• 1998年股东大会
  • 上午场
    • 1. 欢迎致辞
    • 2. 介绍董事会成员
    • 3. 会议记录与流通股数
    • 4. 董事选举
    • 5. 正式商务会议休会
    • 6. 问答环节开始
    • 7. 市盈率解释
    • 8. 没有”难度系数加分”
    • 9. 有效市场假说”污染”了商学院
    • 10. “时间是糟糕生意的敌人”
    • 11. 芒格想要”我们能理解的好主意”
    • 12. 伯克希尔内部”拥有许多不同的才能”
    • 13. 卖出股票的少数理由之一
    • 14. 自己做出判断
    • 15. 巴菲特调侃内布拉斯加橄榄球队的汤姆·奥斯本
    • 16. 自豪地没有战略规划
    • 17. 应对”千年虫”问题”状况良好”
    • 18. 需要立法来遏制竞选开支的”军备竞赛”
    • 19. “生活的秘诀是弱竞争”
• 1998年年度股东大会
  • 第二部/共六部
    • 23. “什么是重要的，什么是可知的？”
    • 24. 对价值线“完美快照”的赞扬
    • 25. 保险业并购未损害GEICO
    • 26. “优秀公司”应该回购股票
    • 27. 伯克希尔保险浮存金成本为负
    • 28. 不担心日本可能“抛售”美国债券
    • 29. 对部分社保资金投入股市的温和支持
    • 30. 商学院对资本成本的说法“前后矛盾”
    • 31. 我们更喜欢个人股东
    • 32. “地震不知道你收到了多少保费”
    • 33. 巴菲特希望年报呈现什么
    • 34. 芒格单独应对可口可乐 vs 百事可乐
    • 35. 忽略可口可乐的资产处置收益
    • 36. 股票期权与虚增的盈利
    • 37. 本杰明·格雷厄姆以及巴菲特会如何教授投资
    • 38. 芒格：Wesco是一个“历史意外”
    • 39. 买伯克希尔还是买它持有的股票？
    • 40. 股东获得估值伯克希尔所需的信息
    • 41. 推动牛市的三个因素
• 1998年年度股东大会
  • 第3/6部分
    • 42. 巴菲特和芒格在”偷懒”方面不相上下
    • 42. Buffett and Munger about equal at “goofing off”
    • 43. 为沃尔特·迪士尼-大都会/ABC的会计处理辩护
    • 43. Defending Walt Disney-Capital Cities accounting
    • 44. 巴菲特希望会计改革
    • 44. Buffett wants accounting change
    • 45. 我永远不会足够了解科技股
    • 45. I’ll never know enough to buy tech stocks
    • 46. 我们在股票回购上”错过了机会”
    • 46. We’ve “missed the boat” on share buybacks
    • 47. “微笑列车”
    • 47. “Smile train”
    • 48. 巴菲特为什么买入白银
    • 48. Why Buffett bought silver
    • 49. 我只对学生讲话
    • 49. I only talk to students
    • 50. 如果被迫选择，我们会保留经营性业务
    • 50. If forced to choose, we’d keep the operating businesses
    • 51. 即使我们前25名高管全部倒下，我们也没问题
    • 51. We’d be fine even if our top 25 execs all dropped dead
    • 52. “诚实只能帮你到这里”
    • 52. “Honesty will only do so much for you”
    • 53. 内在价值：“说易行难”
    • 53. Intrinsic value: “Easy to say and impossible to figure”
    • 54. “多元模型是游戏的关键”——芒格
    • 54. “Multiple models is the game” for Munger
    • 55. 巴菲特：税收不困扰我
    • 55. Buffett: Taxes don’t bother me
    • 56. 寻找热爱事业胜过金钱的所有者
    • 56. Looking for owners who love their business more than money
  • 下午场
    • 1. 什么时候是买房的好时机？
    • 6. 制药股：“我们愚蠢地错过了这个机会”
    • 6. Pharmaceutical stocks: “We stupidly blew that one”
    • 7. 分权“几乎接近完全放弃”
    • 7. Decentralization “just short of total abdication”
    • 8. 避免“冻结公司”
    • 8. Avoid the “Frozen Corporation”
    • 9. 选股检查清单
    • 9. Checklist for selecting stocks
    • 10. 轻松决策案例：国家收银机公司
    • 10. Easy decision case study: National Cash Register
    • 11. “诺曼·洛克威尔式的心态”
    • 11. “Norman Rockwell frame of mind”
    • 12. A股和B股几乎是等同的投资选择
    • 12. A and B shares are nearly equivalent investment choices
    • 13. 青少年如何为未来做准备
    • 13. How teenagers can prepare for the future
    • 14. “我们并不排斥海外投资”
    • 14. “We are not reluctant to invest abroad”
    • 15. 慈善捐赠的股票出售不会损害股价
    • 15. Philanthropy share sales won’t hurt stock price
    • 16. 巴菲特最喜欢的关于其哲学的书
    • 16. Buffett’s favorite book on his philosophy
    • 17. 60年代出售迪士尼是一个“巨大的错误”
    • 17. Disney sale in the ’60s was a “huge mistake”
    • 18. 菲尔·卡雷是巴菲特的英雄之一
    • 18. Phil Carret is one of Buffett’s heroes
    • 19. 冷战结束不是一个投资因素
    • 19. End of Cold War isn’t an investing factor
    • 20. 子公司经理从不被事后批评
    • 20. Subsidiary managers are never second-guessed
    • 26. 伯克希尔的股价“比大多数公司更好地”追踪内在价值
    • 26. Berkshire stock tracks intrinsic value “better than most”
    • 27. KKR出售吉列股份“对我们毫无意义”
    • 27. KKR sale of Gillette shares “means nothing to us”
    • 28. 不拆分意味着“更优质的股东群体”
    • 28. No split means “better class of shareholders”
    • 29. “账面价值不是我们考虑的因素”
    • 29. “Book value is not a factor we consider”
    • 30. 航空业不够“吸引人”以至于没买股票
    • 30. Airlines not “intriguing” enough to buy stock
    • 31. 除非利润增长，否则日本股票“回报不佳”
    • 31. No “good returns” on Japanese stocks unless profits increase
    • 32. “我们只对价格和价值感兴趣”
    • 32. “We’re only interested in price and value”
    • 33. 警惕那些必须“疯狂花钱”的公司
    • 33. Beware of companies that must “spend money like crazy”
    • 34. 伯克希尔已经为逆境做好准备
    • 34. Berkshire is prepared for adversity
    • 35. “我们永远不会就伯克希尔的股票给出建议”
    • 35. “We’re never going to give out advice on Berkshire stock”
    • 36. 乔治·伯恩斯：在不健康习惯中幸存下来的榜样
    • 36. George Burns: role model for surviving unhealthy habits
    • 37. “我们可以无限期等待”
    • 37. “We wait indefinitely”
    • 38. 房地产方面“有证可查的失败记录”
    • 38. “Certified record of failure” in real estate
    • 39. 耐克：“我们保留所有那些观点”
    • 39. Nike: “We keep all of those views to ourselves”
    • 40. 巴菲特预计不会出现食品脂肪诉讼
    • 40. Buffett doesn’t expect litigation over fats in food
    • 41. 强劲的经济功劳可以归于很多人
    • 41. Lots of credit to go around for strong economy
    • 42. 菲利普·费雪的“闲聊”法如何改变了巴菲特的人生
    • 42. How Phil Fisher’s “scuttlebutt” method changed Buffett’s life
    • 46. 物超所值
    • 46. “Get more quality than you’re paying for”
    • 47. 对分拆子公司毫无兴趣
    • 47. No interest in spinning off subsidiaries
    • 48. 股东助力内布拉斯加家具城和波仙珠宝的销售
    • 48. Shareholders boost sales at Nebraska Furniture Mart and Borsheims
    • 49. 对汽车行业没有特殊见解
    • 49. No special insights into automobile industry
    • 50. 互联网销售可能助力波仙珠宝和GEICO
    • 50. Selling on internet could help Borsheims and GEICO
    • 51. 麦当劳 vs 冰雪皇后
    • 51. McDonald’s vs. Dairy Queen
    • 52. 与伯恩家族一起赚钱
    • 52. Making money with the Byrne family
    • 53. 改进公共教育
    • 53. Fixing public education
    • 54. “事实是，你可以拥有你想要的声誉”
    • 54. “The truth is you can have the reputation that you want”
    • 55. 不预期Y2K问题会带来投资影响
    • 55. No expectations of investment problems due to Y2K
    • 56. 麦当劳将保留其房地产
    • 56. McDonald’s will keep its real estate
    • 57. 伯克希尔在持有证券方面结构”糟糕”
    • 57. Berkshire is “poorly” structured for owning securities
    • 58. 尽职调查无用且抓不住重点
    • 58. Due diligence is useless and misses the point

WARREN BUFFETT: Morning. Morning. I’m Warren Buffett, chairman of Berkshire, and — this is my partner. This hyperactive fellow over here is Charlie Munger. (Laughter) And we’ll do this as we’ve done in the past, following the Saddam Hussein school of management, we’re going to go through the business meeting in a hurry, and then we’re going to do questions. And we’ll do those until 3:30, with a break at noon, when we’ll take off for 30 minutes or so while you can grab lunch. And those of you — there’s — we’re operating in an overflow room as well — so those of you who are in the overflow room now can join the main floor after the noon break, because we’ll have plenty of room then. We’ll go until 3:30. We’ll try to get to all the questions we can. We’ve got 11 zones, ten of them in this room, and we’ll just make our way around them.

I’ve got a little map here, which I’ll get oriented on here in a second. And let’s see. And I think we’ll get through the business meeting now. Incidentally, I don’t see that movie before it’s shown, but that was one of our directors singing at that final session there. (Applause) We keep costs down at Berkshire. (Laughter)

WARREN BUFFETT: OK, the meeting will now come to order. I’m Warren Buffett, chairman of the board of directors of the company and I welcome you to this 1998 annual meeting of shareholders. I will first introduce the Berkshire Hathaway directors that are present in addition to myself. So we have — and I can’t see very well with the lights here, but if you’ll stand as I name you. Susan T. Buffett, the vocalist. (Applause) Howard G. Buffett, the non-vocalist. (Applause) Malcolm G. Chace. (Applause) Charlie, you’ve met. And Ron Olson. (Applause) And Walter Scott Junior. (Applause) Also with us today are partners in the firm of Deloitte and Touche, our auditors. They are available to respond to appropriate questions you might have concerning their firm’s audit of the accounts of Berkshire. Mr. Forrest Krutter is secretary of Berkshire. He will make a written record of the proceedings. Miss Becki Amick has been appointed inspect of elections at this meeting.

She will certify to the count of votes cast in the election for directors. The named proxy owners for this meeting are Walter Scott Junior and Marc D. Hamburg. Proxy cards have been returned through last Friday, representing 1,039,276 Class A Berkshire shares, and 1,080,509 Class B Berkshire shares to be voted by the proxy holders as indicated on the cards. The number of shares represents a quorum and we will therefore directly proceed with the meeting. We will conduct the business of the meeting and then adjourn the formal meeting. After that, we will entertain questions that you might have.

WARREN BUFFETT: First order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott Jr., who will place a motion before the meeting. WALTER SCOTT JR.: I move the minutes — the reading — reading of the minutes of the last stockholders meeting be dispensed with.

WARREN BUFFETT: Do I hear a second? (Voices) A lot of seconds. The motion has been moved and seconded. Are there any comments or questions? We will vote on this motion by voice vote. All those in favor say aye.

VOICES: Aye.

WARREN BUFFETT: Opposed? Motion’s carried. Does the secretary — (laughter) — have a report of the number of Berkshire shares outstanding, entitled to vote, and represented at the meeting?

FORREST KRUTTER: Yes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent by first-class mail to all shareholders of record on March 6, 1998, the record date for this meeting, there were 1,199,680 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at this meeting. And 1,245,081 shares of Class B Berkshire Hathaway common stock outstanding, with each share entitled to 1/200th of one vote on motions considered at the meeting. Of that number, 1,039,276 Class A shares and 1,080,509 Class B shares are represented at this meeting by proxies returned through last Friday.

WARREN BUFFETT: Thank you, Forrest. If a shareholder is present who wishes to withdraw a proxy previously sent in and vote in person on the election of directors, he or she may do so. Also, if any shareholder that is present has not turned in a proxy and desires a ballot in order to vote in person, you may do so. If you wish to do this, please identify yourself to meeting officials in the aisles who will furnish a ballot to you. Those persons desiring ballots, please identify themselves so that we may distribute them.

WARREN BUFFETT: The one item of business at this meeting is to elect directors. I now recognize Mr. Walter Scott Junior to place a motion before the meeting with respect to election of directors.

WALTER SCOTT JUNIOR: I move that Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chace, Charles T. Munger, Ronald L. Olson, and Walter Scott Junior, be elected as directors.

WARREN BUFFETT: Is there a second? It’s been moved and seconded that Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chace, Charles T. Munger, Ronald L. Olson, and Walter Scott Junior be elected as directors. Are there any other nominations? Is there any discussion? Nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the election of directors and allow the ballots to be delivered to the inspector of elections. Would the proxy holders please also submit to the inspector of elections a ballot on the election of directors, voting the proxies in accordance with the instructions they have received. Miss Amick, when you are ready you may give your report.

BECKI AMICK: My report is ready. The ballots of the proxy holder, in response to proxies that were received through last Friday, cast not less than 1,039,298 votes for each nominee. That number far exceeds the majority of the number of the total votes related to all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes, including the additional votes to be cast by the proxy holders in response to proxies delivered at this meeting, as well as those cast in person at this meeting, if any, will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Miss Amick. Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chace, Charles T. Munger, Ronald L. Olson, and Walter Scott Junior have been elected as directors. After adjournment of the business meeting, I will respond to questions that you may have that relate to the businesses of Berkshire that do not call for any action at this meeting. Does anyone have any further business to come before this meeting before we adjourn?

WARREN BUFFETT: If not, I recognize Mr. Walter Scott Junior to place a motion before the meeting.

WALTER SCOTT JUNIOR: I move this meeting be adjourned.

WARREN BUFFETT: Second? (Laughter) Motion to adjourn has been made and seconded. We will vote by voice. Is there any discussion? If not, all in favor say aye?

VOICES: Aye.

WARREN BUFFETT: All opposed say I’m leaving. This meeting is adjourned. (Laughter and applause) Charlie and I may not get paid much, but we work fast on an hourly basis. (Laughter)

WARREN BUFFETT: Now, we’re going to do this by zones, and I think you can see who is manning each — yeah, I see we’ve got a number out there already. And please ask just one question. The only thing that I can think of that we won’t discuss is what we’re buying or selling or may be buying or selling, but we’ll be glad to talk about anything that’s on your mind. So let’s go right to zone 1 and start in.

AUDIENCE MEMBER: Thanks for the beautiful — beautiful weekend in Omaha. I’m Mike Asale (PH) from New York City, with a question for Warren and Charlie about what makes a company’s price-earnings ratio move up relative to other companies in its industry. How can we, as investors, find companies, and even industries, that will grow their relative price-earnings ratios as well as their earnings? And thank you for the wonderful weekend and for sharing your brilliance with the shareholders.

WARREN BUFFETT: Oh, thank you.

AUDIENCE MEMBER: Thank you. (Applause)

WARREN BUFFETT: You know, it’s very simple, the price-earnings ratio — relative price-earnings ratios — move up because people expect either the industry or the company’s prospects to be better relative to all other securities than they have been — than their proceeding view. And that can turn out to be justified or otherwise. Absolute price-earnings ratios move up in respect to the earning power — or the prospective earning power of — that is viewed by the investing public of future returns on equity, and also in response to changes in interest rates. And in the recent — well really, ever since 1982, but accentuated in recent years, you’ve had decreasing interest rates pushing up stocks, in aggregate. And you’ve had an increase in corporate profits. Return on equity of American businesses improved dramatically recently. And that also — and people are starting to believe it, so that has pushed up absolute price-earnings ratios. And then within that universe of all stocks, when people get more enthusiastic about a specific business or a specific industry, they will push up the relative P/E ratio for that stock or industry. Charlie, you got anything?

CHARLIE MUNGER: Yes, I think he also asked, how do you forecast these improvements in priceearnings ratios.

WARREN BUFFETT: That’s your — that’s your part of the question. (Laughter)

CHARLIE MUNGER: Around here I would say that if our predictions have been a little better than other people’s, it’s because we tried to make fewer of them. (Laughter and applause)

WARREN BUFFETT: We also try not to do anything difficult, which ties in with that. We really do feel that you get paid just as well — you know, this is not like Olympic diving. In Olympic diving, you know, they have a degree of difficulty factor. And if you can do some very difficult dive, the payoff is greater if you do it well than if you do some very simple dive. That’s not true in investments. You get paid just as well for the most simple dive, as long as you execute it all right. And there’s no reason to try those three-and-a-halfs when you get paid just as well for just diving off the side of the pool and going in cleanly. (Laughter) So we look for one-foot bars to step over rather than seven-foot or eight-foot bars to try and set some Olympic record by jumping over. And it’s very nice, because you get paid just as well for the one-foot bars.

AUDIENCE MEMBER: Good morning. My name is Joe Lacey (PH). I’m from Austin, Texas. In this era when the financial departments of the institutions of higher learning are referring to you as an anomaly, and they preach the efficient markets hypothesis, saying that you can’t outperform the market, where does one go to find a mentor like you found in Ben Graham? Someone you can ask questions to regarding value investing.

WARREN BUFFETT: My understanding is that the University of Florida has instituted a couple of courses that, actually, Mason Hawkins gave them a significant amount of money to finance. And I believe they’re teaching something other than efficient markets there. There’s a very good course at Columbia I know that gets a lot of visiting teachers to come in. I go there and teach occasionally, but a number of practitioners do. So there — I think the efficient market theory is less holy writ now than it was 15 or 20 years ago in universities, but it’s — there’s a lot of it taught, but I think you can find more diversity in what is being offered now than ten or 20 years ago. And I’d recommend, you know, looking into those two schools. You know, it’s really quite useful. If you had a merchant shipping business, if all of your competitors believe the world is flat, you know, that is a huge edge, because they will not take on any cargo to go to places that are beyond where they think they will fall off. And so we should be encouraging the teaching of efficient market theories in universities. (Laughter) It amazes me.

But, you know, I think one time that — was it Keynes that said that most economists are most economical about ideas? That they make the ones they learned in graduate school last a lifetime. (Laughter) And what happens is that you spend years getting your Ph.D. in finance and you learn theories with a lot of mathematics in them that the average layman can’t do. And you become sort of a high priest. And you get an enormous amount of yourself and ego, and even professional security, invested in those ideas. And it gets very hard to back off after a given point. And I think that to some extent has contaminated the teaching of investing in the universities. Charlie?

CHARLIE MUNGER: Well, I would argue that the contamination was massive. (Laughter) But it’s waning.

WARREN BUFFETT: Yeah, it is waning.

CHARLIE MUNGER: It’s waning. The good ideas eventually triumph.

WARREN BUFFETT: Yeah. The word “anomaly” I’ve always found interesting on that, because, you know, after a while — I mean Columbus was an anomaly, I suppose, for a while. But what it means is something that the academicians could not explain, and rather than re-examine their theories, they simply discarded any evidence of that sort as anomalous. And I think when you find information that contradicts previously cherished beliefs, that you’ve got a special obligation to look at it and look at it quickly. I think Charlie told me that one of the things Darwin did was that whenever he found anything that contradicted some previous belief, he knew that he had to write it down almost immediately because he felt that the human mind was conditioned, so conditioned to reject contradictory evidence, that unless he got it down in black and white very quickly his mind would simply push it out of existence. Charlie knows more about Darwin than I do. Maybe he can explain that.

CHARLIE MUNGER: Well, I don’t know about Darwin, but I did find it amusing. One of these extreme efficient market theorists explained Warren for many, many years as an anomaly of luck. And he got the six sigmas, six standard deviations of luck. And then people started laughing at him because six sigmas of luck is a lot. So he changed his theory. Now Warren has six or seven sigmas of skill. (Laughter)

WARREN BUFFETT: No.

CHARLIE MUNGER: So you see —

WARREN BUFFETT: I’d rather have the six sigmas of luck, actually. (Laughter)

CHARLIE MUNGER: The one thing he couldn’t bear to leave was his six sigmas. (Laughter)

AUDIENCE MEMBER: My name is Warren Hayes (PH). I’m from Chicago, Illinois. I understand from various publications, like Outstanding Investor Digest, that many of the best value investors are buying high-quality, multi-national Japanese companies that are trading below net-net working capital value. Do you agree that these values exist in Japan? And would you consider a purchase of some of them?

WARREN BUFFETT: Well, Henry Emerson, who publishes the Outstanding Investor’s Digest is here, so I will give a tout on it. I read the Outstanding Investor’s Digest, OID, and it’s a very good publication. And I have read some of the commentary about Japanese securities. We’ve looked at securities in all major markets, and we certainly looked at them in Japan, particularly in recent years when the Nikkei has so underperformed the S&P here. We’re quite a bit less enthused about those stocks as being any kind of obvious bargains than the people that you read about in OID. The returns on equity in most areas of Japanese business, returns on equity are very low. And it’s extremely difficult to get rich by owning — by being the owner of a business that earns a low return on equity. You know, we always look at what a business does in terms of what it earns on capital. We want to be in good businesses. Where you really want to be is in businesses that are going to be good businesses and better businesses ten years from now. And we want to buy them at a reasonable price.

But many years ago we gave up what I’ve labeled the “cigar butt” approach to investing, which is where you try and find a really kind of pathetic company, but it sells so cheap that you think there’s one good free puff left in it. And — (laughter) — we used to pick up a lot of soggy cigar butts, you know. I mean, I had a portfolio full of them. And there were free puffs in them. I mean, I made money out of that. But A, it doesn’t work with big money anyway, and B, we don’t find many cigar butts around that we would be attracted to. But those are the companies that had low returns on equity. And if you have a business that’s earning 5 or 6 percent on equity and you hold it for a long time, you are not going to do well in investing. Even if you buy it cheap to start with. Time is the enemy of the poor business, and it’s the friend of the great business.

I mean if you have a business that’s earning 20 or 25 percent on equity, and it does that for a long time, time is your friend. But time is your enemy if you have your money in a low-return business. And you may be lucky enough to pick the exact moment when it gets taken over by someone else. But we like to think when we buy a stock we’re going to own it for a very long time, and therefore we have to stay away from businesses that have low returns on equity. Charlie?

CHARLIE MUNGER: Yeah, it’s not that much fun to buy a business where you really hope this sucker liquidates before it goes broke. (Laughter)

WARREN BUFFETT: We’ve been in a few of those, too.

CHARLIE MUNGER: Right. (Laughter)

WARREN BUFFETT: Yeah, Charlie and I, we — or at least I have, I’ve owned stock in an anthracite company. There are probably people in this room that don’t know what anthracite is. Three railway companies. Windmill manufacturers. What other gems have we had, Charlie?

CHARLIE MUNGER: Textiles. (Laughter)

WARREN BUFFETT: Yeah, textiles. Don’t even think. (Laughter) Yeah, Berkshire was a mistake, believe it or not. I mean we went into Berkshire because it was cheap statistically just as a general investment back in the early ’60s, and it was a company that in the previous ten years had earned less than nothing. I mean it had a significant net loss over the previous ten years. It was selling well below working capital, so it was a cigar butt. And it was — I mean we could have done the things we’ve done subsequently from a neutral base rather than a negative base, and actually it would have worked out better, but it’s been a lot of fun.

AUDIENCE MEMBER: Hello. My name is Martin Weigand from Bethesda, Maryland. Again, I want to thank you for your letters and principles. They’re a great help for small business people running their business. My question is, last year you said you had filters in your mind to help you quickly analyze businesses. How do your filters take into account the very fast changes of technology and the way that businesses communicate with their customers, take orders, things like that?

WARREN BUFFETT: Well, we do have filters, and sometimes those filters are very irritating to people who check in with us about businesses, because we really can say in ten seconds or so “no” to 90 percent-plus of all the things that come in, simply because we have these filters. We have some filters in regard to people, too. But the question of technology is very simple. That doesn’t make it through our filter. I mean, so if something comes in where there’s a technological component that’s of significance, or where we think the future technology could hurt the business as it presently exists, we look at, you know, we look at that as something to worry about. We will — it won’t make it through the filter. We want things that we can understand, which filters out a lot of things. (Laughter) And we want them to be good businesses, and we want the people to be people we’re very comfortable with. That means ability and integrity. And we can do that very fast.

We’ve heard a lot of stories in our lives, and it’s amazing how they — you can become quite efficient in, probably, getting 95 percent of the ideas through in a very short period of time that should get through. Charlie?

CHARLIE MUNGER: Yeah, we have to have an idea that is A, a good idea, and B, a good idea that we can understand. It’s just that simple. And so those filters are filters against consequences from our own lack of talent. (Laughter)

WARREN BUFFETT: Filters haven’t changed much over the years, either. (Laughter)

AUDIENCE MEMBER: Hi. I’m Allan Maxwell. I live in the wonderful tropical island of O-maha. (Laughter)

WARREN BUFFETT: That’s right up there with Aksarben. That’s Nebraska spelled backwards. (Laughter)

AUDIENCE MEMBER: Everybody in this room’s got to be wondering the same question. Who, in your opinion, both of you, is the next Warren Buffett?

WARREN BUFFETT: Charlie? Who’s the next Charlie Munger? Well, let’s try that first. That’s a more difficult question. (Laughter)

CHARLIE MUNGER: There’s not much demand. (Laughter) I don’t think there’s only one way to succeed in life, and our successors, in due time, may be different in many ways. And they may do better.

WARREN BUFFETT: Incidentally, we have a number of people in the company, some of whom are in this room today, and the ones you saw on that screen, who are leagues ahead of Charlie and me in various kinds of abilities. I mean a lot of different talents. We’ve got a fellow in this room today who’s the best bridge player, probably, in the world. And Charlie and I could work night and day, and if he spent ten minutes a week working on it, he’d play better bridge than we would. And there are all kinds of intellectual endeavors that, for some reason or another, one person’s a little bit better wired for than someone else. And we have people running our businesses that if Charlie and I were put in charge of those businesses, we couldn’t do remotely as well as they do. So there’s a lot of different talents. The two that we’re responsible for is, we have to be able to keep able people, who are already rich, motivated to keep working at things where they don’t need to do it for financial reasons. I mean it’s that simple.

And that’s a problem any of you could think about, and you’d probably be quite good at it if you gave it a little thought, because you’d figure out what would cause you to work if you were already rich and didn’t need the job. Why would you jump out of bed and be excited about going to work that day? And then we try to apply that to the people who work with us. Secondly, we have to allocate capital. And these days we have to allocate a lot more capital than we had to allocate a decade ago. That job is very tough at present. Sometimes it’s very easy. And it will be easy at times in the future and it’ll be difficult at times in the future. But there are other people that can allocate capital, and we have them in the company. Charlie, you have any —?

CHARLIE MUNGER: No.

AUDIENCE MEMBER: Good morning. My name is Jad Khoury (PH). I’m from Gaithersburg, Maryland. I just want to thank you for sharing your wisdom. And my question is, what criteria do you use to sell stock? I kind of understand how you buy it, but I’m not sure how you sell.

WARREN BUFFETT: Yeah. Well, the best thing to do is buy a stock that you don’t ever want to sell. I mean — and that’s what we’re trying to do. And that’s true when we buy an entire business. I mean, we bought all of GEICO or we bought all of See’s Candy or The Buffalo News. We’re not buying those to resell. I mean, what we’re trying to do is buy a business that we will be happy with if we own it the rest of our lives, and we expect to with those. It’s the same principle applies to marketable securities. You get extra options with marketable securities. You can add to holdings. Obviously easier — we can never own more than a hundred percent of a business, but if we own 2 percent of a business and we like it at a given price, we can add and have 4 or 5 percent. So that’s an advantage.

Sometimes, if we need money to move to another sector, like we did last year, we will trim some holdings, but that doesn’t mean we’re negative on those businesses at all. I mean, we think they’re wonderful businesses or we wouldn’t own them. And we would sell A, if we needed money for other things. The GEICO stock that I bought in 1951, I sold in 1952. And it went on to be worth a hundred or more times — before the 1976 problems — 100 or more times what I’d paid. But I didn’t have the money to do something else. So you sell if you need money for something else. You may sell if you believe the valuations between different kinds of markets are somewhat out of whack. And, you know, we have done a little trimming last year in that manner. But that could well be a mistake. I mean the real thing to do with a great business is just hang on for dear life. Charlie?

CHARLIE MUNGER: Yes, but the sales that do happen, the ideal way is when you found something you like immensely better. Isn’t that obvious that’s the ideal way to sell?

WARREN BUFFETT: And incidentally, the ideal purchase is to find — is to have something that you already liked be selling at a price where you feel like buying more of it. I mean, we probably should have done more of that in the past in some situations. But that’s the beauty of marketable securities. You really do — if you’re in a wonderful business, you do get a chance, periodically, maybe to double up in it, or something of the sort. If the market — if the stock market were to sell a lot cheaper than it is now, we would probably be buying more of the businesses that we already own. They would certainly be the first ones that we would think about. They’re the businesses we like the best. Charlie?

CHARLIE MUNGER: Nothing more.

AUDIENCE MEMBER: Good morning, Mr. Buffett, Mr. Munger. My name is Ron Wright (PH) from Iowa City, Iowa. New companies have always been an interest to me. Is it reasonable to assume an Omahabased company with only $5 billion in the bank might succeed in telecommunications?

WARREN BUFFETT: Well, I think that a new company with 5 billion in the bank is probably better off than most new companies. (Laughter) Be like Jennifer Gates, as a newborn. (Laughter) I think you’re probably referring to a company that was created out of one of our local operations that’s run by Walter Scott, one of our directors, from the Kiewit Company, Level 3. I can tell you, it’s got very able management. And I’ll take your word for it that it’s also got 5 billion in the bank, but you’ll have to make your own judgment on the stock. I know Charlie won’t comment on that one. (Laughs)

AUDIENCE MEMBER: Yes, good morning. This is Mo Stintz (PH) from Omaha, Nebraska. In the past you’ve often said that the insurance operation is the most important business in Berkshire’s portfolio. Is that true? And what are numbers two and three? I’d also like to ask, is it true that Charlie chose the colors for the cover of this year’s annual report?

WARREN BUFFETT: Did Charlie chose them? (Laughs) He had nothing to do with them. I chose them. (Laughter) They were a tribute to the Nebraska football team and Tom Osborne, who you saw. (Applause) Tom, incidentally, has a very low-key style, and Bobby Bowden, a few years ago, was in Lincoln. And he said that on their first date that Nancy had to slap Tom three times. And somebody said, “Was he that fresh?” And she said, “No, I was just checking to be sure he was alive.” (Laughter) Tom had a fairly conservative offense for a time in the past, although it hasn’t been so conservative the last few years, but somebody said at that time the most reckless thing he did was to eat some cottage cheese the day after the expiration on the carton by then. (Laughter) But I — no, I chose the colors. Now what was the question? (Laughter) What was the question, Charlie? Do you remember? A memorable question, but give it to us again. (Laughter)

WARREN BUFFETT: Are we back there in zone 8? Oh, the number — yeah, sure. The question was about the insurance business, which we have said will be, by far, the most important business at Berkshire. We said that many, many years ago, and it’s proven to be the case. It obviously got a big leg up when we purchased all of GEICO. Insurance, as far as the eye can see, will be, by far, the most significant business at Berkshire. And the question about two and three: in terms of earnings, FlightSafety is the second largest source of earnings. But we don’t really think of them that way. I mean we do know our main business is insurance, but we really have a lot of fun out of all of our businesses. And I had a great time out at Borsheims yesterday, or at a Dairy Queen. So it will be accident, to some extent, over the next ten years, what ends up being the second or third or fourth largest. That’ll be determined by opportunity. We bid on certain businesses — or negotiated on them — that could have been very large businesses if they become part of Berkshire.

And that’ll happen again in the future. So we have no predetermined course of action whatsoever at Berkshire. We have no strategic planning department. We don’t have any strategic plan. We react to what we think are opportunities. And if it’s a business we can understand, and particularly if it’s big, you know, we would love to make it number two. Charlie?

CHARLIE MUNGER: I also want to say proudly that we have no mission statement.

WARREN BUFFETT: No. (Laughter and applause) It’s hard to think of anything that we do have, as a matter of fact. (Laughter) Yeah, we have never had — I mean I’m sure you all know this. We’ve never had a consultant. And we try to keep things pretty simple. We still have 12 people at headquarters. We have about 40,000 people that now work for Berkshire. And we hope to grow a lot, but we don’t hope to grow at headquarters. (Laughter)

AUDIENCE MEMBER: Yes, my name is Patty Buffett and I’m from Albuquerque, New Mexico.

WARREN BUFFETT: I like your name. (Laughter)

AUDIENCE MEMBER: Thanks. In your opinion, what effect will the year 2000 compliant issue have on the U.S. stock market and the global economy?

WARREN BUFFETT: Well, I get different reports on 2000, but the main report I hear — I think, you know, we — you wouldn’t want to rely on me on this, but you could rely on our managers. And I think we’re in good shape. It’s costing us some money but not huge amounts of money to be prepared for 2000. With companies in which I’m a director, you know, I hear some reasonably good-sized numbers. Those numbers are in their annual reports and described as to the cost of compliance. But what I’m told by people that know a lot more than I do, is that they think probably that the weakest link may be in governmental units. They seem to think that in terms of where they stand versus the commercial sector, in terms of reaching where they need to be by 2000, that there’s some areas of both national and state and local governments, and foreign government, where they’re really behind the curve. Now, that is not an independent judgment of mine.

But somebody said, “You want to be very careful about making a phone call at five seconds before midnight at the millennium because you may get charged for 100 years,” you know. (Laughter) So it’ll be interesting. I don’t think it’s going to affect Berkshire in any material way, and I certainly have a feeling that the world will get past it very easily. But it is turning — it is expensive for some companies, and it’s going to be very expensive for governments. Charlie?

CHARLIE MUNGER: Yeah, I find it interesting that it is such a problem. You know, it was predictable that the year 2000 would come.

WARREN BUFFETT: Yeah. (Laughter and applause) Yeah. Yeah, we decided that back in 1985, actually. (Laughter) We didn’t welcome it, understand. That’s not Berkshire’s style, though. (Laughs) It is fascinating, isn’t it, when you think about it, that a whole bunch of people with 160 IQs that could build up such a problem, but here we are. And — (laughter) — that’s why we stick with simple things. (Laughter)

AUDIENCE MEMBER: My name is Kristin Cham (PH). I’m from Springfield, Illinois. And I’m a proud shareholder of Berkshire Hathaway. (Applause)

WARREN BUFFETT: We’re glad to you have you here.

AUDIENCE MEMBER: I’ve heard a little about your thoughts on trying to control campaign spending. Could you tell us more about your thoughts and efforts on this topic? Thank you.

WARREN BUFFETT: Charlie, did you get all of that?

CHARLIE MUNGER: I think it was campaign spending.

WARREN BUFFETT: Oh, campaign spending. Yeah, I have joined something that Jerry Kohlberg — this is personal. This has nothing to do with Berkshire — that Jerry Kohlberg spearheaded. And it’s taken a position — and probably 30 or so mostly business people — taken a position against soft money, and also taken a position on very fast disclosure of campaign finance money, because I personally think that the arms race, in terms of campaign spending by businesses, you know, has just begun. It doubled in the last election. But political influence — and I don’t mean that by buying a vote, but I mean just in terms of having a (inaudible) in Washington or in other state capitols. Political influence has been an underpriced product in the past. I mean, the government is enormously important in this country to most companies. It was amazing how cheap — cheaply — it could be — attention could be purchased. But the price is going up, and there will be an escalation.

And I don’t think it’s easy — if you’re the manager of a business and you own 1/10th of 1 percent of it and you’re in a business that’s heavily affected by government, I don’t think it’s very easy to tell your board of directors that you’re going to take a hands-off approach. So I think legislation is needed in that arena, and there are over a hundred campaign finance reform bills that have been introduced. Everybody wants to have their name on a bill. They just don’t want to have it passed. (Laughter) And, you know, John McCain’s been working hard on it. And it’s something I think we have to come to grips with because it’s going to be a battle of the wallets for influence.

And, like I say, if I were running some other company, and my competitors were spending money to get the attention of would-be legislators, or actual legislators, it’d be very difficult to take some high and mighty position that I wasn’t going to do it myself, and my board and my shareholders might ask me why I was taking that position. We are lucky, basically, to be in a business that’s relatively unaffected by legislation, although we will — we’re going to pay a lot of tax this year. I said two years ago that it would only take 2,000 entities in the whole United States — businesses, individuals, any kind of entity — to pay the same amount of taxes as Berkshire, and that would take care of the entire budget. You’d need no Social Security taxes. You’d need no nothing. I think we’re going to be able to say that again this year. I think that if you multiply our tax by 2,000 you will more than account for the entire federal budget, including Social Security and everything else.

So you might say, “Why aren’t you in Washington lobbying for a capital gains rate at corporations that’s the same as individuals?” or something, but we basically haven’t played that game. We feel very fortunate. I’ll say this. I would rather, in this country, be a huge taxpayer myself than be somebody who needed the other end of it, the government dispensing. I mean, if anybody here is paying taxes and they want to — (applause) If you’d like to shift positions with somebody in a veteran’s hospital or, you know, that has a couple of children by age 19 and is getting a check from the government, you know, I don’t want to shift positions. I’m happy to be paying the taxes.

WARREN BUFFETT: Yeah, I would say that, personally, I would not think that has much to do with it. I think the two big factors are in — well, there’s three big factors. One is the improved return on equity, which was a fundamental factor that pushed stock prices up. Two is a decline in interest rates that pushed stock prices up. And then finally, stock prices advancing, themselves, brings in buying. It doesn’t go on forever, but it creates its own momentum, to some extent, if you have these underlying factors that started to push it along. So I would say two of the three factors are fundamental and the third is a market-type factor that bull markets do feed on themselves, and I think that you’ve seen some evidence of that. But I don’t think that any specific — you know, the 401(k) factor or whatever it may be, was it by itself. But I do think money is pouring into mutual funds, for example, because people have had a very favorable experience with those funds. And that does bring investors along. People want to be on the train. Charlie?

And I think, incidentally, many of them have very unrealistic expectations.

CHARLIE MUNGER: Yeah. The general investment experience in the last, what, 18 years in common stocks has been awesomely high, I think by any past standards now, isn’t that right, Warren?

WARREN BUFFETT: Right. Well you’ve had — since 1982 you’ve had roughly tenfold in the Dow, and probably similar in the S&P. With a huge amount of money and with more participants all the time. And there are people coming into the market every day because they feel that they’ve missed the boat or they’re coming in heavier than they came in before, simply because they’ve had a pleasant experience. Past experience doesn’t — does not mean much, in terms of what you should expect from your investments. You will do well in your investments because you own or bought things at the right price and the businesses behaved well from that point forward.

CHARLIE MUNGER: Well, you won’t have 18 more years of 17 percent or 18 percent per annum. That I think we can virtually guarantee.

42. Buffett and Munger about equal at “goofing off”

WARREN BUFFETT: Area 9.

AUDIENCE MEMBER: Hello. I’m Tubby Stayman from Palm Beach, Florida. I know you enjoy bridge very much. I know you play my late husband’s convention. Tell me, how often are you able to devote to this wonderful game? How many times a week do you play other than the internet?

WARREN BUFFETT: I didn’t get all of that, Charlie? Did you?

CHARLIE MUNGER: How much bridge are you playing?

WARREN BUFFETT: Uh-oh.

AUDIENCE MEMBER: Yes. (Laughter)

WARREN BUFFETT: Well, this week — we should put this in the annual report, because it may be a material factor. (Laughter) I’m probably — at least ten hours a week. Maybe a little more. I don’t get any better by doing it, either, so it’s rather discouraging, but it is a lot of fun. And it has to have come out of reading time. I don’t think it’s hurt Berkshire yet, but that may be because we’re in a slow period generally. If the market goes down a lot, I promise to cut back on my bridge. (Laughter) Charlie?

CHARLIE MUNGER: Yeah. Well, I probably play three or four hours a week. But I don’t play on the internet.

WARREN BUFFETT: He plays a lot of golf, though. Confess Charlie.

CHARLIE MUNGER: Oh yes. (LAUGH)

WARREN BUFFETT: Yeah, we both spend about the same amount of time goofing off. I mean if you —(laughter) — want to know.

43. Defending Walt Disney-Capital Cities accounting

WARREN BUFFETT: OK. Area 10.

AUDIENCE MEMBER: Yes, my name is Cary Blecker (PH), also from West Palm Beach, Florida. With all due respect to Mr. Eisner if he’s in the audience, there’s been some criticism levied recently at the Disney Company, mainly from an accounting professor at one of the state universities in New York, in reference to Disney’s purchase of Capital Cities and the way they accounted for that purchase. Basically, what this professor is saying is that Disney somehow created a slush fund and is charging the expenses to the merger to this slush fund rather than earnings. If you’re familiar with this criticism, I’m wondering what you think of it? And if you’re not, are you familiar with the way Disney accounted for the purchase of Capital Cities?

WARREN BUFFETT: Yeah, I am familiar.

AUDIENCE MEMBER: Thank you.

WARREN BUFFETT: And actually, Abe Briloff, who wrote that, is a fellow who, in general, I admire. Abe wrote me a letter not more than about three or four weeks ago and asked me to talk at a university where he teaches. And I wrote him back and I told him I wouldn’t be able to do it because it’s not in proximity to where I’ll be. And I told him — and he asked me about the Disney thing. And I told him I disagreed with him on — I admire what Abe does in the attempt to have accounting reflect economic reality, but he and I don’t see it exactly the same on some points, although we would agree on other points. I think — I don’t think Disney is a very complicated enterprise to evaluate. I mean there are — when Cap Cities bought ABC, there were purchase accounting adjustments, and they tend to wash through, to some extent. I mean if you have programs that you’re stuck on, you may write those down from what the previous carrying cost was. Maybe the previous management should have written them down, too, at that point.

But I don’t think that — I think with Disney, what you see now is what you get. Charlie?

CHARLIE MUNGER: Yeah. I’ve got no great quarrel with the accounting at Disney. I think —

WARREN BUFFETT: Abe Briloff is a wonderful guy.

CHARLIE MUNGER: Yeah. He’s got a good sense of humor and he generally fights the right demons, but I don’t think you can criticize Disney’s accounting.

WARREN BUFFETT: We certainly disagree with Abe, who, like I say, I agree with Charlie, he is a good guy. But he — we disagree with him on amortization of intangibles entirely. So we would say that if Disney is charging, whatever it may be, probably 400 million a year for amortization of intangibles, which is not tax deductible, we would include that as a component of earnings. So there might be some plusses and minuses that you’d make in adjustments, but I would say, by the time you add back amortization of intangibles that we would probably think the economic earnings of Disney might well be more than the reported earnings in the next few years.

44. Buffett wants accounting change

WARREN BUFFETT: I think that the intangible amortization question — which the FASB is looking at now — I think it should be changed. I mean I think it absolutely distorts economic reality, and I think that it influences whether people go to purchase, or accounting, or pooling, and they do all kinds of acrobatics to try and get pooling accounting. And, you know, it shouldn’t make that kind of difference in reported numbers, based on whether a transaction, which has exactly the same economics, is done through a purchase or pooling. But I have seen managements, some I know quite well, arrange to do things on a pooling basis that they think — where if they were private they would do it on a purchase basis. And I think that’s nuts. And I think if accounting is pushing people to doing things that are nuts, that it’s time for accounting to look at itself. I would say that — (applause) — net, the economic earnings of Disney, in our view, are somewhat higher than reported earnings.

45. I’ll never know enough to buy tech stocks

WARREN BUFFETT: Zone 11, please.

AUDIENCE MEMBER: Good morning, Mr. Munger and Mr. Buffett. My name is Prakash Puram (PH) from Minneapolis. There seem to be great values in the technology sector that meet most of your criteria and philosophy in investing, with the exception of the simplicity criterion. Names like IBM, Microsoft, HP, Intel. Would you ever consider investing in companies in this sector in the future?

WARREN BUFFETT: Well, the answer is no, and it’s probably pretty unfortunate, because I’ve been an admirer of Andy Grove and Bill Gates and, you know, I wish I had translated that admiration into backing it up with money. But the truth is, I don’t know where Microsoft or Intel — I don’t know what that world will look like in 10 years. And I don’t want to play in a game where I think the other guys have got an advantage over me, and — I could spend all my time thinking about technology for the next year and I wouldn’t be the hundredth or the thousandth or the 10,000th smartest guy in the country in looking at those businesses. So that is a seven or eight foot bar that I can’t clear. There are people that can clear it, but I can’t clear it. And no matter how I train, I can’t clear it. So, the fact that there will be a lot of money made by somebody doesn’t bother me, really.

And I mean there may be a lot of money made by somebody in cocoa beans, but I don’t know anything about them. And there are a whole lot of areas I don’t know anything about. So, you know, more power to them. And I think it would be a very valid criticism if Charlie and I — if it were possible that Charlie and I, by spending a year working on it, could become well enough informed so that our judgment would be better than other people’s, but that wouldn’t happen. And it would be a waste of time. It’s much better for us to swing at the easy pitches. Charlie?

CHARLIE MUNGER: Whatever you think you know about technology, I think I know less. (Laughter)

WARREN BUFFETT: That’s probably about true, incidentally. Charlie has a little more of — he understands some things in the physical world a lot better than I do.

46. We’ve “missed the boat” on share buybacks

WARREN BUFFETT: But anyway. We’ll go to zone 1.

AUDIENCE MEMBER: Good morning. I’m Murray Cass from Markham, Ontario. First off, against my dentist’s advice, I’d like to thank you for the free Coke and ice cream last night. (Laughter) Earlier this morning, Mr. Buffett, you mentioned that you liked when wonderful companies like Coke purchased their shares back. Similarly, I own shares in a wonderful company, that’s Berkshire. Should I be hoping that you buy your own shares back?

WARREN BUFFETT: Well, it’s interesting, we should have — perhaps we should have bought some shares back, but usually at the time we could have bought something else that also did very well for us. I mean maybe when we were buying Coke we could have been buying our own shares back. To some extent there hasn’t been that much trading in it. But I think it’s a valid criticism to say that we have missed the boat at various times in not repurchasing shares. We’ll see what we do in the future on it. If it looks like the best thing to do with money, it’s what we should be doing. And in the past, I’ve probably been not optimistic enough in respect to Berkshire compared to other things we were doing with money. Now, the money we spent buying the GEICOs and all of that has turned out to be a good use of money, too. But we’ve never wanted to leverage up. That’s just not our game. So we’ve never wanted to borrow a lot of money to repurchase shares.

We might advise other people to do it, but we would — it’s not our style ourselves. We’ve got all our money in the company. We’ve got all of our friends’ and our relatives’ money virtually. So we have never felt that we wanted to leverage up this company like it was just one of a portfolio of a hundred stocks. But it’s a valid criticism to say that we have not repurchased shares when we should have. And it’s also a valid criticism to say that we’ve issued some shares we shouldn’t have issued. Charlie?

CHARLIE MUNGER: Oh, I would agree with both comments.

47. “Smile train”

WARREN BUFFETT: Area two.

AUDIENCE MEMBER: Fellow investors of Berkshire and Hathaway, Warren Buffett and Charlie Munger. I am from originally China. Now I have a company in Michigan. I want to ask questions based on facts. I want to sell Coke, GEICO, and a little book called The Wizard of Omaha: The Investment Philosophy of Warren Buffett, in China. Through all the villages, the cities, little towns, I want to make that a reality. Cheers.

WARREN BUFFETT: Cheers. (Applause)

CHARLIE MUNGER: Cheers.

WARREN BUFFETT: Zone three. (Laughter)

AUDIENCE MEMBER: I have not asked the question.

WARREN BUFFETT: Oh, just warming up. OK. (Laughter)

AUDIENCE MEMBER: I will.

WARREN BUFFETT: They always tell me to get off the stage while you’re in good shape, but I’ll say it. (Laughter)

AUDIENCE MEMBER: I could (inaudible), but you missed your chance. (Laughter) I’m a owner of Berkshire and I spent 6 percent of my net worth to be engaged to Berkshire.

WARREN BUFFETT: Wise decision. (Laughter)

AUDIENCE MEMBER: I did better than guess who? Bill Gates. I notice Bill Gates and you were traveling on a slow boat in China. I want to go home, on a fast train. You want to cut me off?

VOICE: Do you have a question or —?

AUDIENCE MEMBER: If you want to cut off, fine. Up to the investors. (Applause) I’ll quit if you want to do that.

VOICE: Do you have a question? A question?

AUDIENCE MEMBER: I come long ways.

VOICE: OK. Ask your question.

AUDIENCE MEMBER: OK. I know I’m a problem for you. (Laughter)

VOICE: Not a problem. Just ask the question.

AUDIENCE MEMBER: But I’m here for a reason. Because I made some money, I’m go on a train. A smile train. Yesterday, or the day before, at the baseball I asked Mr. Warren Buffett, “Have you heard of the smile train?” He said, “No.” I’m back here to respond. This is a smile train.

WARREN BUFFETT: OK, we thank you. But I think that’s your question.

48. Why Buffett bought silver

WARREN BUFFETT: We’d better go to zone 4, I think. (Applause)

AUDIENCE MEMBER: Good morning, or afternoon, actually. My name’s Matt Schwab. I’m from New York. Pound Ridge, New York. I actually had a question about the silver purchase last year. When you announced it, you said that you believed that supply and demand fundamentals would only be established at a higher price — re-established at a higher price. I was just wondering if you could go into more detail about what some of those fundamentals are. I mean, we’ve read a lot about, like, battery technology and some other things.

WARREN BUFFETT: Yeah, we have no inside information about great new uses for silver or anything of the sort. But the situation — and you can get these figures and they’re not precise, but I think they’re in general — they’re generally accurate. You can see from looking at the numbers that aggregate demand, primarily from photography, from industrial uses, and from ornamental jewelry-type uses, is close. Call it 800 million-plus ounces a year. And there are 500 million or so ounces being produced of silver, annually, although there will be more coming on in the next couple of years. There’s more coming on right now. However, most of that silver is produced as a byproduct in the mining of gold or copper and lead zinc, so that since it’s a byproduct, it’s not responsive to — not very responsive to price changes, because obviously, if you’ve got a copper mine and you get a little silver out of it, you’re much more interested in the price of copper than silver.

So you have 500 million ounces or so of mine production, and you have 150 million ounces or so of reclaimed silver, a large part of which relates to the uses in photography. So there’s been a gap in recent years of perhaps 150 million ounces — but none of these figures are precise — which has been filled by an inventory of bullion above ground, which may have been a billion-two, or more, ounces a few years back, but which has been depleted. And no one knows the exact figures on this, but there’s no question that the bullion inventory has been depleted significantly. Which means that the present price for silver does not produce an equilibrium between supply, as measured by newly-mined silver plus reclaimed silver, and usage. And that — eventually something will happen to change that picture. Now, it could be reduced usage, it could be increased supply, or it could be a change in price. And that imbalance is sufficiently large, even though there is some new production coming on, and there’s the threat of digital imaging that will reduce silver usage, perhaps, in the future in photography.

But we think that that gap is wide enough so that it will continue to deplete inventories — bullion inventories — to the point where a new price is needed to establish equilibrium. And because of the byproduct nature, which makes the supply inelastic, and because of the nature of demand, which is relatively inelastic, that — we don’t think that that price change would necessarily be minor. It’s interesting, because silver has been artificially influenced for a long time. You saw that movie about — you know, it was William Jennings Bryan, who was editor of The Omaha WorldHerald and a congressman from Nebraska — and his brother was governor of Nebraska — who was the big silver man. And they used to talk 16-to-1. The 16-to-1 ratio, I think, goes back to Isaac Newton, when he was master of the mint. Charlie will know all about that, because he’s our Newtonian expert here. But that ratio had kind of a mystical significance for a while. Didn’t really mean anything.

And in 1934, the government passed an act called The Silver Purchase Act of, surprisingly, 1934, which set an artificially high price for silver at that time, when production and usage was much less. And the government, U.S. government, ended up accumulating two billion ounces of silver. Now, this was at a time when demand was a couple hundred million ounces a year, so you’re talking ten years’ supply. So there was an artificially high price for a while. By the early 1960s, that became an artificially low price of $1.29, and at that time I could see the inventories of the U.S. government being depleted, somewhat akin to what inventories are being depleted now. And despite the fact that Lyndon Johnson and the administration said they would not demonetize silver, they did demonetize it, and silver went up substantially. That was the last purpose we had of silver, but I’ve kept track of the figures ever since. The Hunt brothers caused a great amount of silver to be converted into bullion form, including a lot of silver coins.

So they, again, increased the supply in a very big way by their action in pushing the price way up to the point where people started melting it down. So you had this — dislocations in silver over a 60-plus year period, which has caused the price to be affected by these huge inventory accumulations and reductions. And we think right now that — or we thought last summer when we started buying it — that the price we bought it, that that was not an equilibrium price, and that sooner or later — and we didn’t think it was imminent, because we don’t wait till things are imminent. You know, we were going to buy a lot of silver. We didn’t want to buy so much as to really disrupt the market, however. We had no intention of replaying any Hunt scenario. So we wanted to be sure we didn’t buy that much silver. But we liked it. Charlie?

CHARLIE MUNGER: Well, I think this whole episode will have about as much impact on Berkshire Hathaway’s future as Warren’s bridge playing. (Laughter) You’ve got a line of activity where once every 30 or 40 years you can do something employing 2 percent of assets. This is not a big deal for —

WARREN BUFFETT: No.

CHARLIE MUNGER: — Berkshire. The fact that it keeps Warren amused and — (Laughter)

WARREN BUFFETT: Yeah, I do like —

CHARLIE MUNGER: — and not doing counterproductive things — (Laughter)

WARREN BUFFETT: It makes me feel good about — it makes me feel better about all those pictures that people take over the weekend. (Laughs) They all use a little bit of silver. (Laughter)

CHARLIE MUNGER: At least it shows something that teaches an interesting lesson. Think of the discipline it takes to think about something for three or four decades, waiting for a chance to employ — (laughter) — 2 percent of your assets. I’m afraid that’s the way we are. (Laughter) It means there’ll be some dull stretches.

WARREN BUFFETT: Right. Yeah, it’s less than a billion dollars in silver. It’s $15 billion in Coke. You know, it’s a —

CHARLIE MUNGER: It’s a non-event.

WARREN BUFFETT: It’s 5 billion in American Express. I mean it is close to a non-event, but if you see it there — you know?

CHARLIE MUNGER: At least it shows the human personality at work. (Laughter) Very peculiar personality, I might add. (Laughter)

WARREN BUFFETT: Reinforced by a partner.

CHARLIE MUNGER: Yes. (Laughter)

49. I only talk to students

WARREN BUFFETT: OK, let’s go to area five.

AUDIENCE MEMBER: My family is a Class B shareholder. Thank you for issuing those shares. I have one observation and one question. Your Class B share is creating a new phenomenon in this country. These “baby shares” are not only attracting my baby boomer generation, but also X generation and (inaudible) generation, your grandchildren. My question is, this next generation would like to hear from you your investment discipline, your lifestyle, and your philosophy of contributing the wealth back to the society in a language they can understand and communicate back to their friends when they get back to school on Tuesday. Thank you.

WARREN BUFFETT: Thank you. (Applause) Well, I appreciate that, and I would say the only speeches I give — I get a lot of requests, perhaps because I don’t do them. But I get a lot of requests, including from a lot of our managers, in terms of trade conventions, all kinds of things. I don’t do — the only groups I talk to are students. And I try to talk to college and university students, although I talk to high school students, too. Whenever it fits, in terms of travel schedules. And I just think that if you’re going to spend your time with groups talking, that rather than entertain people, that it probably is better to talk to the group you talked about. Charlie and I are never reluctant to talk, so we do it. Charlie has given a couple of talks. One I sent you a few years ago from USC, but there’s been another one recently that I think everybody would profit by reading. So, it was reprinted in the Outstanding Investor Digest, but if you write Charlie, I’m sure he’ll send you a copy.

50. If forced to choose, we’d keep the operating businesses

WARREN BUFFETT: Area six, please.

AUDIENCE MEMBER: Hi, my name is David Oosterbaan. I’m from Kalamazoo, Michigan. This is a hypothetical question about Berkshire. It’s going to take a little imagination, I think. The scenario is as follows, that the U.S. Justice Department makes a ruling that Berkshire must split into two parts immediately. You and Mr. Munger must decide which part to keep. You can either choose your marketable securities, Coke, Gillette, Disney, et cetera, or you can choose your insurance and private businesses. Which one do you choose and why?

WARREN BUFFETT: Well, that’s an easy question for me. I would choose the operating businesses anytime, because it’s more fun. And I have a good time out of the investments too, but I like being involved with real people, in terms of the businesses where they’re a cohesive unit that can grow over time, and — You know, I wished we owned all of Disney or Coca-Cola or Gillette, but we aren’t going to. So if I had to give up one or the other, I’d give up the marketable securities. But it’s not going to happen, so we’re going to be happen in both arenas, and I look forward to being in both arenas for the rest of my life. Charlie?

CHARLIE MUNGER: Well, I’ll be in a hell of a fix if I am not in the same arena. (Laughter)

WARREN BUFFETT: We’d both be in a hell of a fix.

CHARLIE MUNGER: Yeah, yeah.

51. We’d be fine even if our top 25 execs all dropped dead

WARREN BUFFETT: Area 7.

AUDIENCE MEMBER: Yes, hello to Mr. Munger and Mr. Buffett. My name is Jerry Gonzalez (PH) from Plantation. My question is, what are your recommendations of Berkshire Hathaway if Charlie Munger were in charge, or your third man in charge — your third man, which I think you said, is the CEO of GEICO, what are your recommendations?

WARREN BUFFETT: I missed that.

JERRY GONZALES: If Charlie Munger were to stay in charge fully, 100 percent, or your third man, the CEO of GEICO.

CHARLIE MUNGER: Well, in due course this corporation will have a change in management. I’m afraid we have no way of fixing that. (Laughter) But we do not — apart from making sure we’ve got good options and having some system in place, we are not obsessing about a future management yet.

WARREN BUFFETT: No. The directors —

CHARLIE MUNGER: Warren plans to live almost indefinitely.

WARREN BUFFETT: Absolutely. (Laughter) Although I must say, at my last birthday somebody asked me how old I was. And I said, “Well, why don’t you just count the candles on the cake?” And he said he was driven back by the heat, so — (Laughter) But we’re not going to leave willingly. And we do — the directors know who — they have a letter that says who we think should be the ones to succeed us at both the operating aspect and the investment allocation aspect. And those letters can change over time as we keep hanging around. But I don’t worry about the fact that 99 percent-plus of my estate will be in Berkshire Hathaway stock or that a foundation will eventually receive that stock. So it doesn’t bother me in the least. I can’t think of a place I’d rather have it. And that includes my appraisal of the managers that we have who can step in and do what Charlie and I do. And who knows, one of them may even understand technology. (Laughter)

CHARLIE MUNGER: I think this place would have very respectable prospects if the top 25 managers all dropped dead at once.

WARREN BUFFETT: Well, that’s not an experiment we intended to pursue. (Laughter)

CHARLIE MUNGER: No, but I see no reason to think it wouldn’t continue to do quite well.

WARREN BUFFETT: Right.

CHARLIE MUNGER: It’s been lovingly put together to have a certain margin of safety.

WARREN BUFFETT: Right. We actually — if we have a choice, it’s number three through 23, though — 25 — that we’re interested in. (Laughter)

52. “Honesty will only do so much for you”

WARREN BUFFETT: OK. Area 8, please.

AUDIENCE MEMBER: This is Raul from Walnut Creek, California. Thanks Mr. Buffett, thanks Mr. Munger, thanks for your great company. I wish I had known about it 10 years ago. You are not only the greatest but the most honest. I want to commit 99 percent of what I have to Berkshire Hathaway, and I will. The question I want to ask is, how do you calculate the intrinsic value of the company? And based on intrinsic value, to me, Berkshire Hathaway looks a great bargain at these prices, especially based on look-through earnings. Is that true? And one last question I want to ask, just for fun. What do you think about telecom IPOs like Qwest, (inaudible)? They seem to pop up 50 percent at opening. Does it make any sense to invest in these? Thank you very much.

WARREN BUFFETT: Charlie, you want to tackle that?

CHARLIE MUNGER: I didn’t follow that all. Intrinsic value, we give you the facts and you make your own conclusions. I like the fact that you think we’re honest, but, you know, if you people keep bidding up the price of our stock, honesty will only do so much for you in the future. (Laughter)

WARREN BUFFETT: Yeah, we’ve never been tested. I mean we’re very lucky. We’ve never had anything that we needed, really, that we haven’t had. And, you know, who knows what the situation would be if your family was starving or something? So our intention is to continue the position where we’ll never be tested, too, I might add.

53. Intrinsic value: “Easy to say and impossible to figure”

WARREN BUFFETT: The intrinsic value question. I mean, by definition, intrinsic value is the present value of the stream of cash that’s going to be generated by any financial asset between now and doomsday. And that’s easy to say and impossible to figure, but it’s the kind of thing that we’re looking at when we look at a Coca-Cola, where we think it’s much easier to evaluate the stream of cash that comes in the future than it is in a company such as Intel, marvelous as it may be. It’s easier for us. Andy Grove may be better at figuring out Intel than Coke. And in Berkshire, it is complicated by the fact that we have no business that naturally employs all of the capital that flows to us, so it is dependent, to some extent, on the opportunities available and the ingenuity used when that cash pours in, as it does. Some businesses have a natural use for the cash. Actually, Intel has a good natural use for the cash over time as they’ve expanded in their business. And many businesses do. But we do not have a natural use. We have some businesses that use significant amounts of cash.

FlightSafety will buy a lot of — build a lot of simulators this year and they cost real money. But in relation to the resources available, we have to come up with new uses, new ways to use cash. And that makes for a more difficult valuation job than if you’ve got — well, the classic case used to be a water or electric utility where the cash could be deployed and the return was more or less guaranteed within a narrow range, and it was very easy to make calculations then as to the expectable returns in the future. But that’s not the case at Berkshire. We’ve got very good businesses, both directly and partially owned. And those businesses are going to do well for a long, long time. But we do have new cash coming in all the time, and sometimes we have good ideas for that cash and sometimes we don’t. And that does make your job more difficult, in terms of computing intrinsic value. We’ll have — yeah, we’re going to break after the next question. At that time — we break whenever Charlie and I run out of candy up here, actually.

(Laughter) We’re going to let everybody — you can get something to eat, if you want to stick around, and we will be here till 3:30 when we reconvene at 12:30. And those of you who have been with us this morning and had enough, we thank you for being here this weekend. We’ve had a terrific time with you, so I’m very appreciative of that.

54. “Multiple models is the game” for Munger

WARREN BUFFETT: Let’s have a question from zone 9 and then we’ll go to lunch.

AUDIENCE MEMBER: Good morning. My name’s Frank Gurvich (PH). I’m a shareholder from London, Ontario in Canada. My question is for Mr. Munger, and it concerns his models. And the question specifically is related to market valuation. I know I’m not going to get a prediction. That’s not your bag. What I’m curious about, is there any specific touchstone models that you reflect upon in trying to gain perspective at these markets where the historic valuations are quite high? And why do you draw on those models? And my second question is for Mr. Buffett and it relates to taxation. If you were able to trade your portion of your portfolio, at least, in a tax-exempt fashion, like 401(k) plans, or in Canada, the RSP plans, would you possibly trade more actively?

WARREN BUFFETT: Charlie, you want to answer yours first?

CHARLIE MUNGER: Yeah. Well, the Munger system for dealing with reality is to have multiple models in the head, and then run reality against multiple models. I think it’s a perfect disaster to look at reality through just one model or two. It’s — There’s an old proverb that says, “To the man with only a hammer, every problem looks pretty much like a nail.” (Laughter) And that is not our system. So I can’t sit here and run through all the models in my head, even though there aren’t that many. But multiple models is the game.

55. Buffett: Taxes don’t bother me

WARREN BUFFETT: The question about taxation. It would not — if we were running Berkshire absent a capital gains tax, I don’t think it would make much difference in what we do. I don’t think it would make — certainly it wouldn’t make a difference in causing us to trade actively. We own the businesses we want to own. We don’t own them because taxes have restrained us from selling them. And as I mentioned earlier, I’m fairly sure we’ll pay at least a billion dollars in income tax this year. We might not, but it looks that way to me, that we’ll pay a billion dollars. And I could do things that at least deferred, and perhaps — and I certainly could do things by doing nothing — that avoided paying that billion in tax, or a good bit of the billion, call it 800 million of the billion. But that is not a big factor with me. It’s never been a big deal with me. I paid my first income tax when I was 13, so I guess I got brainwashed at the time. And it doesn’t bother me a lot to be paying taxes.

I think, net, personally, I’m under-taxed in relation to what the society has delivered to me, and, you know, I don’t send along any voluntary payments to I.R.S., I want you to understand. (Laughter) But I really do. I mean, there’s nobody I want to trade places with because their tax situation is better than mine. So it would not increase the activity.

56. Looking for owners who love their business more than money

WARREN BUFFETT: I’ve been asked to take one more question from zone 10. I’m not sure why, but maybe because they see that I still have candy up here. (Laughter) So zone 10, please, and then we’ll break.

AUDIENCE MEMBER: Mr. Buffett and Mr. Munger, my name is Sanjiv Mirchandani, shareholder from Boston. First of all, thank you to both of you for everything. I have two questions. For you, Mr. Buffett, you obviously have filters that you apply on selecting people as you do on stocks. Can you tell us a little bit about what those filters are?

WARREN BUFFETT: Filters on people?

AUDIENCE MEMBER: Yes, in selecting — you have an ability to motivate people who have a lot of money to keep working. What do you look for to figure out who those people are?

WARREN BUFFETT: Well, that’s a key, key question, because when we buy businesses we don’t have managers to put in them. I mean we are not buying them that way. We don’t have a lot of MBAs around the office that we’re —

CHARLIE MUNGER: Thank God.

WARREN BUFFETT: Yeah. (Laughter) And, you know, I have not promised that they’re going to have all kinds of opportunities or anything. So as a practical matter, we need management with the businesses that we buy. And three times out of four, thereabouts, the manager is the owner and is receiving tens of millions, maybe hundreds of millions of dollars. So they don’t have to work. And we have to decide in that time when we meet them whether they love the business or love money. And we’re not making a moral judgment. Charlie may, but I’m not making a moral judgment about whether it’s better to love the business or love money, but it’s very important for me to know which of the two is the primary motivator with them. And we have had extremely good luck in identifying people who love their business. And so all we have to do is avoid anything that, on our part, that diminishes that love of the business or makes other conditions so intolerable that they overcome that love of the business. And we have a number of people working for us, they have no financial need to work at all.

And they probably outwork, you know, 95 percent or more of the people in the world, and they do it because they just love smacking the ball. And we almost — we virtually had no mistakes in that respect. And we have identified a number of people, Charlie and I have, in terms of proposals to us, where we’ve felt that they did really — they liked the money better than the business. They were kind of tired of the business. You know? And they might promise us that they would continue on and they would do it in good faith, but something would happen six months later or a year later and they’d say to themselves, “Why am I doing this, you know, for Berkshire Hathaway when I could be doing,” whatever else they want to do? I can’t tell you exactly how we — what filter it is that we put them through mentally, but I can tell you that if you’ve been around a while, you can — I think you can have a pretty high batting average in coming to those conclusions. As you can about other aspects of human behavior.

I’m not saying you can take a hundred people and take a look at them and analyze their personalities or anything of the sort. But I think when you see the extreme cases, the ones that are going to cause you nothing but trouble, or the ones that are going to bring you nothing but joy, I think you can identify those pretty well. Charlie?

CHARLIE MUNGER: Well, yeah, I think it’s pretty simple. You’ve got integrity, intelligence, and experience, and dedication. And that’s what human enterprises need to run well, and we’ve been very lucky in getting this marvelous group of associates to work with all these years. It would be hard to do better, I think, than we’ve done on that respect. Look around this place. I mean, and really, you young people look around this place. And look at how much gratification can come into these lives which have been mostly spent in deferring gratification. It’s a very funny group of people, you shareholders. (Laughter)

AUDIENCE MEMBER: OK. My name is Tom Conrad (PH), I’m from McLean, Virginia. I just wanted to first thank you, Mr. Buffett and Mr. Munger, for each year answering our questions. I found myself at 5 a.m. standing outside the door here, and I don’t do that for anyone. (Laughter) And it’s a real pleasure to hear your answers. I have two questions. One is, with Travelers, the company Travelers, and their merger with Citibank, do you have confidence in the management of Sandy Weill? My second question is, you said it in a few meetings ago that diversification is a protection against ignorance. And it only takes three great companies to be set for an investment lifetime. And I invested in those three companies: Coca-Cola, Gillette, and Disney. And I went ahead and invested in a fourth company without asking you. I invested in Pfizer. And I just wonder what you think about the pharmaceutical industry, if you feel there’s some great companies in that industry. Thank you very much.

WARREN BUFFETT: Yeah. Well, A) we think Sandy Weill is a very, very good manager. Sandy is — I mean, the record is clear. It is not easy to manage in Wall Street, and Sandy has done an excellent job there as well as in other allied, or somewhat allied, fields. So his record is proven. And he has been (inaudible) ever since buying Commercial Credit from Control Data. He’s built a terrific company. And he built a terrific company in businesses that themselves aren’t necessarily so terrific, so it’s required real management skill.

6. Pharmaceutical stocks: “We stupidly blew that one”

WARREN BUFFETT: Pharmaceuticals, we missed. We would not have known how to pick out any single business, but we — single company — within the industry, but we certainly should’ve recognized — did recognize, didn’t do anything about it — that the industry as a whole represented a group that would achieve good returns on equity, and where some sort of a group purchase might’ve made sense. We did buy one a while back, but we didn’t — it was peanuts. And it would of been — it was within our circle of competence to identify the industry as likely to enjoy very high profits over time. It would not have been within our circle of competence to try and pick a single company. Charlie?

CHARLIE MUNGER: Yeah, we stupidly blew that one. (Laughter)

WARREN BUFFETT: We’ll blow more, too. (Laughter)

7. Decentralization “just short of total abdication”

WARREN BUFFETT: Zone five.

AUDIENCE MEMBER: Yes, sir. Good afternoon. My name is Matt Lovejoy from Lexington, Kentucky. And gladly, I’m not a consultant. (Laughter) I have a question, sir, Mr. Buffett, about your operating management style. In my opinion, the mainstream media minimizes the significance of your nonpublic operating investments. When you consider capital allocation in these companies, do you have the managers submit annual business plans? And if so, do you formally meet with those managers to see how well you can track progress against those plans?

WARREN BUFFETT: Yeah, that’s a good question. And the answer is that we may meet with some of them annually, we may meet with others semiannually, but we have no formal system whatsoever, and we will never have a formal system. We don’t demand any meetings of any of our managers. We have no operating plan submitted to headquarters. Some of the companies use operating plans themselves, some of them don’t. They are all run by people who have terrific records, and they have different batting styles. And we’re not about to tinker with somebody that’s batting with .375 just because somebody else holds the bat a little differently or uses a different weight bat, or something of the sort. So we believe in letting them do, currently and in the future, what has been successful for them in the past. And different people have very different styles. I’ve got my own style, you know? But we have managers that like to talk things over, we have other managers that like to go their own way.

And we have managers that have a by-the-book approach which works well, we have other managers who wouldn’t dream of that. We have managers that — most managers probably have monthly statements of financials. We have other managers that don’t. And that really isn’t a problem. What we want to have is good managers, and there’s more than one way to get to, at least, business heaven, and we have a number that have found different ways to get there. So we have never imposed — we have certain requirements because we’re a public company, and SEC requirements, and International Revenue Service coordination. But we’ve never imposed anything from the top on any of the operating managements. We have MBAs running companies, we have people who never saw a business school. And talent is the scarce commodity, and when you find talent and they’ve got their own way of doing things, we let it — we’re delighted to have them do it. More than letting them do it — we want them to do it their way. We don’t want to change them. Charlie?

CHARLIE MUNGER: Yeah, the truth of the matter is that we have decentralized power in the operating businesses to a point just short of total abdication. (Laughter) And we don’t think our system is right for everybody. It has suited us and the kind of people that have joined us. But we don’t have criticism for other people, like Emerson Electric or something, who have operating plans, and compare performance quarterly against plan and all that sort of thing. It’s just not our style.

WARREN BUFFETT: Yeah, we centralize money and — (laughs) — everything else we decentralize, pretty much, but — I don’t know whether you’ve met him here, but for example, Al Ueltschi is here. He started FlightSafety in 1951 and he’s — I don’t know what he’ll spend on simulators this year, but it could easily be a hundred million dollars or thereabouts. And he — if I spent hours with him, I couldn’t add 1/100th of 1 percent to his knowledge of how to allocate that money. It would be ridiculous. It’d be a waste of his time and it would be an act of arrogance on my part. And I have no worries about how Al allocates the money. And that’s an unusually capital intensive business compared to most of our businesses. There’s some that I get into the details more because I just worked with the person that’s running things a long time and we kind of enjoy it. Ajit and I talk virtually every night about the reinsurance business.

You know, I am not improving the quality of his decisions at all, but it’s an interesting game and I like hearing about it, and he doesn’t mind talking about it, so we talk them over. But that’s just a matter of personal chemistry. And as we add managers, we will adapt to them. We adapt our accounting systems, to a degree, to them. Now, we do have certain requirements that result from the SEC and IRS. But we don’t — our managers know their businesses and they know how to run them. And if they don’t — this hasn’t been the case — but if they didn’t, we would, you know, we’d do something about the manager, we wouldn’t try and build a bunch of systems.

8. Avoid the “Frozen Corporation”

WARREN BUFFETT: Zone 6, please.

AUDIENCE MEMBER: Good afternoon, gentlemen. My name is George Donner from Fort Wayne, Indiana. My question has to do with estimating the intrinsic value of a company, in particular the capital intensive companies like you were mentioning. I’m thinking of things like McDonald’s and Walgreens, but there are lots of others where you have a very healthy and growing operating cash flow, but it’s marginally or completely offset by heavy expenditures on putting up new stores or restaurants, or building a new plant. And so my question is, what do you do for your estimate of future free cash flow? And with Treasurys around — long Treasurys around 6 percent — at what rate do you discount those cash flows?

WARREN BUFFETT: Well, we discount at the long rate just to have a standard of measurement across all businesses. But we would take the company that is spending the money as it comes in, and they don’t get credit for gross cash flow, they get credit for whatever net cash is left every year. But of course, if they’re spending the money wisely, even though you have to discount it for more years, the growth in cash development should offset that or they weren’t investing it wisely. The best business is one that gives you more and more money every year without putting up anything to get it, or very little. And we’ve got some businesses like that. The second-best business is a business that also gives you more and more money. It takes more money, but the rate at which you invest — reinvest — the money to get that growth is a very satisfactory rate. The worst business of all is the one that grows a lot, and where you’re forced — forced, in effect — forced to grow to stay in the game at all, and where you’re reinvesting the capital at a very low rate of return.

And sometimes people are in those businesses without knowing about it. But in terms of discounting, in terms of calculating intrinsic value, you look at the cash that is expected to be generated and you discount back at — in our case, we use the long-term Treasury rate. That doesn’t mean that you pay the amount that that present value calculation leads to, but it means that you use that as a common yardstick, that Treasury rate. And that means that if somebody is reinvesting all their cash flow the next five years, they’d better have some very big figures coming in down the road. Because at some day, a financial asset has to give you back cash to justify you laying out cash for it now. Investing is the art, essentially, of laying out cash now to get a whole lot more cash later on, and something at some point better deliver cash. Ben Graham in his class, we used to talk about what he called the Frozen Corporation. And the Frozen Corporation was a company whose charter prohibited it from ever paying anything to its owners, or ever being liquidated, or ever being sold and —

CHARLIE MUNGER: Sort of like a Hollywood producer. (Laughter)

WARREN BUFFETT: Yeah. And the question was, what was such an enterprise worth? Well, that’s sort of a theoretical question, but it forces you to think about the realities of what business is all about. And business is all about putting out money today to get back more money later on. Charlie?

CHARLIE MUNGER: I do think there is an interesting problem that you raise, because I think there is a class of businesses where the eventual cash back part of the equation tends to be an illusion. I think there are businesses where you just keep pouring it in and pouring it in, and then all of a sudden it doesn’t work, and no cash comes back. And what makes our life interesting is trying to avoid those and get in the alternative kind that drowns you in cash. (Laughter)

WARREN BUFFETT: The one figure we regard as utter nonsense is the so-called EBITDA. I mean, the idea of looking at a figure before the cash requirements and merely staying in the same place — and there usually are — any business with significant fixed assets almost always has with it a concomitant requirement that major cash be reinvested in order simply to stay in the same place competitively and in terms of unit sales — to look at some figure that is before — that is stated before those cash requirements, is absolute folly and it’s been misused by lots of people to sell lots of merchandise in recent years.

CHARLIE MUNGER: It’s not to the credit of the investment banking fraternity that it has learned to speak in terms of EBITDA. I mean, the idea of using a measure that you know is nonsense, and then piling additional reasoning on that false assumption, it’s not creditable intellectual performance. And then once everybody is talking in terms of nonsense, why, it gets to be standard. (Laughter)

9. Checklist for selecting stocks

WARREN BUFFETT: Zone 7, please.

AUDIENCE MEMBER: Hi. My name is Brennan Vecchio (PH) and I’m in the Academy of Finance at Northwest High School in Omaha. Could you explain the criteria you look at when selecting your stocks?

WARREN BUFFETT: Well, we look at — I’m glad you came. I hope there’s a large group. I got a note, I think from your teacher, on that. (Applause) We look at it — the criteria for selecting a stock is really the criteria for looking at a business. We are looking for a business we can understand. That means they sell a product that we think we understand, or we understand the nature of the competition, what could go wrong with it over time. And then when we find that business we try to figure out whether the economics of it means the earning power over the next five, or 10, or 15 years is likely to be good and getting better or poor and getting worse. But we try to evaluate that future stream. And then we try to decide whether we’re getting in with some people that we feel comfortable being in with. And then we try to decide what’s an appropriate price for what we’ve seen up to that point. And as I said last year, what we do is simple but not necessarily easy. The checklist that is going through our mind is not very complicated.

Knowing what you don’t know is important, and sometimes that’s not easy. And knowing the future is definitely — it’s impossible in many cases, in our view, and it’s difficult in others. And sometimes it’s relatively easy, and we’re looking for the ones that are relatively easy. And then when you get all through you have to find it at a price that’s interesting to you, and that’s very difficult for us now. Although there have been periods in the past where it’s been a total cinch. And that’s what goes through our mind. If you were thinking of buying a service station, or a dry cleaning establish, or a convenience store in Omaha to invest your life savings in and run as a business, you’d think about the same sort of things. You’d think about the competitive position and what it would look like five or 10 years from now, and how you were going to run it, and who was going to run it for you, and how much you had to pay.

And that’s exactly what we think of when we look at a stock, because the stock is nothing other than a piece of a business. Charlie?

10. Easy decision case study: National Cash Register

CHARLIE MUNGER: Yeah. If finance were — when finance is properly taught, it should be taught from cases where the investment decision is easy. And the one I always cite is the early history of National Cash Register Company, and that was created by a fanatic who bought all the patents, and had the best salesforce, and the best production plants. He was a very intelligent man and passionately dedicated to the cash register business. And of course, the cash register business was a godsend to retailing when cash registers were invented. So that was the pharmaceuticals of a former age. If you read an early annual report prepared by Patterson, who was CEO of National Cash Register, an idiot could see that this was a talented fanatic. Very favorably located, and that, therefore, the investment decision was easy. If I were teaching finance, I would collect a hundred cases like that. And that’s the way I would teach the students.

WARREN BUFFETT: We have that annual report. What was that, 1904 or something, Charlie? But it’s really a classic report because Patterson not only tells you why his cash register is worth about 20 times what he’s selling for to people, but he also — (laughs) — tells you that you’re an idiot if you want to go in competition with him. It’s a classic.

CHARLIE MUNGER: It is just a (inaudible). But no intelligent person can read this report and not realize — (laughs) — that this guy can’t lose.

11. “Norman Rockwell frame of mind”

WARREN BUFFETT: Area 8, please.

AUDIENCE MEMBER: Good afternoon. My name is Robert Rowland (PH) from London, England. I’ve been in Omaha all weekend with my wife on the first leg of my honeymoon, and I’ve noticed you’re quite a buyer of nostalgic assets. Can I ask whether nostalgia is one of your filters? (Buffett laughs) Are there any assets like that left in the U.S. to buy? And if not, can I suggest you come to the U.K. where all we do is sell them? (Laughter)

WARREN BUFFETT: Well, I don’t want to interrupt your honeymoon. (Laughter) But if you’d send me a list of those companies over there that are long on nostalgia, that might be to our liking. Because Charlie and I tend to operate from sort of a Norman Rockwell frame of mind. And it is true that the kind of companies we like sort of do have a homey, Norman Rockwell, Saturday Evening Post-type character to them there. They have character. And they’re the kind of companies, I think, frequently, that people, when they join them, expect to spend the rest of their lives there rather than look at it as something to stick on their resume. And there are businesses like that. If you look at the businesses that we’ve bought in the last three or four years, there is real character to the businesses and to the people that build them.

That’s why the people that build them stay on and feel very strongly about running them correctly, even though they have no financial consequence to themselves whatsoever, so — If you’ve got a list of those in England and you still have any strength left after your honeymoon, drop me a line. (Laughter)

12. A and B shares are nearly equivalent investment choices

WARREN BUFFETT: Zone 9, please.

AUDIENCE MEMBER: Good afternoon. Joshua Andrews (PH) from Omaha Northwest High School, Academy of Finance.

WARREN BUFFETT: Good.

AUDIENCE MEMBER: And on behalf of the Academy of Finance, we want to thank you for the tickets. There’s 33 of us in attendance today.

WARREN BUFFETT: Terrific. (Applause)

AUDIENCE MEMBER: We had the opportunity to play a national game, the Investment Challenge. And on the list of the stocks there were BRK A and BRK B. Can you explain what the difference of the two stocks are?

WARREN BUFFETT: Yeah, the difference between the Berkshire A and B is simply that an A can be converted to a B at any time in the ratio of one A into 30 Bs. The B cannot be converted into the A, so it’s a one-way street on conversion. The economic value of the B is exactly 1/30th that of the A. So anytime the A ever gets any money of any kind from dividends, or liquidation, or a merger, or something of the sort, for every $30 that you get on the A you’re going to get $1 on the B. The two differences are that there is less voting power, proportionately, in the B. And the B does not participate in a designated-contributions program that Berkshire runs, simply because that would be very, very hard to administer. And when we issued the B we pointed out those two differences. The B should never sell for more than 1/30th of the price of the A. When it sells just a tiny bit above that then arbitrage settles in as people buy the A and convert it to B, and sell the B.

Occasionally the B may be at a slight discount to the A because it’s not convertible the other way. But I think as a practical matter you can treat the A and B as very equivalent investment choices. There’s not enough difference to make it significant. Charlie?

CHARLIE MUNGER: Nothing further.

13. How teenagers can prepare for the future

WARREN BUFFETT: OK. Area 10, please.

AUDIENCE MEMBER: My name is Sheena Cho (PH) from the Academy of Finance. What recommendations would you give us as teenagers to prepare for our future and become as successful as you? (Laughter)

WARREN BUFFETT: Well, if you’re interested in business, I definitely think you ought to learn all the accounting you can by the time you’re in your early 20s. Accounting is the language of business. Now, that doesn’t mean it’s a perfect language, so you have to know the limitations of that language, as well as all aspects of it. So I would advise you to learn accounting. And I would advise you to be — in terms of part-time employment or anything else, work at a number of businesses. There’s nothing like seeing how business operates to build your judgment in the future about businesses. You know, when you understand what kind of things are very competitive, and what kind of things are less competitive, and why that works that way, all of that adds to your knowledge. So I would do a lot of reading. If you’re interested in investments, I would — A, I would take the accounting courses. I’d do a lot of reading about investments and I would get as much business experience.

I would talk business with people that are in business to find out what they think makes their operation tick, or where they have problems and why. I just think you just kind of sop it up every place that you can. And if it turns you on, you’ll do well in it. I mean, I think that, you know, certain activities grab different people. But if business is of interest to you, my guess is you’ll do well. And if you understand business you understand investments. Investments are simply business decisions in terms of capital allocation. I wish you well on it. Charlie?

CHARLIE MUNGER: Yeah, there’s also the little matter of underspending your income year after year after year.

WARREN BUFFETT: Which we have mastered. (Laughter)

CHARLIE MUNGER: Yes. That really works if you keep at it.

WARREN BUFFETT: Yeah, I mean, Charlie and I both — Charlie started having children at a rapid rate, so — and he was lawyer when there was not big money in then. But, I was — any money you save before you get out and start having a family is probably — any dollar — is probably worth $10 later on simply because you can save it. The time to save is young, and you’ll never have a better time to save than really, free formation of a family. Because the expenditures come along then whether you like them or not. So I — You know, work for yourself first and put the money aside. I was lucky that way, I didn’t have to pay for my own college. Probably wouldn’t have gone to college if I’d had to pay for it. But I, you know, I was able to save everything I made in my teens and those dollars got magnified quite a bit. Whereas the money I — when I started first selling securities, I mean, the money I made then was taken up by family needs to quite an extent. So start saving early.

A lot of it’s habit anyway, so it’s a great habit to have.

14. “We are not reluctant to invest abroad”

WARREN BUFFETT: OK, zone 1, please.

TONI: I’m Toni Ausnit (PH) from New York City, following up on the questioner from London. In light of the current dearth of investment opportunities, do you see yourselves investing in non-U.S. companies which are well-managed, understandable, and growing?

WARREN BUFFETT: Well, if we find such companies as you describe at a price that’s half attractive we’re perfectly willing to buy them. So the answer to that is yes. But we would be looking, to an extent, worldwide irrespective of market conditions in the United States. Now, market valuations in this country tend to be fairly well-matched in most of the major countries. So we don’t — there’s been a bull market all over the world in a huge way in the bigger markets. And so unfortunately — I mean, it would of been nice for us if the U.S. market had tripled and other markets had stayed the same, and then we would be very likely to be finding things abroad. We’re not finding them abroad, but we’re certainly looking for the kind of thing you’re talking about. We are not reluctant to invest abroad. And our two — well, all three of our largest holdings — American Express, Gillette, and Coke — and we’re talking about $25 billion of market value there that we have — all three of those have major businesses abroad.

And in the case of Coke and Gillette, it’s a majority of their earnings from abroad. So we’re interested and there’s better growth opportunities in many areas abroad than here. But we’re not finding bargains as we look around the world. Charlie?

CHARLIE MUNGER: Nothing more.

15. Philanthropy share sales won’t hurt stock price

WARREN BUFFETT: OK. Area two.

AUDIENCE MEMBER: My name is Henry Allen (PH), Mamaroneck, New York. Question I have is a little delicate, relates to my family and heirs rather than myself, because I’m a couple of decades older than you gentlemen. You’ve been very candid about the succession and the estate planning, but how will the recipients of huge grants — charitable grants — get the liquidity they need without — to use the money without unduly driving the stock down?

WARREN BUFFETT: Well, I don’t think that supply and demand, in terms of specific — you know, let’s just say that 3 percent of Berkshire were to be added to the supply, anyway. I don’t think that makes much difference. What really makes the difference is the prospects of the business. If my charitable foundation were operative today, it would have to sell — it would have to give away 5 percent of the value of the foundation every year. And if Berkshire paid no dividend, that means it would have to sell 5 percent of the holdings per year. I don’t think that the price of Berkshire would be materially different if there were a seller of — that would be, in this case, 2 percent of Berkshire’s capitalization — I don’t think it would be materially different. If it is, it probably should be different. I mean, there should be a reasonable amount of trading that can take place annually without affecting the price of the stock materially or the price of the stock is being propped for sort of unnatural reasons. So I wouldn’t really worry about that.

We had one shareholder die about a year, year and a half ago, that had 3/4 of 1 percent of the company, for example. It was sold in, I don’t know, six weeks or thereabouts, and they raised, at that time, $250 million or thereabouts from the sale. I am not worried about that. I’m worried about — I mean, I don’t worry — but the key factor is what are the prospects of the businesses? If the businesses are worth money — there are all kinds of companies on the New York Stock Exchange who are perfectly decent businesses where 30 or 40 percent of the stock turns over a year. And Berkshire’s price should not be way different if 10 percent trades a year as opposed to the present 3 percent. Charlie?

CHARLIE MUNGER: I agree with that. I don’t think there’d be any problem at all at the present time if the Buffett Foundation were selling 5 percent of its holdings every year.

WARREN BUFFETT: Could be 500 shares a week or something like that. But if there isn’t demand for 500 shares a week of A on a company with our capitalization, then the price probably is artificially wrong at that time.

CHARLIE MUNGER: But I just had lunch with Susie and it doesn’t look to me like she’s in any imminent danger of mortality. (Laughter)

WARREN BUFFETT: No. Yeah, it will — it will come into play when the survivor of the two of us dies and when the estate gets cleaned up and everything else. So I think — I certainly hope and I think it’s quite a ways away.

CHARLIE MUNGER: You people have more important things to worry about. (Laughter and applause)

16. Buffett’s favorite book on his philosophy

WARREN BUFFETT: Zone 3, please.

AUDIENCE MEMBER: My name is Jim Howard (PH). I’m from Syracuse, Indiana. My question is, does the book “Buffettology” by Mary Buffett present fairly, in all material respects, the calculations you use in evaluating a business for purchase, or did the lady just write a book?

WARREN BUFFETT: Well, it was written by two authors. But I would say that — no, I would say that in a general way, it gets at the investment philosophy. But I wouldn’t say that — it’s not the book I would’ve written, precisely, but I have no quarrel with it, either. I actually think by reading Berkshire’s reports, you should be able to get more — I would think you’d get more of our philosophy than in any other manner. I think Larry Cunningham, the fellow who held the symposium at the Cardozo School at Yeshiva, did the best job, actually, of sort of reconstructing the various things that have been written at Berkshire into sort of the best-organized presentation of our philosophy. So and he —

CHARLIE MUNGER: And he’s selling it right here. It’s a very practical —

WARREN BUFFETT: Yeah, he had it at Borsheims — in the mall outside Borsheims yesterday. And Larry did a very good job. You know, I had nothing to do with it, but I think that that — I really think he’s done a first-class job of sort of organizing by topic, I mean, all these things that I’ve sort of written annually and Charlie’s written over time. So that would be — that would probably be my — if I were picking one thing to read, that would probably be the one.

17. Disney sale in the ’60s was a “huge mistake”

WARREN BUFFETT: OK, zone 4, please.

AUDIENCE MEMBER: My name is Leigh (inaudible). I’m from Los Angeles, California. And I want to begin by thanking you for having Bob Hamman. It was a stroke of genius. I could shop at Borsheims and my husband was entertained while I did so. (Laughter)

WARREN BUFFETT: Well, Bob is not only the best bridge player around but he is an entertaining guy, too. We —

AUDIENCE MEMBER: He’s great.

WARREN BUFFETT: Yeah, he is great. I agree with you.

AUDIENCE MEMBER: My question. You owned Disney once before and sold it. You also owned advertising companies in the ’70s, I believe —

WARREN BUFFETT: Right.

AUDIENCE MEMBER: — and you sold them. Could we have some insight into your thinking as to why you sold them?

WARREN BUFFETT: I’m not sure I want to give you any insight into that thinking. (Laughs) Well, we’ll start off with the fact that when I was 11, I bought some Cities Service preferred at 38 and it went to 200, but I sold at 40, so — (laughter) — grabbing my $2 a share of profit. So I — everything we’ve ever sold has gone up subsequently, but some of them have gone up more painfully, subsequently, than others. And certainly the Disney sale in the ’60s was a huge mistake. I should have been buying, forget about holding, and — That’s happened many times. I mean, we think that anything we sell should go up subsequently, because we own good businesses and we may sell them because we need money for something else, but we still think they’re good businesses, and we think good businesses are going to be worth more over time. So everything I sold in the past, virtually that I can think of, has gone on to sell at a lot more — for a lot more money. And I would expect that would continue to be the case.

That’s not a source of distress. But I must say that selling the Disney was a mistake, and actually the ad agencies had done very well since we sold them, too. Now, maybe some of that money went into Coca-Cola or something else, so I don’t worry about that. I would worry, frankly, if I sold a bunch of things right at the top, because that would indicate that, in effect, I was practicing the bigger fool-type approach to investing, and I don’t think that can be practiced successfully over time. I think the most successful investors, if they sell at all, will be selling things that end up going a lot higher, because it means that they’ve been buying into good businesses as they’ve gone along. Charlie?

CHARLIE MUNGER: Well, I’m glad that the questioner brought this touch of humility, because it is really useful to be reminded of your errors. (Laughter) And I think we’re pretty good at that. I mean, we kind of mentally rub our own noses in our own mistakes. And that is a very good mental habit. Warren can tell you the exact number of cents per shares that he sold at and compare it with the current price. It actually hurts him. (Laughter)

WARREN BUFFETT: It actually doesn’t hurt. (Laughs) The truth is, you know, because, you know, you just keep on doing things. But it is instructive to look at — to do postmortems on everything and say — as long as you don’t get carried away with it. But every acquisition decision, that kind of thing, you know, there should be postmortems. Now, most companies don’t like to do postmortems on their capital expenditures. I’ve been a director of a lot of companies over the years and they’ve usually not spent a lot of time on the postmortems. They spend a lot of time on telling you how wonderful the acquisitions are going to be, or the capital expenditures, but they don’t like to look so hard, necessarily, at the results.

CHARLIE MUNGER: Think of how refreshing a board of directors meeting would be if they sat down, “And now we’ll spend three hours examining all our stupid blunders and how much we’ve blown.”

WARREN BUFFETT: And then after that the compensation committee will meet. Now — (laughter) — that’s not going to happen. (Laughter)

CHARLIE MUNGER: Right.

18. Phil Carret is one of Buffett’s heroes

WARREN BUFFETT: OK. Area 5, please.

AUDIENCE MEMBER: My name is Keller, Harpel Keller, from Portland, Oregon. Two questions, one of a personal nature. Obviously there are many, many people here today. And I wonder if one of the true patriarchs of the investment business is here today, Phil Carret —

WARREN BUFFETT: Well, I’ll answer —

AUDIENCE MEMBER: Many of his friends and admirers would wish him well.

WARREN BUFFETT: Phil, up till a week ago was going to be here today. Phil is 101, wrote a book on investments in 1924, and I’ve known Phil for about 46 or ‘7 years. And Phil has made all the meetings for a number of years, would be here today, and he broke a hip about five or six days ago. But he sent a message that he will definitely be here next year. (Laughter) And he will be, too. (Applause)

WARREN BUFFETT: Phil is a hero of mine. Go ahead.

19. End of Cold War isn’t an investing factor

AUDIENCE MEMBER: Second question. Has to do with Ben Graham. And he changed his valuation standards as the decades progressed. When he couldn’t buy stocks below a net-net, he changed his standards because the environment changed. Now, the world today seems to be a much different place than in 1989 when the U.S.S.R. collapsed. Even they are stumbling toward the free enterprise system. The Russian mafia is a perverse illustration of that. Now there is only one superpower in the world, the U.S.A., and we must be extremely grateful for the men who put us on the track to the free enterprise system. Now, the free enterprise system is out of the bottle, it’s not going to get back in. It seems to be expanding and accelerating around the world. With the resulting expansion of world trade, may that lead to a reevaluation of historical measures for measuring investments?

WARREN BUFFETT: Well, my answer to that would be that I doubt it, but I, you know, I also don’t know. But I don’t think that the end of the Cold War is something that I would factor into my evaluation of businesses. There are all kinds of events that happened, and their impact, in terms of being quantified, very difficult to figure over time, very difficult to isolate any single variable in a complex economic equation. So in terms of how the world was going to work ten years from now, or the returns are going to be on equity in business, you know, I don’t know what will be all the variables that impact on that. And obviously, right now people are very bullish about the fact that those returns — or something like those returns — will continue. But I don’t — I would not rely in making such a projection on the fact that the Cold War has ended or really any political or economic development around the world. I don’t know how to predict future earnings of American business.

And when I look at all of the great historic events of the past, nothing there gives me much in the way of a clue as to which ones would signal major changes in profitability of American business. Charlie?

CHARLIE MUNGER: Well, I think you raise one very interesting question. If the rest of the world becomes very much more prosperous, as it will if it adopts the free enterprise system, which investments are likely to do best? I would argue that the Cokes and Gillettes and so on are likely to be helped by a great increase in prosperity in what is now the Third World. And I’m not so sure that’s true of a lot of other businesses.

WARREN BUFFETT: Yeah, we like the international businesses we have. And as I say, our three top holdings all have a major international aspect to them, and really, in aggregate, a dominant international aspect to them. And there’s no question in my mind that a Coke will grow faster outside of the United States than in the United States, and the same is true of Gillette, maybe the same is true of American Express. So that’s built into what we — our evaluation of those businesses. But I felt that way before 1989, too. I mean, it’s very hard to evaluate how the ball is going to bounce, generally, around the world. But it is a plus to have products such as Gillette has or Coke has, that have demonstrated the fact that they travel extraordinarily well around the world, the people crave those products, and that they’re going to — no one’s going to find a way to do it better than those two companies in their respective fields. And they sell an inexpensive product, so all of that’s going for us.

But in terms of how stocks generally sell or the profitability of American business generally is in the future, it doesn’t help me much. Charlie, any more on that?

CHARLIE MUNGER: No more.

WARREN BUFFETT: OK.

20. Subsidiary managers are never second-guessed

WARREN BUFFETT: Area 6.

AUDIENCE MEMBER: Hi. My name is Bartley Cohen (PH). I just want to thank you for a great weekend. And my question is, after you bought Dairy Queen I heard they put Coca-Cola into all the stores, but yesterday when I went to the Nebraska Furniture Mart they said they don’t take American Express. And my question is — (crowd noise) — my question is, do you encourage the subsidiaries and the companies that you have stock to use each other’s products, or do you leave it up to the management of the subsidiary?

26. Berkshire stock tracks intrinsic value “better than most”

WARREN BUFFETT: OK. Area 1, please.

AUDIENCE MEMBER: Good afternoon. My name’s Gary Bialis (PH), I’m from Southern California. I want to thank you again for producing this Owner’s Manual that you did a couple of years ago. I find it quite useful and use it quite often. Two questions: can you tell me if the rule of thumb is still applicable regarding the statement in the Owner’s Manual, that the percentage increase in the book value tracks pretty well with the percent increase in intrinsic value? Or is the fact that you now have more owned businesses, especially ones like GEICO and FlightSafety, mean that the spread between those two has possibly narrowed?

WARREN BUFFETT: Well no, the two have tracked pretty well over the years. I mean, compared to the record of most businesses that are publicly owned, I would say that over the 33 or so year span, our market price has tracked intrinsic value more closely than, you know, 80 or 90 percent of the companies that we view, probably 90 percent. But that doesn’t mean it does it all the time. And there are times when the market price will outpace intrinsic value — the change in intrinsic value — and there are times when, obviously then, that it will lag behind. So it’s far from perfect but it’s better than most. Ideally, we would like it to track it perfectly. If we ran this as a private company and we met once a year, and set a price on the stock to have it traded once a year, and Charlie and I were responsible for setting that price, we would try to set a price that was as close to intrinsic value as we could. And that would be — to the extent that we could do it — it would be a perfect tracking. The market isn’t like that, and the market responds to a lot of other things.

So it’s perfect. It’s not getting more perfect, in our view. But we still think that Berkshire tracks it better than most companies. Charlie, you have —

CHARLIE MUNGER: Nothing to add.

27. KKR sale of Gillette shares “means nothing to us”

WARREN BUFFETT: Area 2.

AUDIENCE MEMBER: I’m Elizabeth Cruz (PH) from New York City. I have a question about Gillette. Another significant Gillette investor, KKR, recently sold over a billion dollars in Gillette shares, shares that they had acquired through Gillette’s acquisition of Duracell. Knowing that KKR has also been a successful investor, do you see this as a negative signal about Gillette’s future prospects, particularly on the eve of the launch of the Mach 3 razor? And what do you think their plans are for the remainder of their shares?

WARREN BUFFETT: Well, I think they may have even publicly stated — I’m pretty sure they have — the Duracell shares from which the Gillette shares came were held by a specific investment fund that was formed in, I don’t know what year, but a given year, and which is scheduled to disband at a certain point. So those shares, whether they were of Duracell or whether they’re of Gillette, were scheduled for disposition at some point within a given term. And I think that KKR made the decision — and they’ve made it with other stocks, too — is to have maybe three or so offerings between now and that terminal date for their partnership. And why they pick any one of — any given date, you know, is up to them and their advisors. It means nothing to us. I mean, if they didn’t have that kind of a fund and they decided to sell, it wouldn’t make any difference to them [us]. And I presume if we made a decision to sell, it wouldn’t make any difference in their case.

So we, you know, we form our ideas of valuation independent of anybody else’s thinking on it. But in the case of KKR, specifically, they have a termination date on a partnership that owned those shares, and have to dispose of them one way or another between now and the termination date, and probably decided that with the quantity of stock they had, that they were going to have several sales. The Mach 3 is terrific, incidentally. I’ve been using it since October. So Henry did not decide to sell that stock based on the Mach 3. (Laughter)

28. No split means “better class of shareholders”

WARREN BUFFETT: Area 3, please.

AUDIENCE MEMBER: I am Gertrude Goodman (PH) from Palm Springs, California. Mr. Buffett and Mr. Munger, there are many stocks that rise and eventually split. My question is, do you foresee in the near future a split for Berkshire Hathaway Class A?

WARREN BUFFETT: Well, that’s an easy one. (Laughter) No. The answer is no. We have no plans to split the A. In effect, we let people who want to split the A split it themselves into a B. So that anybody who owns the A can have a 30-for-1 split any morning they wake up and want to have such a split. (Laughter) Charlie, do you have any additional comment?

CHARLIE MUNGER: No, I think you said “no” perfectly. (Laughter and applause)

WARREN BUFFETT: We don’t take that attitude because we’re cavalier about how shareholders feel. We really think that in the long range interest of Berkshire that the policy we followed on not splitting has benefitted the company and shareholders. Nothing dramatic about it, but I think that we have a better class of shareholders, in aggregate, in this room, than we would have if we were selling at $3 a share, or $30 a share, or maybe even $300 a share.

29. “Book value is not a factor we consider”

WARREN BUFFETT: Area 4, please.

AUDIENCE MEMBER: Good afternoon, Mr. Buffett and Mr. Munger. My name is Jack Sutton (PH) from New York City. I have two questions. The Japanese stock market has been likened to the U.S. market in 1974. With Japanese stocks selling at very low price-to-book values, as compared to U.S. stocks, would it not make sense to invest in a basket of Japanese stocks or an index fund of Japanese stocks? Question number two: Berkshire Hathaway tends to invest in companies with high margins and high return on common equity. Berkshire’s investment in the airline business seems to have digressed widely from those principles. Could you elaborate on why Berkshire invested in the airline industry, and would Berkshire consider new investments in the industry in the future?

WARREN BUFFETT: I’m going to the first question. The reason that — and I don’t know the exact figures — that Japanese stocks would sell at a lower price-book ratio than U.S. stocks is simply because Japanese companies are earning far less on book than American companies. And earnings are what determine value, not book value. Book value is not a factor we consider. Future earnings are a factor we consider. And as we mentioned earlier this morning, earnings have been poor for a great many Japanese companies. Now, if you think that the return on equity of Japanese business is going to increase dramatically, then you’re going to make a lot of — I mean, and you’re correct, you’re going to make a lot of money in Japanese stocks. But the return on equity for Japanese businesses has been quite low, and that makes a low price-to-book ratio very appropriate because earnings are measured against book. And if a company’s earning 5 percent on book value, I don’t want to buy it at book value if I think it’s going to keep earning 5 percent on book value.

So a low price-book ratio means nothing to us. It does not intrigue us. In fact, if anything, we are less likely to look at something that sells at a low relationship to book than something that sells at a high relationship to book, because the chances are we’re looking at a poor business in the first case and a good business in the second case.

30. Airlines not “intriguing” enough to buy stock

WARREN BUFFETT: What was the other question on, Charlie?

CHARLIE MUNGER: Buying — airlines.

WARREN BUFFETT: Airlines. Yeah, I always repress everything on airlines. I don’t want to — (Laughter) No, we’ve never bought an airline common stock that I can remember. So what we did was we lent money to USAir for a 10-year period and we had a conversion privilege there. It looked like it — it was a terrible mistake. I made the mistake. But we got bailed out. But we — we never made the determination — when we bought our stock, USAir was selling at $50 a share or thereabouts, the common. And we didn’t have an interest in buying USAir at 50, or 40, or 30, or 20. And we got a chance to as things went along — (laughter) — all the way down to 4. (Laughter) And we never bought it. And we’ve never bought American, or United, or Delta, or any other airline. It is not a business that intrigues us.

We did think it was intriguing to lend money to them with a conversion privilege and it’s worked out now because we got lucky, and because Steve Wolf came along and really rescued the company from right at the brink of bankruptcy. But we’re unlikely to be in airlines, although again, we wouldn’t mind lending money to a lot of businesses that we wouldn’t buy common equity in. I mean, that could happen again in various industries, including the airline industry. Charlie, do you have anything to say on either the airlines or the Japanese market?

CHARLIE MUNGER: Well, the airline experience was very unpleasant for us. The net worth just melted. It was (inaudible) a billion and a half, and it just went a hundred million, a hundred million, a hundred million, and finally the cash is running down. It is a very unpleasant experience. (Laughter) We try and learn from those experiences but we’re very slow learners. (Laughter)

31. No “good returns” on Japanese stocks unless profits increase

WARREN BUFFETT: Japanese market (inaudible)?

CHARLIE MUNGER: Oh, the Japanese market. I suppose anything — (Laughter as Buffett reaches for box of candy) I suppose anything could happen. After all, we bought silver. (Laughter) But we have never made a big sector play on a country. In fact, we’ve almost never made a big sector play.

WARREN BUFFETT: We would have to come to the conclusion that Japanese business, instead of earning whatever it’s earning on equity now, is going to earn appreciably more on equity. I’ve got no basis for it — I wouldn’t argue if anybody else feels that way — I wouldn’t argue with them. But I have no basis for coming to that conclusion. And unless you come to that conclusion, you’re not going to make good returns. I mean, unless that happens, you’re not going to make good returns from Japanese stocks. You can not — you can’t earn a lot of money from businesses that are earning 5 percent on — or 6 percent — on equity. And I look at the reports but I don’t see the earning power now. Now, maybe it’ll all change. I mean, there’s talk of — there’s already been a small temporary tax cut, but corporate tax rates are quite high, as you know, in Japan. And they used to be 52 percent here in the United States, now they’re 35.

So you could have things happen that increase corporate profits, but I don’t have any special insight into that that anyone that reads the press generally would not have.

CHARLIE MUNGER: There are also readings in corporate culture that have to be made. Owning stock in a corporation where you know that if shareholders or somebody else has to suffer, the choice is likely to be that somebody else will be chosen. That is a different kind of a company to invest in than one that thinks that the principal purpose of life is to keep some steam boiler company going in a particular community or something, no matter how much the shareholders suffer. I think it’s hard to judge corporate culture in the foreign countries as well as we can judge it in our own.

32. “We’re only interested in price and value”

WARREN BUFFETT: Area five?

AUDIENCE MEMBER: Yvonne Edmonds (PH) from Cedar Mountain, North Carolina. I have a specific question but not a trivial one. You regularly compare Berkshire Hathaway’s performance to the S&P 500, which is very helpful and very interesting. But I haven’t seen a correlation coefficient between the S&P 500 daily — from day-to-day — performance — to close, say — and Berkshire Hathaway’s close. Now, it so happens for me — and I’m sure some other people in the audience — that I don’t always have access to newspapers — or the internet, for that matter — newspapers that publish Berkshire Hathaway performance on a daily basis, or even a weekly basis for that matter, or a monthly basis. It would be very helpful to know the extent of a correlation coefficient between those two variables. If you have that, would you let us know what it is? And if you don’t, would you please consider calculating it in the future?

WARREN BUFFETT: Well, it could be calculated but I don’t think it would have much meaning. I mean, it would be an historical correlation coefficient which, you know, I would be very reluctant to have people place any weight in. I try to indicate even the limitations of the yearly comparison of the relative performance, because what was doable by us in the past is not doable today. I mentioned in my annual report, the best decade I ever had on comparative performance by far was the 50s. Now, I don’t think it was because I was a lot smarter then — (laughs) — unwilling to accept that. But you know, I had some edge of — well, it’s probably 40-plus points per year. But I was working with it — that has no relevance to today whatsoever. It would be misleading to publish it or make calculations based on it. So I think that you would find — I don’t know what you’d find on a specific correlation between Berkshire and the S&P.

You’d find a lot of correlation — well, you might not find so much — you’d find it in intrinsic value between that and Coke, and a few stocks like that. But I don’t really think that’s particularly useful information going forward. We have no objection, anybody wants to make the calculation. But it wouldn’t be something that would be of any utility to us, and if we don’t think it’s utility to us, we don’t want to put it out for shareholders as being of possible utility. We do think that the S&P annual calculation has some meaning because it’s an alternative for people to invest. They don’t need us to buy the S&P. So unless, over time, we have some advantage over that, you know, what are we contributing? What value is added by our management? So we think that that’s — people should hold us accountable even though we would prefer not to be. Because it is a tough comparison for us as a tax-paying entity against a non — pre-tax calculation on the S&P.

But we don’t pay any attention to beta or any of that sort of thing. It just doesn’t mean anything to us. We’re only interested in price and value. And that’s what we’re focusing on all the time, and any kind of market movements or anything don’t mean anything. I don’t know what Berkshire is selling for today and it really makes no difference. You know, it just doesn’t make any difference. What does count is where it is 10 years from now. And I can’t tell you what it was selling for on May 4th, 1983, or May 4th, 1986, so I don’t care what it sells for on May 4th, 1998. I do care, you know, where it is, in general, 10 years from now, and that’s where all the focus is. Charlie?

CHARLIE MUNGER: Yeah, we’re publishing data in the form where we would like it if we were the passive shareholder. And so you’re getting the data and you’re getting it on a time schedule based on what we would want if we were in your position. And we don’t think — (laughter as Buffett holds up a Dairy Queen Dilly Bar that was just given to him) — and we don’t think the correlation coefficients would help us.

WARREN BUFFETT: We don’t think anything that relates either to volume, price action, relative strength, any of that sort of thing — and bear in mind, when I was in my teens I used to eat that stuff up. I mean, I was making calculations based on it all the time, and kept charts on it, even wrote an article or two on it. But it just — it just has no place in the operation now.

CHARLIE MUNGER: One of the pleasant things about dealing with Warren all these years is he’s never talked about a correlation coefficient. (Laughter) If the correlation isn’t so extreme you can see it with the naked eye, he doesn’t compute it. (Laughter)

33. Beware of companies that must “spend money like crazy”

WARREN BUFFETT: OK, we’re going to go to zone 6 and I’m going to have a Dilly Bar, and Charlie has got one here, too. (Laughter and applause) These are terrific.

AUDIENCE MEMBER: My question has to do with what you mentioned earlier about how companies have to reinvest a certain amount of cash in their business every year just to stay in place. And if one could say that the best businesses are the ones that not only throw off lots of cash, but can reinvest it in more capacity. But I suppose the paradox is that the better a company’s opportunities for making expansionary capital expenditures, the worse they appear to be as consumers of cash rather than generators of cash. What specific techniques have you used to figure out the maintenance capital expenditures that you need to do in order to figure out how much cash a company is throwing off? What techniques have you used on Gillette or other companies that you’ve studied?

WARREN BUFFETT: Well, if you look at a company such as Gillette or Coke, you won’t find great differences between their depreciation — forget about amortization for the moment — but depreciation and sort of the required capital expenditures. If we got into a hyperinflationary period or — I mean, you can find — you can set up cases where that wouldn’t be true. But by and large, the depreciation charge is not inappropriate in most companies to use as a proxy for required capital expenditures. Which is why we think that reported earnings plus amortization of intangibles usually gives a pretty good indication of earning power, and — I don’t — I’ve never given a thought to whether Gillette needs to spend a hundred million dollars more, a hundred million dollars less, than depreciation in order to maintain its competitive position. But I would guess the range is even considerably less than that versus its recorded depreciation. Businesses you have to worry about — I mean, an airline business is a good case. In the airlines, you know, you just have to keep spending money like crazy.

And you have to spend money like crazy if it’s attractive to spend money, and you have to spend it the same way if it’s unattractive. You just — it’s part of the game. Even in our textile business, to stay competitive we would’ve needed to spend substantial money without any necessary — any clear prospects of making any money when we got through spending it. And those are real traps, those kind of businesses. And they make out one way or another, but they’re dangerous. And in a See’s Candy we would love to be able to spend 10 million, 100 million, $500 million and get anything like the returns we’ve gotten in the past. But there aren’t good ways to do it, unfortunately. We’ll keep looking, but it’s not a business where capital produces the profits. At FlightSafety, capital produces the profits. You need more simulators as you go along, and more pilots are to be trained, and so capital is required to produce profits. But it’s just not the case at See’s.

And at Coca-Cola, particularly when new markets come along, you know, the Chinas of the world or East Germany or something of the sort, the Coca-Cola Company itself would frequently make the investments needed to build up the bottling infrastructure to rapidly capitalize on those markets, the old Soviet Union. So those are — those are expenditures — you don’t even make the calculation on them, you just know you’ve have to do it. You got a wonderful business, and you want to have it spread worldwide, and you want to capitalize on it to its fullest. And you can make a return on investment calculation, but as far as I’m concerned it’s a waste of time because you’re going to do it anyway, and you know you want to dominate those markets over time. And eventually, you’ll probably fold those investments into other bottling systems as the market gets developed. But you don’t want to wait for conventional bottlers to do it, you want to be there.

One of the ironies, incidentally — and might get a kick out of it, some of the older members of the audience — that when the Berlin Wall went down and Coke was there that day with CocaCola for East Germany, that Coke came from the bottling plant at Dunkirk. So there was a certain poetic — (crowd noise) — irony there. Charlie, do you have anything on this?

CHARLIE MUNGER: I’ve heard Warren say since very early in his life that the difference between a good business and a bad business is usually the good business just throws up one easy decision after another, whereas the bad business gives you a horrible choice where the decision is hard to make and, is this really going to work? And is it worth the money? If you want a system for determining which is a good business and which is a bad business, just see which one is throwing the management bloopers time after time after time. Easy decisions. It’s not very hard for us to decide to open a new See’s store in a new shopping center in California that’s obviously going to succeed. It’s a blooper. On the other hand, there are plenty of businesses where the decisions that come across your desk are just awful. And those businesses, by and large, don’t work very well.

WARREN BUFFETT: I’ve been on the board of Coke now for 10 years, and we’ve had project after project come up, and there’s always an ROI. But it doesn’t really make much difference to me, because in the end almost any decision you make that solidifies and extends the dominance of Coke around the world in an industry that’s growing by a significant percentage, and which has great inherent underlying profitability, the decisions are going to be right and you’ve got people there that will execute them well.

CHARLIE MUNGER: You’re saying you get blooper after blooper.

WARREN BUFFETT: Yeah. And then Charlie and I sat on USAir, and the decisions would come along, and it would be a question of, you know, do you buy the Eastern Shuttle, or whatever it may be? And you’re running out of money. And yet to play the game and to keep the traffic flow with connecting passengers, I mean, you just have to continually make these decisions — whether you spend a hundred million dollars more on some airport. And they’re agony because, again, you don’t have any real choice, but you also don’t have any real conviction that it’s going to translate — those choices are going to — or lack of choices — are going to translate themselves into real money later on. So one game is just forcing you to push more money in to the table with no idea of what kind of a hand you hold, and the other one you get a chance to push more money in, knowing that you’ve got a winning hand all the way. Charlie? Why’d we buy USAir? (Laughter) Could’ve bought more Coke.

34. Berkshire is prepared for adversity

WARREN BUFFETT: Area 7.

AUDIENCE MEMBER: My name is Bakul Patel (PH). I am from upstate New York. And my question is, is Berkshire prepared for 1929 style of depression or, like, a prolonged bear market that exists in Japan? And would it be as successful in those situations?

WARREN BUFFETT: Well, we are probably — we don’t expect what you’re talking about, but we are probably about as well-prepared as any company can be for adversity, because Berkshire has been built to last. Net, we would benefit over a 20-year period by having some periods of terrible markets periodically in that 20-year period. That doesn’t mean we’re wishing for them and it doesn’t mean they’re going to happen, but — We make our money by allocating capital well, and the lower the general stock market would be, the better we can allocate capital. So we’re well-prepared but we’re not necessarily expecting. Charlie?

CHARLIE MUNGER: Yeah, we are not going to ever sell everything and go to cash and wait for the crash so we can go back in. On the other hand, we are structured so that I think, net, a lot of turmoil in the next 20 years will help us, not hurt us. I don’t mean it’ll be pleasant to go through the downcycle, but it’s part of the game.

35. “We’re never going to give out advice on Berkshire stock”

WARREN BUFFETT: Area 8.

AUDIENCE MEMBER: My name is Pete Banner (PH) from Boulder, Colorado. First of all, Mr. Buffett and Mr. Munger, thank you for your genuine generosity today. Berkshire closed yesterday, the A share was about — or Friday — $69,000 and the B share was about $2,300. Do you feel that price is grossly overpriced, or grossly underpriced, or reasonably priced?

WARREN BUFFETT: Well, I’ll let Charlie answer that one. (Laughter)

CHARLIE MUNGER: I’m not going to say. (Laughter)

WARREN BUFFETT: No, we’re just never going to — we’re never going to give out advice on Berkshire stock. There’s no — You know, that is up to people who want to buy and sell it, and anything we would say could easily get magnified, and people would be acting on it months later, and who knows all the problems that it could produce, so —

CHARLIE MUNGER: It would be quite eccentric if we were to every day put out an announcement, “Now’s the time to buy, now’s the time to sell,” our own stock. Eccentric we are, but that eccentric we aren’t. (Laughter and applause)

36. George Burns: role model for surviving unhealthy habits

WARREN BUFFETT: Area 9.

AUDIENCE MEMBER: Irene Finster, your longtime partner from Tulsa, Oklahoma —

WARREN BUFFETT: Hi, Irene. Yeah, Irene has a soda fountain. You ought to go visit her. (Laughter)

AUDIENCE MEMBER: First I want to thank you for giving your shareholders the opportunity to select their own charities. And second, I’m very concerned about your health due to your diet — (Laughter) — of red meat —

WARREN BUFFETT: Irene. (Applause) Irene, these are our products that I’m eating. (Laughter)

AUDIENCE MEMBER: Red meat, candy, ice cream — (laughter) — and —

WARREN BUFFETT: And that’s just what I do — that’s what I do in public —

AUDIENCE MEMBER: —and Coke. (Laughter) And I want to know what your doctor says. (Laughter)

WARREN BUFFETT: My doctor says I must be heavily relying on my genes. (Laughter) No, I will tell you, I — I mean, Charlie and I are both very healthful. If you were in the life insurance business, you would be happy to write us at standard rates, I could assure you of that. (Laughter)

CHARLIE MUNGER: You know, they asked George Burns when he was 95, “What does your doctor say about smoking these big, black cigars?” And he said, “My doctor’s dead.” (Laughter and applause)

WARREN BUFFETT: Charlie and I played bridge with George when he was about 97, I’d say, at the Hillcrest Country Club. And there was a big sign behind him that said, “No smoking by anyone under 95.” (Laughter) And actually, at his 95th birthday party, he had about five very good-looking young girls that were there to greet him with a big cake and everything. And he looked them over one after another and he said, “Oh girls,” he said, “I’m 95. One of you is going to have to come back tomorrow.” (Laughter and applause) We’re very big on George Burns in recent years. (Laughter)

37. “We wait indefinitely”

WARREN BUFFETT: Area 10.

AUDIENCE MEMBER: My name is Hubert Vose (PH). I’m from Santa Barbara, California. Earlier this morning, you made a comment that if the market fell you would be spending less time on the internet because you’d be very busy. And this is reinforced an impression I have had that the cash flows of Berkshire Hathaway are enormous, but that possibly in the last 12 months you’ve been investing less than you had previously. And if so — if this is correct, what does that say about waiting for attractive values? How long are you willing to wait, and what does that say to the investment public in their own habits?

WARREN BUFFETT: Well, you’re correct that we have not found anything to speak of in equities in a good many months, and — The question of how long we wait, we wait indefinitely. We are not going to buy anything just to buy something. We will only buy something if we think we’re getting something attractive. And that — and incidentally, if things were 5 percent cheaper that — or 10 percent cheaper — that wouldn’t change anything materially. So we have no idea when that period ends. We have no idea whether — as I’ve said, it can turn out that these valuations are perfectly appropriate if returns on equity stay where they are. But even then, they aren’t in the least mouthwatering, so we won’t feel we’ve missed anything particularly if returns stay where they are. Because if it turns out that these levels are OK, they still will not produce great returns from here, in our view. That doesn’t mean you couldn’t have a tremendous market in the short-term or something of the sort. Markets can do anything.

And you look at the history of markets and you just see everything under the sun. But we will not — you know — we have no timeframe. If the money piles up, the money piles up. And when we see something that makes sense, we’re willing to act very fast, very big. But we’re not willing to act on anything that doesn’t check out in our view. There’s no — you don’t get paid for activity, you only get paid for being right. Charlie?

CHARLIE MUNGER: Yeah. An occasional dull stretch for new buying, this is no great tragedy in an investment lifetime. Other things may be possible in such an era, too. I mean, it isn’t like we have a quiver with only one arrow.

WARREN BUFFETT: We sat through periods before. I mean, the most dramatic one being the early ’70s — late ‘60s and early ’70s. For a long time it seemed — doesn’t seem so long when you look back on it, seems long when you’re going through it — but it — like having a tooth pulled or something, but it’s, you know, what can you do about it? The businesses aren’t going to perform better in the future just because you got antsy and decided you had to buy something. We will wait till we find something we like. We’ll love it when we can swing in a big way, though. That’s our style.

38. “Certified record of failure” in real estate

WARREN BUFFETT: Area 1.

AUDIENCE MEMBER: Larry Pekowski (PH), Millburn, New Jersey. Berkshire seems never to have made any real, pure real estate investments, not counting facilities the operating companies might own, with the exception of Wesco’s involvement in the residential project in California. I was wondering if you’ve ever looked at a real estate transaction and tried to apply the same filters, meaning competitive advantages, returns on capital, that you do in operating companies. And if not, is it a circle of competence issue, or is there something you find disinteresting about real estate?

CHARLIE MUNGER: (Inaudible)

WARREN BUFFETT: You want to take it? OK, Charlie wants to take this one.

CHARLIE MUNGER: Let me take this one, because here’s an area where we have a perfect record that extends over many decades. We have been demonstrably foolish in almost every operation that had to do with real estate we’ve ever touched. Every time we had a surplus plant and didn’t want to hit the bid and let some developer kind of take an unfair advantage of us, we would of been better off later if we’d hit the bid and invested the money in fields where we had the expertise. That housing tract that I developed because I didn’t want to let the zoning authorities rob me the way they wanted to. I wish I had let them. (Laughter) We have a certified record of failure in this deal. (Laughter)

WARREN BUFFETT: And the funny thing is, we understand real estate. (Laughter)

CHARLIE MUNGER: And we’re good at it. (Laughter and applause) Right.

WARREN BUFFETT: Actually, (inaudible), we do understand real estate. And Charlie got his start in real estate.

CHARLIE MUNGER: Yeah, be we understand other things better. And so the chances that we’re going to be big in real estate are low.

WARREN BUFFETT: Yeah. We’ve seen lots of things, and we’ve — the prices, you know, just don’t intrigue us, in terms of what we get for our money. I tried to buy a town when I was, what, 21 years old. The U.S. government had a town in Ohio for sale and it would of worked out very well. I’m always — there’s nothing about the arena that turns us off, but we don’t see great returns available. And like Charlie says, the few things — (inaudible) old plant or something, that is not — we have not been great at working our way out of those. Fortunately, they haven’t been very important in relation to the net worth of Berkshire.

39. Nike: “We keep all of those views to ourselves”

WARREN BUFFETT: Area 2.

AUDIENCE MEMBER: Good afternoon. My name is Fred Costano (PH) from Detroit, Michigan. My question concerns Nike. Nike is a company experiencing some short-term problems, but it’s a great company with an excellent track record. Phil Knight is similar to Bill Gates in the respect that he’s a marketing genius and is a very hard worker. Making sneakers is a very simple business with high margins. How do you view Nike and what do you think of the company?

WARREN BUFFETT: Well, I think Phil Knight is a terrific operator. I think — and he’s a competitor. He’s got a lot of money in Nike. But as terms of what we think of the stock, you know, we keep all of those views to ourselves pretty much.

40. Buffett doesn’t expect litigation over fats in food

WARREN BUFFETT: Area 3? (Laughter)

AUDIENCE MEMBER: Hello, my name is Ed Clinton and I’m from Chicago, Illinois. I’m wondering about the tobacco litigation. There’s also — there have been some comments about fatty food. Do you think there’s going to be a new trend of fatty food litigation coming out of the tobacco problems?

WARREN BUFFETT: Well, I sign a waiver before I — (laughs) — do any of that myself. No, I would doubt — I would — I do not see those two as being remotely similar. But Charlie, do you have any different views on it?

CHARLIE MUNGER: Well, I think the traditional tort system is particularly ill-suited for solving what might be called the tobacco health problem. So I regard that whole thing as sort of a Mad Hatter’s Tea-Party. And we sit out from afar.

41. Lots of credit to go around for strong economy

WARREN BUFFETT: Area 4.

AUDIENCE MEMBER: Yes, I’m Fred Bunch from near Tightwad, Missouri. In light of the current —

WARREN BUFFETT: What was the name of that town? (Laughter)

AUDIENCE MEMBER: Tightwad, Missouri.

WARREN BUFFETT: Tightwad, Missouri, huh? (Laughter)

AUDIENCE MEMBER: There’s a bank there.

WARREN BUFFETT: Did they name it after me or Charlie? (Laughter)

AUDIENCE MEMBER: Well, either one, really. (Buffett laughs) You’d both fit in. (Buffett laughs) In light of today’s healthy growth and stability of the American economy at the present time and over the last five years or so, how much credit, if any, do you give the Clinton administration and why?

WARREN BUFFETT: Well, I give credit to — I give credit going back to Volcker, significant credit to Volcker. I give credit to Reagan. I give credit to — certainly to Greenspan and to Rubin, and I give credit to Clinton on that — I think that first tax bill was very important. It carried by one vote. And I think he may listen to Rubin. So I think there’s a lot to give credit for and I think you can spread it around a fair amount. Charlie may be less charitable here. Let’s see. (Laughter)

CHARLIE MUNGER: No, I’ve got no great quarrel with the way the country — the economy’s reformed. I think it’s way better than any of us would’ve predicted.

42. How Phil Fisher’s “scuttlebutt” method changed Buffett’s life

WARREN BUFFETT: Area 5?

AUDIENCE MEMBER: My name is Travis Heath (PH). I’m from Dallas, Texas. And my question regards what Phil Fisher referred to as “scuttlebutt.” When you’ve identified a business that you consider to warrant further investigation — more intense investigation — how much time do you spend commonly, both in terms of total hours and in terms of the span in weeks or months that you perform that investigation over?

WARREN BUFFETT: Well, the answer to that question is that now I spend practically none because I’ve done it in the past. And the one advantage of allocating capital is that an awful lot of what you

46. 物超所值

WARREN BUFFETT: 第9个问题。

观众提问: 下午好，我是来自南加州的史蒂夫·杰克。我的问题关于品质与价格的权衡。我参加过三次股东大会，每年都听到关于可口可乐的溢美之词。但据我所知，过去三年你们没有增持过一股可口可乐，尽管其股价表现相当不错。如果投资者投资期限相对较短，比如三到五年，你们认为品质与价格应该各占多少权重？

WARREN BUFFETT: 如果你的投资期限是三到五年，第一，我不建议这样做。因为如果你打算届时退出，这就更接近于“博傻理论”的范畴。审视任何投资的最佳方式是：如果我永远持有它，并把全家净资产都投进去，我会作何感受？我们本质上相信——如果你说的“品质”是指业务在未来一段时间内如你预期般表现的确切性，其可能表现的区间相当狭窄——这正是我们喜欢买入的企业类型。我只能说，我们愿意支付一个舒适的价格，这在某种程度上取决于利率水平。在过去一年里，我们并未为喜欢的企业找到这种舒适价格。但也不至于不舒适到让我们想卖出。

但现在的价格并非我们愿意增持的价格——我们大约在五年前增持过一次可口可乐，未来也可能再次增持。增持的可能性远大于减持。我们对大多数业务都是这种感觉。去年我们曾认为债券相对有吸引力，于是减持了某些头寸并清仓了部分小仓位，以便在债券上做出更大配置。查理？

CHARLIE MUNGER: 嗯。你谈到品质与价格。投资游戏总是涉及同时考虑品质和价格。诀窍在于以你付出的价格获得高于价格的品质。就这么简单。

WARREN BUFFETT: 但不容易。

CHARLIE MUNGER: 对，不容易。

47. 对分拆子公司毫无兴趣

WARREN BUFFETT: 第10区。

观众提问: 下午好，先生们。我是来自新泽西州格林村的杰夫·柯比。请你们谈谈通常对股东免税分拆的看法，特别是如果你们认为伯克希尔旗下某家运营公司若独立上市，其市场估值会比作为伯克希尔一部分更高时，你们会如何看待？

WARREN BUFFETT: 嗯，伯克希尔历史上确实有过某些组成部分作为独立公司可能获得更高估值倍数的情况，尽管我认为现在不是这样。但我们对于分拆的反应是——即使我们认为存在短期市场优势，我们基本上也不会感兴趣。我们喜欢目前作为伯克希尔单一实体一部分的这些业务组合。我们希望能增加这个业务组合。随着时间的推移，我们会增加这个组合。而仅仅因为短期内能获得略高的市场价值就将其拆分成许多小块，这对我们毫无意义。查理？

CHARLIE MUNGER: 没错，这会增加大量摩擦成本和运营开支。我们——我不知道还有哪个和我们规模相当的公司运营成本比我们更低，我们喜欢这样。

WARREN BUFFETT: 是的。(掌声) 目前我们的税后运营成本已降至资本价值的0.5个基点。而许多共同基金的运营成本是125个基点——这意味着他们的运营成本与资本比率是我们的250倍——(笑声)

CHARLIE MUNGER: 而且他们只有一堆有价证券，我们却还有这些业务。

WARREN BUFFETT: 没错。顺便说一句，我们不需要再低了——

CHARLIE MUNGER: 我们还能更低，沃伦。(巴菲特笑) 还能低很多——

WARREN BUFFETT: 是啊，我知道。(笑声) 你觉得他们(伯克希尔董事会)会愿意每年只拿500美元而不是900美元吗，查理？(笑声) 前排传来哀叹声。

48. 股东助力内布拉斯加家具城和波仙珠宝的销售

WARREN BUFFETT: 第1区。

观众提问: 下午好，巴菲特先生和芒格先生。我很好奇，你们能否告诉我们内布拉斯加家具城和波仙珠宝这个周末的销售额？其次，你们是否有兴趣投资汽车行业？如果目前没兴趣，未来什么会改变你们的想法？

WARREN BUFFETT: 第一个问题，我不知道家具城的具体数字，但我知道那里有很多股东。我得到了口头报告。他们的日常营业额变动较小——这家公司——家具城日均销售额约80万美元。这是一个大业务。所以我们的股东有影响，但不像在波仙珠宝那样相对影响大。波仙珠宝今年销售额是去年的两倍多，他们度过了很棒的一天。(笑声)

49. 对汽车行业没有特殊见解

WARREN BUFFETT: 另一个问题是什么，查理？

观众提问: ——行业。汽车行业。

WARREN BUFFETT: 哦，汽车行业。是啊，查理在60年代中期大举投资通用汽车，对吧查理？那是你最大的持仓？

CHARLIE MUNGER: 我当时短暂地产生了幻觉。(笑声) 幸运的是，幻觉过去了。(笑声)

WARREN BUFFETT: 是啊。不，他赚钱了。

CHARLIE MUNGER: 是的，我赚了。

WARREN BUFFETT: 我们——这是个有趣的行业，值得我们关注。我的意思是，很多年前它是经济中的主导因素——或者说是压倒性因素。它的重要性已经下降了不少，但仍然是个非常重要的行业。这是个任何人都能关注的行业。也就是说，你对产品和竞争产品有经验，而且——这个房间里的每个人都大致了解这个行业的经济本质。但我们从不认为自己比别人更了解它。所以我们曾看到汽车公司有时市盈率很低，事后看来价格很有吸引力，但我们从不觉得自己知道五年后哪家汽车公司会比现在增长最多，或者哪家会比市场预期增长更多。我们天生就不具备这种知识。查理？

CHARLIE MUNGER: 我同意。

50. 互联网销售可能助力波仙珠宝和GEICO

WARREN BUFFETT: 第2区。

斯科特·拉德: 嗨，我是来自明尼苏达州伊文普雷里的斯科特·拉德。我的问题是：十年后——我指的是波仙珠宝面向消费者的零售部分，而非企业部门——十年后，在每日运营基础上，您认为哪三件事会发生最大变化，最能影响你们在该领域保持主导地位的能力？

WARREN BUFFETT: 嗯，我认为——你具体指波仙珠宝吗？

观众提问: 是的。

WARREN BUFFETT: 好的，我认为波仙珠宝——我不会说三件事——但波仙珠宝可能是我们旗下少数几家公司之一，互联网可能为我们带来巨大潜力。我不知道这会不会发生，但毫无疑问我们运营——我在互联网上发布过信息——我们的毛利率远低于蒂芙尼或上市珠宝企业。我们为顾客提供了更多的价值。我们的运营成本远低于上市公司。我在互联网上说，我们的运营成本比上市竞争对手低15到20个百分点，在某些情况下甚至更多。所以我们有很大的优势。现在，人们购买珠宝时最大的疑问总是：“你怎么知道该信任谁？” 你知道，这是大多数人在购买时感到非常不安的商品。我认为伯克希尔·哈撒韦的品牌标识可以帮助人们建立信任。我认为全国各地的客户体验也会有所帮助。

而且我认为——我认为这是一个高价商品，所以省钱变得非常重要。就像汽车保险一样，省钱非常重要。所以我认为互联网可以在传播和促进波仙珠宝全国声誉方面起到重要作用。因此，波仙珠宝可能实现巨大增长，而互联网将是其中的重要部分。我们的工作是向全国人民传递信息：他们真的可以让我们寄送半打商品给他们，在没有高压销售的情况下查看，在家中选择他们想要的东西，和我们交易会很划算。现在有很多人在利用这一点。但随着时间推移，这个数字可以增长10倍、20倍甚至50倍。我认为我们应该在这方面非常努力。当然，GEICO也可以通过互联网实现增长。

任何为消费者提供超值交易的产品，问题之一是如何接触到这些消费者，而互联网提供了可能性。问题是，全世界每个人都会在那里，为什么他们要点击你而不是别人？实际上，伯克希尔·哈撒韦的名字可能对此有所帮助，尽管GEICO的品牌已经非常知名。GEICO是——我在年报中说过，我们今年将花费一亿美元用于推广。我们会花更多的钱。GEICO的品牌潜力非常非常大。我们打算不断推进。查理？

CHARLIE MUNGER: 尽管如此，如果互联网有助于我们的一些业务，那么CD-ROM和个人电脑的组合无疑打击了我们的世界百科全书业务。

WARREN BUFFETT: 是的，我们交了入场费。

CHARLIE MUNGER: 是的，我们——(笑声)——不全是好处。

WARREN BUFFETT: 对。

51. 麦当劳 vs 冰雪皇后

WARREN BUFFETT: 第3区。

观众提问: 我叫Jorge Gobbi，来自瑞士苏黎世。我的问题关于食品业务，主要是麦当劳和冰雪皇后。麦当劳和冰雪皇后在投资领域上是否有重大差异？如果有，您能解释一下吗？

WARREN BUFFETT: 是的，存在重大差异。麦当劳在全球范围内可能拥有大约三分之一的店面。我无法告诉你确切比例，但如果他们有23,000家门店，他们拥有其中数千家并自行运营。其余的大部分，他们也拥有所有权并租赁给加盟商。因此，他们在全球实体设施上有非常庞大的投资，并获得了很好的回报。冰雪皇后——包括Orange Julius——有6,000多家门店，其中30多家由公司运营。即便如此，有些还是合资或合伙形式。因此，两者在固定资产上的投资差异巨大。对加盟商或其房东来说，固定资产的投资显然很重要。但作为特许授权方，这对公司本身并不重要，所以冰雪皇后的资本投入相对麦当劳要小得多。

但麦当劳也从拥有这些店址中赚了很多钱。而冰雪皇后在多数情况下只收取加盟商销售额的4%作为特许权使用费。在麦当劳，除了这个比例，还有租金等收入。所以它们是两种截然不同的经济模式。两者最终都依赖于加盟商的成功。也就是说，你必须让加盟商的业务良好，母公司才能长期良好发展。两家公司都面临这种情况。查理？

CHARLIE MUNGER: 我没什么补充的。考虑到为加盟商提供全国知名品牌、质量控制以及各种有用的商业支持，4%其实并不多。

WARREN BUFFETT: 不，4%处于——如果看整个行业——4%处于较低范围。但这很有效——

CHARLIE MUNGER: 吸引我们的部分原因是冰雪皇后向加盟商收取的费用很低。

WARREN BUFFETT: 一个成功的加盟商可以以远高于其有形资产投资的价格出售其业务。我们显然也希望如此，因为这意味着他的业务很成功，也意味着随着时间的推移，我们也会拥有成功的业务。你希望加盟业务——你希望加盟商赚钱，并希望他创造出比投入资本更有价值的资产。这就是目标。

52. 与伯恩家族一起赚钱

WARREN BUFFETT: 第4区。

观众提问: 下午好，芒格先生和巴菲特先生。我叫Patrick Byrne，是一名股东，来自俄亥俄州辛辛那提。今年再次回来提问，想看看能否让你们两位在一个问题上产生分歧。我选择了教育领域，也许能看出你们之间的一些差异。不过首先，关于教育，我想简单表示感谢。我很幸运，我的父母在70年代末明智地购买了一些伯克希尔的股票，并存入我和兄弟们的大学基金，这基本上支付了我们的高等教育费用。我猜想一定有成千上万像我们一样的人，教育费用是由你们创造的财富支付的，我们欠你们的人情。尽管也许我们不上大学而持有股票会更好。(笑声和掌声) 关于教育，米尔顿·弗里德曼曾说过或写道，如果你真的关心美国的贫困问题以及妇女和少数族裔的劣势等，如果你能解决美国的一件事，那就是公共教育体系。巴菲特先生，您当然一直非常公开地支持公共教育并做了很多事，我相信芒格先生也是如此。但我注意到，去年股东大会上，芒格先生——或者说你们两位——批评了高等教育的某些方面，比如商学院。但芒格先生包括——我可以说，他对美国公共教育体系有点批评。我想知道你们是否同意弗里德曼的说法，以及你们认为公共教育的重要性是什么，以及可以做些什么来改进它。

WARREN BUFFETT: 我马上让查理发言，但我想先说，Patrick Byrne是Jack Byrne的儿子，Jack Byrne在70年代中期GEICO陷入困境时通过挽救公司为我们赚了一大笔钱。事实上，我是在一个周三晚上8点左右在华盛顿见到帕特里克的父亲的，当时GEICO已经破产，几乎就要被宣布破产。和他谈了大约三个小时后，第二天我就买入50多万股GEICO，价格是2 1/8美元，也就是后来我们以70美元买入的股票价格（按拆股后算）的40美分。所以帕特里克的父亲——我们可能赚了——(笑)——我们可能让伯恩家族赚了更多钱；他也为我们赚了很多钱。Patrick现在在辛辛那提经营Fechheimers，做得非常出色。

他的兄弟Mark，如果我们在6月30日如期实现目标，将在伦敦和百慕大设立一项重大业务，我们将成为非常重要的合伙人。他还有另一个兄弟，在加州打高尔夫球。但如果形势艰难，我们也会试图招募他。

53. 改进公共教育

WARREN BUFFETT: 查理，有了这么多准备时间，你对教育有什么看法？(笑声)

CHARLIE MUNGER: 嗯，我当然同意米尔顿·弗里德曼的看法，很难找出一个比美国教育——尤其是低年级教育，在许多大城市失败得如此惨烈——更值得去解决的因素了。是的，我认为这是一个可怕的问题，需要解决。当然，关于最佳解决方案的辩论非常激烈。我本人对大城市学校系统能靠自身动力得到改善持怀疑态度。换句话说，我很同情那些认为我们可能必须采取替代方案的人，比如教育券。激励结构在某些地方已经糟糕透顶，无法通过渐进式改革来修复；需要革命。沃伦，你对大城市公立学校更乐观——

WARREN BUFFETT: 嗯，我不一定更乐观。但我觉得，一个没有面向全体人民的良好公立学校体系的民主制度，简直是一种嘲弄。因为一开始就有如此多的不平等。(掌声) 这不只是金钱的不平等。我的意思是，我的孩子，不管他们是否继承财富，或者你的孩子，不管他们是否继承财富，与那些父母都在努力维持生计、或者只有单亲、生活在贫困中的孩子相比——一开始就如此不平等，如果你通过给那些通常已经处于较高阶梯的人提供远比那些选错子宫的人更好的教育来加剧这种不平等，我认为这是社会——一个富裕社会——不应该容忍的。但这并不意味着解决起来容易。因为我多次说过，不幸的是，良好的公立学校体系似乎像处子之身，可以保持但无法恢复。

当一个体系变得糟糕时，很难有所作为，因为在这种情况下，富裕的人都会退出这个体系。他们对债券发行不那么感兴趣，对家长教师协会不那么感兴趣，对别人孩子的结果也不那么感兴趣，因为他们都为自己的孩子选择了别的体系。为富人建立一套教育体系，为穷人建立另一套，而穷人得到的是更差的体系，这在我看来只会加剧不平等以及由此产生的其他问题。所以我不知道如何改进这个体系。我读过一些正在进行的实验。

但我确实相信，如果你有一个良好的公立学校体系，就像我们在奥马哈这样，你就要竭尽全力去维护它，这样富有的祖父母或父母就没有动机说：“我喜欢平等的理念，但我更爱我的孙子或我的孩子，所以我要把他从公立学校体系里拽出来。” 然后你就会看到这种逃离，留下的只是那些负担不起这种选择的人。我对教育券制度的问题是，如果有一种办法——我喜欢竞争的理念，我认为一个好的教会体系，例如，能创造出更好的公立体系——我认为我们在奥马哈就有这种情况——但我认为教育券制度，如果仅仅意味着给每个人额外的金额，那只是意味着富人得到了公立学校体系的X美元补贴，而穷人之间的差距依然存在。

我的意思是，你可以有一个高尔夫球券制度——因为我打高尔夫——我不常打——但如果我在奥马哈乡村俱乐部打球，你可以有一个券制度，给每个奥马哈人每年一千美元打高尔夫，让他们有更多机会去乡村俱乐部。但这只会减少我一千美元的账单，却仍然无法让在公共球场打球的人受益，因为他仍然超出自己的能力范围，无法达到与我完全平等的水平。我——我认为没有什么比这更重要了——我完全同意查理——我认为最关键的是前八个年级，之后就可以放松了。如果前八个年级搞好了，好事就会随之而来。如果搞砸了，之后是无法纠正的。我认为——我赞扬沃尔特·安能伯格捐赠的5亿美元。但在这个领域很难看到成果。如果你发现某些方法有效，我认为应该推广到其他地方。

我认为，显然——芝加哥的一位人士说，工会在推动改革方面造成了相当大的问题，但他背后的政治影响力足以克服其中一些问题。这应该成为国家的首要任务。我们国家有足够的钱让每个人都接受良好的教育，问题在于我们能否执行？这是我希望像Patrick这样有才智的人去努力的事情。查理，你有什么要补充的吗？

CHARLIE MUNGER: 是的。我认为，当某件事明显未能履行文明社会赋予它的功能时，只是不断地向失败的运作模式投入更多资金，这不是芒格的方法。所以我完全支持在那些失败最严重的地方尝试新模式。我完全不介意只针对穷人发放教育券。但我认为我们必须在我们问题最严重的学校采取行动，改变我们的方法。我认为继续这样下去是疯狂的。

WARREN BUFFETT: 所以你基本上支持基于收入调查的教育券？

CHARLIE MUNGER: 哦，我——

WARREN BUFFETT: 我的意思是，我不反对这个想法。

CHARLIE MUNGER: 我只知道我们——这是一个可怕的失败领域。部分问题在于意识形态。如果你有一条绝对规则，禁止按能力分组教学，尽管基于分组教学的系统可以显著提高可衡量的阅读能力，那么那些思维僵化的人就不应该拥有权力。我们应该——(掌声)——做有效的事情。

WARREN BUFFETT: 你知道，我们有很多——在奥马哈，它是有效的。问题在于，一旦它下滑到一定程度，那些有能力做些什么的公民基本上就会选择退出。这——我不知道——

CHARLIE MUNGER: 我是奥马哈公立学校的产物，在我那个年代，去私立学校的是那些在公立学校表现不佳的人。今天德国的情况仍然如此。我的意思是，私立学校是为那些跟不上公立学校的人准备的。我更喜欢那样的系统。但是，一旦该系统的很大一部分明显失败，我认为就必须采取行动。不能只是重复那些无效的做法。

WARREN BUFFETT: 嗯，我同意这一点。Patrick，你的问题得到答案了吗？(掌声)

54. “事实是，你可以拥有你想要的声誉”

WARREN BUFFETT: 我们去第5区。

观众提问: 我叫凯文·墨菲，来自加州卡马里奥。我的问题是，你们在判断一个人是否诚实时会看什么？

WARREN BUFFETT: 这是个好问题，凯文。我认为，一般来说，查理和我在我们遇到的情况下能做得相当好，但我们需要看到一些行为证据。而且我得说，即使在某些职业中，我们预期会看到更高比例的人表现良好。但如果我们与某人共同工作几个月或更长时间，我认为我们能在预测他们行为方面有相当高的成功率。在所罗门公司，我能够相当快地从与我积极合作的人中区分出让我感觉很好的人和让我有点紧张的人。但如何精确地识别这一点，凯文——有时把午餐钱放在他们桌上试试——(笑声)——也许你会很快发现——(笑声) 我们喜欢的人——你知道，最好的例子是像汤姆·墨菲这样的人，他们总是竭尽全力确保你得到更好的交易。这并不意味着他们没有竞争意识。我的意思是，如果你和他打高尔夫球赌钱什么的，他非常想赢。但是他——有些人就是不会把不属于他们的功劳占为己有。事实上，他们甚至会把自己可能做的事的功劳让给你。随着时间的推移，你会感受到的。查理，你有什么好的指导原则吗？

CHARLIE MUNGER: 是的。我认为人们在生活中会留下记录。所以，像你这个年纪的人应该明白，到他22、23岁的时候，他已经留下了相当多的记录，世界就能了解他。所以我认为记录非常重要。如果你很早就开始，在像诚实这样简单的事情上保持完美的记录，你就已经在通往成功的路上了。(掌声)

WARREN BUFFETT: [意大利实业家] 詹尼·阿涅利曾告诉我，他说：“当你年纪大了，你会得到你应得的声誉。” 他说你可以——

CHARLIE MUNGER: 对，对。

CHARLIE MUNGER: ——在早期暂时蒙混过关。但等到任何人到了60岁左右，他们很可能会得到他们应得的声誉。事实是，你可以拥有你想要的声誉。如果你列出所有你钦佩别人身上的品质，你会发现几乎所有你列出的东西——你可能无法踢出60码的橄榄球之类的——但几乎所有你列出的、在你钦佩和喜欢的人身上的品质，只要你决心去做，你都可以拥有。本·富兰克林不是这样做的吗，查理？

CHARLIE MUNGER: 哦，当然。我总是说，得到你想要的东西的最好方法是配得上你想要的东西。

WARREN BUFFETT: 我要再来点花生脆糖。(笑声)

55. 不预期Y2K问题会带来投资影响

WARREN BUFFETT: 第6区。

观众提问: 我是来自佐治亚州亚特兰大的南希·西尔。今天早上有人问过你关于2000年计算机问题。您是否预见到千年虫问题会对经济或我们的公司产生任何负面财务影响？如果会，您正在考虑哪些财务策略？

WARREN BUFFETT: 嗯，我不认为我们的公司会有大问题。你知道，这么大规模的事情总会有一些问题——(笑) 如果人们在1980年或1985年没预见到，那么到2000年他们也不可能完美解决，你可以肯定这一点。但我认为这对伯克希尔·哈撒韦现在没有我们应该考虑的投资影响。而且我认为你会在政府领域看到大部分问题。你知道，也许他们两三年都找不到你的纳税申报单。(笑声) 谁知道呢？查理？

56. 麦当劳将保留其房地产

WARREN BUFFETT: 第7区。

观众提问: 在您对麦当劳的描述中，您觉得麦当劳埋藏着一项伟大的业务，以及两项与之混合的不错业务。问题在于房地产和运营业务，按照公司目前的资本结构，它们无法赚取与特许经营业务相同的回报。您曾经是，或者现在仍是麦当劳的重要股东。我想我的问题是，解决方案显而易见：为什么你们不推动一个解决方案，使其能像国际冰雪皇后那样创造同样的机会？

WARREN BUFFETT: 嗯，我猜——我不知道具体细节——但我猜，在全球拥有23,000个店址的情况下，此时将房地产业务与特许经营业务分开将极其困难。我认为他们本可以走不同的路线。我并不是说那会是更好的路线。事实上，我认为他们很可能选择了正确的路线，即拥有并控制如此多的房地产。但我只是觉得问题会非常棘手。当然，你不会想出售然后租回，因为在我看来，这样做最终不会增加价值。而将其分拆成房地产信托或其他形式，在100多个国家运营，并处理所有特许经营协议，我认为这将是一个非常非常大的问题。我自己不想处理。

所以我认为你应该看待麦当劳——我对他们的计划一无所知——但你应该将麦当劳视为一项非常好的业务，但它会继续以目前的方式处理房地产。尽管我认为他们已经暗示会减少对新物业的所有权——比目前少一些。但那里有23,000个店址，每个经营者的具体安排对他们来说都非常重要。这将是一项艰巨的任务，而且我不确定最终能创造多少额外价值。查理？

CHARLIE MUNGER: 是的，麦当劳多年来赚取的资本回报率很高，即使他们拥有大量房地产。我认为很难质疑他们的做法。他们有最好的记录。

WARREN BUFFETT: 而且在我看来，其市盈率与房地产分离的情况不会有太大差别。你知道，我的意思是，如果你把所有房地产以某种方式剥离，你可能会多得到一点。但对我来说这不是什么大事。

57. 伯克希尔在持有证券方面结构”糟糕”

WARREN BUFFETT: 第8区。

观众提问: 嗨，我是来自蒙大拿州米苏拉的蕾切尔·怀特。午休时，我听到一些人在讨论双重征税及其对伯克希尔投资理念的影响。我想知道您能否稍微谈一下。我不确定我是否理解。以及您能否解释这是否会影响您的投资。

WARREN BUFFETT: 嗯，我们的结构非常糟糕。如果你要从头开始，做我们做过的大部分事情，你可能不会采用公司形式，或者不完全像我们这样做。我的意思是，那位先生谈到麦当劳时所说的，对伯克希尔·哈撒韦的适用程度远远超过麦当劳，尤其是在对部分收入流免税方面。如果我们持有可口可乐的成本是12、13亿美元，市值是150亿美元，我们不会卖出。但如果卖出了，我们将产生大约50亿美元的资本利得税。这意味着150亿变成了100亿。现在，如果这100亿反映在伯克希尔的估值中，而你在我们买入可口可乐时买了我们的股票，那么你又要为可口可乐税后的增值部分交第二次税。因此，在有公司介于你和证券之间的情况下持有证券是非常不利的。

如果我们以合伙制运营，情况就不是这样。我经营伯克希尔·哈撒韦——我是说，我经营巴菲特合伙公司很多年，我们只在个人层面缴一次税。所以我们的股东——就我们持有有价证券而言——我们持有大量有价证券——而且多年来在这些证券上获得了大量利润——是以不利的方式持有这些证券的。现在，我们还有浮存金，这有助于我们持有它们，这是一个巨大的优势。但是公司持有证券——如果你可以选择直接持有或通过合伙制持有——公司持有是不利的。而我们被卡住了。我们已经这样很多年了。我们没有计划对此采取任何行动。即使我们想，可能也做不到。因此，与合伙制运营相比，这对我们的表现是一种拖累。例如，劳合社的辛迪加就没有这个问题。一些在百慕大运营的保险公司可能也没有同样的问题。

当然，合伙制在持有证券方面也没有这个问题。但这对我们来说是生活中的现实，我们将缴纳大量税款。查理？

CHARLIE MUNGER: 是的，我们无法避免公司所得税，这对间接持有证券的人来说是一个巨大的劣势。到目前为止，我们还算成功地克服了它，但我们背负着这个负担。

WARREN BUFFETT: 自从个人税率降到20%而我们的公司税率是35%以来，这变得更不利了。如果我们从一只股票上赚了1美元，它就变成了65美分，而就你持有伯克希尔而言，这65美分再减去20%，就变成了52美分。而如果你直接持有股票，你会有80美分。当我们持有GEICO且它未与我们合并时，这个问题更极端。我的意思是，GEICO有资本利得，我们在GEICO中按比例也有资本利得，以此类推。我的意思是，你的结构确实会产生重大影响。但通常一旦你进入某种结构，你就会被困住，就像我在回答那位关于麦当劳的先生时所说的那样。

CHARLIE MUNGER: 现在，就我们在公司层面持有期限非常长而言，实际的数学劣势会缩小。

WARREN BUFFETT: 是的，而且如果我们不是以公司结构运营，我们可能无法获得我们现有的浮存金，所以这也是一个缓解因素。但我们更希望在有选择的情况下，拥有不需要缓解因素的缓解因素。(笑声)

58. 尽职调查无用且抓不住重点

WARREN BUFFETT: 请进入第9区。

观众提问: 下午好。我叫弗雷德·斯特拉斯海姆，来自奥马哈本地。我有一个关于你们收购方法的问题。我在你们的年报中读到关于收购Star Furniture的过程，很感兴趣。据我了解，巴菲特先生，您审阅了财务数据一段短时间，看到了您喜欢的东西，然后与Melvyn Wolff先生会面两小时就达成了交易。您写道，无需检查租约、制定雇佣合同等等。

WARREN BUFFETT: 对。

观众提问: 我认为大多数公司在进行收购时，会觉得需要进行大量法律尽职调查，比如检查租约、调查未披露的环境责任或潜在的诉讼。我的问题是，您的方法是否曾让您吃过亏？

WARREN BUFFETT: 我们吃过亏——我们只在对业务未来经济前景的判断上犯过错，这与尽职调查无关。我们认为人们通常所说的”尽职调查”在大多数情况下实际上只是一些例行公事。这是大公司必经的过程。他们觉得必须这样做。但在我看来，他们常常忽略真正重要的东西：评估与你打交道的人，以及评估业务的经济前景。这才是交易的99%。你知道，你可能百分之一的机会遇到环境责任问题，或者你可能会发现一份糟糕的租约。我问过Melvin，“你有没有什么糟糕的租约？” 这是最简单的方法。

我可以读遍所有租约，试图找出每个条款，但这不是问题所在。我们做过很多糟糕的交易。例如，1966年收购Hochschild Kohn百货公司时我们就做了一笔糟糕的交易。人很好，但我们错估了业务的经济前景。但租约没有任何影响。那种东西根本不重要。我不记得有任何时候，别人所谓的”尽职调查”能帮我们避免一笔糟糕的交易。

CHARLIE MUNGER: 我也不记得。

WARREN BUFFETT: 不。这是30多年的经验。关键是你就是不想——我在许多上市公司董事会任职——我曾在19家上市公司董事会任职——他们所谓的尽职调查就是派律师出去，让一堆投资银行家进来做演示等等。我认为这严重分散了注意力，因为董事会坐在那里，被所有这些迷住了，每个人都在报告这件事多么美妙，以及他们如何检查了专利等等。没有人真正关注业务未来五到十年会走向何方。你知道，关于经济前景的商业判断——以及一定程度上对人的判断——但商业经济前景——这是交易谈判的99%。其余的，人们可能是为了自我保护。我认为太多时候他们只是把它当作拐杖，来推动他们无论如何都想做的交易，当然所有专业人士都知道这一点。所以请相信我，他们回来时会带着尽职调查报告，无论是否尽职。

(笑声) 我们对此并不热衷。我不知道我们这些年来做了多少交易，但我认为传统尽职调查从未起过任何作用。

CHARLIE MUNGER: 不，我们有过几次有利的惊喜——

WARREN BUFFETT: 确实如此。确实如此。我们通常打交道的那些人，通常先告诉我们坏消息，然后在我们达成交易后才告诉我们好消息。1969年，我们在罗克福德与一位名叫Eugene Abegg的先生做了一笔交易，伊利诺伊国民银行信托公司。我花了几个小时就达成了交易，而且，反正Eugene不可能隐藏任何坏消息。在接下来的十年里，每次我去那里吃午饭，他都会指出镇上我们拥有的、账上没有的建筑，或者我们拥有的、他没告诉我的基金会里的钱。他甚至给了我一些他仍然放在身边的银行票据，那些是我们自己的钱，他从未告诉过我。我们可以像剪纸娃娃一样把它们剪掉。我的意思是，Eugene不是一个会亮出所有底牌的人。

(笑声) 我们通常打交道的都是这种人，我当然可以说Melvyn和他的妹妹Shirley更是如此。