side.

CHARLIE MUNGER: By the way, that reputation for being quick and simple, and doing what we promised and so on, has helped at Berkshire time after time.

WARREN BUFFETT: Yeah. Yeah, we wouldn’t have made that deal without, essentially, having that reputation. But they knew —

CHARLIE MUNGER: Well, you bought the Northern Natural Gas Company in one weekend. And they wanted the Monday — that money on Monday.

WARREN BUFFETT: They needed the money on Monday.

WARREN BUFFETT: Before the lawyers could complete the legal papers, we managed to do it.

WARREN BUFFETT: Well, not only that, but I think it took some clearance by — in Washington. And, essentially, I think I wrote a letter and said that if they didn’t — if they decided after looking at it they didn’t want to clear it, we’d undo the deal.

But these guys needed the money so bad, we were going to give them the money, essentially, based on the deal clearing. And there wasn’t any reason why it wouldn’t clear, but that was just a procedural problem.

But most companies can’t do that. I mean, we can. We’ve got a flexibility that, really, in most large companies just plain doesn’t exist. There’s too many people have to sign off on it or something of the sort.

So the Northern Natural deal would not have been made if we’d had to follow the normal timetable. It —

CHARLIE MUNGER: And it’s a lovely business to own.

WARREN BUFFETT: Yeah. Absolutely.

26. Buffett wants to be remembered as a (very old) teacher

WARREN BUFFETT: Now, we’re moving from one station to another between now and 3:30, so we now go to station 8.

AUDIENCE MEMBER: Good morning or good afternoon, Warren and Charlie, John —

WARREN BUFFETT: Hi.

AUDIENCE MEMBER: — Norwood from West Des Moines, Iowa. You guys have iron bladders. (Laughter)

WARREN BUFFETT: We won’t tell you the secret to that.

AUDIENCE MEMBER: Fine — (Laughter)

I was wondering about a contraption under the —

WARREN BUFFETT: No.

AUDIENCE MEMBER: — table there.

WARREN BUFFETT: No. You can come down and inspect.

AUDIENCE MEMBER: All right. (Laughter)

Hey, I had a question for each. Warren, I was fortunate to ask you a question, I think, in 2011 about legacy and what you wanted to be known for a hundred years from now. And I’m kind of curious to hear what Charlie would like to be known for.

Warren, I’m 52. So I guess you started this — doing this — when I was born. And I’m kind of interested in a memory from your first annual meeting.

CHARLIE MUNGER: My first memory when Warren got on this subject and they asked him what he wanted said at his funeral.

He said, “I want them to all be saying ‘that’s the oldest looking corpse I ever saw.’” (Laughter) And —

WARREN BUFFETT: That may be the smartest thing I ever said. (Laughter)

Oh, it — well — with me, it —very simple. It — I really like teaching.

So, basically, I’ve been doing it formally and, you could say, somewhat informally, all my life. And I certainly had the greatest teachers you can imagine. So, if somebody thought that I did a decent job at teaching, I’d feel very good about that. (Applause)

CHARLIE MUNGER: Yeah. To make the teaching endurable it has to have a bit of wise-assery in it. And that we’ve both been able to supply. (Laughter)

WARREN BUFFETT: And for those of you who are old-time basketball fans, have I mentioned that on Wilt Chamberlain’s tomb it was reputed that it was going to say, “At last, I sleep alone?” (Laughter)

27. “Don’t wait till you’re 93”

WARREN BUFFETT: OK. Station 9.

AUDIENCE MEMBER: Good afternoon, Mr. Munger and Mr. Buffett.

My name is Ji Wen Yue (PH). I come from China. It’s my first time to come to this meeting. And I think I’m very lucky to have a chance to ask question.

WARREN BUFFETT: We’re glad to have you.

AUDIENCE MEMBER: Thank you. Everyone has personal dreams. And at a different age, maybe dreams will come different to you. And what’s your dream now?

WARREN BUFFETT: Charlie, we’ll let you go first.

CHARLIE MUNGER: I didn’t quite hear that.

WARREN BUFFETT: Oh, I — what’s your dream now? She says —

CHARLIE MUNGER: My dream. Well — (Laughter)

WARREN BUFFETT: Let’s skip the first one. (Laughter)

CHARLIE MUNGER: Sometime when I’m especially wishful, I think, oh, to be 90 again. (Applause)

And I got some advice for the young. If you got anything you really want to do, don’t wait till you’re 93.

WARREN BUFFETT: No, do it. (Laughter)

No, that’s the same thing I would tell students is, you can’t always find it the first time or the second time. But when you go out in the world, look for the job that you would take if you didn’t need a job.

I mean, don’t postpone that sort of thing. Somebody — I think it was Kierkegaard, said that, you know, life must be evaluated backwards but it must be lived forwards.

And you want to sort of — Charlie says all he wants to know is where he’ll die so he’ll never go there, you know. And so you — (Laughter)

You do want to do a certain amount of reverse engineering in life. I mean, that’s not — that doesn’t mean you can do everything that way.

But you really want to think about what will make you feel good, when you get older, about your life.

And you, at least generally, want to keep going in that direction. And, you know, you need some luck in life. And you got to accept some bad things that are going to happen as you go along.

But life has been awfully good to me and Charlie, so we have no complaints.

CHARLIE MUNGER: What you don’t want to be is like the man, when they held his funeral, and the minister said, “Now, it’s the time for somebody to say something nice about the deceased.” And nobody came forward. And nobody came forward.

He said, “Surely, somebody can say somebody — something nice — about the deceased.” And nobody came forward.

And finally, one man came up. And he said, “Well,” he said, “His brother was worse.”

WARREN BUFFETT: Yeah. (Laughter)

28. Buffett’s regret: “I wish I’d met Charlie earlier”

WARREN BUFFETT: OK. We’ll move to station 10 and see if we can improve on it. (Laughter)

AUDIENCE MEMBER: Hi. My name is Andy Lijun Lin from Loyal Valley Innovation Capital from Shanghai.

This is my sixth year from Shanghai to here. I have say — I have to say to you two, Warren and Charlie, you are highly respected and deeply loved by millions and millions, or even billions, globally.

I have two questions today. First question, in your letters to shareholders you said you believe EBITDA is not a good parameter to value a business. Why it’s not? Can you elaborate on that?

Second question, you both have very successful and happy lives with great respect. My question is to each of you. In retrospect, from a personal standpoint, do you have regrets in life?

If there is one thing you could have done differently in your life, family, personal, or business, what is it? Thank you very much.

WARREN BUFFETT: Yeah. I don’t think you should expect us to answer that on personal.

But in business, I would say I wish I’d met Charlie earlier. (Laughs)

We’ve had a lot of fun ever since I was 29 and he was 35. But it would’ve been even more fun if we’d started many, many years earlier. We had a chance to. We worked in the same grocery store but not at the same time.

29. Teaching the “delusion” of EBITDA is “horror squared”

WARREN BUFFETT: In respect to EBITDA, depreciation is an expense. And it’s the worst kind of an expense. You know, we love to talk about float. And float is where we get the money first and we have the expense later.

Depreciation is where you spend the money first, you know, and, then, record the expense later. And it’s reverse float. And it’s not a good thing.

And to have that enter into a multiple — it’s much better to buy a business that has, everything else being equal — has no depreciation because it has, essentially, no investment and fixed assets that makes X, than it is to buy a company where there’s a lot of depreciation in getting to X.

And I — actually, I may write a little bit more on that next year, just because it’s such a mass delusion. And, of course, it’s in the interests of Wall Street, enormously, to focus on something called EBITDA because it results in higher borrowing power, higher valuations, and all of that sort of thing.

So it’s become very popular in the last 20 years, but I — it’s a very misleading statistic that can be used in very pernicious ways.

Charlie, on either one of those subjects?

CHARLIE MUNGER: I think you’ve understated the horrors of the subject and the disgusting nature of the people that brought that term into the valuation of business. It was just —

It would be like a leasing broker of real estate who’s got a thousand square-foot new suite to be leased, and he says it’s got 2,000 feet in it. That’s not honorable behavior. And that’s the way that term got into common usage.

Nobody in his right mind would think that depreciation is not an expense.

WARREN BUFFETT: Yeah. It — but it’s very much in the interest of Wall Street.

CHARLIE MUNGER: Yes. That’s why —

WARREN BUFFETT: You —

CHARLIE MUNGER: — they did it.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: It made the multiple seem lower.

WARREN BUFFETT: And what’s amazing is the way it’s accepted, actually.

But anyway, it just illustrates how people use language, you know, and sell concepts that work to their own use.

And “2 and 20” has the same sort of thing. I mean, the number of people — the amount of money that’s overperformed after paying 2 and 20, compared to the expenses that have been incurred, I will assure you, makes for a terrible indictment of that particular arrangement.

But as long as it can get sold, it will get sold. And —

CHARLIE MUNGER: And, now, they use it in the business schools. Now, that is horror squared.

I mean — (laughter) — it’s bad enough that a bunch of thieves start using a term. But when it gets so common that the business schools copy it, that is not a — that’s not a good result.

WARREN BUFFETT: OK. (Applause)

30. “Nobody should be roadkill in this sort of society”

WARREN BUFFETT: Station 11.

AUDIENCE MEMBER: Good afternoon. I’m Whitney Tilson, a shareholder from New York.

My question is related to the ones asked earlier about job cuts. Perhaps, the only thing that makes American workers angrier than layoffs is to shut down an operation entirely and move the jobs overseas.

Ask anyone in Ohio or Michigan, and they’ll tell you stories about companies that have been operating in those states for decades, benefitting from the educational system, infrastructure and so forth, things that were paid for by local taxpayers.

But, then, some high-paid consultants came along and showed the company how it could reduce its costs by relocating production to Mexico or China. And poof, the good U.S. jobs disappeared.

My observation is that most investors and those in corporate America today worship at the altar of maximizing shareholder value, which is code for doing whatever is necessary to boost the share price as high as possible.

But in doing so, companies are taking actions that make millions of workers feel, at best, fearful and left behind and, at worst, deeply harmed by corporate America.

It makes so many people so angry that I think it’s testing the post-World War II economic order, which is rooted in free trade, and even the strength of our democracy. I’d argue that it was decisive in our last election.

So my question to you is, do you think that businesses should consider factors outside of pure economics when making these types of decisions? What obligations, if any, do they have to their employees and communities in which they operate?

And lastly, if a Berkshire CEO came to you and asked for your approval to close a U.S. operation and relocate it overseas to save money, what questions would you ask beyond the economics of this decision? Thank you.

WARREN BUFFETT: Yeah. Well, the truth is that — (applause) — in certain cases, production that would otherwise — that had formerly been in the United States has definitely been supplanted by production that comes from other parts of the world.

Originally — I was there when Fruit of the Loom was called Union Underwear and bought by Graham-Newman Corp in 1955, I believe. And it was probably all domestic then. And the truth is if it was all domestic now, it wouldn’t exist.

We had the same thing happen with Dexter Shoe. And it was a wonderful company and skilled workers. And in the end, if we sold the shoes at a price that yielded what they cost us, they were not competitive with shoes from around the world.

Trade, I would argue — both ways, export, import — massive trade should be — and is, actually — enormously beneficial both to the United States and the world. I mean, it will — it — greater productivity will benefit the world in a general way.

But to be roadkill, to be the textile worker in New Bedford that was put out of a job eventually, to be the shoe worker in Dexter — at Dexter to be — was put out of work, you know, is —

I mean, it would be no fun to go through life and say, “I’m doing this for the greater good and so that shoes or underwear will sell for five percent less,” or something, “and the American public will actually never know.”

So what you need is two things, in my view. You’ve got an enormously prosperous country. You’ve got almost $60,000 of GDP per capita. It’s unbelievable — six times what it was when I was born, in real terms.

So we’ve got the prosperity. And that prosperity is enhanced by trade. We were only exporting five percent of our GDP back in 1970, and that’s — I think it’s around 12 percent or something like that now.

We’re doing what we do best. But we need an educator-in-chief, logically the president — I don’t mean this specific president. I mean any president who’s been around for decades — has to be able to explain to the American public the overall benefits of, essentially, free trade.

And then, beyond that, we have to have policies that take care of the people that become the roadkill in the process.

Because it doesn’t make any difference to me if — as far as I’m concerned, if my life is miserable because I’ve been put out of business by something that’s good for 320-some million people in some infinitesimal way, and it’s messed up my life when I’ve tried to live it in a proper way.

So we have got the resources to take care of those people. The investors, I don’t worry about. I wrote about this a few years ago.

The investors can diversify their investments in such a way that, overall, trade probably benefits them and they don’t get killed by a specific industry condition.

But the worker, in many cases, can’t do that. You’re not going to retrain some 55-year-old worker in New Bedford who may not even speak English in our textile mill or something. I mean, they —

If they get destroyed by something that’s good for society, they get destroyed, unless government puts in some policies that takes care of people like that. And we’ve got a rich society that can do that. And we got a society that will benefit by free trade.

And I think we ought to try to hit both objectives of making sure that there is not roadkill and that, at the same time, we get — 320 million people — get the benefits of free trade. (Applause)

Charlie?

CHARLIE MUNGER: Well, I don’t quarrel with that. And we have unemployment insurance for that exact reason.

But I’m afraid that a capitalist system is always going to hurt some people as it modifies and improves. There’s no way to avoid it.

WARREN BUFFETT: Yeah. Well, capitalism is brutal to capital if you’re in the wrong businesses. And, like I say, you can diversify those results.

Capitalism is brutal to people that have the bad luck to be skilled or develop their skills for decades.

But a rich — a very rich society can actually — if it’s beneficial to society overall, it can take care of those people. I mean, it just — you know, the new tax —

The bill that was passed a couple days ago reduces my taxes, you know, by 17 percent. You know, and is that needed by the government or anything of the sort?

CHARLIE MUNGER: I wouldn’t start spending the money.

WARREN BUFFETT: No. And — (laughter) — but that was the will, I mean, of the —

No, I agree. I don’t think — who knows what happens with the bill? But I’m just — to have that happen, and I don’t think —

I think if you polled a thousand people in Omaha that were walking to a shopping center as to whether my tax bill had been cut by some very large sum because of what passed, I don’t think many people would have the faintest idea what happened, in terms of the coverage of it and all of that that took place.

So I — we’ve got — we do have — it’s probably more like 57- or $58,000 of GDP per capita — family of four, $230,000. But nobody should be roadkill in this sort of society —

CHARLIE MUNGER: Well, remember what Bismarck said: There are two things that nobody should have to watch. One is the making of the sausage. And the other is the making of legislation. (Laughter)

WARREN BUFFETT: Yeah. Well, I would say that somebody ought to watch. (Laughter)

Anyway, we’ve hit the magic hour of 3:30. We’ll reconvene at 3:45 to do — have a formal shareholders meeting.

And that may take a while. So, you’re welcome to stay and watch that. Or you’re welcome to shop. And I might even have a small preference of that. But go — do whatever you wish. OK. (Applause)

31. Formal business meeting begins

WARREN BUFFETT: OK. Let’s regroup.

If you’ll all take your seats, we’ll begin the formal meeting. And I’ll work from a script in this.

The meeting will now come to order. I’m Warren Buffett, chairman of the board of the directors of the company. I welcome you to this 2017 annual meeting of shareholders.

This morning, I introduced the Berkshire Hathaway directors that are present. Also with us today are partners in the firm of Deloitte and Touche, our auditors.

Sharon Heck is secretary of Berkshire Hathaway, and she will make a written record of the proceedings.

Becki Amick has been appointed inspector of elections at this meeting, and she will certify to the count of votes cast in the election for directors and the motions to be voted upon at this meeting.

The named proxy holders for this meeting are Walter Scott and Marc Hamburg.

Does the secretary have a report of the number of Berkshire shares outstanding —?

VOICES: (Inaudible)

WARREN BUFFETT: if you don’t mind, keep the lights on a little more so I can read this — outstanding, entitled to vote, and represented at the meeting?

SHARON HECK: Yes. I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 8th, 2017, the record date for this meeting, there were 770,994 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 1,310,304,247 shares of Class B Berkshire Hathaway common stock outstanding, with each share entitled to 1/10,000th of one vote on motions considered at the meeting.

Of that number, 538,915 Class A shares and 734,450,954 Class B shares are represented at this meeting by proxies returned through Friday afternoon, May 5th.

WARREN BUFFETT: Thank you, Sharon. That number represents a quorum and will therefore — we will therefore directly proceed with the meeting.

The first item of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott, who will place a motion before the meeting.

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

WARREN BUFFETT: Do I hear a second?

RON OLSON: I second the motion.

WARREN BUFFETT: The motion has been moved and seconded. We will vote on the motion by voice vote. All those in favor say, “Aye.”

VOICES: Aye.

WARREN BUFFETT: I didn’t hear very many. But opposed? The motion is carried.

32. Election of Berkshire directors

WARREN BUFFETT: The next item of business is to elect directors. If a shareholder is present who did not send in a proxy or who wishes to withdraw a proxy previously sent in, you may vote in person on the election of directors and other matters to be considered at this meeting.

Please identify yourselves to one of the meeting officials in the aisle so that you can receive a ballot.

I recognize Mr. Walter Scott to place a motion before the meeting with respect to election of directors.

WALTER SCOTT: I move that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Thomas Murphy, Ron Olson, Walter Scott, and Meryl Witmer be elected as directors.

WARREN BUFFETT: Is there a second?

RON OLSON: I second the motion.

WARREN BUFFETT: It’s been moved and seconded that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Thomas Murphy, Ronald Olson, Walter Scott, and Meryl Witmer be elected as directors.

Are there any other nominations or any discussion?

The nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark the ballots on the election of directors and deliver their ballot to one of the meeting officials in the aisles.

Miss Amick, when you are ready, you may give your report.

BECKI AMICK: My report is ready. The ballot of the proxy holders in response to proxies that were received through last Friday afternoon cast not less than 601,375 votes for each nominee.

That number exceeds a majority of the number of the total votes of all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

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

33. Advisory vote on Berkshire’s executive compensation

WARREN BUFFETT: The next item on the agenda is an advisory vote on the compensation of Berkshire Hathaway’s executive officers. I recognize Mr. Walter Scott to place a motion before the meeting at this time.

WALTER SCOTT: I move that the shareholders of the company approve, on an advisory basis, the compensation paid to the company’s named executive directors as disclosed pursuant to Item 402 of Regulation S-K, including the compensation discussion and analysis, and the accompanying compensation tables, and the related narrative discussion, in the company’s 2017 annual meeting proxy statement.

WARREN BUFFETT: Is there a second?

RON OLSON: I second the motion.

WARREN BUFFETT: It has been moved and seconded that the shareholders of the company approve, on an advisory basis, the compensation paid to the company’s named executive officers.

Miss Amick, when you are ready you may give your report.

BECKI AMICK: My report is ready. The ballot of the proxy holders in response to proxies that were received through last Friday afternoon cast not less than 608,765 votes to approve, on an advisory basis, the compensation paid to the company’s named executive officers.

That number exceeds a majority of the number of the total votes of all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Miss Amick. The motion to approve, on an advisory basis, the compensation paid to the company’s named executive officers has passed.

34. Advisory vote on frequency of advisory compensation votes

WARREN BUFFETT: The next item on the agenda is an advisory vote on the frequency of a shareholder advisory vote on compensation of Berkshire Hathaway’s executive officers. I recognize Mr. Walter Scott to place a motion before the meeting on this item.

WALTER SCOTT: I move that the shareholders of the company determine, on an advisory basis, the frequency, whether annual, biannual, or triannual, with which they shall have an advisory vote on the compensation paid to the company’s named executives as set forth in the company’s 2017 annual meeting proxy statement.

WARREN BUFFETT: Is there a second?

RON OLSON: Second the motion.

WARREN BUFFETT: It has been moved and seconded that the shareholders of the company determine the frequency with which they shall have an advisory vote on compensation of named executive officers with the option being every one, two, or three years.

Miss Amick, when you are ready, you may give your report.

BECKI AMICK: My report is ready. The ballot of the proxy holders in response to proxies that were received through last Friday afternoon cast 131,268 votes for a frequency of every year, 1,954 votes for a frequency of every two years, and 476,661 votes for a frequency of every three years of an advisory vote on the compensation paid to the company’s named executive officers.

The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Miss Amick. The shareholders of the company have determined, on an advisory basis, that they shall have an advisory vote on the compensation paid to the company’s named executive officers every three years.

35. Shareholder motion to disclose political contributions

WARREN BUFFETT: The next item of business is the motion put forth by Clean Yield Asset Management on behalf of shareholders, Tom Beers and Mary Durfee. The motion is set forth in the proxy statement.

The motion requests that the company provide a report on its political contributions. The directors recommended that the shareholders vote against the proposal.

I will now recognize Eileen Durry (PH) — I hope I’m pronouncing that right — to present the motion.

To allow all interested shareholders present their views, I ask to limit the — I ask to limit her remarks to five minutes.

And the microzone — the microphone at zone 1 is available for those wishing to speak for or against the motion. Zone 1 is the only microphone station in operation.

For the benefit of those present, I ask that each speaker for or against the motion, with the exception of the original proposer, limit themselves to two minutes and confine your remarks solely to the motion.

And do we have, at station 1, the representative of Clean Yield Management? Or, wait. Sorry. Clean Yield Asset Management.

EILEEN DURRY: Good afternoon, Mr. Chairman, board of directors, and my fellow shareholders.

My name is Eileen Durry. And I have been asked to read the following statement by the filers of this proposal, Tom Beers and Mary Durfee.

Our proposal, number four on the proxy ballot, calls on Berkshire Hathaway to fully disclose the extent of its political spending.

Why do we ask for this? Corporate political spending is a controversial activity that must be carefully managed and overseen at the most senior levels of management.

Mismanagement or misjudgment around political contributions can bring reputation damage, political risks, and legal consequences.

In recent years, at the urging of shareholders and other stakeholders, scores of companies have adopted stronger disclosure and better oversight of political contributions.

Best practices in this area include full disclosure of direct and indirect political contributions, descriptions of policies and procedures to ensure full legal compliance, and a commitment to board oversight.

But our company’s policies in this area are so nonexistent or hidden that they have earned it a score of zero for six years running on the leading rating system for corporate political disclosure and accountability, the CPA-Zicklin Index.

In contrast, 56 percent of the S&P make public a detailed policy governing political expenditures from corporate funds. Peers such as GE, Travelers, Unum, CSX, and Norfolk Southern disclose political spending.

In contrast, all we know about Berkshire’s political spending is contained in the two paragraph response to our proposal in this year’s proxy statement, which seeks to reassure us that Berkshire’s political spending is small, relative to its size.

But management’s statement raises more questions than it answers. It says nothing, for example, about whether Berkshire gives to third party, like trade associations and 501(c)(4)s, which are leading sources of dark money contributions that are nearly impossible to trace.

Since 2012, over $670 million in dark money was spent in the U.S. elections with no disclosure of who the underlying donors were.

Fellow shareholders, as you know, our company is a large and complicated enterprise. Berkshire Hathaway ranks number four in the Fortune 500.

At a time when the trend among large companies is to be more open about their political spending and their policies regarding dark money vehicles, it doesn’t behoove or benefit Berkshire Hathaway to be so secretive if it has nothing to hide. If you agree, please vote in favor of proposal number four.

WARREN BUFFETT: Thank you. Are there other people that wish to speak on the motion?

EILEEN DURRY: Not that I know of.

WARREN BUFFETT: OK. Thank you.

And I will tell you that, to my knowledge, in 52 years, Berkshire Hathaway, at the parent company level, has not made a political contribution. I don’t — I, personally, disagree strongly with the Citizens United decision, which was a five-to-four vote.

And I think that having unlimited contributions by wealthy individuals through super PACs and — or wealthy corporations — I do not think it’s a plus at all. And I think it’s a minus in our democracy. And I think that big money does — can often distort the political process.

It’s a reality that any of our subsidiaries in heavily regulated industries are probably going to have to make some political contributions. Their competitors do it.

And I tell our managers, basically, if they — I don’t want them making contributions on their own personal preferences in elections to be made from corporate funds. And I would regard that as a breach of trust with Berkshire.

But I do recognize that if they’re in the railroad industry, or the electric utility industry, or whatever it may be, that there is a necessity, essentially, to make political contributions. And I’m sure they give money to people that I wouldn’t vote for.

But that is a reality of doing business in certain businesses which have a significant political aspect to their activities.

So, I (inaudible) and my heart is with you to some extent, in terms of I wish Citizens United had gone the other way. I don’t like the idea of great sums being spent.

But I do not think we — I think it — personally, I think that it could be disadvantageous to actually list all of the political organizations to which people contribute when competitors don’t. And I think there’s expense involved in all three of the proposals that are coming up on this one.

So I, personally, voted against the proposition. But I do hope, like you, that money plays a lesser part in politics — big money — in the future — and undisclosed money — than it does now. And I don’t think the odds are good that the Supreme Court is going to reverse Citizens United.

So with that, I would say the motion is now ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballot on the motion and deliver their ballot to one of the meeting officials in the aisles.

Miss Amick, when you’re ready, you may give your report.

BECKI AMICK: My report is ready. The ballot of the proxy holders in response to proxies that were received through last Friday afternoon cast 64,449 votes for the motion and 542,399 votes against the motion.

As the number of votes against the motion exceeds a majority of the number of votes of all Class A and Class B shares properly cast on the matter, as well as all votes outstanding, the motion has failed.

The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

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

36. Shareholder motion on methane emissions

WARREN BUFFETT: The next item of business is put forth by Baldwin Brothers Inc. on behalf of shareholder Marcia Sage. The motion is set forth in the proxy statement.

The motion requests that the company provide a report reviewing the company’s policies, actions, plans and reduction targets related to methane emissions from all operations. The directors have recommended that the shareholders vote against the proposal.

I will now recognize Eileen Durry to present the motion. To allow all interested shareholders to present their views, I ask her to limit her remarks to five minutes.

The microphone at zone 1 is available for those wishing to speak for or against the motion. Zone 1 is the only microphone station in operation.

For the benefit of those present, I ask that each speaker for and against — or against the motion — limit themselves to two minutes — although, Miss Durry, that’s five minutes in your case — and to confine your remarks solely to the motion.

EILEEN DURRY: Good afternoon, Mr. Chairman, members of the board, and fellow shareholders.

My name is Eileen Durry. I am here to move Arjuna Capital and Baldwin Brothers’ proposal on behalf of Marcia Sage, a long-term investor in our company.

Proposal five seeks to protect shareholder value by ensuring the transparent disclosure for information regarding methane emissions.

The reason for this proposal are clearly in the interest of protecting long-term shareholder value. Leaked gas has a direct economic impact on our company as it is no longer available for sale, establishing a clear business case for reduction targets and control processes.

In fact, leaked methane represented $30 billion of lost revenue in 2012, equivalent to three percent of gas produced globally.

The National Resources Defense Council estimates that capturing currently wasted gas for sale could reduce methane pollution by roughly 80 percent.

And while the climate benefit of replacing coal with natural gas has been widely publicized, that benefit is negated when leakage rates exceed 2.7 percent, as methane carries 84 times the global warming impact of CO2 over a 20-year period.

Recent academic studies are particularly troubling as they have identified methane leakage far north of current EPA estimates. Additionally, gas storage presents outsized risks.

The 2015 failure of a gas injection well at Southern California Gas Company’s Aliso Canyon storage field in Los Angeles revealed major vulnerabilities in the maintenance and safety of natural gas storage facilities. The incident exposed both a lack of oversight and contingency planning in the face of a well blowout.

Berkshire Hathaway has storage facilities that face similar risks as it is estimated to hold the 11th highest volume in natural gas in the country.

There are over 400 gas storage facilities around the country, many of which were drilled decades ago. Numerous independent researchers have concluded that if natural gas is to lead to a more sustainable energy future, then missing emissions must be addressed.

Ongoing concerns have spurred public debate and led to regulatory action at the state and federal level. A strong program of target-setting measurement, mitigation, and disclosure would indicate a reduction in regulatory risk as well as efficient operations maximizing gas for sale and shareholder value.

Given this, we believe our company has a tremendous opportunity to move forward by providing shareholders with this important information.

ISS, the leading provider of proxy voting advice, agrees and has a recommended a vote in favor, noting such disclosures would allow shareholders to better understand the company’s management of its methane emissions and any related risks. Thank you for your consideration.

WARREN BUFFETT: Are there other people who wish to speak on this motion?

EILEEN DURRY: I don’t believe so.

WARREN BUFFETT: OK. The motion is now ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballot on the motion and deliver their ballot to one of the meeting officials in the aisles. Miss Amick, when you’re ready, you may give your report.

BECKI AMICK: My report is ready. The ballot of the proxy holders in response to proxies that were received through last Friday afternoon cast 57,600 votes for the motion and 542,870 votes against the motion.

As the number of votes against the motion exceeds a majority of the number of votes of all Class A and Class B shares properly cast on the matter, as well as all votes outstanding, the motion has failed.

The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Greg, incidentally — is there a live microphone? You’re — yeah, there we — you might talk a little bit about the methane situation.

GREGORY ABEL: Sure, Warren. So thank you for your comments.

And when you think about methane emissions, it is a serious issue, relative to carbon. It was highlighted 84 times worse than a carbon emission. But I’d be very pleased to report on our situation at Berkshire Hathaway.

So, three different issues were raised in the comment. One was overall emissions from oil and gas production. So, the first thing I would just highlight is that we do not own any oil and gas producing assets. So we don’t have any wells and, effectively, don’t have that risk.

The second thing that was highlighted was the significant loss of gas at Aliso Canyon. It was a injection well that failed. Took many months to fix the well.

And if you fundamentally look at the problem there — and we do own other storage facilities, but we do not use their technology or that type of well. All of our wells are cased to the top which creates a very different risk and, literally, can be mitigated within hours.

And, then, the third issue which was raised was leakage rates. And it was highlighted, at least in a second response to the proposal, that the leading companies in the industry have a leakage rate of one percent, or they’ve put together programs to achieve a leakage rate of one percent.

And I’m happy to report, when we look at our leakage rate from our pipelines, we’re at 0.53 of one percent. So, basically, half of the leading companies in the industry. So that, obviously, support the recommendation of the shareholders. Thank you.

WARREN BUFFETT: Thanks, Greg. You’ve heard the vote. And the proposal fails.

37. Shareholder motion to divest fossil fuel holdings

WARREN BUFFETT: The next item of business is a motion put forth by a shareholder, the Nebraska Peace Foundation. The motion is set forth in the proxy statement. The motion requests that the company divest of its holdings in companies involved in the extracting, processing, or burning of fossil fuels.

The directors have recommended the shareholders vote against the proposal.

I will now recognize Mark Vasina to present the motion. And, again, to allow all interested shareholders to present their views, I asked him to limit his remarks to five minutes.

And the microzone at zone 1 is available for those wishing to speak for or against the motion. Zone 1 is the only microphone station in operation.

And for the benefit of those present, subsequent speakers should — I ask that they limit themselves to two minutes and confine your remarks solely to the motion. With that, if you’ll proceed.

MARK VASINA: Thank you. My name’s Mark Vasina. I represent the Nebraska Peace Foundation. We’re here to present our proposal asking Berkshire Hathaway to divest of its carbon-based assets over a period of 12 years, a period of time we believe is a very modest proposal indeed.

Last year, we were here with a proposal that Berkshire Hathaway evaluate and report on the impact of climate change on their insurance companies.

After our — after the meeting, we were approached by a number of shareholders who suggested we were pulling our punches. And they suggested the real question is divestiture. So we thought about it. We came back to ask for divestiture of the carbon-based assets.

We recognize that for a public company that’s involved in investing in other companies, divestiture represents different kinds of challenges from those of university endowments, pension plans, public foundations, such as the Bill and Melinda Gates Foundation — organizations which have divested or have implemented divestiture plans.

However, we believe that the necessity for divestiture involves more than just a social, ethical, or even moral question, but also involves financial risk.

As the Bank of England, in their recommendation to the insurance companies that they regulated, that they investigate and report on the climate change risk to these companies, they pointed out that financial risk of holding these carbon-based assets was real — unpredictable.

Things like regulatory risk, political risk, technology changes, investment — investor sentiment changes — these things pose risks towards the financial value of assets in this type of investment.

So we are proposing, as I said, divestiture of all carbon-based assets over 12 years.

I’m going to be followed by three prominent American climate scientists, Frank LaMere of the Winnebago tribe of Nebraska, and Richard Miller, Creighton University theologian. Thank you for giving us the opportunity to make our case for this proposal.

WARREN BUFFETT: Thank you. And we’ll proceed to the next speaker, please.

MICHAEL MANN: Chairman Buffett, board members and shareholders, my name is Michael Mann. I’m a professor at Penn State University and a climate scientist.

And as a scientist who spends much of my time communicating the reality and threat of climate change, it’s an honor to have this opportunity to speak to you today.

Warren Buffett, known as the Wizard of Omaha, is an inspiration to many, a symbol of the value of work ethic, self-made success, and the great reward that comes with foresight.

Now, foresight means recognizing both opportunity and risk. And when it comes to risk, there is no better example than climate change. I recently co-authored an article in the journal, “Scientific Reports,” for example, demonstrating that climate change played a key role in the onslaught of unprecedented, devastating droughts, floods, and heat waves in recent years.

And the impacts we’re seeing now are just the veritable tip of the iceberg. Carbon emissions must be brought down dramatically within the next few years if we are to avert the worst impacts of climate change.

Mr. Buffett coined the term “Noah’s Law” in his 2015 shareholder letter to describe the risk posed by climate change, stating, “If there is only a one percent chance the planet is heading toward a truly major disaster and delay means passing a point of no return, inaction now is foolhardy.”

Well, I couldn’t agree more. And the science tells us that we are heading toward disaster in the absence of substantial reductions in greenhouse gas emissions.

Board member Bill Gates demonstrated bold leadership a year ago when the Bill and Melinda Gates Foundation announced it was divesting of fossil fuel holdings.

Were Mr. Buffett to follow suit, it would send a profound message to the rest of the global business community, a message that we can both mitigate risk and seize opportunity in the form of massive growth in clean energy technology by tackling this problem now head-on before it’s too late. Thank you.

WARREN BUFFETT: Thank you. And I believe there’s another speaker or maybe two. If you’ll identify yourself, please.

RICHARD SOMERVILLE: My name is Richard Somerville. I’m a climate scientist and a professor at the University of California San Diego.

Chairman Buffett, board and shareholders, the world is warming. It is due to human activities. It is getting worse. The observational evidence is overwhelming.

All the warmest years, globally, are recent years. We see the weather changing. We see more severe floods and droughts. Sea level rise is accelerating. Ice sheets and glaciers are shrinking worldwide.

Climate change will become more and more serious unless emissions of heat-trapping gases and particles are quickly and drastically reduced.

The biggest unknown about future climate is human behavior. Everything depends on what humanity does now. We have our hands on the thermostat that controls the climate of our children and grandchildren.

In 2015, the nations of the world agreed in Paris on how much warming can safely be allowed. The Paris target was informed by science. And the science shows that to meet the target, emissions need to be reduced drastically and quickly.

We cannot just muddle through. Dithering and procrastinating lead to catastrophe. Alleviating the disruption of climate change is cheap compared to coping with the damage that unmitigated climate change will cause.

Want an example? Doing nothing about climate change means that sea level will become so high that coastal cities must eventually be abandoned.

We caused this problem. We can solve it. And polls show that most Americans want strong actions to limit climate change.

The forces driving clean energy are powerful. The market is turning against fossil fuels. The prices of solar and wind energy are dropping. They can already compete without subsidies. Vehicle electrification is happening fast.

Clean energy provides jobs and economic growth. Progress and prosperity do not require emitting heat-trapping gasses.

Berkshire Hathaway and Warren Buffett are rightly admired and respected worldwide. Helping the world confront climate change should be an important part of their legacy. We owe it to our children and grandchildren. Thank you.

WARREN BUFFETT: Thank you. I believe there’s one more speaker. (Applause)

DAVID TITLEY: Thank you, sir. I am David Titley, retired rear admiral, former oceanographer of the Navy and now a professor of practice at Penn State.

I’ve been a shareholder of Berkshire Hathaway since December of 2000. Thank you, sir, for your leadership of this enterprise.

When I was stationed at the Pentagon, I had the privilege of working directly for the Pentagon’s foremost strategic planner, Mr. Andrew Marshall.

He taught me how to think about risk, and especially risks that may seem distant or low probability, but one with very high impact, such as weapons of mass destruction. Climate change is a fat tail, emerging risk.

It’s really a risk to people, to us. And when this risk is not managed, we have a security problem.

One example would be Syria. Climate is one of the links in a long chain of events that led to the tragic outcome. Non-climate events, such as over a million refugees pouring into Syrian cities from the Iraq War, stress Syrian governance.

Then, about a decade ago, an exceptionally intense drought and heat spell, linked with high confidence to a changing climate, devastated Syrian agriculture. Now, you have millions of desperate people with nothing and a breeding ground for extremists.

Syria is an example of why, in the security community, we say that climate change accelerates the risks of instability. It can make bad places worse, a lot worse.

Senior military officers know you must address risks and take precautions while you can, before it’s too late. The U.S. Defense Department understands the risks of climate change. And it’s been working quietly to adapt to the changing climate for years.

Winston Churchill is alleged to have said, “Americans can always be counted upon to do the right thing after exhausting every other possibility.” But we will prevail. And you, sir, can help.

Here’s my ask. What are government and business leaders doing to stabilize the climate? We should reduce rather than accept the risks of unchecked climate change because the ice doesn’t care which party controls the White House or the Congress. It just melts. Thank you. (Applause)

FRANK LAMERE: I am Frank LaMere, of the Bear Clan of the Winnebago Tribe of Nebraska.

It was the indigenous people of this continent who first consecrated the ground on which we live and grow, who offered up prayers and petitions asking that we be allowed to live and to provide a way for the generations to come.

In exchange for the blessings given by the creator, our forbearers agreed to be good stewards of the land. The stewardship of our Mother Earth, who provides for us, has now changed. But the covenant remains the same. Let there be no mistake about that.

If we continue to disrespect our earth mother, those things given us, bountiful harvest, protection from the elements and good, clean water will surely be taken from us. Our elders speak of this. It has been foretold.

On Christmas Eve, my son came from Standing Rock to visit us for one hour. His mother and I worried about him. “How is it there? Why did you go?” I asked. He said, “It is dangerous, dad. But someone has to protect our water.”

I nodded and said, “Ahoo! That is good.” He is a water protector. I stand on his shoulders. Mni wiconi. The protectors proclaim water is life.

Bearing that in mind, I am told that this waterway flowing south from Standing Rock and passing just a short walk from here would be fouled by any kind of breach in the Dakota Access Pipeline.

My sense and my years tells me that this will happen. Millions would be poisoned.

I’m further told that this collective body holds a 15 percent interest in the — an oil company that is a 25 percent shareholder in the Dakota Access Pipeline.

I would ask that you walk away from that investment, stand with Mother Earth today.

I’m a Winnebago Indian. The Missouri River brought us here when we had no place to go.

We stand with our Mother Earth now as she stood with us. Think about that. Mni wiconi. Water is life. Pinagigi. Thank you.

WARREN BUFFETT: Thank you. (Applause)

RICHARD MILLER: Dear Chairman Buffett, board members and shareholders.

I am Richard Miller. I am an associate professor of philosophical theology and sustainability studies at Creighton University. I write and teach on ethical issues raised by the climate crisis.

As a rationale for voting no on the divestment resolution, the board maintained that Berkshire should not limit its universe of potential investments based upon complex social and moral issues, and that following state and federal laws was sufficient to meet your obligations.

There is not only an overwhelming consensus in the scientific community about the reality and dangers of climate change, but there is also an overwhelming consensus among all major ethical theories that is one not morally justified to use increased profit as a rationale for doing harm to others.

By continuing to invest in, and thus promote, the extracting, processing, and burning of fossil fuels, Berkshire is doing harm to people around the world and creating conditions that will threaten future generations.

While one is not morally justified to use increased profits as a rationale for doing harm to others, one cannot also opt out of ethical considerations by appealing to moral complexity. When you’re doing harm to others, especially at that — this scale, there is no neutral space.

Nor can you simply appeal to the fact that Berkshire is following state and federal laws when those laws are, themselves, unethical in that they allow the United States to violate the human rights of people around the world and set in motion catastrophic future for young people.

The consensus among ethical theories will, in due time, become self-evident to the average person, analogous to the way slavery, as an evil, is self-evident today.

Indeed, the recognition of the immorality of investing in fossil fuels is rapidly gaining ground as more and more institutions divest their fossil fuel holdings.

Mr. Buffett, you’re standing on an ethical house of cards. It is only a matter of time before it comes tumbling down.

Like the thousands gathered here and the millions on live stream, I admire your considerable achievements. But I am afraid that if you do not change course very soon, history will not judge you kindly. Thank you for your time.

WARREN BUFFETT: OK. Thank you. (Applause)

The motion is now ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the motion and deliver their ballots to one of the meeting officials in the aisles.

Miss Amick, when you’re ready, you may give your report.

BECKI AMICK: My report is ready. The ballot of the proxy holders in response to proxies that were received through last Friday afternoon cast 7,784 votes for the motion and 594,044 votes against the motion.

As the number of votes against the motion exceeds a majority of the number of votes of all Class A and Class B shares properly cast on the matter, as well as all votes outstanding, the motion has failed.

The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Miss Amick. The proposal fails. And Mr. Scott, do you have a motion?

WALTER SCOTT: I move the meeting be adjourned.

WARREN BUFFETT: Is there a second?

RON OLSON: I second the motion.

WARREN BUFFETT: The motion to adjourn has now been made and seconded. We will vote by voice. Any discussion, if not, all in favor say, “Aye.”

VOICES: Aye.