WARREN BUFFETT: He summed it up. In terms of the businesses we buy, and we — when we buy stocks, we look at it as buying businesses, so they’re very similar decisions — we try to know all, or as many as we can know, of the microeconomic factors. We — I like looking at the details of a business whether we buy it or not. I mean, I just find it interesting to study the species, and — and that’s the way you do study it. So I — I don’t think there’s any lack of interest in those factors or denying the importance of them. So am I getting his question or not, Charlie?

CHARLIE MUNGER: Well, there hardly could be anything more important than the microeconomics. That is business. Business and microeconomics is sort of the same term.

AUDIENCE MEMBER: I guess —

CHARLIE MUNGER: Microeconomics is what we do, and macroeconomics is what we put up with.

AUDIENCE MEMBER: The anchoring effect, I mean, how do you deal with that as well?

CHARLIE MUNGER: Well, we’re not anchored to what we’re ignoring.

AUDIENCE MEMBER: I see. (Laughter)

WARREN BUFFETT: But we — Charlie and I are the kind that literally find it interesting in every business — we like to look at micro factors. If we buy — when we buy a See’s Candy in 1972, you know, there may have been 140 shops or something. We’ll look at the — we’ll look at numbers on each one, and we’ll watch them over time, and we’ll see how third-year shops behave in the second year — we really like understanding businesses. It’s just — it’s interesting to us. And some of the information is very useful, and some of it may look like it’s not helpful, but who knows when some little fact stored in the back of your mind pops up and really does make a difference. So, we’re fortunate in that we’re doing what we love doing. I mean, we love doing this like other people like watching baseball games, and which I like to do, too.

But they — just the very act, every pitch is interesting, and every movement, you know, and whether the guy’s — you know, a double steal is interesting, or whatever it may be, and so that’s what our activity is really devoted to, and we talk about that sort of thing.

CHARLIE MUNGER: We try and avoid the worst anchoring effect, which is always your previous conclusion. We really try and destroy our previous ideas.

WARREN BUFFETT: Charlie says that if you disagree with somebody, you want to be able to state their case better than they can.

CHARLIE MUNGER: Absolutely.

WARREN BUFFETT: And at that point, you’ve earned the right to disagree with them.

CHARLIE MUNGER: Otherwise, you should just keep quiet. It would do wonders for our politics if everybody followed my system. (Laughter and applause)

9. I’d “much rather make money for Berkshire than for myself”

WARREN BUFFETT: OK, Becky.

BECKY QUICK: Warren, just a quick request. Would you please stop using C-N-B-C as an acronym for mass destruction? (Laughter.)

WARREN BUFFETT: But if I use N-B-C-C, then I’ve got a problem with [NBCUniversal CEO] Steve [Burke].

BECKY QUICK: This question comes from Matt Bandy in Dallas, Texas. He’s asking about Seritage Growth Properties. He says, “In December, 2015, you filed a personal 13-G evidencing a roughly 8 percent ownership position in the real estate investment trust Seritage Growth Properties, which to my knowledge is not paralleled as a Berkshire investment. “Alternatively, in September, 2015, Warren filed a personal 13-G evidencing ownership in Phillips 66, which is paralleled as a Berkshire investment. “My question is, how do you decide when making a personal investment for your own account versus an investment for Berkshire? I understand market cap and ownership sizing are the likely factors, but does it still not behoove him to invest for the shareholder’s benefit in a company like Seritage that might have significant upside, and where are you putting your personal money to work?”

WARREN BUFFETT: Right. I do not own a share, or never have owned, a share of Phillips 66, so I’m not sure where that person — what he’s referring to. It may be that there’s some way when the form is filled out that — that because I’m CEO of Berkshire that on some line it imputes ownership to me or something. The answer is I’ve never owned a share of Phillips. And Seritage is a real estate investment trust that had a total market value of under $2 billion when I bought it. And my situation is that I have about 1 percent of my net worth outside of Berkshire and 99 percent in it, and I can’t be doing things that Berkshire does. So a Seritage, with a $2 billion market cap, is not really something that is of a Berkshire size. Plus we’ve never owned a real estate investment trust to my knowledge, or my memory, in Berkshire at all. I mean, it’s just not a — so, I could buy that and not have any worry about a conflict with Berkshire.

As a practical matter, you know, my best ideas are — I hope they’re my best ideas —are offlimits for me because they go to Berkshire, if they’re sizable enough to have a significance to Berkshire. We will not be making investments — unless it’s something very odd — we will not be making investments in companies with a total market cap of a couple billion while we’re our present size. But — so, every now and then I see something that’s subsize for Berkshire that I’ll put my — that 1 percent of my net worth in, and the rest of the stuff is off-limits, basically, unless Berkshire’s all done buying something or — I mean, I own some wells that I bought a long, long time ago, and Berkshire was not in — was not interested. I mean, we bought enough or something at the time, or maybe we didn’t have money for investment. But I try to stay away from anything that could conflict with Berkshire.

And if I’d been buying Phillips, when Berkshire was buying Phillips, or immediately — or prior — or subsequently, there could be a case where it’d be OK when — we might have hit some limit. But the answer is I didn’t buy any, and I’ve never owned any. Charlie?

CHARLIE MUNGER: Well, part of being in a position like that we occupy, is you really don’t want conflict of interest or even the appearance of it. And it’s been 50 or 60 years, when have we embarrassed Berkshire by some of our side-gunning? Both of us have practically nothing of significance, in the total picture, outside of Berkshire. I’ve got some Costco stock, because I’m director of Costco. Berkshire’s got some Costco stock. There are two or three little overlaps like that, but basically Berkshire shareholders have more to worry about than some conflict that Warren and I are going to give it. We’re not going to do it.

WARREN BUFFETT: It may sound a little crazy, and it’s only because I can afford to say this, but I would much rather make money for Berkshire than for myself. I mean, it isn’t going to make any difference to me anyway. I’ve got all the money I could possibly need, and way more, and on balance, my personality — everything’s more wound up in how Berkshire does than I am myself, because I’m going to give it all away. So, I know my end result is zero, and I don’t want Berkshire’s end result to be zero. So I’m on Berkshire’s side. (Laughs)

10. Berkshire’s cash flow outlook

WARREN BUFFETT: Cliff. (Applause.)

CLIFF GALLANT: One of the great financial characteristics of Berkshire today is its awesome cash flow. While its simple earnings-less-capex formula yields an annual free cash flow calculation of, I figure, of around 10 to 12 billion, in reality it seems to be much higher, closer to 20 billion, and I think, in part, due to changes in the deferred tax asset year-to-year. What is the outlook for free cash flow, and can investors continue to expect similar dynamics going forward?

WARREN BUFFETT: Yeah. There’s a lot of deferred tax that’s attributable to unrealized appreciation in securities. I don’t have the figure, but let’s just assume that’s 60 billion of unrealized appreciation in securities. Well, then there would be 21 billion of deferred tax. That isn’t really cash that’s available. It’s just an absence of cash that’s going to be paid out until we sell the securities. Some arises through bonus depreciation. The railroad will have depreciation for tax purposes that’s a fair amount higher than for book purposes. But overall, I think of, primarily, the cash flow of Berkshire as a practical matter relating to our net income plus our increase in float, assuming we have an increase. And over the years, float has added $80-billion-plus to make available for investment beyond what our earnings have allowed for, and that’s the huge element.

We’re going to spend more than our depreciation in our businesses, primarily, number one, because of the — well, the railroad and Berkshire Hathaway Energy are two entities that will spend quite a bit more than depreciation, in all likelihood, for a long, long, long, long time. And the other businesses, unless we get into inflationary conditions, it won’t be a huge swing one way or the other. So, our earnings, the 17 — not counting investment, not counting capital gains — but our earnings, which were — whatever they were, you know, around 17 billion — plus our change in float is the net new available cash. But, of course, we can always sell securities and create additional cash. We can borrow money and create additional cash. But it’s not a very complicated economic equation at Berkshire. People didn’t — for a long time, they didn’t appreciate the value of float. We kept explaining it to them, and I think they probably do now. The big thing, the goal, what Charlie and I think about, we want to add, every year, something to the normalized — you know, the normalized earning power per share of the company.

And we think we can do it because we should be able to do it. We have retained earnings to work with every year to get that job done. Sometimes it doesn’t look like we’ve accomplished much, and we haven’t accomplished much. And other years, we — something big happens, and we don’t know ahead of time which year is going to be which. Charlie?

CHARLIE MUNGER: Well, there are very few companies that have ever been similarly advantaged. In the whole history of Berkshire Hathaway, we’ve lived in a torrent of money, and we were constantly deploying it, and disbursed assets, and we were wising up as we went along. That’s a pretty good system.

WARREN BUFFETT: It’s a —

CHARLIE MUNGER: We’re not going to change it.

WARREN BUFFETT: No. And it’s allowed for a lot of mistakes. I mean, that’s the interesting thing. American business has been good enough that you don’t have to be — you don’t have to really be smart to get a decent result. And if you can bring a little bit of intellect, you know, then you should get a pretty good result.

CHARLIE MUNGER: What you’ve got to do is be aversive to the standard stupidities. You just keep those out. You don’t have to be smart.

WARREN BUFFETT: Thank God.

CHARLIE MUNGER: Thank God, right.

11. We’ve “avoided the self-destructive behavior”

WARREN BUFFETT: OK. Section 11.

AUDIENCE MEMBER: Hey, Warren and Charlie. Thank you so much for your generosity and sharing your life’s accumulation of knowledge and financial capital to the progress of humanity. Thank you for that. And Berkshire managers, thank you for building important companies and stewarding our financial futures. Thank you, guys. This is Bruce Wang from MICROJIG, traveling west from Orlando, Florida. Last year, you kindly shared with me the importance of getting the best reputation you can and behaving well. This year I’d like to ask and preface with, Bill Gates wrote, “Warren’s gift is being able to think ahead of the crowd. It requires more than taking his aphorisms to the heart to accomplish that, although Warren is full of aphorisms well worth taking to heart.” And he also added that, “I’ve never met anyone who thought in business in such a clear way.” Warren, what elusive, yet obvious to you, truth has allowed you to think ahead of the crowd and build a clear mental framework to produce a historically significant institution powerhouse brand?

And, Charlie, same to you, what obvious truth presents itself so clearly to you, but many would fervently disagree with you upon?

WARREN BUFFETT: I think I got the question, and I — you know, I owe a great deal to Ben Graham in terms of learning about investing. And I learned a — I owe a great deal to Charlie, in terms of learning a lot about business. And then I’ve also been around — I mean, I spent a lifetime, you know, looking at businesses and why some work and why some don’t work. You know, as Yogi Berra said, you can see a lot just by observing. And that’s pretty much what Charlie and I have been doing for a long time. And you do — I mentioned pattern recognition earlier — you know, there’s — you — and I would say it’s important to recognize what you can’t do. So we have — we may have tried the department store business and a few things, but we’ve — we’ve generally tried to only swing at things in the strike zone, and our particular strike zone. And it really hasn’t been much more complicated than that.

You do not need — you don’t need the IQ in the investment business that you need in certain activities in life. But you do have — you do have to have emotional control. I mean, we see very smart people do very stupid things, and it’s fascinating how humans do that. Just take the people that get very rich and then leverage themselves up in some way that they lose everything. I mean, they are risking something that’s important to them for something that isn’t important to them. Well, you can say, you could figure that one out in first grade, but people do it time after time. And you see that constantly, self-destructive behavior of one way or another. I think we’ve probably — and it doesn’t take a genius to do it, but I think we’ve sort of avoided the selfdestructive behavior. Charlie?

CHARLIE MUNGER: Well, there’s just a few simple tricks that work — work well, and particularly if you’ve got a temperament that has a combination of patience and opportunism in it. And I think that’s largely inherited, although I suppose it can be learned to some extent. Then I think there’s another factor that accounts for the fact that Berkshire has done as well as it has, is that we’re really trying to behave well. And I had a great-grandfather. When he died, the preacher gave the talk, and he said none envied this man’s success, so fairly won and wisely used. That’s a very simple idea, but it’s exactly what Berkshire’s trying to do. There are a lot of people who make a lot of money and everybody hates them, and they don’t admire the way they earned the money. And I’m not particularly admirable of making money running gambling casinos. And, you know, we don’t own any. And we’ve turned down businesses, including a big tobacco business.

So, I don’t think Berkshire would work as well if we were just terribly shrewd, but didn’t have a little bit of what the preacher said about my grandfather, Ingham. We want to have people think of us as having won fairly and used wisely. It works. (Applause.)

WARREN BUFFETT: And we were very, very lucky to be born when we were and where we were. And I mean, we — you could’ve dropped us at some other place in time or some other part of the world, and things would’ve turned out —

CHARLIE MUNGER: And think of how lucky you were to have your Uncle Fred. Warren had an uncle who was one of the finest men I ever knew. I used to work for him, too. You know, a lot of people have terrible relatives. (Laughter.)

WARREN BUFFETT: That’s not an unimportant point. Just yesterday, we had a meeting of all my cousins and a whole bunch that we just get together at the annual meeting time. There are probably 40 of us or 50 of us there. And they were pulling out some old pictures, and four — I had four aunts, they are all in these pictures — and every one of them — you know, I mean, you were so lucky to have one like that, and I had four. I mean, they just were — in every way they reinforced a lot of things that needed some reinforcement in my case.

CHARLIE MUNGER: I wish you’d had a couple more. (Laughter.)

WARREN BUFFETT: But —

CHARLIE MUNGER: We’d be doing even better.

WARREN BUFFETT: But, he mentioned my Uncle Fred, but my Aunt Katie worked in the store, too. My Aunt Alice worked in the store, and they just — you just couldn’t have been around better people. I think Charlie would agree with that.

CHARLIE MUNGER: Yeah. Well, we were very lucky.

WARREN BUFFETT: Yeah. My grandfather was a little tough, however. Tell them what my grandfather used to do when he paid you on Saturday, Charlie.

CHARLIE MUNGER: Well, that was very interesting. Warren’s a Democrat, but he came from different antecedents. I worked for his grandfather, Ernest, and he was earnest. (Laughs) And when they passed Social Security, which he disapproved of because he thought it reduced self-reliance — and he paid me $2 for 10 hours work, there was no minimum wage in those days — on Saturday, and it was a hard ten hours. At the end of the ten hours, I came in and he made me give him two pennies, which was my contribution to Social Security. (Laughter) And he gave me two $1 bills and a long lecture about the evils of Democrats, and the welfare state, and a lack of self-reliance, and it went on and on and on and on. So, I had the right antecedents, too. I had Ernest Buffett telling me what to do.

WARREN BUFFETT: OK. Enough family history.

CHARLIE MUNGER: I haven’t overstated that, have I?

WARREN BUFFETT: No, you haven’t overstated it at all. (Laughs)

CHARLIE MUNGER: You can’t believe what people — and he thought he was doing his duty by the world to do that.

WARREN BUFFETT: But we were lucky then. The people we were around when we were young, we were very lucky.

12. Due diligence doesn’t find the real risks of buying a company

WARREN BUFFETT: Andrew.

ANDREW ROSS SORKIN: “Warren and Charlie, you’re famous for making a deal over a day or two with nothing more than a handshake. You pride yourself on the small overhead of doing the diligence mostly yourself. Other successful acquisitive companies use teams of internal people, outside bankers, consultants, and lawyers to due diligence, often over many months to assess deals. Speed may be a competitive advantage. You’ve done some amazing deals. But does your diligence process also put us at greater risk? And if you’re ever gone, how would you recommend Berkshire change how we approach dealmaking?

WARREN BUFFETT: Yeah. I get that question fairly often, sometimes — often from lawyers. In fact, our own — we talked to Munger Tolles, the law firm, and that was one of the questions I got, why we didn’t do more due diligence, which we would have paid them by the hour for. The — (Laughter) It’s interesting. We’ve made plenty of mistakes in acquisitions. Plenty. And we made mistakes in not making acquisitions, but the mistakes are always about making an improper assessment of the economic conditions in the future of the industry of the company. They’re not a bad lease. They’re not a specific labor contract. They’re not a questionable patent. They’re not the things that are on the checklist, you know, for every acquisition by every major corporation in America. Those are not the things that count. What counts is whether you’re wrong about — whether you’ve really got a fix on the basic economics and how the industry’s likely to develop, or whether Amazon’s likely to kill them, you know, in a few years, or that sort of thing.

We have not found a due diligence list that gets at what we think are the real risks when we buy a business. And like I say, we’ve made — we’ve certainly made at least — oh, at least a half a dozen mistakes and probably a lot more if you get into mistakes of omission. But none of those would have been cured by a lot more due diligence. They might have been cured by us being a little smarter. It isn’t — it just isn’t the things that are on the checklist that really count. Assessing whether a manager, who I’m going to hand a billion dollars to, for his business, and he is going to hand me a stock certificate, assessing whether he’s going to behave differently in the future in running that business than he has in the past when he owned it, that’s incredibly important, but there’s no checklist in the world that’s going to answer that. So, if we thought there were items of due diligence — and incidentally, there are a few that get covered.

I mean, you want to make sure that they don’t have twice as many shares out as you’re buying or something of the sort. But they’re — if we thought there were things that we were missing that were of importance in assessing the future economic prospects of the business, you know, we would, by all means, drill down on those. But the question of — you know, when we bought See’s, it probably had 150 leases. You know, when we — when we buy Precision Castparts, they have 170 plants, you know, there’s going to be pollution problems at some place. Those are — that is not what determines whether a $32 billion acquisition is going to look good five years from now, or ten years from now. We try to focus on those things. And I do think it probably facilitates things with, at least, certain people that our method of operation does cut down — You get into squabbles on small things. I’ve seen deals fall apart because people start arguing about some unimportant point, and their egos get involved, and, you know, they draw lines in the sand and all of that. I think we gain a lot.

When we start to make a deal, it usually gets done. Charlie.

CHARLIE MUNGER: Well, if you stop to think about it, business quality usually counts on something more than whether you cross the T in some old lease or something. And the human quality of the management who are going to stay are very important. And how are you going to check that as — by due diligence, you know? And I think — I don’t know anybody who’s had a generally better record than Berkshire in judging business quality and the human quality of the people. We’re going to lead the business after it’s acquired, and I don’t think it would’ve improved at all by using some different method. So I think the answer is that for us, at least, we’re doing it the way we should.

WARREN BUFFETT: Negotiations that drag out have a tendency — they’re more likely to blow up for some reason. I mean, people — they can get obstinate about very small points, and it’s silly to be obstinate, but people get silly sometimes. I like to keep things moving. I like to show a certain amount of trust in the other person, because usually trust comes back to you. But the — you know, the truth is there’s some bad apples out there, and spotting them is not going to come from looking at documents. You really have to size up whether that person who’s getting a lot of cash from you is going — how they’re going to behave in the future, because we’re counting on them. And that assessment is as important as anything involved — you know, we know all the figures and everything going in, and we know what we’ll pay, and so we don’t want things to get gummed up in negotiations. And I’m perfectly willing to lose small points here and then on a deal.

If I have the deal on the right terms, I don’t believe in — in making a — and Tom Murphy taught me this — I mean, you know, you just don’t try and win every point. It’s a terrible mistake. You make a decent deal, and if you find something that bends a little different someway, that’s OK. If you think it’s bad faith and gives an indication of the character of the person you’re dealing with, then you got another problem, and you’re lucky if you find that out early. Charlie, any more?

CHARLIE MUNGER: How many people who, in this room, are happily married, carefully checked their spouse’s birth certificate and so on? (Laughter) My guess is that our methods are not so uncommon as they appear.

WARREN BUFFETT: Yeah. I’ll think about that. (Applause.)

13. “We don’t pay any attention to titles”

WARREN BUFFETT: OK, Gregg.

GREGG WARREN: Warren, the announcement earlier this month, that Ajit Jain would be taking over responsibility for all of Berkshire’s reinsurance efforts once Tad Montross retires from General Re, has raised some questions about not only the change in leadership structure but succession planning. Given the state of the reinsurance market, it makes sense to have Ajit overseeing both businesses, especially if the pricing environment expected to be difficult for another ten years, and there are duplicative efforts that can be streamlined. Given this move and the change in responsibilities we’ve seen at several of Berkshire’s subsidiaries the last few years, I was just wondering if you could just give us some color on how succession planning is handled at the subsidiary level, and any insight you could give us into what led you to finally decide to have Ajit oversee both of Berkshire’s reinsurance arms, and whether or not it will change the amount of work you’ll be doing on the specialty side of the business, would be greatly appreciated.

WARREN BUFFETT: Yeah. Well, Tad Montross, after 39 years, has done an absolutely sensational job for Berkshire. You know, originally — (applause) Gen Re was a problem child for a while, as you know. Some brought on by itself and some external. But the — and Tad is — I mean, he’s sensational, and I tried several times, maybe successfully in terms of months but not in terms of years, to get him to stay on longer. As you say, it makes sense to have the reinsurance operation under Ajit. Ajit’s ability to handle more and more things in insurance — he oversees a company called GUARD, which most of you have never heard it, and we bought it a few years ago, and it’s doing terrifically. It’s based in Wilkes-Barre, Pennsylvania. It’s doing a great job with small business policies, primarily workers’ comp, around the country. And it’s flourished, you know, being put under Ajit. He started the specialty operation a couple years ago, and under Peter [Eastwood], that is going gangbusters.

And I have found — and this is interesting, but it’s true — I have found with really able people, they can handle so much. I mean, they almost — well, just take Carrie Sova, that put this meeting together. You know, if you have some preconceived notion that an annual meeting that’s going to have 40,000 people therefore needs, you know, to spend millions of dollars with all kinds of organizational planning and meetings and meetings and meetings, but really able people — my assistant, Debbie Bosanek, she can do anything. So there’s just no limit to what talented people can accomplish. And if I had something else in insurance tomorrow that needed doing, I’d probably call Ajit on that, too. So it has no — you know, in terms of my succession, that’s something — we’ll have a board meeting on Monday, but we’ll talk about it as we always do at every meeting and — you know, when — we haven’t — our thoughts are as one on that, and everybody knows why it makes the most sense. But five years from now, something different could make sense.

That’s one reason for not announcing any names. I mean, who knows what happens in terms of the time when it happens or what happens to the person involved? Maybe their situation changes. So it’s not a — there are no tea leaves to read in the fact that Ajit is supervising Gen Re from this point forward. Charlie?

CHARLIE MUNGER: Well, and there’s an obverse side of that. Not only can the able people usually do a lot more, but the unable people by and large you can’t fix. So —

WARREN BUFFETT: That is for sure.

CHARLIE MUNGER: I think you’re forced to use our system if you have your wits about you.

WARREN BUFFETT: And we don’t feel the need to follow any kind of organizational common view as to, you know, you do this and you have — only so many people can report to you or any of this sort of thing. Berkshire — every decision that comes up, you know, we just try and figure out the most logical thing to do at that time. But we don’t have some grand design in mind of, you know, like an army organizational chart or something of the sort, and we never will.

CHARLIE MUNGER: Warren and I once reached a decision we wouldn’t pay more than X dollars for something, and the man who was subordinate to both of us who was working on it just said, you guys are out of your minds. This is really stupid. This is a quality operation, you ought to pay up for it. We just looked at one another, and did it his way.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: We don’t pay any attention to titles or —

WARREN BUFFETT: He was right, too.

CHARLIE MUNGER: He was right, yeah, of course. (Laughs)

WARREN BUFFETT: OK. I’m sorry. Have you got —?

CHARLIE MUNGER: If a charwoman gave us a good idea, we’d accept it cheerfully.

WARREN BUFFETT: Actually, one time the woman that does clean my office came in, and I think she’d been kind of wondering what I did, you know, based on — and I’d see her frequently, and her name was Ruby. And finally one day she decided to really get to the heart of the matter, and she said, “Mr. Buffett, do you ever get any good horses?” Apparently thought this is where I was really making my money, was at the track, but — (Laughter)

14. “The rating agencies are wrong” on Berkshire

WARREN BUFFETT: OK. Station 1.

AUDIENCE MEMBER: Hello, Mr. Buffett —

WARREN BUFFETT: Hi.

AUDIENCE MEMBER: — Mr. Munger. Nirav Patel. Haverhill, Massachusetts. Thank you for taking my question. With Berkshire Hathaway being so well managed, why doesn’t it have a highest credit bond rating?

CHARLIE MUNGER: Let me take that one.

WARREN BUFFETT: OK.

CHARLIE MUNGER: The rating agencies are wrong — (laughter and applause) — and set in their ways.

WARREN BUFFETT: And we don’t fit their model very well.

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: Yeah. I mean, we don’t look like anything, exactly, they see otherwise. But —

CHARLIE MUNGER: But that’s the answer.

WARREN BUFFETT: Yeah. And we — (Laughter) I’ll say this, though. What I do, when they come in the door, I always say, “Let’s talk quadrupleA.” I believe in starting the negotiation from that standpoint. I never get any place.

15. 3G’s cost cutting hasn’t hurt Kraft Heinz

WARREN BUFFETT: OK. Carol.

CAROL LOOMIS: Questions continuing to come in about the financing and working relationship that Berkshire formed with 3G a couple of years ago, and this is one of those questions: “While 3G has been very successful in cutting costs and increasing margins at Kraft Heinz, the company has seen volumes and revenues decline. As a long-term investor, how do you judge when a management is cutting muscle as well as fat? Can a business increase revenues while cutting costs?” And I forgot to say, this came from Rick Smith at New York City.

WARREN BUFFETT: Well, the answer is, yes, that sometimes you can cut costs that are a mistake to cut, and you can — and sometimes you can keep costs that are a mistake to keep. Tom Murphy had the best approach. I mean, he never hired a person that he didn’t need, and therefore, they never had layoffs. And you might say that at headquarters at Berkshire, we follow a similar approach. You would never — we just don’t — we don’t take on anybody. Now, I think it is totally crazy when companies are in — now, if you’re in a cyclical business, you may have to cut a workforce because there aren’t as many carloads of freight moving, or something like that, so you cut back on crane crews and all that — but the idea that you give up your staff, whatever it may be, economists or something like that, because business has slowed down — if you didn’t need them — if you don’t need them now, you didn’t need them in the first place, you know.

I mean, the people that are there just because somebody started a department, and they hired more people, and so on, I would argue that — since we’ve forgotten to insult this group so far — I would suggest that happens in investor relations departments, perhaps, or something of the sort. You know, you get people — you get a department going and they’re always going to want to expand. The ideal method is not to do it in the first place. But there are all kinds of American companies that are loaded with people that aren’t really doing anything or are doing the wrong thing. And if you cut that out, it should not really have any significant effect on volume. On the other hand, if you cut out the wrong things, you could have a big effect. I mean, it can be done in a dumb way or a smart way. My impression, with everything I’ve seen, and I’ve seen a fair amount so far, is that 3G, in terms of the cost cuts that they have made, have been extremely intelligent about it, and have not done things that will cut volume.

It is true that in the packaged goods industry, volume trends for everybody — whether they’re fat or lean in their operation — volume trends are not good. And the test will be over time — you know, three, five years — are the operations which have had their costs cut, do they do poor, in terms of volume, than the ones, that in my judgment, look very fat? So far I see no evidence of that whatsoever. I do think at Kraft Heinz, for example, we’ve got certain lines that will decline in volume. I think we’ve got certain lines that will increase. But I think overall, the packaged goods industry is not going to go anyplace in terms of physical volume, and it may decline just a bit. I can’t — I’ve never — I’ve never seen anybody run anything more sensibly than 3G has, in terms of taking over operations where costs were unnecessarily high, and getting those costs under control in a hurry. And the volume question, we’ll look at as we go along.

But believe me, I look at those figures every month, and I look at everybody else’s figures every month, and I try to — I’m always looking for any signs of underperformance because of any decisions made, and I’ve seen none. Charlie?

CHARLIE MUNGER: Yeah. And sometimes when you reduce volume, it’s very intelligent, because you’re losing money on the volume you’re discarding. It’s quite common for a business, not only to have more employees than it needs, but sometimes it has two or three customers that it would be better off without. And so it’s hard to judge from outside whether things are good or bad just because volume is going up or down a little. Generally speaking, I think the leanly-staffed companies do better at everything than the ones that are overstaffed. I think overstaffing is like getting to weigh 400 pounds when you’re a normal person. It’s not a plus.

WARREN BUFFETT: Yeah. Sloppy thinking in one area probably indicates there may well be sloppy thinking elsewhere. And I have been a director of 19 public corporations, and I’ve seen some very sloppy operations, and I’ve seen a few really outstanding business operators. And there’s a huge, huge difference. If you have a wonderful business, you can get away with being sloppy. We could be wasting a billion dollars a year at Berkshire, you know, 650 million after tax, that’d be 4 percent of earnings, and maybe you wouldn’t notice it. But —

CHARLIE MUNGER: I would.

WARREN BUFFETT: — it grows. (Laughter) Charlie would notice it, so I — But it’s the really prosperous companies that — you know, some — well, the classic case I think were the tobacco companies many years ago. I mean, they, you know, they went off into this thing and that thing and — and it was practically play money because it was so easy to make, and it didn’t require, you know — it didn’t require good management, and they took advantage of that fact. You can read about some of that in “Barbarians at the Gate.”

16. We paid less for Van Tuyl than it appears

WARREN BUFFETT: OK. Jonathan.

WARREN BUFFETT: Yeah. Well at GEICO, we have two variables, and they apply to well over 20,000 people. I think you have to be there a year, but beyond that point, anybody that’s been there a year or more — and I could be wrong on the exact period — is subject — and knows — understands — that these two variables will determine bonus compensation. And as you go up the ladder, it has a multiplier effect. It’s still the same two variables, but it gets to be larger and larger, in terms of bonus compensation as a percentage of your base, but it’s always significant. It’s always significant. And those two variables are very simple. I care about growing the business, and I care about growing it with a profitable business. So we have a grid, which consists of growth and policies in force on one axis — not gross in dollars, because that’s reflected by average premiums, which are outside their control — but growth in policies in force. And then on the other grid, we have the profitability of seasoned business. It costs a lot of money to put business on the books.

I mean, we spend a lot of money on advertising and all of that. So the first year, any business we put on the books is going to reduce profits significantly. And I don’t want people to be worried about the profit if it’s going — that comes — that might be impaired by growing the business fast. So, profit of seasoned business, growth of policies in force. Very simple. We’ve used it since 1995. We put a tiny little tweak or two in for new businesses or something, but it’s overwhelmingly a simple system. Everybody understands it. In February, or so, it’s a big day when the two variables are announced and people figure out how they come out on it. And it totally aligns the goals of the organization, in terms of compensation, with the goals of the owner. And that’s a simple one. The interesting thing about —

CHARLIE MUNGER: It’s simple, but other people might reward something like just profits, and so the people don’t take on new business, they should take it on, because it hurts profits. So you’ve got to think these things through, and, of course, Warren’s good at that, and so is [GEICO CEO] Tony Nicely.

WARREN BUFFETT: Yeah. And just thinking about — you know, I mean, very — somebody comes in and says, well, if you reward profits — you don’t want to award profits, alone. It’d be the dumbest thing you could do. You just quit advertising, and, you know, start shrinking the business a little. That’s a — and like I said, that — people there know that the very top person is getting paid based on those same two variables. So that they — they don’t think that the guys at the top have got a cushy deal compared to them, and all of that. It’s just a very logical system. The interesting thing — and I’ll get to your second thing in a — second question — in a minute, but the interesting thing is that if we brought in a compensation consultant, they would start coming up with plans that would be designed for all of Berkshire, and get us all pulling together, you know —

CHARLIE MUNGER: Maybe an undertaking parlor.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: God knows where they’d get the plan.

WARREN BUFFETT: The — you know, the idea of having a — sort of — a coordinated arrangement for incentive compensation across 70 or 80 businesses, or whatever, is just totally nuts. And yet, I would almost guarantee you that if we brought in somebody, they would be thinking in terms of some master plan, and little subplans, and all this kind of thing, and explain it with all kinds of objectives. We try to figure out what makes sense in each business we’re in. There’s some businesses where the top person is enormously important, or some businesses where the business itself dominates the nature — the result. We try to design plans that make sense. In certain cases — I asked one fellow that came to work for us — or that was selling me his business — the day I met him he came to the office, and he had a business he wanted to sell, but he also wanted to keep running it. And I made a deal with him on it. And then I said, you know, tell me what the compensation plan should be. And he said, well, he said, I thought you told me that. (Laughs) I said no.

I said, I don’t want a guy working for me that has a plan that he thinks doesn’t make sense, or that he’s unhappy with, or chewing at him, or he’s complaining to his wife about it, whatever it may be. You tell me what makes sense. And he told me what made sense, and it made sense, and we’ve been using it ever since. Never changed a word. We have so many different kinds of businesses. Some of them are very tough businesses. Some of them are very easy businesses. Some of them are capital intensive. Some of them don’t take capital. I mean, you just go up and down the line, and to think that you’ll have a simple formula that can be sort of stamped out for the whole place, and then with some overall stuff for corporate results on top of it, you’d be wasting a lot of money, and you’d be misdirecting incentives. So we think it through one at a time, and it seems to work out pretty well.

In terms of the person that succeeds me, it’s true, I have sent a memo to the — in fact, I sent two memos to the board — with some thoughts on that. Maybe I’ll send a third one. But I don’t think it would be wise to disclose exactly what’s in those letters. But it’s the same principle as I’ve just gotten through describing.

CHARLIE MUNGER: And he wanted more bad examples. A lot of the bad examples of incentives come from banking and investment banking. And if you reward somebody with some share of the profits, and the profits are being reported using accounting practices that cause the profit to exist on paper that are not really happening in terms of underlying economics, then people are doing the wrong thing, and it’s endangering the bank and hurting the country and everything else. And that was a major part of the cause of the great financial crisis: it’s that the banks were reporting a lot of income they weren’t making, and the investment banks were, too. The accounting allowed, for a long time, a lender to use his bad — as his bad debt provision — his previous historical loss rate. So an idiot could make a lot of money by just making waygamier loans at high interest, and accruing a lot of interest, and saying, “I’m not going to lose any more money on these, because I didn’t lose money on different loans in the past.” That was insane for the accountants to allow that. And — literally insane.

That’s not too strong a word. And yet nobody’s ashamed of it. I’ve never met an accountant that’s ashamed of it.

WARREN BUFFETT: The other — another thing that — possibility is when you get the very greedy chief executive who wants an enormous payoff for himself, and to justify it, designs a pyramid, so that a whole bunch of other people down the line get overpaid in some relation — or get paid — in relation to something they have no control over, just so it doesn’t look like he’s all by himself, in terms of that fantastic payoff he’s arranged for himself. There’s a lot of misbehavior. And, you know, we saw it — you saw it in pricing of stock options. I mean, people that — you know, I literally would hear conversations in a board room where they hoped they were issuing the options, you know, at a terribly low price. Well, if you’ve got people interested in having options issued at a terribly low price, they may occasionally do something that might cause that. And it certainly — what could be dumber than a company looking for a way to issue shares at the lowest price?

Compensation isn’t as complicated as the world would like to make it, but that’s — if you were a consultant, you would want to make people think it’s very complicated, and that only you could solve this terrible problem for them that they couldn’t solve.

CHARLIE MUNGER: We want it simple and right, and we don’t want it to reward what we don’t want. If you have — those of you with children — just imagine how your household would work if you constantly rewarded every child for bad behavior. The house would be ungovernable in short order.

22. BNSF’s capital expenditures

WARREN BUFFETT: OK. Gregg.

GREGG WARREN: During the past several years, Burlington Northern has spent more than just about every railroad on capital expenditures. While the company reduced its capex budget from $5.7 billion during 2015, to $4.3 billion this year, it stills represents around 20 percent of annual revenue, which we believe is at least a bare minimum for most railroads to continue to invest indefinitely. Other than maintenance capex, which is likely to account for around 60 percent of that total, what do you believe are the most likely additional investment opportunities for BNSF, realizing that the secular decline in coal, which has accelerated of late, and the complicated nature of crude oil shipments, where BNSF has already invested heavily the past few years, are likely to push it more towards other parts of the business?

WARREN BUFFETT: As I mentioned in the annual report, in the case of all railroads, merely spending their depreciation expense will not keep them in the same place. So depreciation is an inadequate measure of the actual steady state of capital expenditure needs of a railroad, even in these fairly noninflationary ways. And that’s an important consideration in buying the business. We knew that going in, and it’s been reinforced since. We spent a lot of money in 2015 because we had a lot of problems to correct. That was when we spent the 5.7 billion. I would say that the true maintenance capex, if you’re looking at 4.3 billion, is higher than 60 percent of that number, when you really evaluate keeping the railroad in competitive shape to do just the same volume as it would be doing the year before. There is an additional expense at BNSF that is not reflected in the figures. There — we also have a lot of intangible expenses at some other businesses that aren’t real expenses. I mean, overall, I think that Berkshire’s figures actually are on the conservative side, in relation to real economic earnings.

But that’s not true at any railroad. We’ve also had something called “positive train control,” which amounts to a lot of money for the industry. I think we may be a little further along than most of them in paying for that, but that’s 2 or $300 million a year and maybe — I don’t know whether it’d be close to 2 billion, or something like that, in aggregate. So it is a very capital-intensive business. We run — at the BNSF — we run far more gross, in revenue ton miles, than any other railroad in North America. And that has obviously some — is a factor on capital expenditures. But I would say that it’s very likely that we will spend more than depreciation — unfortunately, quite a bit more than depreciation — to stay in the same place for a long, long time, as will other railroads. And that is — that’s a negative in the picture. We will always be looking for ways to use capital expenditure money to develop additional business, and we get that opportunity regularly. It’s just a question of the size of it.

And, you know, we did a lot of that in the Bakken, and we got benefits from it. We’re not getting benefits as much as we thought we would at this point when the price of oil was falling off. But that was a very sensible capital expenditure. And I hope we get the opportunity to do more. What’s happening in coal, with the decline, I mean, that doesn’t really have anything to do with our overall capital expenditure budget except we won’t be spending a whole lot of money to expand in that arena. Does that answer your question OK?

GREGG WARREN: I was just thinking maybe with intermodal as well, if that’s, you know, a longer-term opportunity to invest more heavily there.

WARREN BUFFETT: Well, we’re always open to it. But we would want — you know, you have to see a fair amount of revenue coming from — We had a proposition, very recently, which we worked on for many, many years, in terms of making the port at Long Beach considerably more efficient. And we spent a lot of money on that, and spent a lot of time, and we would’ve spent a lot more money — a whole lot more money — if it’d been approved. Recently a court came out with a decision that was negative on it, and whether that kills the chance to do that or we look someplace else, you know, we’ll have to look at the situation.

CHARLIE MUNGER: Our competitors there pretend to be environmentalists. (Laughs) It’s a common practice now.

WARREN BUFFETT: Yeah. In any event, we wouldn’t — we thought we had something that made a lot of sense, for both the area and for the transportation system of the country, and — but there are —

CHARLIE MUNGER: We are trying to do the right thing, and so far we’ve lost.

WARREN BUFFETT: But we’re still willing to spend a lot of money —

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: — if we can find things that make the railroad more efficient, or make it larger, I mean, either way.

23. U.S. benefits overall from low oil prices

WARREN BUFFETT: OK. Section 4.

AUDIENCE MEMBER: Good afternoon, Mr. Buffett and Mr. Munger. My name is Marcus Douglas. I’m an investment advisor from Houston, Texas. Where I’m from, there are a lot of people losing their jobs, mostly due to the sharp decline of crude oil prices. My question pertains to the overall state of the union, more so than my dear city. Keeping in mind that crude oil is primarily bought and sold in American dollars, do either of you believe the major fluctuations in the supply of crude oil influence the future monetary policy decisions?

WARREN BUFFETT: Well, that’s yours, Charlie.

CHARLIE MUNGER: Well, my answer would be, not much.

WARREN BUFFETT: Yeah, it’s an important industry, obviously. And the decline in the price of oil has had a lot of effects, very good for the consumer, millions and — well, hundreds and millions of consumers — and very bad for certain of the businesses, like the one we bought in Lubrizol, and some others, to a degree. You know — net, it should be good for the United States, overall, to have low prices for oil. We’re a net oil importer. I mean, just like it’s good for the United States to have low prices for bananas. We’re a banana importer. Anything we net buy is a plus when prices fall, but oil is big enough, and extends into so many areas, that it also hurts, plenty, when the price of oil falls, and it particularly hurts capital values. So the value — the consumer gets the benefit when he or she goes to the filling station, you know, every two or three weeks, or something like that, and it comes in relatively small increments. The capital value contraction, which is huge, if you project out lower-price oil for a while, you know, hits immediately.

I mean, an oil field that was worth X may be worth half X, or a third of X, or no X, overnight. And so, there’s certain big factors — well, in terms of our chemical operation, people just stop ordering. So you have this big impact on capital values immediately, and you have the benefits move in over time. But net, the United States is better off, and Saudi Arabia is worse off, when prices of oil are lower. Oil is a big part of the economy, but our economy has continued to make progress, overall, during the oil price decline. But obviously, different regions suffer disproportionately, just like they boomed — you know, they got a real boom in — during the period when it was at $100, and when trucking came in big time. Charlie?

CHARLIE MUNGER: Well, I think that that will do it for this subject.

24. No need to sweep cash from subsidiaries

WARREN BUFFETT: OK. Carol.

CAROL LOOMIS: The question is from Larry Levowitz (PH) of Boston. “The year-end balance sheet for our manufacturing, service, and retailing operations shows total current assets of 28.6 billion, of which cash and equivalents are 6.8 billion. “Meanwhile, total current liabilities are 12.7 billion, implying net working capital of 15.9 billion. “It has become increasingly common for companies like Apple and Dell to finance their business via their suppliers, in some cases with negative working capital. “Why is it necessary for these Berkshire businesses to have so much working capital, particularly so much cash? “More generally, how do you think about efficiently managing the working capital of a business segment so large, sprawling, and decentralized as this one?”

WARREN BUFFETT: Yeah. Well, we have excess cash every place at Berkshire, so we don’t — at present, it really doesn’t make any difference whether we have it at certain subsidiaries or other subsidiaries. So we do not — we have excess cash. As I pointed out in the past, we’ll never go below 20 billion in cash, and we’ll actually stay comfortably above it, but — allowing for the preferred that’s going to — of Kraft Heinz — we’ll be, again, over 60 billion of consolidated cash. We don’t really worry much about what pocket it’s in. It’s not making anything, anyway, at these levels. Now, if rates move higher, we’ve actually got the mechanics in process to do sweep accounts and that sort of thing, which — so I would pay no attention to the particular cash that’s being held in that category there. The cash in Berkshire Hathaway Energy, the cash in the railroad, we have independent levels, that we don’t guarantee their debt, and they run with ample cash, and we would not look at sweeping that down to a minimum.

But if you talk about 40 or 50 of our miscellaneous subsidiaries, we will go to a sweep account when rates gets where it really makes any difference to do it. But right now, when you’re getting zero, it doesn’t make much difference where you get zero. So I think the fellow’s overanalyzed it a little bit, but I understand why he did it.

CHARLIE MUNGER: Warren, one of these ideas is, why don’t we imitate some of these other people, and pay our suppliers a lot more slowly, so we have more working capital?

WARREN BUFFETT: Yeah. Well, that’s a big thing in business now. And last year, Walmart, for example, went to almost all of their suppliers, as I understand it, and certainly the companies that we supply, and they basically had a list of half a dozen things that they wanted present suppliers to agree to, and one of those things was more-extended terms. And each of our companies made their own decisions, but my guess is they got more extended terms from most of their suppliers, maybe a very high percentage of their suppliers, and they may have gone from — I don’t remember the exact request, whether they went from 30 to 60 days, or what it was — but they got a meaningful extension. So, you will — you know, in a couple years or a year, takes time to implement, you’ll see higher payables, relative to sales, at Walmart than you saw a year or two ago. And, you know, they are under a lot of pressure competing with Amazon and others, and that’s one of the ways they expressed it.

And I’ve seen it done other places, and it’s conceivable that one of our subsidiaries might deem it wise to do it, but I don’t think they will. I mean, I think that the pressure for cash at Berkshire is not that high, and I think that the pressure for — or the desire for — great relations with suppliers is — would probably overcome, in most of our managers’ minds, any desire to start extending terms.

CHARLIE MUNGER: Yeah. I think it’s hard to do that, brutally, when you’re rich and your supplier isn’t, and think that your supplier is going to love you. And so I think there’s something to be said for leaning over backward to have a win-win relationship with both suppliers and customers, always. (Applause)

WARREN BUFFETT: It’s never been pushed at Berkshire, that’s for sure. You can argue we got a pretty good thing going in float anyway, so — (Laughs)

CHARLIE MUNGER: Yeah, and we don’t need it. Let somebody else set the record on that one.

25. “We don’t need to inflate the figures”

WARREN BUFFETT: OK. Jonny?

JONATHAN BRANDT: Most American corporations separate out supposedly one-time restructuring costs, whereas Berkshire doesn’t. Berkshire’s reported operating earnings are, therefore, in my opinion, of higher quality. Have you ever calculated how much higher operating earnings, on average, would be if Berkshire separated out plant closing costs, product line exits, severance pay, and similar items? Is it a material number? Or does Berkshire not incur much in the way of these types of costs typically because most of your acquisitions are stand-alones?

CHARLIE MUNGER: Let me take that one. That’s a question like asking, why don’t you kill your mother to get the insurance money? (Laughter) We don’t do it. We’re not interested in manipulating those numbers, and we haven’t had a restructuring charge ever, and I don’t think we’re about to start. (Applause)

WARREN BUFFETT: Yeah. I would say this, too, Johnny. We don’t do that. The numbers would not be huge. You know, there could be a year, I suppose, when they might be, for some reason, but they are more conservatively stated than most companies, and I think they’re of higher quality. But I’ve pointed out, also, that I think that our depreciation expense at the railroad, which is standard and which all of the other railroads use, is inadequate as a measure of true operating earnings, but that’s —

CHARLIE MUNGER: And you’re talking about — we like to advertise our defects.

WARREN BUFFETT: Not all of them. (Laughs) There’s no question that we — I think we will have more amortization of certain intangibles in our — which reduce earnings and reported earnings, but which, in reality, are not expenses — we’ll have more of that than some companies. And I’ve pointed that out. I haven’t — I never want to report one of these things where I have the whole adjusted earnings set out and say, this is what you’re supposed to pay attention to, because every one of those I’ve seen virtually results in some inflation of figures. Things are good enough at Berkshire. We don’t need to inflate the figures.

26. Berkshire Hathaway’s credit default swaps

WARREN BUFFETT: OK. Station 5.

AUDIENCE MEMBER: This is Martin, calling from Germany. I’m a fixed-income manager. We launched, with (inaudible), a fund and —

WARREN BUFFETT: You have my — you have my sympathy.

AUDIENCE MEMBER: Yeah, yeah. The volume is about 600, 650 million. We are 4.1 percent ahead this year. Obviously my question is about fixed income. If I look in your annual report, it’s about the volume of 25 billion. And if I add, let’s say, the CDS, you were selling the CDS, it is by the volume of 7 or 8 billion. So my concrete question is, the premium on your CDS is about 31 percent — 31 basis points — at the end of the year, so mark-to-market, it is probably at the high teens or 20s. So would you consider to unwind this position? Are you allowed to do it and the (inaudible) say no? But probably you can make exactly the contrary trade on it. That means you are buying protection. Is that a philosophy which you stand behind? Could you do that from the (inaudible) point of view, when the premiums are extremely low, which is at the case that the spreads are, as I said, between 15 and 20 basis points? Can you give —?

WARREN BUFFETT: Charlie, that sounds like it was designed for you. (Laughs) I think he was referring to — we have one position left over from six or seven years ago, or thereabouts, that involves us selling protection on zero coupon municipal bonds with a nominal value — maturity value, which is — since there’s zero coupons, is far off, and not present value, at all. I think 7.7 billion or something like that. And we’re just sitting with that position because we like the position. And the gentleman mentions that our CDS — our CDS is — that’s an insurance premium against our debt that people buy. A, there’s a fair amount of activity in it from time to time, and I think that’s partially caused by the fact that we neither collateralize that municipal contract that he refers to, but we don’t collateralize, with minor exceptions, the equity puts that are still out there. So the counterparties have to buy — I believe this is the case — I think the counterparties have to buy protection on Berkshire’s credit through CDSs.

Now, the people they buy it from, their credit probably isn’t as good as Berkshire’s, so I mean I think they’re — but it’s probably an internal rule at some of these firms that are on the other side of the contract, and so — but that really doesn’t make any difference to us. Back in 2008 and ‘9, our CDS prices went up to a crazy level, and I even commented here at the annual meeting that I would love to be selling them myself, except I wasn’t allowed to. But what goes on in a CDS market really isn’t of any particular interest to us, and it’s too bad for the other guys. They didn’t get collateral from us and we wouldn’t have given it to them. And so they have to buy these things that, like I say, from our standpoint, they’re wasting their money, but they probably have internal rules that make them. I think I’ve addressed your question, but — Charlie, do you think I’ve addressed his question?

CHARLIE MUNGER: Well, the truth of the matter is that we don’t pay much attention to trying to get an extra two basis points by being gamey on our short-term things. And that credit default position is a weird, historical accident, and we don’t pay much attention to it, either. It’ll go away in due course.

WARREN BUFFETT: Yeah. All of our contracts are just going to expire. We’re not — now, we do a few operational contracts in our energy company. I’ve mentioned a couple places where they — for their own reasons and sometimes because the utility commissions want them to — they do certain things, but it’s peanuts. And the positions that I instituted six or seven years ago are basically all in a runoff position, and the first big runoffs will be in 2018, in a couple years.

CHARLIE MUNGER: We’re basically not in — we don’t fool around with our own credit defaults.

WARREN BUFFETT: No, no, never, no. But I would’ve liked to have sold them in 2008. (Laughs) They actually got up — people were paying —

CHARLIE MUNGER: I know, it was crazy.

WARREN BUFFETT: — 500 basis points, 5 percent, in terms of betting that Berkshire would go broke, which was totally crazy, but I couldn’t take advantage of it. I wanted to, though.

27. A fantastic manager makes a huge difference

WARREN BUFFETT: Becky.

BECKY QUICK: This question comes from Tom Hinsley, a long-time shareholder from Houston, Texas, who says, “Over the years, you’ve been effusive in your praise of Ajit Jain and his contributions to Berkshire. “In the 2009 chairman’s letter you wrote, ‘If Charlie, Ajit, and I are ever sinking in a boat, and you can only save one of us, swim to Ajit.’ My question is, what if we don’t get to Ajit in time? Please comment on the impact on National Indemnity and Berkshire, and whether or not there’s another Ajit in the house.”

WARREN BUFFETT: There’s not another Ajit in the house. I didn’t hear the part immediately before it when you were — but there is not another Ajit on the house.

BECKY QUICK: The impact on National Indemnity — I guess the impact on the insurance companies, as a result —

WARREN BUFFETT: If we lost him?

BECKY QUICK: Yeah.

WARREN BUFFETT: It would be very significant. And that would be true of some other managers of some other subsidiaries. But it’s quite dramatic with Ajit’s operation, because, literally, there were a few years when we had, like, 25 or so — or 30 — people where that operation — it was an unusual period to be in — but where it’s earning potential, under Ajit, was fantastic. That probably won’t happen to that degree again. I wish it would. But he’s done a tremendous amount for Berkshire. But I can, you know, you can start with [GEICO CEO] Tony [Nicely] — you go to all — there have been a lot of managers that have created billions and billions of dollars of value for Berkshire. I mean, and maybe you can get into the tens of billions, you know. It’s — having a fantastic manager that has a large business — potential business — available to them, and who makes the most of it, you know, it’s huge over time. You don’t see it necessarily in a week or a month or anything of the sort.

But when you’re building capital value, I mean, think of the value of [CEO] Jeff Bezos to Amazon. It wouldn’t have happened without him, you know, and you’re looking at huge values. And I could name other situations. You know, the value of Tom Murphy and Dan Burke was the difference between zero and what they ended up with. I mean, they built that thing from a bankrupt UHF station in Albany. It wasn’t that they were — they didn’t invent television or anything of the sort, they just managed it so well. So, really outstanding managers, they’re invaluable, and we want to — Charlie and I can’t do it ourselves, but we want to align ourselves with them and then, you know, have them feel about Berkshire the way we feel about it. And if we do that, we have an enormous asset, and we do have, in Ajit and a number of the other managers. Charlie?

CHARLIE MUNGER: Yes, and Ajit has a longer shelf life than we do. (Laughter) He’d be particularly missed.

WARREN BUFFETT: Well, let’s not give up here, Charlie. (Laughter) I reject such defeatism. (Laughs)

28. Paying a little money now to have a lot of money later

WARREN BUFFETT: Cliff.

CLIFF GALLANT: Thank you. Low-to-negative interest rates is something that’s been discussed a few times today, and you’ve mentioned its implications for a return on float. I was wondering, how should shareholders value the 25 percent of the float that’s been created by retrocessional reinsurance, where the business is booked at an underwriting loss, and at times, has adversely developed?

WARREN BUFFETT: Yeah. Cliff brings up, some of our business, in the insurance business, we take with either the probability of some underwriting loss, in order to get to use the money for a very long period of time. And it would look, under today’s interest rates, like we can’t do much with that. There’s two answers to that. We don’t think it will — for the duration of the kind of contracts we have — we don’t expect these rates, but we could be wrong. But the second one, also, is that we do think that occasionally we will get chances, even in periods of low interest rates, to do things that are — will produce quite a bit — very reasonable returns. And so we do not — we are not measuring it against, you know, double-A corporates, or anything of the sort.

We’re measuring it in the potential utility, to us with our really pretty unusual flexibility, in respect to the deployment of funds, and this long period when we’ll have an opportunity, perhaps, to come up with one or two things that — where we can deploy money at a rate that may be quite a bit higher than other people. Assume now the money can be deployed. Charlie?

CHARLIE MUNGER: Yeah, we’re willing to pay a little money now to have just a certainty of having a lot of money available in case something really attractive comes up in a difficult time.

WARREN BUFFETT: Yeah. It’s an option cost.

CHARLIE MUNGER: It’s an option cost, right.

WARREN BUFFETT: And that option came in handy in 2008 and ‘9, for example.

CHARLIE MUNGER: Did it ever.

29. No nationwide bubble in residential real estate now

WARREN BUFFETT: OK. Station 6.

AUDIENCE MEMBER: Hi, Charlie and Warren. My name is Mindy Jensen, and I’m from Longmont, Colorado. I work for the largest real estate investing social network online, called BiggerPockets.com. We’re seeing investors starting to get concerned that the real estate market is a bit frothy, similar to the run-up of 2005, ‘6, and ‘7, that led to the crash in 2008. Warren, in 2012, you told Becky Quick that if you had a way to easily manage them, you’d buy 100,000 houses and rent them out. How do you feel about the real estate market today?

WARREN BUFFETT: It’s not as attractive as it was in 2012. (Laughs) The — you know, we’re not particularly better at predicting real estate markets than we are stock markets, or interest rate markets, but there’s certainly — and it’s driven to some extent by these low interest rates — but there’s certainly properties that are being sold at very, very low cap rates that strike me as having more potential for loss than gain. But again, if you can borrow money for very, very little, and you think you’re getting into some very safe asset, 100 basis points or 150 basis points higher, there’s a great temptation to do it. I think it’s a mistake to do that, but, you know, I could be wrong. I don’t see a nationwide bubble in residential real estate now, at all. I think, you know, I think in a place like Omaha or, you know — most of the country — you are not paying bubble prices for residential real estate. But it’s quite different than it was in 2012.

And I don’t think the next time around the problem is going to be a real estate bubble. I think that it certainly was the cause, in a very large part, of what happened in 2008 and ‘9, but I don’t — I don’t think it’ll be a replica of that. Charlie?

CHARLIE MUNGER: Nothing to add.

30. Praise for portfolio managers Ted Weschler and Todd Combs

WARREN BUFFETT: OK. Andrew.

ANDREW ROSS SORKIN: Warren, Todd and Ted now have been at Berkshire for several years. What have been their biggest hits, and failures, specifically? And what have they learned from Charlie and Warren, and what are the biggest differences between you and them?

WARREN BUFFETT: Well, I’ll answer the last part, the easiest. I am trying to think of very big deals that we can do something in, in investments, or in business, preferably just in operating businesses. I mean, they still are — their primary job is working on — each has a $9 billion portfolio, and one of them has, I don’t know, perhaps seven or eight positions, and the other one has maybe thirteen or fourteen, but they have a very similar approach to investing. They’ve both been enormously helpful in doing several things, including important things, that — for which they don’t get paid a dime, and which they’re just as happy working on as — working on the things — as they are when they’re working on things that do pay off for them financially. They’ve got — they’re perfect cultural fits for Berkshire. They’re smart at what they do. And, you know, they’re a big addition to Berkshire. Charlie?

CHARLIE MUNGER: Again, I’ve got nothing to add.

WARREN BUFFETT: Did I cover the whole thing, Andrew, or was there one —a part I missed there?

ANDREW ROSS SORKIN: Biggest hits and failures. I think they specifically wanted to know, in terms of investments, and trying to understand the way you think perhaps — I think the question was more — I think — the implication was, the way they think and the way you think, are there differences?

WARREN BUFFETT: Yeah. They’re — I would say they’re — they have a bigger universe to work with, because they can look at ideas in which they can put 500 million, and I’m looking — I’m trying to think of ways to put, you know, sums into billions. But — and they probably — well, they certainly — have more extensive knowledge of certain industries and activities in business that have developed in the last ten or fifteen years. They’d be smarter on that than I am. But their approach to investing, I mean, they’re looking for businesses that they understand and that are going to — and through the stocks of those businesses — that they can buy at a sensible price and that they think will be earning significantly more money five or ten years from now. So it’s very similar to what I’m thinking about, except I’d probably add another zero to it.

CHARLIE MUNGER: And we don’t want to talk about specific hits and failures.

WARREN BUFFETT: No. OK. Gregg. Yeah, we will never get into disclosing — I mean, we file reports every 90 days that show what Berkshire does in marketable securities, but we don’t identify — I may identify whether it’s mine or theirs, but we don’t get into identifying what they do individually.

31. We moved money to pay for Precision Castparts

GREGG WARREN: Looking at Berkshire’s finance and financial products segment, there was a fairly significant increase in the amount of cash carried on the group’s books last year. After holding steady between 2 and 2-and-a-half billion dollars during 2012 to 2014, the amount of cash held at the segments spiked up to 5.4 billion at the end of the third quarter of last year, and $7.1 billion at the end of 2015. This incidentally coincided with your acquisition of GE’s railcar leasing unit, as well as the acquisition of several railcar repair maintenance facilities. Sales and profitability were fairly solid last year, but don’t really seem to account for the magnitude of the change in cash. And investments, debt, and other liabilities do not look to have changed significantly enough to count for the difference, perhaps accounting for about $1 billion of the increase. Just wondering where the additional $3.5 billion in cash came from, and whether or not the elevated level

征收碳费用是必要的，它能让化石燃料的价格体现真实成本，包括其造成的空气污染、水污染和气候变化对人类付出的代价。为了刺激私营部门在清洁能源和能效方面进行有效投资，碳排放费用也应该逐步提高。最重要的是，它能稳步减少化石燃料的使用。我不是要求您当场支持碳费，但我希望您能思考这一点，并在您的下一份报告中给出明确的表态。这或许能成为您最伟大的遗产。它可能影响一切，甚至包括我们未来的气候进程。谢谢。

沃伦·巴菲特：谢谢你，汉森博士。我要说的是，我们——（掌声）——尽管在某些具体细节上可能存在分歧，而我也并非此领域的专家——但我认为，在气候变化的重要性上，你我并无分歧。你知道，这是一个一旦突破就不可逆转的议题。如果我们正走在您认为确定、我认为很可能的道路上，那这就是一个极其重要的议题。但提出的这个动议是关乎其保险方面的影响，我们讨论过——请相信我，我们认真思考并讨论过保险方面的影响，实际上，我已经在年度报告中对这一要求作出了回应。因此，股东们面前的议题并非我个人对气候变化是否真实存在或碳税是否合适的看法，而是它是否对我们的保险业务构成风险。

我认可英格兰银行——我读过那份报告——但我们恭敬地不同意他们的观点，不是关于气候变化的重要性，而是关于对我们保险业务的风险。我们并非被迫——我们不会签长期保单。我们不会被强迫承保任何东西。因此，我们的判断是基于提交给我们的提案，通常是判断是否愿意以特定价格、在一年期限内接受特定风险。显然，气候在我们的业务中极为重要，飓风也许是最重要的，尽管我们也涉及地震——但这正是该提案所讨论的内容，我们也对此作出了回应。这并不意味着我们在气候变化对人类重要性的看法上存在分歧。因此，我很乐意听取各位附议者的发言。

吉姆·琼斯：你好。我叫吉姆·琼斯。我是伊利诺伊州立大学凯蒂保险学院的执行主任。我想基于气候变化带来的三个隐藏风险，表达我的担忧。第一，与保险公司投资化石燃料可能产生的搁浅资产有关。第二，是一个与气候变化相关的更为隐蔽的风险。这个风险与财产险、寿险和医疗险业务线相关的长期负债有关。我意识到许多聪明人和专家并未看到长期负债问题，但他们忽略了一个重要部分：原保险公司无法撤销或重新定价整个业务组合。在飓风卡特里娜、丽塔和威尔玛过后，佛罗里达州开发了新的飓风模型，而这些公司试图获得推荐的费率批准，但未获准许。因此，许多保险公司开始退出该市场。十年后，那些表现不佳的业务中仍有大约40%留在这些保险公司的账面上，而这种情况可能会在其他几个面临气候风险的州重演。对于再保险公司而言，与客户之间的再保险关系价值是一项长期业务。

这之所以如此重要，是因为据我统计，你们的156个再保险客户已经提交了气候变化披露文件，这些客户期望其长期利益能受到再保险公司的保护。如果做不到，就可能出现关系违约风险，如果他们觉得你们的再保险只是一年期的合同，可以重新定价或退出的话。而你们就会进入替代性再保险市场日益激烈的竞争领域，该市场去年规模已达720亿美元，而本季度早些时候，巨灾债券发行额创下了22亿美元的纪录。

沃伦·巴菲特：谢谢。我要指出的是，据我所知，从未有人要求我们签订长期合同。我们的原保险公司知道我们是一次审视一年，我们不会承保我们认为有重大负面概率的业务。他们也不指望我们这么做。这已经远不如过去那样是一个关系型业务了，而更像是一个交易型业务。但是——如果我们因为客户希望我们做蠢事而失去他们，那就失去吧。在我们的业务中——我不是在替其他再保险公司说话——但在我们的业务中，我相信与其他大多数再保险公司一样，他们不会为了维持关系而去做自认为非常不利的事情。那算不上真正的关系，那是一种补贴。所以，坦率地说，我不认为这对伯克希尔会带来任何负面后果。

关于卡特里娜飓风之后的情况——费率上涨了，而实际上，自1850年之前我们有记录以来，佛罗里达州的飓风经历比任何时期都要好。顺便说一句，这让我们感到意外。但在此期间，我们没有在佛罗里达承保巨灾业务，因为我们觉得费率不够。实际上费率是足够的，我们只是判断错了。而且，顺便说一句，我们退出佛罗里达我们认为定价错误的巨灾业务，这件事本身并没有损害我们的业务。如今这更像是一个交易型业务——也许曾几何时，关系在再保险中非常重要，但随着如此多的参与者进入，它已经非常像一个交易型业务了。没有人期望你去做非常愚蠢的事。你知道，如果有人期待，那这种关系本身就是错误的。但很高兴听下一位发言。

简·克利布：你好，巴菲特先生。我叫简·克利布。我运营一个名为“勇敢的内布拉斯加”的组织，该组织曾是一个击败基石XL输油管道的非典型联盟的一部分，旨在保护我们州的含水层以及产权。几年前我在纳尔逊参议员家见过您，当时我把您拉到一边，问我们如何才能推动医疗改革通过？您告诉了我两件事：民调数字很重要，并且我们必须持续施加公众压力。对于气候变化和气候行动，我们有同样的感受。最近的耶鲁大学研究表明，甚至有47%的保守派人士相信气候变化，并希望看到企业和政府采取行动。您对这个决议的回应让我印象深刻，因为其中一句话提到，如果你住在低洼地区，也许应该搬家。那么，我们与生活在沿海社区的印第安兄弟姐妹们合作，其中有一个部落现在成了美国第一批气候难民。他们当时没有搬家的选择，是被迫搬迁的。

因此，我们向您求助，也向自己求助，继续施加公众压力，希望您和查理能与我们站在一起。也许不是今年，也许不是明年，但我们非常期待您能进行全面的气候风险分析，并撤资您持有的所有化石燃料。最后，解决气候变化问题需要小公司和强大的力量，也需要大公司和强大的力量。因此，您在内华达州阻挠小型太阳能项目，是走错了路。谢谢。（零星的掌声）

沃伦·巴菲特：我认为你会有合理的时间去搬家，但我要说，如果你在低洼地区做50年的投资，那可能是个错误。我实际上说过，作为低洼地区的房主，你可能需要考虑搬家。而我要说的是，如果你预计在那里住十年左右，我不认为我会考虑搬家。但如果我认为这是在做一个100年的投资，我不会这么做。我认为这回到了那个问题——我们有一份股东提案，问的是气候变化给保险部门带来哪些风险？我们没有否认气候变化是一个极其重要的课题。我们没有否认它的存在。但它不会损害我们的保险业务，与可能影响我们保险业务的其他因素相比，它是微不足道的。而这正是本次会议要讨论的议题。但我会很高兴听下一位发言。

与会者：下午好，巴菲特先生。我叫凯·哈恩（音）。我作为股东已经超过十年了，基本上贯穿了我的投资生涯。今天有人说您思考问题比大众超前。关于这个决议，您说伯克希尔的保险业务会在保单续期时提高费率，这说得通。但您也同意气候变化对我们的星球构成了重大挑战。我要说，如果政治行动在当前关于这个议题的速度持续推进，气候变化将对全球金融市场的稳定构成重大挑战。我个人同意汉森博士的观点，碳费是解决这个问题的方案。我想知道您能否告诉我们，您认为解决这个问题的方案是什么，以及您是否认为伯克希尔的业务（更广泛地说，不仅仅是保险业务）会在未来一二十年受到这个议题的影响？

沃伦·巴菲特：是的。我怀疑在未来一二十年内它会受到影响。但我完全不会与您争论的是，除非设计出各种减排技术——比如封存之类的技术，很多人在研究——或者除非温室气体排放大幅减少，否则这很可能（并非确定无疑）是文明面临的一个极其重要的问题。过去也有过——我的意思是，肯定会有一些非常聪明的人研究如何以某种方式改变这种平衡，要么通过减少大气中的排放，要么通过各种可能减轻影响的技术，但这里没有人会否认它的重要性。我认为它不会——我认为它不会以严重的方式影响气候（就此而言，也不会影响保险业）在未来一二十年。

但是，正如我在报告中所指出的，当你面对一个存在不可逆转点的问题时，采取行动的时间不是等我们离那个点还有十分钟的时候。因此，我们强烈支持一些政策，比如可再生能源方面的政策，但我认为，在科学界内部，也有可能存在一些解决方案，这些方案超出了我有限的物理学知识，但有很多比我聪明得多的人在外面。我认为，在减排方面的一个根本问题——如果这些解决方案没有实现的话——在于这是一个全球性问题，需要重要国家之间的合作，我认为奥巴马总统在与其他国家领导人合作方面开了一个好头。但这不可能仅靠美国解决，您比我更清楚。我很乐意听下一位发言。

与会者：你好。我叫南希·迈耶（音），我和我丈夫成为股东已经15年了。我们对伯克希尔·哈撒韦公司充满信心。这也是我们投资的原因。所以我在这里只是想作为股东说，我想请求我的股东伙伴们考虑气候变化的经济成本，并敦促伯克希尔·哈撒韦公司通过这项决议，以展现我们在保险行业的领导力。谢谢。

沃伦·巴菲特：谢谢。我很感激您一直是我们的股东，但我确实认为，基于某些原因——我真的不认为这个决议——我认为这个决议在某种意义上不适用于我们的保险业务。我的意思是，保险——全球气候对我们保险业务来说并非风险。随着时间的推移，它可能是一个对地球的风险，但这是另一回事。我的意思是，我们可以通过所有类型的决议说，显然核扩散对地球构成威胁，然后你可以说，好吧，那它也对伯克希尔构成威胁。

但就针对伯克希尔而言，你知道，你可以读一下决议，就像我说的，和 Ajit Jain 一起，他可能是我认识的最懂保险的人，我99%的净资产都在伯克希尔，这些最终都将捐给慈善机构，我不希望看到它消失，我也将自己视为伯克希尔的首席风险官，我担心可能伤害伯克希尔的事情，而我没有在气候变化方面看到它对我们保险部门构成威胁。但是，谢谢。

理查德·米勒：下午好，巴菲特先生。我是理查德·米勒，来自奥马哈的克雷顿神学系。我研究和教授气候变化及其社会影响。我只是想让您知道，伯克希尔是在一个更大的经济体中运营的，而尼古拉斯·斯特恩最重要的气候分析——经济分析——表明，按照我们目前的道路，到本世纪末，全球GDP损失30%是可能的。另一个问题是，当我们谈论为气候变化做点什么时，“做点什么”意味着为了避免严重的海平面上升，我们需要从今天起，全球每年减少7%的排放量。我们唯一一次在经济持续增长的情况下，在十年内实现减排，是在1990年代的英国，我们每年只减少了1%。因此，我们谈论的与奥巴马总统渐进的举措完全不同。我们需要做点什么——不，我们需要立即进行大规模转型。考虑到您在全球拥有大量的资产，您在这个问题上是一个世界级的重要人物，而不仅仅是在这个特定的股东决议上。谢谢您的时间。

沃伦·巴菲特：谢谢。这是——发言结束了吗？

与会者：您说什么？

沃伦·巴菲特：您是最后一位发言者吗？

与会者：是的，我认为所有发言者都讲完了。

沃伦·巴菲特：好的。谢谢。查理，你有什么想说的吗？

查理·芒格：嗯，有。我们在奥马哈，这里海平面相当高。在我们的保险公司里，我们对这个议题没有很大的经济利益。我们现在承保的巨灾保险远不如很多年前那么多了。因此，我们作为一个公司，被要求在非常复杂的问题上采取公开立场。我们城市里有犯罪问题。我们有一百个——我们有一千个——对我们文明至关重要的复杂问题。如果我们把会议时间都花在就所有这些问题采取公开立场上，我认为会适得其反。而且我不喜欢的是，不断提出这个议题的人从来只讨论一个解决方案：减少化石燃料的消耗。还有个地球工程学的可能性，没人愿意谈论，我认为这是愚蠢的。所以，把我记成不欢迎这个决议的人。（掌声）

沃伦·巴菲特：我们不想开政治集会。现在可以对动议进行表决了。如果有股东要亲自投票，请现在在动议的选票上做出标记，并将选票交给过道上的会议工作人员。阿米克女士，当你准备好时，请做报告。

贝基·阿米克：我的报告准备好了。根据上周四晚上之前收到的代理投票委托书，代理投票持有人的投票结果是：赞成动议69,114票，反对动议531,724票。由于反对票数超过了所有A类和B类股票就该事项有效投票的多数，也超过了所有已发行股票的票数，该动议未获通过。特拉华州法律要求的投票精确计数的认证将交给秘书，存入本次会议记录。

沃伦·巴菲特：谢谢你，阿米克女士。该提案未通过。

38. 休会

沃伦·巴菲特：在休会之前，有人要向我们的审计公司提问吗？如果没有，我请斯科特先生向会议提出动议。

沃尔特·斯科特：我提议本次会议休会。

沃伦·巴菲特：奥尔森先生？

罗恩·奥尔森：我附议。

沃伦·巴菲特：休会动议已经提出并获得附议。我们将进行口头表决。是否有任何讨论？如果没有，赞成的请说“赞成”。反对的请说“反对”。