AUDIENCE MEMBER: Mr. Buffett and Mr. Munger. This is Eric Chang from Beijing, China. First, thanks for the occasion for us to engage with you like this, and also for inspiring young people to learn. Mr. Munger has described you as an incredible learning machine in terms of learning new areas, and expanding your circle of competence. So I would like to understand is if you can make it more concrete, recently you make investment in BYD, a company in China that makes batteries and also electric cars which are, arguably, technology companies. So can you sort of go through that example and see how you sort of like analyzed the case and asked questions that helped you make a decision to invest in such a company? Thank you.

WARREN BUFFETT: Charlie deserves 100 percent of the credit for BYD, so I’m going to let him answer that.

CHARLIE MUNGER: Well, it’s an interesting example because Berkshire would not have made an investment in BYD if the opportunity had come along five or 10 years earlier. And it shows that the old men are continuing to learn, and that’s absolutely essential. Berkshire would have a lower potential than it does if we had stayed the way we were. And — so you are absolutely right in calling attention to this episode. Again, Dave Sokol helped. I wasn’t at all sure I could get Warren to do this all by myself so I inveigled Dave into going over to China, and the two of us were able to help the learning process. (Laughter)

WARREN BUFFETT: Well put. Well put.

26. Why we will never hire a compensation consultant

WARREN BUFFETT: Becky?

BECKY QUICK: This question comes from Mark Wares (PH) and it has to do with Berkshire’s compensation. He says, “How does Berkshire structure the performance based-compensation of the CEOs of its subsidiaries? Please because as specific as you can regarding the metrics on which you focus the most, and how the degree to which those are attained translates into compensation.”

WARREN BUFFETT: Yeah, well, the first thing we do is we never engage a compensation consultant. (Applause) And we have, whatever it may be, 70-plus or whatever number businesses we have. They have very different economic characteristics. To try to set some Berkshire standard to apply to businesses such as insurance, which has capital as a bulwark but which we get to invest in other things we’d invest in anyway, so there’s minus capital involved, to a BNSF or our utility business where there’s tons of capital involved, or in between See’s where there is very little capital involved. We have other businesses that are basically just so damn good that a, you know, a chimpanzee could run them, and we have other business that are so tough at times that, you know, if we had Alfred P. Sloan back, you know, we wouldn’t be able to do very well with them. So there’s enormous differences in the economic characteristics of our business. I try to figure out what — if I owned the whole business — what is a sensible way to employ somebody and compensate them, considering the economic characteristics of the business.

So we have all kinds of different plans. It doesn’t take a couple of hours of my time a year to do it. We have managers who stay with us, so they must be reasonably happy with the plans. And, you know, it is not rocket science, but it does require — it requires the ability to differentiate. If we had a human relations department, it would be a disaster. They would be attending conferences and people would be telling them all these different things to put in equations and so on. It just requires a certain amount of common sense. And it requires, incidentally, an interaction with the managers where, you know, I listen to them, they listen to me, and we sort of agree on what really is the measure of what they’re actually adding to the company. And — what do you — what do you say to that, Charlie?

CHARLIE MUNGER: Well, I think the U.S. Army and General Electric have centralized personnel policies that probably work best for them, and we have just the opposite system, and I think it clearly works best for us. And practically nobody else is entirely like us, which makes us very peculiar. And I like it that way, don’t you?

WARREN BUFFETT: Yeah, we really like it that way. We get worried when people agree with us. (Laughter) We pay people — we pay some very big money. We have managers that have made and will make in the tens of millions annually, and we have managers that, you know, when we suffer, they suffer. But you’ve got to treat people fairly. Even though they don’t need the money, everybody wants to be treated fairly. And so the rationale for how you’re doing it should be understood, but there is no crossBerkshire rationale at all. I mean, if you run See’s Candy, to put a cost of capital factor in or something like that, what the consultant would tell you, it’s nonsense. It isn’t going to make any difference whether there’s 40 million or 43 million or 37 million of capital in the business. The main thing to do is, in terms of market position and all that sort of thing, the real thing I really want to pay managers for is widening the moat that separates our business from our competitors’ businesses over time.

Now, that gets very subjective, so I don’t have any perfect way of doing that. But that is always going through my mind in trying to design compensation systems. So far, like I say, I don’t think — I can’t — can you recall any manager that’s ever left us over compensation, Charlie?

CHARLIE MUNGER: I think it’s amazing how simple it’s been and how little time it has taken and how well it has worked. There’s this idea that headquarters can do these wonderful things. Headquarters, in a conglomerate kind of a company, is frequently hated in the field. We don’t want to be hated in the field. We don’t want an imperial headquarters with big costs that’s imposed everywhere. And averaged out, it’s worked wonderfully well for us.

WARREN BUFFETT: Yeah, we make no headquarters charges. We charge for our credit with a couple of companies, but — most companies are allocating a couple percent of sales, maybe, or whatever it might be, to all their different operations. And usually it’s resented out in the field. And —

CHARLIE MUNGER: Is it ever.

WARREN BUFFETT: Yeah. So we don’t do it.

27. “We won’t trade reputation for money”

WARREN BUFFETT: Number 11.

AUDIENCE MEMBER: Thank you. My name is Joe Bob Hitchcock. I’m a winemaker from the Napa Valley in California. I would like to suggest that the next time you and Charlie have a steak at Gorat’s that you accompany it with a new health food, a Napa Valley red wine. (Laughter)

WARREN BUFFETT: We just went in the wine distribution business, as you may know. (Laughs)

AUDIENCE MEMBER: Excellent.

CHARLIE MUNGER: Warren is helpless, but I’m with you.

AUDIENCE MEMBER: OK. (Laughter) I’ll send you a bottle. One of the keys to the success of Berkshire is your policy to allow the managers of the various Berkshire Hathaway companies to operate with minimal interference from Omaha. But if you became aware of unethical or illegal activities at a Berkshire Hathaway-owned company, would you directly and personally intervene?

WARREN BUFFETT: Sure. We have to jump in. We have a hotline, which I think was a very good invention of — it wasn’t an invention, but a good policy embodied in Sarbanes-Oxley. And, you know, that’s been a plus to us. I get letters directly sometimes. So I want to hear about problems. I hope somebody else has heard about them first and already gotten them solved, but if they don’t get solved someplace else, I want to hear about them. And we have an internal audit function, which is important at Berkshire. And anything that comes in, you know, when somebody calls in on the complaint line and says, “The guy works next to me has bad breath,” I tend to skip over those. But if anything comes in that relates to alleged bad behavior, it’s going to get investigated at Berkshire. And it does. And every now and then, there have been some important transgressions that have come to us via either letters to me, or calls on the hotline, or maybe letters to the audit committee, whatever. We encourage that. Charlie?

CHARLIE MUNGER: Yeah. We care more about that than business mistakes, way more.

WARREN BUFFETT: We have a letter that goes out every roughly two years; it’s the only communication. I probably ought to put a copy of it in the annual report sometime so that the shareholders see it. But it’s a page and a half long. It asks the manager to tell me who, if something happened to them that night, who I should consider putting in charge of the place the next day. Doesn’t mean I’ll follow their advice, but I want to know their reasons and the pluses and minuses. But it starts off basically and it says, “Look, we’ve got all the money we need.” We’d like to make more money. We love making money. But we don’t have a shred more reputation than we need, and we won’t trade reputation for money. And we want that message to get out. It’s the reason we stick that Salomon thing in the movie every year. I mean, you can — probably some of you can recite it by now, but I don’t think it can hurt to keep repeating that story.

And the one thing we tell — we tell them that message, and then I’ve added a new line in this. And I say, if the reason you’re doing something, the best reason you can come up with, is that the other guy is doing it, it’s not good enough. There’s must be — there’s got to be some other reason besides, “The other fellow’s doing it,” or you’re in trouble. And I tell them, “Call me if anything’s questionable. You think it’s close to the line, give me a call.” By saying that, nobody gives me a call because they — (laughs) — they know that the very fact that they think it’s that close to the line probably tells them it’s over the line. But I want to hear about stuff. We can cure any problem if we hear about it soon enough and take action soon enough. But if it’s allowed to fester out someplace and people cover it up — and sometimes they have — then we’ve got a problem.

And we will have more of that in the future, there’s no getting around it, you know. If you have 260,000 people, there can be some things going on. I just hope we hear about them fast. And I hope their managers hear about them even faster and do something before it even gets to us. But we want very much to protect the reputation of Berkshire. It’s the right thing to do. Charlie?

CHARLIE MUNGER: Well, it is absolutely essential. And Berkshire, averaged out, has a very good reputation, as you can tell by the ratings from major media and surveys. And that is absolutely precious to us. In a sense, you people are part of the culture, too. The ideal is not to just make all the money that can be legally be made without causing too much legal trouble. The idea is bigger than that. It’s that we celebrate wealth only when it’s been fairly won and wisely used. And if that idea pervades the culture of a place, including the shareholders, we think that’s very helpful to us. (Applause)

28. BNSF has benefitted from good regulations

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: This question relates to your investment in Burlington Northern, and it comes from Josh Sanbules (PH), who I believe is in New York City. And he asks, “You mention in your annual letter that regulators of the railroad industry need to provide, quote, ‘certainty about allowable returns,’ unquote, in order to make huge investments. If you were going to help the regulators calculate, quote, ‘allowable returns,’ how would you suggest they do it?”

WARREN BUFFETT: Well, I think the Service Transportation Board — and maybe Matt Rose could help give more details — but I think they’ve adopted something like 10 1/2 percent, or thereabouts, on invested capital. And if you had a major enough change in interest rates or something, you could argue that there should be some adjustment, perhaps, in one direction or another. Usually, in the case of regulated utilities, they talk about return on equity. And you have different amounts in different states, but some states it may be 11 percent, in some states it may be 12 percent or something like that. It’s usually in that range. With the railroads, they’ve gone toward this return on invested capital, which includes debt as an adjusted figure. And I don’t think that’s a crazy, crazy standard. I mean, the railroad, unlike the electric utility, when you get an allowed return in the electric utility you’re almost certain of earning it, I mean, if you behave yourself. And your demand is never going to fall off that much, probably, that you’ll go way below your return.

The railroad’s got more downside in it if you run into a terrific industrial recession, so you’re not as protected on the downside. But there should be some figure, and I would argue that the 10 1/2 percent, or whatever it may be on invested capital, that’s been achieved by the four big railroads in recent years, something close to that or right around that figure. And you want the railroads investing a whole lot more than depreciation, and I would think that would be — it’s certainly an inducement to me to invest money in improving the transportation system. And on the other hand, if that return were far lower than that, it would be crazy to put money, because you can’t change that railroad system and do something else with it. So I think the country and the railroad systems have a very common interest in not earning exorbitant profits or anything like that, but getting a decent return on what is sure to be much needed investment over the next 10, 20, 30 years. And I’d go along with — if the Service Transportation Board says 10 1/2 percent, or some number like that, I think that’s not a crazy number. Charlie?

CHARLIE MUNGER: Well, yeah, the railroads have been a hugely successful system, in terms of a regulated business. If you stop to think about it, the railroads of America have been essentially totally rebuilt in the last 30 or 40 years. They’ve improved the tracks, they’ve changed the size of the tunnels, they’ve improved the bridges. The average train can be more than twice as long and twice as heavy. And you can hardly imagine a business that’s done a better job in adapting to the needs of the rest of us than the American railroad industry. And that’s by and large been a system of wise regulation accompanied by wise management. And that was not always the case. If you go back a long time, neither the management nor the regulation was all that wise. But the existing system has worked very well for all of us.

29. “Lumpy” earnings as competitive advantage

WARREN BUFFETT: OK, number 12.

AUDIENCE MEMBER: Hello, my name is Ashish Texali (PH). I am from New Delhi, India. First of all, I would like to thank Kelly Bruce (PH) and Carol from American Express to the help they’ve extended to make this event possible. The question regarding General Re and reinsurance business. As the insurance business uses complex models, how is Berkshire more comfortable that insurance business models are not exposing you to significant risks like the models did for Wall Street? Also, if it is not confidential, is there concentration of risk? That is, what are those few events which can cause significant loss for insurance businesses?

WARREN BUFFETT: I’m not sure I got all of that, but we run significant risks from earthquakes. We had, in the Chilean quake — I don’t know how much would have been in the first quarter. When you read our 10-Q there will be a number in there. But we insure 20 percent of Swiss Re. We will take 20 percent of their loss from that. We have various other exposures in something like that. We included our best estimate in those figures I put up earlier. Our peak risks now, in terms of earthquakes or hurricanes — which are the two biggest natural catastrophes, in terms of frequency and severity — are probably down quite considerably from a few years ago, not because of any diminished appetite for risk. But we just haven’t felt that the rates were that attractive in those areas. But if we thought the rates were attractive, we’re perfectly willing to take on a group of risks where, if something very close to worst case happened, you know, we would lose $5 billion or something like that. We lost 3 billion-plus in Katrina. We lost well over 2 billion, I think quite a bit more than that actually, on 9/11.

There will be things come along like that. Nothing that ever remotely comes close to making us uncomfortable, though, in terms of the level. I don’t know whether I got his full question there or not, Charlie, but you —

CHARLIE MUNGER: Well, pretty close. I would say that the main difference between our practice and that of most other people is that we are deliberately seeking a method of operation which will give us occasional big losses in a single year, big overall losses. And everybody else is trying to avoid that. And we just want to be rich enough so a big loss in a single year is a blip. And that’s a competitive advantage, that willingness to endure fluctuating annual results. Big advantage, wouldn’t you say?

WARREN BUFFETT: It’s a huge advantage. It’s a huge advantage. And it’s one that no one else is going to pick up on. I mean, they know what we do, they just don’t want to do it, or they’re unable to do it, in terms of financial resources. So, I would say that comes very close to a permanent and substantial advantage at Berkshire. I don’t — forget about — you shouldn’t forget about it, but forget about the human suffering and all that. Just the financial consequences of a Katrina, you know, when we lose 3 billion in that, I don’t feel any different the next day than I felt the day before, financially. I mean, it just doesn’t make any difference, because we are in that particular game. And as long as we make the right decisions over time, in terms of the premiums we get, and as long as we never expose ourselves to a loss that would really shake up our capital structure or anything, you know, that is a game in which we have a huge competitive edge. And it gets wider every year.

So, you know, risk — we are in the business — in insurance, we are in the business of taking the other guys’ desire to smooth their earnings, and, in exchange, get what we think are larger, lumpy earnings over time. We like the business. Carol? Oh, go ahead, Charlie.

CHARLIE MUNGER: I was going to say Warren has a different position than a lot of other people in the insurance business. After a year in which Berkshire has a big loss, he can look into his shaving mirror and say, “Your shareholder still loves you.” (Laughter)

WARREN BUFFETT: That’s right.

CHARLIE MUNGER: Other people are not in that position.

WARREN BUFFETT: Charlie and I knew a guy from Omaha who, 40 or 50 years ago, was one of the richest guys in the United States, named Howard Ahmanson. And Howard had a fetish about owning 100 percent of everything that he came in contact with. And so he said, when asked why, he said, “I like to look in the mirror and say, ‘All my shareholders love me.’” (Laughter) And I’m not quite that extreme, but I like to look in the mirror and say, “Enough of my shareholders love me.” (Laughter)

30. “Gambling” with derivatives

WARREN BUFFETT: Carol.

CAROL LOOMIS: This question is about derivatives. “What useful function do derivatives serve in our economy? We got along quite well without them for many years. If they serve no useful purpose, and in fact, have demonstrated that they can do considerable damage to the economy, why are they not made illegal, especially the naked ones? There is precedent for that. “I believe that short selling of stocks that one does not own or has managed to borrow is illegal.”

WARREN BUFFETT: Charlie has — he can get worked up more on this than I can, so I’m going to let him answer that. (Laughs)

CHARLIE MUNGER: Well, I think the usefulness of derivatives has always been overrated. If we didn’t have any derivatives at all, including contracts to buy and sell grain that were traded on exchanges, we’d still have plenty of oats and wheat. I mean, I think it is slightly more convenient for people to be able to hedge their risks of farming by using derivative markets and commodities. And the test is not, “Is there any benefit in derivatives?” The question is, is the net benefit versus disadvantage from derivatives useful? Or would we be better off without it? My own view is that, if we went back to having nothing but derivative trading in commodities, metals, currencies, safely conducted under responsible rules, and all other derivatives contracts vanished from the earth, it would be a better place. (Applause)

WARREN BUFFETT: We’ll take a current example. Burlington Northern has hedged diesel fuel, which they use a lot of, over the years. And then they also have fuel adjustment clauses in a lot of their contracts for transportation. With Matt Rose, who does a wonderful job of running Burlington, I basically say, “Look at. If I were running the place, I wouldn’t bother to hedge them,” because if you hedge it — if you hedge it for a million years, you know, you’re going to be out the frictional costs, probably, of doing it, unless you’re smarter than the market generally on diesel fuel. And if you’re smarter than the market on diesel fuel generally, we’ll go into the business of speculating on diesel fuel. I mean, if we’ve really got an edge, you know, why bother to run the trains? Let’s just speculate diesel fuel. But I also say, you know, they’ve got — and if you have an organization where you have somebody in charge of that activity, it’s going to take place.

On the other hand, Matt Rose has done a fabulous job, as well as his management team, in running Burlington Northern. If they are more comfortable, or they find it useful in any way, in terms of pricing contracts, or anything, to hedge it, that’s fine with me, too. I mean, it’s his company, he can figure out the best way of running it. I’ll hold him responsible for how it does over time. And, you know, I would do it one way and somebody else would do it another way. I don’t think that’s — I would not condemn anybody that’s running a railroad for hedging diesel fuel, nor would I condemn anybody that runs an energy company, like we do at MidAmerican, for hedging energy costs in certain ways. But I do think, if we could put up a presentation, number 4 on the screen, please. I think it was said very well in 1935.

In fact, chapter 8 of Keynes’s General — chapter 12, I’m sorry — chapter 12 of Keynes’s “General Theory” is, by far, in my view, probably Charlie’s too, the best description of the way capital markets function, the real way people operate. It’s prescriptive, it’s descriptive. Everybody should read chapter 12. It’s a little — it starts a little slow in the first few pages. But Keynes — I’m going to read this because I don’t think Charlie has it in front of him. The first part of it is very familiar to people. I mean, this quote has been used a lot. But every word in this, to me, is right on the money. “Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation.” You can change that to “gambling” if you want to. “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”

That’s the famous part of the quote. Keynes went on to say, “The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism - which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object.” That was written in 1935. I don’t think there’s been anything better written about how government, how citizens, should look at Wall Street and what it does and it doesn’t. It’s always had this mixture of a casino operation and a very socially important operation. And when derivatives became popular, and academia was behind them 100 percent. They were teaching more about how to value an option than they were about how to value a business. And I witnessed that and it drove me crazy. But in 1982, Congress was considering, really, the expansion of a derivative contract to the general public in a huge, publicized way. It was the S&P 500 contract. That changed the whole derivatives game.

At that point, basically, Wall Street just said, “Come on in, and everybody can speculate in an index. Not any real company, just an index. And you can buy it at 10 o’clock in the morning and sell it at 10:01, and you’re contributing to this wonderful society by doing it.” And I wrote a letter to Congressman Dingle, and we’ll put up exhibit 5. I just excerpted a few of the statements I made there. This was one month before they put in trading in the S&P 500, April. They put it in April, 1982, in Chicago; did a little in Kansas City first. And I went through four pages of things and I just pulled out a few things. But I think that, to some extent, what I forecasted then has turned out to be the case. And then it got squared and all of that, as both the people in Wall Street kept dreaming up new and new ways for people to gamble. And as I say, academia was applauding all along the way and getting hired as consultants to various exchanges to tell them how wonderful they were, in terms of their social purpose.

I think that — well, it’s up there for you to read. I’d be glad — the whole letter was reprinted, I believe, in Fortune at one time, Carol. Was it—?

CHARLIE MUNGER: By the way, if I remember right, this was like the only letter in opposition to this uniformly acclaimed new world of better gambling in things related to securities. Warren wrote the letter —

WARREN BUFFETT: And it’s a —

CHARLIE MUNGER: — all those years ago, and it was the only letter —

WARREN BUFFETT: Incidentally —

CHARLIE MUNGER: He basically said the idea’s insane. It will do more harm than good. Then, as now, people didn’t pay that much attention to him.

WARREN BUFFETT: And I’ll venture that very few people in this room know — you all know that if you buy a stock, you have to hold it for a very long period of time to get a special capital gains treatment on it. If you buy an S&P 500 contract at 11 o’clock and sell it at 11:01 and have a profit, it’s taxed 60 percent as a long-term capital gain, and 40 percent as short-term capital gain. So you really get better tax treatment if you’re gambling on an S&P 500 derivative, which is what it is, in Chicago, than you do if you invest for four or five months in some security and then have to sell it for some reason. It’s a tribute to the lobbying power of a rather small group that has done very well off this particular activity. Charlie, can you think of any reason why it’s 60 percent long-term gain if you hold something for 30 seconds? (Laughs)

CHARLIE MUNGER: Well, of course it’s crazy. It’s neither fair nor sensible. But if a small group with a lot of money and influence cares a great deal about something and the rest of us are indifferent, why, they tend to win before our legislative bodies. That’s just the way it is. I always liked Bismarck’s remark that you shouldn’t watch two things: sausage making and legislation making. (Laughter)

31. Buffett is losing his bet against hedge funds

WARREN BUFFETT: OK, with those hopeful words — (laughter) — we’re going to break for lunch. Before we break for lunch, I made a charitable wager with a group, Protégé Partners, two years ago about the behavior of funds of funds that they would select, hedge funds, and the S&P index fund. The duration of our wager is ten years, and whichever one loses, the money goes — well the money from both goes to the winner’s charity, is what it amounts to. Interesting firm out on the West Coast that supervises what they call these long bets. So if we’ll put up exhibit 6, you can see at this point I’m behind. And have we gotten exhibits? Yeah. Let’s go to lunch. OK. (Laughter)

Afternoon Session

1. Speak out, but speak responsibly

WARREN BUFFETT: And I think therefore we go to 13, which is in a separate room. And is there anybody at the microphone in 13?

AUDIENCE MEMBER: Yes, there is.

WARREN BUFFETT: OK.

AUDIENCE MEMBER: Hello, Mr. Buffett and Mr. Munger. This is a shareholder from New York. One could argue that a major contributor to the great bubble was that there wasn’t a healthy and open debate. That all the opinion and all of the money was on one side of the trade. And I was thinking about this recently as I read Christine Richard’s new book, “Confidence Game,” about Bill Ackman and his battle with what was once the largest bond insurer, MBIA. The story also reminded me of David Einhorn and the questions he raised about Allied Capital and Lehman Brothers. We now know that they were 100 percent correct, but at the time that they first spoke up they were attacked by the companies, pilloried by the media, ignored by the accountants of those firms and the rating agencies, and perhaps most alarmingly were investigated by the SEC for daring to go public with their bearish analyses. And I can tell you that watching what happened to them, it’s a real deterrent to anyone else speaking up and raising similar questions. So I’d be curious for your thoughts on this, and is having short sellers speak out healthy for our markets?

And in general what should be done to encourage a greater diversity of opinions so that we can avoid future bubbles? Thank you. (Applause)

WARREN BUFFETT: Yeah, I don’t see anything wrong with people who are positive or negative speaking out, as long as they’re willing to be held responsible for the kind of statements they make. I mean, there are — obviously — Well, take the extreme example. If there were two banks in town, and I owned one of them and I was of kind of a devious type of mind, I might go out and hire 50 people to stand in line in front of the other bank, and I would probably not have a competitor before long. So you can do things on either side, the long side or the short side, that I would regard as certainly unethical and in many cases should be illegal. But anytime you attack the conventional wisdom, you’re going to meet with a lot of opposition because you’re threatening people’s positions. When we would talk about the efficient market theory 30 years ago when it was absolutely de rigueur that — and virtually every finance department in the country, major schools, you either had to swear allegiance to it or you were not going to be promoted. You know, people don’t like that.

And any institution, when they get a threat from the outside, they will attack both the threat and the threatener. But that exists on both sides. I have no problem with short selling, and I have no problem with speaking out responsibly about your reasons for doing so, any more than I have on the long side. There have been some very bad practices on the short side, and there have been some very bad practices on the long side, in terms of people trying to literally spread things that are untrue. But that has probably been more on the long side over the years than on the short side, by some margin. Charlie?

CHARLIE MUNGER: Yeah, I think to some extent you’re criticizing the wrong people. In many cases, the accountants that allowed the lousy accounting are the ones that ought to be held in the dock. And they get very little criticism in America and that’s a mistake.

2. Why there’s no synergy among subsidiaries

WARREN BUFFETT: Becky? (Applause)

BECKY QUICK: This question comes from Ben Soh (PH) who lives in the metro Vancouver area in British Columbia, Canada. This is for either Mr. Buffett or Mr. Munger. He wants to know about synergies at Berkshire, specifically, “Does it make sense that the Dairy Queen stores here sell PepsiCo products and would not expect — accept — American Express, only Mastercard or Visa? (Laughter)

WARREN BUFFETT: There are — around the world, there are pretty close to 6,000 Dairy Queen outlets of one sort or another. And some are called Grill and Chill now, different things, but roughly 6,000, and company-operated are 70 of those. So almost 99 percent are franchised, and at Dairy Queen we do not control what the franchisees do. Most of the franchisees — last time I checked sometime back — but most of the franchisees serve Coke, the enlightened ones — (laughter) — but it is entirely their business. They can — they can — they can serve Coca-Cola products or Pepsi. It seems some of the other franchise operations seem to have more control over that than Dairy Queen. But if you think about it, Dairy Queen goes back before McDonald’s, before Wendy’s, before Burger King, before Kentucky Fried, all of those. It goes way back into the ’30s, and a lot of the agreements with franchisees were territorial operators were done on the back of a napkin, or something of the sort.

So to some extent we have less control over what franchisees do, particular in certain — a few parts of the country — than other people. But we’ll — keep asking for Coke, and maybe you can cause them to see the light. The synergies, any synergies, any synergies at Berkshire come about at the operational level pretty much. We do not tell our companies to do business with each other. We hope they do do business with each other, and, you know, and we hope that each side of a subsidiary A offers good reasons for subsidiary B to do business with them. But the whole idea at Berkshire is that our managers are responsible for their businesses, and if they’re going to be responsible for their businesses it means we shouldn’t tell them what to do, except in very limited ways. Charlie?

CHARLIE MUNGER: Well, you’ve accurately described the way it is. What’s interesting about it is we really like it that way. (Laughter)

WARREN BUFFETT: It’s a lot less work. (Laughs)

CHARLIE MUNGER: Yes.

WARREN BUFFETT: And I think, actually, that there’s some merit. Sometimes people work better together if it’s their decision to work together than if you tell them to work together.

CHARLIE MUNGER: It goes beyond that. Warren and I would like it that way if we were in the subsidiaries. There’s no doubt about that.

WARREN BUFFETT: Yeah, we’d probably leave if it wasn’t that way. (Laughs)

3. Act as if “you were an owner of the place”

WARREN BUFFETT: OK. Area 1.

AUDIENCE MEMBER: Dear Mr. Buffett, dear Mr. Munger, my name is Steven Roman (PH). I’m a student of engineering maschinenbau at the University of Vienna in Austria. If I one day want to apply as a manager with one of the Berkshire companies, what qualities are you especially looking for? And what do I have to do to become your successor? (Laughter)

WARREN BUFFETT: Probably shoot me. (Laughter) The managers of our subsidiaries hire their own people. The number of decisions I have to make about managers are really, really few. As I mentioned earlier, they do send me a letter that if something happens to them, gives me their ideas about who should succeed them. But I make no decisions about who gets hired at GEICO, or Burlington, or Mid-American or anything of the sort. I mean, if they need a CFO they go out and hire a CFO, or if they need somebody to run a plant they go out and hire them themselves. They are responsible for their operations, and occasionally we have a death, we have an occasional — very occasional, I can’t even hardly think of one — resignation. And at that point I have to make a decision about who should be put in charge of the operation. But I don’t think I’ve had more than 10 or 12 of those in 45 years. So I’m not a very good employment agency. We have 21 people, I think it is, at headquarters, and I made a terrific hire here a few months ago.

But that’ll take care of me for four or five years. Charlie?

CHARLIE MUNGER: Yeah, there’s no indication we’d be particularly good at it, either. (Laughter)

WARREN BUFFETT: Yeah. I wasn’t going to mention that. (Laughter) But I would say this: if you want — what is interesting to me is that when you find somebody outstanding, boy, do they jump out. I mean, somebody that is thinking about the place the right way, is working extra hard, whatever it may be. There aren’t — you don’t have that much competition in this world. So, in terms of generally advancing within organizations, I think you’d be surprised at how little competition you really have if you start thinking like you would if you were an owner of the place, and working like you would if you were an owner of the place, and pretty soon you may be running something.

Now, when you get into look-through earnings or sometimes when we talk about the earnings per share and the investments per share, some of that I don’t repeat every year because we try to get — run at, maybe, 12,000 words or something like that in the annual report. I really think if you extend it too much — I’ll say this, nobody’s told me it was too short, yet — (laughs) — including my editor, who is here today. And every other year I may do that breakdown between operating earnings and the — but that takes 1,000 words or so to explain it to people. The whole report is guided, as it has been ever since I really started taking it seriously in the mid ’70s, is guided by the idea that I’m — actually, I’m writing it to my two sisters who are here. And I have my audience in my mind — is two very intelligent, interested people but who are not around the place, been gone for a year, and they’re very capable of understanding anything but they’re not necessarily familiar with all the lingo. If I get too esoteric on it, so I should explain that.

And I really want them to understand how I’m thinking about the business, and by implication, how I think they should think about it, and to answer the questions that I think would be in their mind. And they’ve got most of their net worth in it, so they’re going to read to the end. And I really haven’t changed that framework in my mind for how I’ve written it. I start mentally off writing, “Dear Doris and Bertie,” and then I just cross them off and put, “To the shareholders of Berkshire Hathaway.” But that’s the way it’s done. Charlie?

CHARLIE MUNGER: Yeah, but the details can change as the facts change. The undistributed earnings of corporations in which we hold shares, but do not control, used to be way more important than they are now. It’s perfectly natural that the emphasis would shift.

WARREN BUFFETT: Yeah, the undistributed earnings now, without me looking at it very carefully, you know, are probably — they’re not more than, probably, 15 percent of our reported earnings or something like that. They used to be a much higher percentage. And they’re still important. But I don’t think they’re — I think the people that understand that Coca-Cola and American Express aren’t paying out all their earnings, and it’s not a big enough number that I would want to spend a lot of the report explaining it.

WARREN BUFFETT: Number 4.

AUDIENCE MEMBER: My name is Joe Hudson (PH), a shareholder from Culver, Indiana. I doubt either of you have any money in Roth IRAs, but what are your thought on the opportunity this year for anyone to convert IRAs to Roth IRAs, thus having all future growth on Berkshire or other investments 100 percent tax free? Is the government making a big mistake here, and should people be concerned about the deal changing down the road?

CHARLIE MUNGER: I’ll take this one, because I have an IRA that I am going to convert to a Roth IRA. So there’s your answer. (Laughter)

WARREN BUFFETT: Well, I still don’t understand it, but —

CHARLIE MUNGER: You don’t have to. (Laughter)

WARREN BUFFETT: OK. He’s always telling me that. (Laughter) I assume - if Charlie said it, it must be true.

WARREN BUFFETT: Let’s go to Andrew. (Laughter)

ANDREW ROSS SORKIN: This question I’m actually very self-interested in. It comes from Anton Ossip (at) Alexander Forbes from Johannesburg, and (he writes), “Last year you said you were down on the newspaper industry. “Given your life-long interest in newspaper companies and your stake in the Washington Post Company and others, has your view changed in the past year with the introduction of the iPad and other e-reading technologies? “Do you think we will see a contraction in the value of — in the value retained by — media houses versus what will be passed on to distributors of the media?”

WARREN BUFFETT: Well, you could probably answer it better than I can. My relatively uninformed opinion — because I’m not that up on the technology — but I just have a feeling that when the money — has basically — the money to run good newspapers has come from advertising, you know, three-quarters of the money or thereabouts — the papers become less useful to advertisers. I mean, they were the only game in town for a long, long time. They are not the only game in town. And what a difference that makes if you’re selling something. So, when the Philadelphia Inquirer, I — Stan Lipsey is here — I called Stan up and I said, “Stan, this is probably like an old fire horse or something, but let’s think about it anyway a little bit.” And it was sold yesterday at a bankruptcy sale, although I think that’s pending confirmation. But, you know, it is very tempting, if you’ve still got fairly substantial circulation - The Philadelphia Inquirer and they’ve got the Daily News there, too. But the math is really tough.

I mean, the distribution costs, the printing costs, everything, and maybe all this changes that in some way that you would understand better than I would. But since I don’t understand it, I have to stay with — and there are plenty of things I don’t understand — and I cannot make an affirmative decision on newspaper ownership. I just got the — the ABC puts out Fast Facts, this big yellow publication — I just got it a couple days ago and I can’t resist looking through there. And I flip the pages and look at circulation of all kinds of papers. Actually, in Buffalo, we were down less than a great many papers, even though, you know, our population demographics are very tough. We were down less than Rochester, I might mention, which is owned by Gannett. But you look at San Francisco Chronicle, you know, down 20-odd percent. Dallas — These are communities that are thriving, and it blows your mind how fast people are dropping it. It’s not just older — it’s not just that younger people aren’t picking it up. I mean, the world has really changed, in terms of the essential nature of newspapers.

There’s nothing that looked — back when Charlie and I would talk about them in 1970 or ‘65, there was probably nothing that looked more bulletproof than a daily newspaper where the competition had melted away. But it’s a form of distributing information and entertainment that has lost its immediacy in many cases. It’s certainly — it is not the essential place to get — think about how stock market quotations were, you know, 30 or 35 years ago. You looked in the paper to see what stocks had done. You looked in the paper to see how sports games had turned out. So its primacy has withered away, and the advertisers weren’t there because they love the publisher of the newspaper. They were there because it was a microphone to talk to everybody in town, and they had to talk to everybody in town. And so you get this chicken and egg thing that the newspaper becomes less valuable as the advertisers float away, and the advertisers float away as the subscribers diminish. And I don’t see a good answer to it, but Charlie, what do you have to say?

CHARLIE MUNGER: Well, the independent newspapers, due to the accidents of history, as they became dominant in their individual towns, for decades had impregnable economic strength. And by and large they behaved better because they were so strong. And they were called the “Fourth Estate.” They were really a branch of the government, they helped keep government honest. And if you take this state in which we’re located, The World-Herald has been a very constructive force, net, over a long period of time. As those dominant franchises have weakened and weakened, it’s not good for the country. I think we’re losing something that we have no substitute for. And I think it’s very sad and I don’t have the faintest idea what to do about it.

WARREN BUFFETT: Charlie and I love newspapers. I think The World-Herald hit a 300,000 circulation peak on Sunday at one time. I don’t think they averaged that for the six-month period, but I seem to remember that, I could be wrong. And the figures — 100,000 off that or something of the sort, and the state has gained population, the city’s gained population. I think it’s as vital to me as ever, but it clearly — it has changed for the populous as a whole. And, you know, when I look at the Philadelphia Inquirer and I forget what it was, 350,000 or something like that of circulation, and, you know, I’m not worried about Philadelphia going away. But when I look at the figures being down — I don’t know, I forget what it was now — 30 or 40,000, you know, in a year, it doesn’t work very well as that goes along, because the advertiser just does not need you the same way as they needed you 10 or 15 years ago. So your ability to price evaporates in them.

It used to be — Charlie and I met Lord Thompson in 1970 or so, and he owns the paper — he owned the paper — in Council Bluffs, right across the river. And he was a jovial fellow, he was very happy to see us. And we said to him, “Lord Thomson,” we said, “We noticed you own the paper in Council Bluffs. Have you ever been there?” He said, “I wouldn’t dream of it.” (Laughter) And then I said, “Well, Lord Thomson,” I said, “You seem to increase the price of your paper every year and your poor advertisers” — I mean the advertising price. And I said, “What can they do about it?” He says, “Nothing.” And then I said to him, “Well, in that case, how do you decide how much to increase prices, since it’s totally at your discretion?” And he said — I think Charlie will remember these words — he says, “I tell my U.S. managers to price to make 40 percent pre-tax.

Above that, I feel I may be gouging.” (Laughter) Those days are gone. (Laughs)

CHARLIE MUNGER: Yes, and the politicians are not behaving better as the newspapers are weakening. We’re going to miss the newspaper power.

WARREN BUFFETT: I agree with that. (Applause)

WARREN BUFFETT: Number 5.

AUDIENCE MEMBER: My name is Robert McArthur (PH) from Boston, Massachusetts. I’m starting a career in investing, and many, if not most, investors my age think they’re value investors. Also, there’s a record number of people here to see you this year, and the same value investors who were laughed at three years ago are now celebrated by the financial press. Will there be fewer metaphorical $100 bills left on the street going forward, and if so, should I look for a career in managing a business instead of managing money?

WARREN BUFFETT: There will probably be fewer, but I would say there will always be — except in the most bubbly of markets, perhaps — but there will always be opportunities if you’re not working with large amounts of money. The money manager — there’s a basic conflict. There’s conflicts in most businesses. Everybody’s pointing out the conflicts now in the investment banking business. But the investment management business has a conflict that’s equally as significant in the fact that asset gathering can become a way more important part of your income than asset managing. But if you manage moderate sums of money, I think there will always be opportunities to overperform. That doesn’t mean lots of people are going to do it, but they will be out there. And, you know, it might have been easier many years ago when there were fewer people looking and not as much information was available on the internet and all that. But people still make the same mistakes and they still get — well, I’ll give you an illustration. Charlie has a company called the Daily Journal Company. And the Daily Journal Company has a bunch of cash.

And it sat there with cash, and it sat there with cash, and I own 100 shares — which is all he’ll let me own — and I got their annual report here a while back. And in their fiscal year of 2009, they never bought stocks before that I’d seen, and all of a sudden they’d bought $15 million worth of stocks and they were worth 45 million. So by sitting around for a while, but waiting until things got really ridiculous in certain cases, he put $15 million out that became 45 million within, probably, a six month period or so. So opportunities come around. You have to be prepared to grab them when they come. And you can’t do it with the kind of money — I mean, you can’t get the extraordinary things with the kind of money that we’re running. With moderate amounts of money, I think there will always be opportunities. Charlie’s going to tell you something more pessimistic now, probably. (Laughter)

CHARLIE MUNGER: Yes. One piece of advice that Warren frequently gives — and it’s particularly useful to those going into money management — take the high road. It’s far less crowded. (Laughter and applause)

WARREN BUFFETT: Alan Simpson used to say, he said, “Those who take the high road in Washington are seldom bothered by heavy traffic.” (Laughter) But getting to the last part of your question, there’s going to be opportunities for talent, whether it’s in money management, operating management, whatever. It’s going to work. Money management, you know, is easier to scale up and easier to get into and all of that. So it was certainly my natural inclination, in any event. I would not have wanted to work my way up to plant superintendent and all of that — (laughs) — until I got a job at the top, you know, about the time they were going to give me a gold watch. But there’s opportunities in both places.

WARREN BUFFETT: Carol?

CAROL LOOMIS: This question is about municipal bonds. Municipal bond defaults, on the scale you described in the 2008 letter, have so far not materialized. To what extent will we see municipalities default outright in the next five to 10 years? Will the bond insurance companies be able to swallow the losses? Will there be federal bailouts of states? And considering all of these risks, should investors be getting paid more than they already are for holding municipal bonds?

WARREN BUFFETT: Well, if the bonds are insured by Berkshire, you don’t need to worry at all. (Laughs) But we’re not insuring a lot of bonds currently, because we don’t think the premiums are appropriate, which gets to the question. Just the other day, within the last few days — you’ve probably read about it in the papers — Harrisburg, Pennsylvania, defaulted on a relatively small amount of bonds. And the bond insurer, named Assured Guarantee, starts paying the interest. And Harrisburg may get things worked out in a week, you know, and they may not. There’s certainly some incentive to do that. And if they do get it worked out, the bond insurer’s not too much on the hook. But what you worry about is correlation in this field, that if one entity defaults — and particularly if nothing terrible happens, that the police are on the street the next day, and the fire trucks still go to fires and all that — and people start thinking, “Why should I have a great fiscal reputation when I can have lower taxes and still have all the services I need?”

It’s very hard to tell how that will play out. I personally think it would be very hard, in the end, for the federal government to turn away a state that was having extreme financial difficulties when they’d, in effect, gone into General Motors and various other entities and saved them. I don’t know exactly how you would tell the governor of state X that you were going to stiff-arm him, and when you’d participated in so many other bailouts of corporations. But who knows what would happen, and who knows how contagious it would be? The big thing you worry about if you’re a bond insurer is contagion. Obviously the bond insurers — except for Berkshire — the bond insurers, in my view, have got extraordinary liabilities in relation to their capital. And virtually every one of them either failed or effectively failed — had to spin off a bad bank versus a good bank type of thing, or something like that — with merely the troubles they encountered when they got into structured securities. And I think they’ve had a very optimistic attitude toward what could happen in the field. But I don’t know the answer on what default rates are going to be over the next few years.

I knew that I felt I was getting paid fairly for taking that risk on a year-and-a-half ago, and I don’t feel that we’re getting offered a premium that’s fair now, so we’re going to let somebody else do it. Charlie?

CHARLIE MUNGER: Yeah, with the municipal bonds, I would try and invest in places that were both prosperous and disciplined. You want to invest in the prosperous, because Ben Franklin was right when he said, “It’s hard for an empty sack to stand upright.” And you want to invest in the disciplined places because integrity still matters. It’s not very difficult, it’s not very complicated.

WARREN BUFFETT: But you could argue that in a country, if the undisciplined are not being punished for being undisciplined, that the taxpayers in disciplined areas would say, “Wait a second. You know, why should we keep up a record of financial prudence and all that and pay our bills when other guys aren’t paying their bills?”

CHARLIE MUNGER: Well, there’s no question about the fact that bad behavior is contagious. That’s the way human nature works. But I’d still rather be with the disciplined, —

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: — prosperous people.

WARREN BUFFETT: Number 6.

CHARLIE MUNGER: That’s why I like the Berkshire meeting. (Laughter)

WARREN BUFFETT: That, and free fudge. (Applause)

AUDIENCE MEMBER: Good afternoon, Mr. Buffett and Mr. Munger. I’m (inaudible) from Fort Lauderdale, Florida. First of all I want to thank you for sharing your wisdom with us so generously. Back in October of 2008, you highly recommended buying U.S. stocks and that was a brilliant idea, it worked very well. And I just want to get your opinion how you think about the market going forward. Are you still that optimistic, and what’s a reasonable rate of return to expect from equities in the next decade or so?

WARREN BUFFETT: Well, I write articles very infrequently, or get interviewed very infrequently, on the subject of the general level of the market itself. Probably only four or five times in 40 years have I really declared myself about — what I thought — about the general level of the stock market. And it turned out I was pretty premature, actually, in October of 2008, as was pointed out to me by a number of people. But I felt — and what I said in that article really was that it would be way better to own stocks over the long term than to follow a policy of buying either long-term bonds or holding cash. And I knew I could make that statement and I would be eventually — I thought odds were very high — I’d be proven right on that. But I don’t like — I don’t know what the stock market’s going to do next week, or next month, or next year. I don’t have any idea. People always think I do.

I know I don’t have any idea, I don’t think about it, it doesn’t make any difference because Charlie and I — I can’t recall a discussion we’ve ever had on it, basically. But I do think over the next 10 years or 20 years, I’d much rather own equities — including U.S. equities — I’d much rather own them than cash, or I’d much rather own them than a 10 or 20year bond. But that’s partly because I’m very unenthusiastic about the alternatives. I think equities are likely to give you some positive — modest positive — real return over time. But beyond that I really don’t know anything. Charlie?

CHARLIE MUNGER: That’s a cheerful thought that equities are the best of a bad lot of available opportunities. (Laughter)

WARREN BUFFETT: You disagree with it?

CHARLIE MUNGER: No, I think you’re right. (Laughter) I think people should get accustomed, on average, to doing less well in their investment portfolios, in real terms.

WARREN BUFFETT: Charlie and I don’t —

CHARLIE MUNGER: I think we’re in for a long period of where the ordinary result is not going to be very exciting.

WARREN BUFFETT: But we like owning businesses. And we’re in a position where we can own entire businesses, but we also like partial ownership of businesses. And we want to own businesses where we really think they have some competitive advantage over time, and where we feel good about the management, and where we think the price is reasonably attractive. I think you can find things like that now, but they aren’t dramatically attractive at all. They do beat, in my view, they do beat holding cash or five, 10, or 20-year bonds.

WARREN BUFFETT: Becky?

BECKY QUICK: This question comes from John Bailer (PH), who’s asking about the rating agencies. He points out that you started selling your stake in Moody’s this year. “Has the investment case for Moody’s changed due to potential regulation, and if so, why not sell the position to zero?”

WARREN BUFFETT: We won’t discuss what we will or won’t do with any position, but I would say this. The ratings agencies have had, and still have, under current conditions, an incredibly wonderful business. I mean, it takes no capital at all, you know, the pricing power is significant. And certain parts of the world feel they need rating agencies. There are also — a certain part of the world is very mad at rating agencies. And many feel that the rating agencies let them down when the rating agencies, essentially, succumbed to the same mania, in effect, you can say, that prevailed throughout the investment world, and, really, the political world, and the media world, et cetera. They made the same mistake that, again, politicians made, I made, you know, you made, mortgage brokers made, whomever. They couldn’t see a world where residential housing, countrywide, would collapse. And I don’t think that was done because they were — the incentive part of it, there may have been some small aspect that that played. I just think that, you know, it’s very hard to think contrary to the crowd.

And on the other hand, there is a, obviously, a backlash against rating agencies. There may be legal remedies. You can get views on that either way. If they are not forced to change their — the whole structure around them does not change in some dramatic way — it’s a pretty darn good business in that you can’t shop pricing in the rating agency business. We have never paid any attention to ratings for bonds, I mean, you know, at Berkshire. We don’t think we should farm out, outsource, investment judgment. If we can’t do it ourselves, we just don’t do it. And we’re not going to rely on somebody else’s opinion, whether it’s a rating agency or an investment advisory organization, or a management consultant firm, or anybody else. So, it’s not a business that we rely on, but we do recognize that if the, sort of, the social model doesn’t change, it still remains a phenomenal business. Charlie?

CHARLIE MUNGER: Well, I would argue that the rating agencies, in their present forum, and structured with their present incentives, have been a wonderfully constructive influence in our country for a great many decades. And what happened, of course, is that the cognition faltered. They drifted with the stupidity of their times in a way that was regrettable. Part of it came out of asininity in American business education. They overbelieved in these ridiculous models and so on and so on. And I have yet to hear a single apology from business academia for its huge contribution to our present difficulties. (Applause)

WARREN BUFFETT: Area 7.

AUDIENCE MEMBER: Mike McCoy (PH) from San Francisco. Chairman Buffett, you frequently speak favorably about the prosperity of future generations, that our children and our children’s children will live better than us. How much of our current prosperity do you attribute to us being able to get oil out of the ground at a fraction of the cost of its value to us in the economy? And how will we be able to live better in the future when we can no longer get more and more of this free lunch and we become dependent on more dilute sources like solar and wind? Couldn’t this turn out like trying to satisfy a drug addict with a Coca-Cola?

WARREN BUFFETT: The oil business — obviously, the discovery of oil — what was it, about 1850- something? Colonel Drake at Titusville, Pennsylvania, or something? That changed the world in a very major way, and it was only 150 years ago. And since then we’ve been sticking straws into the earth at an incredible pace. There’s over 500,000 producing wells in the United States, would you believe that? I mean, 11 barrels, 10 barrels a day average or something of the sort. We have really exploited what may have taken, I don’t know, whether it was hundreds of thousands of years or millions of years to create. It’s contributed in a huge way to the prosperity of the world, but the world, in my view, will not be dependent upon that particular — call it “windfall” — for the next hundred years. And Charlie knows way more about this subject than I do, but there will be other free lunches available. You know, whether it’s solar or — there’s lots of possibilities.

Don’t ever give up on humans’ ability to innovate in ways that create solutions to problems that seem insolvable. We’ve faced all kinds of predictions. You know, all of the inventions having been invented — there’s some famous statement, I forget who made, on that. We haven’t really started. I mean, if you could pick a time in history when you would want to be born — leaving out the nuclear, chemical and biological threat, which is something to leave out — but I would pick today. The world has a bright future. Now, Charlie will give you the other side of that. (Laughter)

CHARLIE MUNGER: No. I think you’re failing to recognize something really important. In the technology of 150 years ago, they really needed the oil to get ahead. In our advanced civilization, which has benefited from this last 150 years of technological expertise, we can get ahead without the oil if we have to. Now, Freeman Dyson is a physicist who is not an economist but a genius, and he’s been very good at pointing out that it isn’t that horrible to contemplate a world which goes off oil, provided that world is as rich and knowledgeable as ours is now. So the fact that they couldn’t have got to where we are now without the oil starting 150 years ago, does not mean we can’t do without the oil if we have to. We need the oil and the gas, and the coal, eventually, for chemical feed stocks more than we need it for keeping warm and propelling our vehicles.

WARREN BUFFETT: And the adjustment, fortunately, will be fairly gradual. I mean, it isn’t like 85 million barrels in the day goes to 50 million or something in five or 10 years. So it’s a workable period of adjustment, in my view.

CHARLIE MUNGER: If it doesn’t bother Freeman Dyson, who knows more about it, I don’t think it should bother you too much. (Laughter)

WARREN BUFFETT: He’s always pulling that on me. (Laughter)

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: I received a number of questions regarding Kraft, and this one comes from a shareholder who says they prefer to remain anonymous. The question is, “Given your stake in Kraft and your public criticism earlier this year about the Kraft-Cadbury deal, how would you grade the Kraft board of director’s capital allocation and the management compensation abilities? “What did you think of Kraft CEO Irene Rosenfeld’s $26.3 million compensation package for services, including her leadership in completing the Cadbury acquisition and selling Kraft’s North American frozen pizza business?”

WARREN BUFFETT: Well, I didn’t like either the Cadbury decision or the pizza decision. But we’ve made our share of dumb deals at Berkshire, you know. So I’ve gotten more tolerant of other people, and incidentally the fact I think it’s a dumb deal doesn’t for certain make it a dumb deal, but I think the odds are it was a dumb deal. In fact, I think the odds are that both deals were dumb. The pizza deal was particularly dumb, but — in my view. But just think of all the dumb things we’ve done, right? Starting with that department store in Baltimore.

CHARLIE MUNGER: Oh yeah, right. A few Irish banks, you know.

WARREN BUFFETT: Right, (inaudible).

CHARLIE MUNGER: We never seem to go —

WARREN BUFFETT: I wish you hadn’t brought this up.

CHARLIE MUNGER: — we never get over it. (Laughs)

WARREN BUFFETT: We expect to do some dumb things, it’s just we get mad when other people do dumb things with our money. (Laughs) You know, the pizza business — somewhere I probably have some figures on that — but when they sold the pizza business for $3.7 billion they announced it as selling it for $3.7 billion. They didn’t sell it for $3.7 billion, that’s what the other guy paid. What they got was about $2.5 billion. And that was a terribly tax-inefficient deal when they’d already shown their ability to understand that you could do a tax-efficient deal when they sold the Post cereals business earlier. And when they referenced — well, they didn’t reference at all what pizza was earning beforehand, but I think that Nestle said it was earning something like 280 million pre-tax, but that was referring to the previous year. When they talked about the Cadbury earnings they were buying, they were talking about next year. And when they talked about the pizza earnings they were selling, they talked about last year.

Pizza in 2009, believe it or not, earned three hundred and, I think, 40 million pre-tax. So they got 2 1/2 billion for 340 million of pizza earnings that were growing as fast or faster than the Cadbury earnings and where the sales were going as fast or faster. It really didn’t make sense in my view. Now, you know, Irene is a perfectly capable manager and she may know a lot of things about that business I don’t know. Like I say, we’ve made plenty of mistakes ourselves. But if it’d been me, I would have voted to keep pizza and not buy Cadbury. And I expressed myself, and I don’t do that too often, but we owned a lot of Kraft. And Kraft, still, is selling for considerably less than the value of its constituent parts, particularly if you value them the way they valued Cadbury. (Laughter) But if they don’t sell them all like they sold pizza, you know, the present price is below the value of Kool-Aid and A.1. Sauce and — and Jell-O and Oscar Meyer wieners and a few things.

Those are very good businesses. I just hated to see them give up a significant portion of those businesses to buy Cadbury at what I felt was a very fancy price. Charlie? And in terms of her compensation, you know, we’ve got a compensation system at Berkshire that I regard as quite rational. And there’s a lot of companies in the United States that have different compensation systems. (Laughter)

CHARLIE MUNGER: Yeah, I think generally, at the top of American businesses, people think they know too much about strategy. And they tend to hate the tough competitive conditions in the business they’re in, and to yearn for some business where it’s less difficult. You remember when Xerox bought Crum & Forster, an American insurance company, one of the dumbest acquisitions in all time? The reason Xerox did that is they didn’t have any tough Japanese competing in the insurance business. They were really tired of facing the tough competition they had in the business they were in. I think it’s quite typical to dream, if you’re in business, that something that’s a little different, no matter how much you pay for it, will make your troubles less.

WARREN BUFFETT: And you will have an absolute army of lawyers, investment advisors, public relations people, all of whom will have a strong economic interest in having you push ahead on deal, after deal, after deal, regardless of how the shareholders come out. It’s just — it’s the way it works. OK.

CHARLIE MUNGER: That’s why Berkshire is a better deal. (Laughter) We are very stupid in many ways, but we have avoided a slight subset of stupidities. (Laughter) And they’re important.

WARREN BUFFETT: OK Number 8.

AUDIENCE MEMBER: Dear Mr. Buffett, dear Mr. Munger. My name is Richard Rentrop. I’m a shareholder from Germany. Mr. Munger, you just mentioned again the importance of integrity. My question is about changes in integrity of management. One of your three key questions is, does management love what they do or does management love the money? So how do you see the crisis having changed integrity of management?

CHARLIE MUNGER: I think what led to the crisis involved, to some extent, a lack of integrity in many a management. Fortunately, some of them are now gone. So, integrity’s very important. It’s the safest way to make money, also. There’s an occasional perfect knave who succeeds pretty well with money, but that kind of success reminds me of what Pope Urban said about Cardinal Richelieu. He said, “If there is a God, Cardinal Richelieu has much to answer for. But if there is no God, he’s done rather well.” (Laughter) And too many people want to be like Pope Urban’s view of Cardinal Richelieu. And — the integrity is important, it’s terribly important. And of course everybody mouths the integrity, even when it’s lacking. So it’s difficult to be sure that professing integrity is the same as having it.

WARREN BUFFETT: The “everyone else is doing it” is the toughest thing. I think —

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: You had this classic example. In about 1993, roughly, you know, the Accounting Standards Board came out and says what was obvious to everybody all along, was that stock options were actually expense, and that expenses, for some reason or another, belonged on the income statement. And America — corporate America — fought back like you cannot believe. I mean, it was like World War III had broken out, in terms of armies of CEOs marching on Washington. So the Accounting Standard Board backed off. Congress — the Senate — voted 88 to 9 to tell them that, you know, what the hell did the Accounting Standards Board know about accounting, and that the Senate would tell them what accounting was all about. When the Accounting Standards Board backed off, they said, “We’ll now say that you can do it one of two ways. Number one is preferred,” which was to expense. Number two was acceptable, but not preferred. Of the Standard & Poor’s 500 companies, 498 chose number two, the non-preferred way. Two took the preferred method.

And I talked to a number of people in that 498 that I would trust to be a trustee of my will, you know, I’d love to have them as a next door neighbor, they could marry my daughter, but in the end they said, “I can’t do it if the other guy isn’t doing it.” It was a variation on the, “I’m doing it because the other guy is doing it.” They basically said, “I’ll be penalizing my shareholders if I report less in the way of earnings than I can report. And all the other guys are doing it that way, and I understand your point.” And the situational ethics problem is huge. I gave you earlier that illustration of how rare it is to find, if you carry it out to tenths of a cent, a four in reported earnings, quarterly. That’s not accidental and it’s — but if you talk to the people that play games to get that four up to five, they would say, “Everybody else is doing it, your own statistics proved that.”

And that is, you know, it is a tough problem to deal with. We try to create as few situations in Berkshire as we can that would induce such behavior. I don’t have the managers submit budgets to me, there is no Berkshire budget, you know. They can use them in their own operations. Some do and some don’t. Many do, a great many do. But if they submit them to me, you know, and the temptation becomes, if they’re not quite making it and they think I’m looking at them all the time, the temptation becomes to fudge in some way. And very few would do it, but the more that thought the other ones were doing it, the more that would do it. It’s just human behavior. And you want to try and create a structure that minimizes the weaknesses in human behavior. And I think Berkshire’s about as good a place at that as any, although I’m sure we’re not perfect at it. Charlie?

CHARLIE MUNGER: Yeah, what’s really interesting on this issue is that so much of the bad behavior does not come from malevolence or overweening greed or anything like that. It comes from subconscious poor cognition that justifies a lot of behavior that’s really not justifiable if it’s better understood. And that happens to practically everybody. And the cure is very difficult. The best cure is to have a system where the people who are making the decisions bear the consequences. And that’s why the system that Wall Street created where nobody really owned the mortgages, they just passed them rapidly to somebody else at a profit. And so nobody felt any responsibility that the mortgages be any good. Systems like that, at a basic level, are irresponsible systems, and it’s deeply immoral to create irresponsible systems like that. But the people who create them don’t realize they’re being immoral, they think those systems are wonderful. Who do you see apologizing for the behavior you now find so regrettable in our recent mess? There are very few apologies, you’ll note. People think they did fine.

WARREN BUFFETT: Carol? (Applause)

CAROL LOOMIS: This question is from James A. Star. “I have read an enormous amount about past market declines and the opportunities they presented to investors. “The last two years have seemed to me, a 43-year-old investor, a real opportunity. Yet in the thick of the action, I was too scared, because I felt the market decline, while severe, was not necessarily sufficient to match the risks of global financial meltdown. “So my question is, given that we are possibly not totally out of the woods, how did the two of you assess this latest buying opportunity against the previous opportunities of your life?”

WARREN BUFFETT: It’s not the greatest one. We’ve seen a few that scream at us, and we’ve seen a few periods of overvaluation that scream at us. And 90 percent of the time we’re somewhere in between and we don’t know exactly where we are in between. The business of being scared, you know, I don’t know what you do about that. If you’re of that — if you have a temperament that when others are fearful you’re going to get scared yourself, you know, you are not going to make a lot of money in securities over time, in all probability. You know, people really — if they didn’t look at quotations — but, of course, the whole world is urging them to look at quotations, and more than that, do something based on small changes in quotations. But think how much more rational — we’ve talked about it before — but think how much more rational investing in a farm is than the way many people buy stocks. If you buy a farm, do you get a quote next week, do you get a quote next month?

If you buy an apartment house, do you get a quote next week or month? No, you look at the apartment house or the farm and you say, “I expect it to produce so many bushels of soy beans and corn, and if it does that, it meets my expectations.” If they buy a stock and they think if it goes up it’s wonderful, and if it goes down it’s bad. We think just the opposite. When it goes down we love it, because we’ll buy more. And if it goes up, it kills us to buy more. And I — you know — all kinds — you know, Ben Graham wrote about it. It’s been explained. But if you can’t get yourself in that mental attitude, you’re going to be scared whenever everybody else is scared.

And to expect somebody else to tell you when to buy and therefore get your courage back up or something, you know, I could get this fellow’s courage up substantially by saying this is a wonderful time to buy, and then a week from now he’d run into somebody else that tells him the world is coming to an end and he’d sell. I mean, he’s a broker’s friend, but he’s not going to make a lot of money. Charlie?

CHARLIE MUNGER: Yeah, I think I developed more courage after I learned I could handle hardship. So maybe you should get your feet wet with a little more failure. (Laughter and applause)

WARREN BUFFETT: I’ve certainly followed that advice. (Laughter) No, some people really do not have the — apparently, they don’t have the temperament, or emotional stability, or whatever it may be, to invest in securities. They’d be much better off if there were no quotations at all. And Keynes talked about that some in the past, too. To take something that should be an asset, a quotation every day, you know, terrific liquidity, nobody says, “How liquid is my farm?” or something of the sort. So they’re not expecting the prices to tell them something about how they’re doing. The market is saying this or that. Whenever anybody says, “The market is saying this or that,” you know, it’s sort of unbelievable. But there’s a lot of interest in investing, and people are going to yak about it all the time. And in the end, what counts is buying a good business at a decent price, and then forgetting about it for a long, long, long time. And some people can do it and some people can’t.

WARREN BUFFETT: Probably not. (Laughter) I do a lot of things that aren’t the best use of my time for Berkshire shareholders. I play bridge on the internet 12 hours a week, you know. I’m not sitting there thinking improving my bridge skills is going to do wonders for Berkshire. (Laughs) No, I — I do — I have seen over the years that the development of broadcast television, as opposed to print, and I would say that if you want to have a record of exactly what you said as opposed to interpreted through not only reporters but editors who bounce back things and say, “Take six paragraphs down to four paragraphs, and why don’t you ask this question?” I would much rather have a record on Charlie Rose which is permanent. Where people can go back and look at exactly what I said, and my body language, and whether I was kidding. I’m sure Lloyd Blankfein would have preferred to have a television interview. He would like to take back that remark about, you know, doing God’s work, under any circumstances.

But I would bet that that was delivered as a throwaway line in terms of something that was said earlier. Clearly he did not mean that in a literal sense, but he’s gotten killed in the media because somebody elected to treat it halfway seriously, and then other people, to fit other stories, play it that way. I like the idea, whether it’s, you know, in terms of CNBC keeping a record of it or Charlie Rose keeping a record of it, of being judged by my own words rather than somebody writing a few paragraphs trying to summarize some views. And that requires being on television instead of having people, essentially, take a one-hour interview, often just shopping for a single quote that fits their storyline, and having that somehow become representative of what I think. So the clearer I can be about what I think, whether writing my own annual report or whether being in broadcast, the better I feel about the accuracy of the reporting. And I figured that out a few years ago. So that’s the direction I go now. And whether it’s the best use of the time, it works fine. I’ll tell you one story on that.

You even have to be a little careful about broadcast. After we made the Burlington deal, Charlie Rose, who may be here, did an interview with me and we taped it on a Friday morning. And we did the tape, and we had a good time doing it. And during the tape there was a little section on it showing great railroad scenes, and one had Cary Grant and Grace Kelly, and another one had Marilyn Monroe in “Some Like It Hot,” and then they showed a bunch of the kind of things we had about railroads in our movie this morning. And when we got all through that, he asked me some question. And just to give a flip answer, but it did tie in with what I’d just seen, I said, “Well, I would have paid more for the Burlington if they’d thrown in Grace Kelly and Marilyn Monroe.” (Laughter) Well, this taped interview ran an hour and six minutes, so when they ran the tape that night they had to take out six minutes and they took out these railroad scenes that showed Grace Kelly and Marilyn Monroe.

(Laughter) So to anybody that viewed this thing, it looked like I was spending my time there fantasizing about these — while Charlie was talking to me. (Laughter) So even television isn’t safe. (Laughter)

23. How Berkshire gets loyal shareholders

WARREN BUFFETT: Number 11.

AUDIENCE MEMBER: Hi, my name is Kip Johann-Berkel from Boston, Massachusetts. First, thank you both for your writings, annual shareholder meetings, and even the Charlie Rose interviews — (Buffett laughs) — as they have helped me grow both as an investor and as a person. Berkshire has, in my opinion, the best and most loyal shareholders of any publicly-traded company or mutual fund. How do you attract and retain a shareholder base, particularly when many of the same behavioral tendencies that produce mispriced securities also produce fleet-footed shareholders? Thank you.

WARREN BUFFETT: Yeah, the interesting thing about marketable securities is that, basically, anybody can buy them. You might elect to join somebody in buying a McDonald’s franchise or a farm, or apartment house, or something, but if you’re running a public company, you know, you can have anybody from, you know, Osama Bin Laden, you know, to the Pope as your shareholder. I mean, they elected — you don’t elect them, they elect you. Now, if you want a shareholder body that is going to be in sync with you, it’s important — in my view — it’s important that you let them know exactly what sort of institution you plan to run. And we’ve got the annual reports, we’ve got television interviews, we’ve got various ways of conveying to people what kind of a place Berkshire is. And to some, that says, “Come in,” and to others it says, “Stay out.” Phil Fisher wrote a great book on investing back in the very early 1960s and he described the situation this way.

He said, “Look it, you can have a restaurant and it can say ‘French food’ and if you have French food inside, you know, people are going — you’re going to get a satisfied and returning clientele. And you can have another one that says hamburgers. But what you can’t do is have hamburgers on the outside on the marquee and deliver French food inside.” And so many companies sort of try and promise everything to everybody. Their investor relations department tells them that any shareholder they can get interested, you know, they want. We want people who think the way we do. And we think, on balance, we won’t disappoint them too much. But if we get a bunch of people who think that the earnings next quarter are going to be up 10 percent for some reason, and that’s the reason they own the stock, we’re going to have a lot of disappointed people. And our goal in life is not to spend our time associating with people who are going to be disappointed with us. It’s our fault if we give out the wrong advertisement.

So we try to advertise what we are, and then we try to deliver on that. And I do think we have the best group of shareholders in the world, you know, among large publicly-traded companies. And I think it’s because we’ve got people that basically look into buying a business, becoming our partners over the years, and they know we’ll treat them like partners. And they, in turn, give us a lot of comfort in having a stable shareholder base and a good feeling about just running the whole place. Charlie?

CHARLIE MUNGER: Well, what happened here is, to some extent, an accident. Warren and I started out investing money for our families and friends, and the people who trusted us when we were young and unknown, of course, we developed a strong affection for. And we morphed into controlling public companies from that base, and so we tend to regard our shareholders, including the new ones, as family. And that’s not put on, that’s the way we regard you. Other people can’t do that because they morphed into their situation in a different way. And if you were a CEO and dealt with the average institutional investor, who is interested in having his portfolio management look good the next six months, you’d find it hard to love your shareholders. They’re sort of a hostile force that are putting unreasonable expectations on you. And so I don’t think Warren and I deserve such wonderful credit for the fact that we have better relations with our shareholders. We came up in a totally different way. Now, we did have enough sense, when we saw that it was such a good thing and so satisfying, that we stayed with it.

But weren’t we — we got into this by accident, didn’t we?

WARREN BUFFETT: Yeah, we got in by accident, and we also were blessed with the fact that we did not have an investor relations department that wanted us to go out and pump up.

CHARLIE MUNGER: But that was on purpose.

WARREN BUFFETT: Yeah, yeah. (Laughter) I have seen them in operation at dozens of companies, I’ve been involved in one way or another. And it is really ridiculous, the idea that you go out and try and cater to the expectations of people that are expecting you to do things you can’t do by operations, but maybe you can do by accounting for a short period of time. It leads to the worst behavior. And in the end, somebody’s going to own all your shares, you know. There’s no way that shares remain empty, you know, in the shareholder list. So why not get a bunch of people who are going to stick with you who are in sync? And the way they’re going to be in sync is if you told them rather accurately what you expect, how you expect to do it, and tell them when you make mistakes, all of that.

CHARLIE MUNGER: But we probably shouldn’t be as critical of people who came up a different way dealing with a different shareholder face. It’s not at all clear that we wouldn’t have ended up somewhat the same way if we’d had the same manner of rising.

WARREN BUFFETT: Sure. Yeah. So we’ll give up being critical for the next five or 10 minutes, and then we’ll go back. (Laughter)

24. Low interest rates are hurting people scared out of stocks

WARREN BUFFETT: Carol?

CAROL LOOMIS: Very short question. Please comment on the implications of our existing, and perhaps continuing, zero percent interest rate.

WARREN BUFFETT: Well, it’s very tough for anybody that’s got their investment in short-term money. You know, if you’re getting a tenth of a percent on some money market fund currently that if you’d started doing that when Columbus landed, and didn’t pay any taxes, you’d have almost doubled your money by now. (Laughter) It’s really — I mean, people talk about easy money policies, but it isn’t so easy on the people who’ve got the money. It won’t go on forever, but it may seem like forever to people that are on fixed income. I’m very sympathetic with them. Basically they got, many of them, became fearful when the world was looking like it was collapsing in late 2008. And the price they pay is really — I know some people like that that are — it’s terrible in terms of returns and their purchasing power will be eaten away. But this will end at some point. I don’t know how it will end, but I would not like to be chairman of the Fed or secretary of the treasury.

Nobody’s ever asked me, but maybe that’s why I say I wouldn’t want to do it. But the — we will — it won’t work forever to run huge budget deficits and try and have very easy monetary policy. And when — if we do run into trouble, the blame should not go to the Fed, the blame should go to Congress. (Applause)

CHARLIE MUNGER: In some sense, the reality of our situation is almost amusingly depressing. Stocks are up because the return from loaning your money out at interest in a safe way is so lousy, and of course, one answer is that can’t last. In which case, stocks won’t be as pronounced a value, relatively speaking. And of course, if it does last, as it has in Japan, we won’t like that either because it will mean we’re mired in some horrible stagnation. This is a very cheery message. (Laughter)

WARREN BUFFETT: The pressure that is exerted by extremely low interest rates — short-term rates — on the value of everything else, it’s hard to overestimate that. I mean, the reason people have their money out at one-tenth of 1 percent is that they’re afraid of everything else. But as they’re being afraid of everything else abates, as it has over the last couple years, the pressure to push stock prices up, push real estate prices back up, it’s enormous. And of course, that’s understood by people who have something to do with those matters. But I don’t think you should underestimate the degree to which the last year of stock prices has been a result of the agony that people are being put through that keep their money in short-term money instruments. Unless they’re terrified of the world, they get pushed into other investments, and I think we’ve seen a lot of that, and we’ll see what happens when money rates do go up, if they do.

25. Valuing businesses by asking questions

WARREN BUFFETT: Twelve.

AUDIENCE MEMBER: Hello, my name is Jeff Colvette (PH) and I’m from Olathe, Kansas. I got started in investing in 1999, right before the big tech bubble, and unfortunately I learned buy and hold and don’t fret about market price fluctuations before I learned the importance of valuing a business and applying a margin of safety. So, as Charlie said, I got my feet wet with huge failure right away. And —

CHARLIE MUNGER: Join the club. (Laughter)

AUDIENCE MEMBER: Thank you, I don’t feel so bad now. So that leads to my question. It seems like I’ve read all the Berkshire reports and all the reading I can do about you two, and I thank you for these wonderful meetings. But it seems like it boils down to some simple things, valuing a business and applying a margin of safety. So my question is, what do you recommend for an approach to getting better and better at valuing companies?

WARREN BUFFETT: That was a very, very good question. And in my own case, you know, I started out without knowing anything about valuing companies. And Ben Graham taught me a way to value a certain type of company that would prove successful, except the universe of those companies dried up. But nevertheless — it was almost a guarantee against failure, but it was not a guarantee that these things would continue to be available. Charlie taught me a lot about the value of a durable competitive advantage, and a really firstclass business. But over time, I’ve learned more about various types of businesses. But you’d be amazed how many businesses I don’t feel that I understand well. The biggest thing is not how big your circle of competence is, but knowing where the perimeter is. You don’t have to be an expert on 90 percent of the businesses, or 80 percent, or 70, or 50. But you do have to know something about the ones that you actually put your money into, and if that’s a very small part of the universe, that still is not a killer.

And I think if you think about what you would pay for a McDonald’s sandwich, you think you would pay for — you know, think about the businesses in your own hometown of Olathe. Which would you like to buy into? Which do you think you could understand their economics? Which do you think will be around 10 or 20 years from now? Which do you think it would be very tough to compete with? Just keep asking yourself questions about businesses. Talk with other people about them. You will extend your knowledge over time. And always remember that margin of safety. And I think you basically have the right attitude because you recognize your limitations, and that’s enormously important in this business. You will find things to do. Six or seven years ago — maybe not that long — six or seven years ago, when I was looking at Korean stocks, for example, I never had any idea that Korean stocks would be something that I would be buying. But I looked over there, and I could see that there were a number of businesses that met the margin of safety test.

And there I diversified, because I didn’t know that much about any specific one, but I knew that a package of 20 was going to work out very well, even if a crook might run one of them, and a couple might run into competition I didn’t anticipate, because they were so cheap. And that was sort of the old Graham approach. You will find opportunities from time to time, and the beauty of it is you don’t have to find very many of them. Charlie?

CHARLIE MUNGER: Well obviously, if you want to get good at something which is competitive, you have to think about it a lot, and learn a lot, and practice doing it a lot. And the way the world is constructed in this field, you have to keep learning, because the world keeps changing and your competitors keep learning. So you just have to get up each morning and try and go to bed that night a little wiser than you were when you got up. And if you keep doing that for a long time — and accumulate some experience, good and bad, as you try and master what you’re trying to do — people who do that almost never fail utterly. They may have a bad period when luck goes against them or something. But very few people have ever failed with that. If you have the right temperament, you may rise slowly but you’re sure to rise.

WARREN BUFFETT: Charlie, did you take any business courses in school?

CHARLIE MUNGER: None. I took accounting.

WARREN BUFFETT: And when did you start valuing businesses and how did you go about it?

CHARLIE MUNGER: When I was a little boy. (Laughter) I can remember, I would come down to the Omaha Club, and there was an old gentleman who hit the Omaha Club about 10:30 every morning. He obviously did almost no work, and yet was quite prosperous.

WARREN BUFFETT: He became your ideal. (Laughter)

CHARLIE MUNGER: Yeah. But he made me very curious as a little boy. I said to my father, “How in the hell does he do that?” And he said, “Charlie,” he said, “A business where he enjoys practically no competition. He gathers up and renders dead horses.” That was an example of avoiding competition by one stratagem. And you keep asking questions like that of reality, starting at a young age, you gradually learn. And weren’t you doing the same thing?

WARREN BUFFETT: Yeah, thankfully he went beyond his original insight there. (Laughs)

CHARLIE MUNGER: I noticed, it was rather interesting — you take the rulers of the businesses when I was a little boy, an awful lot of those businesses, in Omaha, a lot of those businesses went broke, a lot of them sold out at modest prices under distress. And some of the people who rose, like Kiewit, from small beginnings, nobody thought of as the great glories of that early time. And I think that’s kind of the way life is. It’s hard to get anywhere near the top, and it’s hard to hold any position once you’ve attained it. But I think you can predict that Kiewit was likely to win. They cared more about doing it right. They cared more about avoiding trouble. They put more discipline on themselves.

WARREN BUFFETT: Well, if you knew the individual well, you would have bet, right?

CHARLIE MUNGER: What?

WARREN BUFFETT: If you knew the individual.

CHARLIE MUNGER: I would not have bet on any of the people I knew who were already wealthy. But I would have bet on Pete Kiewit. His sister taught me math, and no, half-Dutch, half-German, you know, this is a tough culture. (Laughter)

WARREN BUFFETT: There’s your — you just heard it folks. Half-Dutch, half-German. (Laughter)

CHARLIE MUNGER: Well but —

WARREN BUFFETT: Go out looking for them. (Laughter)

CHARLIE MUNGER: Well, the man who’s recommending this is named Munger. (Laughter) Anyway, the — no — I don’t think it’s that — I was just automatically doing that. What was working, what was failing, why was it working, why was it failing? If you have that temperament, you are gradually going to learn. And if you don’t have that temperament, I can’t help you. (Laughter)

WARREN BUFFETT: If you’d followed Pete Kiewit around for 10 years, you never would have seen him do anything dumb, right?

CHARLIE MUNGER: Oh yeah. It’s so —

WARREN BUFFETT: It’s avoiding the dumb thing. You really don’t have to be brilliant, but, you know, you have to avoid just sort of what almost seem the obvious mistakes. But I would say that you’re on the right track back there, in terms of having the basic fundamentals, knowing your limitations, but still seeking to learn more about various kinds of businesses. Charlie, I think, when he practiced law, any client that came in Charlie was thinking about that business as if he owned the place. And he probably generally thought he knew more about the place than the guy that actually owned it, who was his client. (Laughs) But I remember talking to him, you know, 50 years ago, and he would start talking about Caterpillar dealerships in Bakersfield or something of the sort. He was incapable of looking at a business without thinking about the fundamental economics of it. How’d that guy do with the Caterpillar deal? (Laughs)

CHARLIE MUNGER: Well, he sold it for a perfectly ridiculous price to a dumb oil company. (Laughter) It wasn’t worth half what he got for it.

WARREN BUFFETT: But they had a concept and a strategy.

CHARLIE MUNGER: They had a concept and a strategy, and turned out they had consultants. (Laughter)

WARREN BUFFETT: Yeah. (Laughs)

26. Companies with the best return on capital

WARREN BUFFETT: Becky?

BECKY QUICK: This question comes from Carson Mitchell in Aberdeen, South Dakota, who asks both of you, “What business has had the best return on capital for Berkshire, and what business of any on earth has had the best return on capital?” And he adds, “PS, I would have come by rail but there are no seats in the grain rail cars.” (Laughter)

WARREN BUFFETT: There’s two ways of looking at it. If you talk about the capital necessary to run the business, as opposed to what we might have paid for the business — I mean, if we buy a wonderful business — you could run the Coca-Cola Company —assuming you had the bottling systems — you could run it with no capital. Now, if you buy it for $100 billion, you can look at that as your capital or you can look at the basic capital. When we look at what’s a good business, we’re defining it in terms of the capital actually needed in the business. Whether it’s a good investment for us depends on how much we pay for that in the end. There are a number of businesses that operate on negative capital. Carol’s with Fortune magazine. You know, any of the great magazines operate with negative capital. I mean, the subscribers pay in advance, there are no fixed assets to speak of, and the receivables are not that much, the inventory is nothing. So a magazine business — my guess is that People magazine operates, or Sports Illustrated operates, with negative capital, and particularly People makes a lot of money.

So there are certain businesses. Well, we had a company called Blue Chip Stamps where we got the float ahead of time, and operated with really substantial negative capital. But there are a lot of great businesses that need very, very little capital. Apple doesn’t need that much capital, you know. The best ones, of course, are the ones that can get very large while needing no capital. See’s is a wonderful business, needs very little capital, but we can’t get people eating ten pounds of boxed chocolates every day.

CHARLIE MUNGER: Except here.

WARREN BUFFETT: We want to. (Laughs) Generally, the great consumer businesses need relatively little capital. The businesses where people pay you in advance, you know, magazine subscriptions being a case, insurance being a case, you know, you’re using your customer’s capital. And we like those kind of businesses, but of course, so does the rest of the world, so they can become very competitive in buying them. We have a business, for example, that’s run wonderfully by Cathy Baron Tamraz, called Business Wire. Business Wire does not require a lot of capital. It has receivables and everything, but it is a service-type business and many of the service-type businesses and consumer-type businesses require little capital. And when they get to be successful, you know, they can really be something. Charlie?

CHARLIE MUNGER: I’ve got nothing to add, but at any rate, the formula never changes.

WARREN BUFFETT: If you could own one business in the world, what would it be, Charlie? (Laughter) I hope we already own them, myself.

CHARLIE MUNGER: You and I got in trouble by addressing such a subject many decades ago.

WARREN BUFFETT: That’s right. (Laughs)

CHARLIE MUNGER: And I don’t think I’ll come back to it.

WARREN BUFFETT: OK. (Laughter) Number 13 —

CHARLIE MUNGER: If you name some business that has incredible pricing power, you’re talking about a business that’s a monopoly or a near monopoly.

WARREN BUFFETT: Sure.

CHARLIE MUNGER: And I don’t think it’s very smart for us to sit up here naming our most admired business or something, that other people regard as a monopoly.

WARREN BUFFETT: OK. We’ll move right along. (Laughter)

27. Phone hasn’t been ringing, but we’re still ready to buy

WARREN BUFFETT: Let’s see, have we done number 13? No, I don’t think so, that’s in the other room again. Anybody there?

AUDIENCE MEMBER: Yes, Mr. Buffett, Mr. Munger, greetings from the breakout room. My name is Glenn Tongue from New York. I would like to thank you both for your exemplary stewardship through the economic crisis. We are all wealthier in several ways as a result of your efforts. I’d like to ask about Berkshire’s growth, specifically your acquisition outlook and appetite. Has the phone been ringing?

WARREN BUFFETT: The phone doesn’t ring very often at Berkshire, you know. That’s partly because — well, we set out our criteria in the annual report for what we’re looking for, and we’re not looking for larger and larger things. So when we start saying that we want to buy businesses that earn 75 or 100 million, at a minimum, before tax, that weeds out a lot of phone calls. And I would say that, you know, if we get a couple of — three or four serious phone calls a year that sort of meet our criteria that look like they might be a possibility, that’s a good year, I like that. I don’t think there’s been any major change in the frequency that something comes along that might interest us. The answer is, in terms of being interested, we’re as interested as ever. I mean, we wrote a big check and issued shares in connection with BNSF. But I would love it if Monday morning my phone rings with some big deal. We’ll figure out a way to do it. Charlie?

CHARLIE MUNGER: Yeah, it’s amazing to me that we have been as successful as we have been in buying desirable places. And it’s human revulsion that has helped us, because many of the people who sell to us are so smart that they’re revolted by almost everything else. They don’t want to sell into some fee-driven buying system that doesn’t care about their employees or their business. And they finally decide they want to join this one, they don’t want to join the alternatives. And of course, that’s marvelous for us. We’ve got a screening device out there that is protecting us, to some extent, from the wrong sort of people. And very few people have this particular — We get offered things by people who would not sell to anybody else. That is really peculiar. And it’s happened what, how many times?

WARREN BUFFETT: Well —

CHARLIE MUNGER: A lot.

WARREN BUFFETT: It’s happened, and on important ones. There’s one I’ve mentioned before, so I can mention the name. When I heard from ISCAR, and I’d never heard of ISCAR before, I’d never heard of Eitan Wertheimer, who wrote me, but he basically told me and made it quite specific, they either wanted to sell to Berkshire Hathaway or they didn’t want to sell it to anybody. And we met and we made a deal. And there was another person — I won’t even define exactly the time period — but he came in and he’d been thinking about it for about a year on this business, and he’d built it over many decades. And he said, “There were three possibilities. One was to sell it to a competitor.” And he said, “They would have ideas immediately about all the people they could take out of this place and move the headquarters,” and everything, and they would dismantle something that he’d spent 30 years or so building.

And he decided that he didn’t want to do that, even though it was probably worth more to a competitor, because that’s often the case, than to anybody else. And then he looked at selling to a leverage buyout firm — and now would call itself a private equity firm — and he decided he did not want his place being, basically, a piece of meat that would be resold in not that many years. He really wanted to find a permanent home. So he said, “When I come to you, I don’t come to you because you’re so damned attractive.” He said, “You’re the only guy left.” (Laughter) And we bought the business. So that happens from time to time, and it’s accidental. It’s when something happens in someone’s life that they decide they really want to assure a permanent home. It may be because the family isn’t getting along. It may be, you know, a half a dozen reasons. Maybe somebody wants to monetize it because they want to give away a lot of money.

But periodically that will come up, and we are a logical place to get the call, and we will get the calls. But there’s not much we can do to accelerate the process or do anything of the sort. We are ready to act when it happens. I mean, if I get a call, and it’s a $10 billion deal, on Monday, and I like it, I will say yes. (Laughs) And then I’ll figure out how we do it.

CHARLIE MUNGER: Yeah, I don’t think it’s over. It may be, in fact, it will be, slower than it was in the early days. But that’s not so bad, considering how much richer we all are than we were then.

28. Big question for Berkshire’s future

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: Since I imagine this may be one of the last questions, Peter Brotchie, a shareholder from Wenham, Massachusetts, writes to say, “Thank you, Warren and Charlie, for improving the Q&A session last year. “Along those lines, are there important questions that you were surprised that you don’t get asked about Berkshire’s financials or businesses? And if so, what is the question you would ask yourself if the roles were reversed?”

WARREN BUFFETT: Well Andrew, first of all, I will say we got a lot of compliments on changing the format. It worked, and that’s why we’re continuing it. So it’s worked very well. (Applause) And that applause is for you, not for me, and you deserve it. It really has improved the quality of questions, in terms of having it Berkshire-related and having a system of weeding them out without us being the ones that do the weeding out. Now, I’ve given Charlie time to think about what the answer to that question is going to be, so I’m going to turn it over to him. (Laughter)

CHARLIE MUNGER: Well, I don’t have a lot of comment about things that should be done differently at Berkshire. I think it is quite interesting that we got into BYD, because BYD is surfing along on the developing edge of new technology, and that has not — we have always bragged about avoiding that. Isn’t that a fair statement?

WARREN BUFFETT: That’s fair.

CHARLIE MUNGER: And yet here we are. I think it’s because we’ve shown some capability for learning. And I think the BYD investment is going to work out very well. And I think it’ll work out very well in a way that gives great pleasure to all of us shareholders, because I think they’re going to help solve some significant problems of the world. And, that place is — you know, I spoke with pride of Kiewit. They tried harder, they were more self-disciplined. That’s the way I feel about BYD. And it’s a pleasure to associate with such people, and in my life those are the people with whom I’ve achieved the most. So as far as I’m concerned, we found our own kind, except they’re better. And we may do more of that. And we wouldn’t have felt confident enough to go into venture capital, typically with just a bright young man with an idea, no matter how brilliant.

WARREN BUFFETT: Not me.

CHARLIE MUNGER: No, I wouldn’t either. But BYD had won its spurs in life by the time we found it. They had accomplished things that struck me as almost impossible to do, and yet they’d done them. And so I don’t think that’s the last unusual thing that Berkshire will do, and the last one that will work. And I think the Burlington Northern acquisition — when we did it, we knew it would be better for their shareholders than it was for ours, because, after all, they were getting into Berkshire. (Laughter) But we also thought it was good for our shareholders. And why should we care that it was better for theirs, if it was satisfactory for us? And I think that will happen again, too. That’s our kind of a culture. You know, Middle Western, and constantly improving the place. And with MidAmerican and Burlington, we’re getting a fair amount of engineering into Berkshire, which of course, I like. And so I hope you people are comfortable with the way things are going, because I think they’ll keep going in the same direction. (Applause)

WARREN BUFFETT: Yeah. (Applause) I think they will keep going in the same direction. But to answer your question on that, Andrew, I would probably ask the question, you know, “Can you keep using all of the capital you generate, effectively, for a very long time?” And the answer, I think, to that is that even — we will see more things and we will do some more of this. There comes a point where the numbers get big enough that it gets extraordinarily hard to do things that add value. I mean, if you just play out the numbers, you could see where in 10 or 15 years, not only the capital that’s already accumulated, but the generation of capital in everything, would make it very hard to do things that are, essentially, creating more than a dollar of value per dollar invested. A portion of the money may be able to be used that way, and likely would be used in the kind of businesses we’re in. There comes a point where the numbers get too big. And actually, our history is a curve that approaches that point all the time.

It’s turned out to be that now I think we can go a lot further than I would have thought 30 years ago. I mean, it’s just — it’s developed that way. And partly that’s because we see things that I never would have thought we would have seen 30 years ago. But there is a limit. And there will come a time when we cannot intelligent — in my view — there will come a time when we cannot intelligently use 100 percent of the capital that we develop internally. And then we’ll do something that’s — whatever is in the most interest — best interest — of the shareholders will be done at that point.

CHARLIE MUNGER: I think we will get into Berkshire, on the investment side — probably starting sooner than many of you expect — people who have some promise of being, well, if not as good as Warren, a decent approximation. And in some cases with abilities that Warren lacks. In other words, it won’t be all negative. (Laughter) And so I’m really quite optimistic. (Laughter) I can see — the reason I think we will succeed at that is because Warren never looks twice at anybody who isn’t a little eccentric, which, of course, is what you’re looking at when you look up here.

WARREN BUFFETT: Living proof, yeah. (Laughter)

29. “Find your passion, and then don’t let anything stop you”

WARREN BUFFETT: Well I think we’d better move on to section 1. (Laughs)

AUDIENCE MEMBER: Hello, my name is Joseph Mazzella from Jim Thorpe, PA. I wanted to first thank Mr. Munger and Mr. Buffett, as well as the board of directors for this meeting, as well as the whole shareholder weekend. I’ve had a great time so far.

WARREN BUFFETT: Terrific. (Applause)

CHARLIE MUNGER: Thank you.

AUDIENCE MEMBER: With that, I wanted to share. Aristotle, when asked how to define wealth, answered simply this, “It is he who spends less than he earns.” What advice could you give a young entrepreneur as myself on how to go about defining and both building wealth within their own business, as I hope to build a business that, one day, you’d be interested in acquiring.

WARREN BUFFETT: I predict you’re going to build one. You know, it may not quite get to the size that — and we’re a moving target as well — but if you start off with that principle you just enunciated, there are probably some other similar principles that you’ll have that we would also agree with. There’s nothing like following your passion. I mean, I love what I do, obviously, and I’ve loved it the whole time I’ve done it. Charlie is the same way. We have managers, you know, they come — some of them went to business school, some of them didn’t, you know. They’re all types. But the common factor in them — they’re successful — the common factor is they love what they do, you know. And you’ve got to find that in life. And some people are very lucky in finding it very early. It was dumb luck that my father happened to be in the securities business, so when I would go to his office there were a lot of books to read, and I got entranced with that.

But, you know, if he’d been in some other occupation — I think I would have read those books eventually, but it would have been a lot later. So if you find something that turns you on, my guess is you’re going to do very well in it. And the beauty of it is, in a sense, there’s not that much competition. There are not a lot of people out there that are going to be running faster than you in the race that you elect to get into. And if you haven’t found it yet — you may well have found it — but if you haven’t found it yet, you know, you’ve got to keep looking. And we’ve got 70-plus managers. You know, some of them didn’t — we had one guy that didn’t go to high school, even, didn’t he, Charlie? (Inaudible)

CHARLIE MUNGER: Oh yeah.

WARREN BUFFETT: He quit in fourth grade, I think. Well, Mrs. B never went to school a day in her life. And when you go out to the Furniture Mart — I hope you go out this evening, we expect to set a record today in sales (laughter) — what you are looking at on those 78 acres, you know, is the largest home furnishing store, about 400 million in sales. The largest store in the United States, and it comes from $500 of capital paid in by a woman that never went to a day of school in her life and couldn’t read or write. She loved what she was doing, and, you know, I tell the story, this is a true story. When she was well into her 90s, she invited me over to her house for dinner. That was very unusual. And a very nice house, six or seven blocks away from the store. And I went into the house, and the sofa, the chairs, the lamp, the dining room table, they all had little green price tags hanging down. (Laughter) It made her feel at home. (Laughter) And I said to her, “Mrs.

B, you are my kind of woman.” Forget Sophia Loren and all of that, this is my kind of woman. She loved it. And she loved it all her life, and just think of what that produced. I mean, it just — it’s incredible. I mean, you know, one time — my dad used to quote Emerson, that “the power that lies within you is new in nature.” And basically, the power that was within Mrs. B was new in nature. And over a lifetime it produced amazing things. So find your passion, and then don’t let anything stop you.

AUDIENCE MEMBER: My name’s Frank Teed and I’m from Arkadelphia, Arkansas. This is also an insurance-type question, but I did want to thank Mr. Buffett and Mr. Munger, the board, and in Arkansas we call them the associates — the managers — for your integrity in running Berkshire Hathaway and dealing fairly with the shareholders. So thank you very much.

WARREN BUFFETT: Thank you. (Applause)

AUDIENCE MEMBER: We saw in the credit crisis the gross overuse of credit, which led to the big financial meltdown with the government ultimately stepping in. Now we see a huge increase in debt in our cities, our states, our countries. For Berkshire Hathaway, what could be our exposure on a global financial meltdown? Could there be correlated risk that could get us in trouble? You’ve said we have 40 billion in municipal bond insurance. There’s 8 billion to the states, which I’m not sure exactly if that was a municipal bond. Could a large event cause a large number of losses that was coupled with a decrease in our investments to make an AIG-type situation? Thank you.

WARREN BUFFETT: Well, if you postulate something where there was a total meltdown, and we essentially made the bet in 2008 there would not be. It would be unnecessary, but we came close in 2008, and I decided that A) the government could solve the panic that existed, and finally that they would. There wasn’t any question in my mind they could. The question is, would they get so muddled up, would decision making get paralyzed, would rivalries break out, would, you know, Congress grandstand? All of those sort of things. And I thought there’d be some of that, but I thought in the end we would do the right thing, which was go all in, which we did. And that would happen again. So I — if you talk about some massive nuclear, chemical, or biological attack that really does in a very significant proportion of the population or something, you know, who knows what would happen. But I would say this, that I think Berkshire can withstand anything that any corporation can. And it won’t be our insurance business that causes a problem.

If something extraordinary happens — and I don’t anticipate that at all — but there could be a situation where the world becomes paralyzed. But I think that having gone through 2008, I think that our government probably better understands the necessity of taking massive action at a time like that. Doing whatever is necessary — when the guaranteed money market funds, when the guaranteed commercial paper — I mean, when there are things like that, you know, they were sort of unprecedented, and they did them very quickly. They’d do it again, in my view. There is no reason — the plants of the country don’t disappear, the land doesn’t become less fertile, you know, people don’t become less innovative — things will work unless somehow the gears get all entirely messed up. And I don’t see that happening. Berkshire, from any insurance catastrophe — and you’re right that things correlate on the downside — when things are bad in one area, they really do spread to another. But we were built, I think, to withstand anything that — other than a total sort of wipe out of the world. That isn’t going to happen. Charlie?

CHARLIE MUNGER: I’m not worried about it. (Laughter)

WARREN BUFFETT: Yeah. Huge amounts of debt are not going to do us in. That’s one thing I can guarantee you. I can’t tell you about comets hitting us or something of that sort, but I don’t care how silly governments get in terms of finance, or corporations get, or anything of that sort, that will not harm Berkshire. I want to thank you all for coming. Charlie and I really appreciate it. (Applause) And thank you.

CHARLIE MUNGER: Thank you. (Applause)

WARREN BUFFETT: Thank you. I appreciate it, we appreciate that, I’m sure the panel does. Now we’ll break for about five minutes. Some of you can go shop and some of you will want to stay around for the business meeting, and we’ll start the business meeting in five minutes and we’ll see how long it takes.

34. Berkshire business meeting begins

WARREN BUFFETT: OK. I’ve already introduced the Berkshire Hathaway directors. 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 proceedings. Miss Becki Amick has been appointed inspector of elections at this meeting, and she will certify to the count of votes casts in the election of directors. The main proxy holders for this meeting are Walter Scott and Marc Hamburg. Does the secretary have a report of the number of Berkshire shares outstanding, entitled to vote, and represented at the meeting?

FORREST KRUTTER: Yes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 3, 2010, being the record date for this meeting, there were 1,029,738 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 926,013,086 of Class B Berkshire Hathaway common stock outstanding, with each share entitled to one ten-thousandth of one vote on motions considered at the meeting. Of that number, 705,611 Class A shares and 566,627,821 Class B shares are represented at this meeting by proxies returned through Thursday evening, April 29th.

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

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

WARREN BUFFETT: Do I hear a second?

VOICE: I second the motion.

WARREN BUFFETT: The motion has been moved and seconded. Are there any comments or questions? We will vote on this motion by voice vote. All of those in favor say aye.

VOICES: Aye.

WARREN BUFFETT: Opposed? The motion’s carried.

35. Election of Berkshire directors

WARREN BUFFETT: Second item of business is to elect directors. The shareholders 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. Would those persons desiring ballots please identify themselves so that we may distribute them? I now recognize Mr. Walter Scott to place a motion before the meeting with respect to the election of directors.

WALTER SCOTT: I move that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ron Olson, and Walter Scott be elected as directors.

WARREN BUFFETT: Is there a second?

VOICE: I second the motion.

WARREN BUFFETT: It’s been moved and seconded that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson, and Walter Scott be elected as directors. Are there any other nominations? Is there any discussion? Nominations are ready to be voted 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. Miss Amick, when you’re ready, you may give your report.

BETSY AMICK: My report is ready. The ballot of the proxy holders, in response to proxies that were received through last Thursday evening, cast not less than 756,041 votes for each nominee. That number far exceeds a majority of the number of the total votes related to all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes, including the additional votes to be cast by the proxy holders in response to proxies delivered at this meeting, as well as any cast in person at this meeting, will be given to the secretary to be placed with the minutes of this meeting.

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

36. Business meeting adjourns

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

WALTER SCOTT: I move this meeting be adjourned.

WARREN BUFFETT: Second?

VOICE: I second the motion.

WARREN BUFFETT: 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.