WARREN BUFFETT: Put this over here.

CHARLIE MUNGER:

WARREN BUFFETT: Am I live yet? Yeah.

Morning.

AUDIENCE: Morning.

WARREN BUFFETT: We were a little worried today because we weren't sure from the reservations whether we can handle everybody, but it looks to me like there may be a couple seats left up there.

But I think next year, we're going to have to find a different spot because it looks to me like we're up about 600 this year from last year, and to be on the safe side we will seek out a larger spot.

Now, there are certain implications to that because, as some of the more experienced of you know, a few years ago we were holding this meeting at the Joslyn Museum, which is a temple of culture. (Laughter)

And we've now, of course, moved to an old vaudeville theater. And the only place in town that can hold us next year, I think, is the Ak-Sar-Ben Coliseum where they have keno and racetracks. (Laughter)

We are sliding down the cultural chain — (laughter) — just as Charlie predicted years ago. He saw all this coming. (Laughter)

WARREN BUFFETT: Charlie — I have some rather distressing news to report. There are always a few people that vote against everyone on the slate for directors and there’s maybe a dozen or so people do that. And then there are others that single shot it, and they pick out people to vote against.

And, this will come as news to Charlie, I haven’t told him yet. But he is the only one among our candidates for directors that received no negative votes this year. (Applause).

Hold it — hold it. No need to applaud.

I tell you, when you lose out the title of Miss Congeniality to Charlie, you know you’re in trouble. (Laughter)

WARREN BUFFETT: Now, I'd like to tell you a little bit how we’ll run this. We will have the business meeting in a hurry with the cooperation of all of you, and then we will introduce our managers who are here, and then we will have a Q&A period.

We will run that until 12 o'clock, at which point we’ll break, and then at 12:15, if the hardcore want to stick around, we will have another hour or so until about 1:15 of questions.

So, you're free to leave, of course, any time and I've pointed out in the past that it's much better form if you leave while Charlie is talking rather than when I'm talking, but — (Laughter)

Feel free anytime, but you can — if you're panicked and you're worried about being conspicuous by leaving, you will be able to leave at noon.

We will have buses out front that will take you to the hotels or the airport or to any place in town in which we have a commercial interest. (Laughter)

We encourage you staying around on that basis.

WARREN BUFFETT: Let's have the — let's get the business of the meeting out of the way. Then we can get on to more interesting things.

I will first introduce the Berkshire Hathaway directors that are present in addition to myself and —

First of all, there’s Charlie, who is the vice chairman of Berkshire, and if the rest of you will stand.

We have Susan T. Buffett, Howard Buffett, Malcolm Chase III, and Walter Scott Jr. And that's it. (Applause)

WARREN BUFFETT: Also with us today are partners in the firm of Deloitte and Touche, our auditors, Mr. Ron Burgess and Mr. Craig Christiansen (PH).

They are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire.

Mr. Forrest Krutter, secretary of Berkshire. He will make a written record of the proceedings.

Mr. Robert M. Fitzsimmons has been appointed inspector of election at this meeting. He will certify to the count of votes cast in the election for directors.

The named proxy holders for this meeting are Walter Scott Jr. and Marc D. Hamburg.

Proxy cards have been returned through last Friday representing 1,035,680 Berkshire shares to be voted by the proxy holders as indicated on the cards. That number of shares represents a quorum and we will therefore directly proceed with the meeting.

We will conduct the business of the meeting and then adjourn to the formal meeting — and then adjourn the formal meeting. After that, we will entertain questions that you might have.

First order of business will be a reading of the minutes of the last meeting of shareholders.

I recognize Mr. Walter Scott Jr. who will place a motion before the meeting.

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

WARREN BUFFETT: Do I hear a second?

VOICES: Seconded.

Motion has been moved and seconded. Are there any comments or questions? Hearing none, we will vote on the motion by voice vote. (Laughter)

All those in favor say aye.

VOICES: Aye.

WARREN BUFFETT: Opposed? The motion is carried and it’s a vote.

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 by first class mail to all shareholders of record on March 8, 1994, being the record date for this meeting, there were 1,177,750 shares of Berkshire common stock outstanding, with each share entitled to one vote on motions considered at the meeting. Of that number, 1,035,680 shares are represented at this meeting by proxies returned through last Friday.

WARREN BUFFETT: Thank you. We will proceed to elect directors.

If a shareholder is present who wishes to withdraw a proxy previously sent in and vote in person, he or she may do so.

Also, if any shareholder that’s 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? Just raise your hand.

I now recognize Mr. Walter Scott Jr. to place a motion before the meeting with respect to election of directors.

WALTER SCOTT: I move that Warren Buffett, Susan Buffett, Howard Buffett, Malcolm Chase, Charles Munger, and Walter Scott be elected as directors.

WARREN BUFFETT: Is there a second?

VOICE: Seconded.

WARREN BUFFETT: It’s been moved and seconded that Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase III, Charles T. Munger, and Walter Scott Jr. be elected as directors.

Are there any other nominations? Is there any discussion? Motions and nominations are ready to be acted upon.

If there are any shareholders voting in person, they should now mark their ballots and allow the ballots to be delivered to the inspector of elections.

Seeing none, will the proxy holders please also submit to the inspector of elections the ballot voting the proxies in accordance with the instructions they have received.

Mr. Fitzsimmons, when you're ready you may give your report.

ROBERT FITZSIMMONS: My report is ready. The ballot of the proxy holders received through last Friday cast not less than a 1,035,407 votes for each nominee.

That number far exceeds a majority of the number of all shares outstanding and a more precise count cannot change the results of the election.

However, the certification required by Delaware law regarding the precise count of the votes, including the votes 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, Mr. Fitzsimmons.

Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase III, Charles T. Munger, and Walter Scott Jr. have been elected as directors. (Applause)

WARREN BUFFETT: Does anyone have any further business to come before this meeting before we adjourn?

If not, I recognize Mr. Walter Scott Jr. to place a motion before the meeting.

WALTER SCOTT: I move the meeting be adjourned.

WARREN BUFFETT: Second?

VOICES: Seconded.

The motion to adjourn has been made and seconded. We will vote by voice. Is there any discussion? If not, all in favor say aye?

VOICES: Aye

WARREN BUFFETT: Opposed say no, the meeting is adjourned. (Laughter)

It’s democracy in Middle America. (Laughter)

WARREN BUFFETT: Now, I'd like to introduce some of the people that make this place work to you. And if you would hold your applause until the end because there are quite a number of our managers here.

I'm not sure which ones for sure are here, some of them may be out tending the store as well.

But, first of all, from Nebraska Furniture Mart, Louie, Ron, and Irv Blumkin. I'm not sure who's here, but would you stand please, any of the Blumkins that are present?

OK, we've — looks like Irv. I can't quite see it.

From Borsheims, is Susan Jacques here? Susan? There she is. Susan had a record day yesterday. She just — (applause) — Susan became CEO just a few months ago and she’s turning in records already. Keep it up. (Laughter)

And from Central States Indemnity, we have the Kizers. I'm not sure which ones are here, but there's Bill Sr., Bill Jr., John, and Dick.

Kizers, stand up. I think I can see him — John.

Don Wurster from National Indemnity.

Rod Eldred from the Homestate Companies.

Brad Kinstler from Cypress, our worker's comp company.

Ajit Jain, the big ticket writer in the East.

And Mike Goldberg, who runs our real estate finance group and also generally oversees the insurance group. Mike.

Gary Heldman from Fechheimers.

Chuck Huggins from See’s, the candy man.

Stan Lipsey from the Buffalo News.

Chuck’s been with us, incidentally, twenty-odd years. Stan’s been working with me for well over 25 years.

Frank Rooney and Jim Issler from H.H. Brown.

Dave Hillstrom from Precision Steel.

Ralph Schey from Scott Fetzer.

Peter Lunder, who is with our newest acquisition, Dexter Shoe. And Harold Alfond, his partner, couldn’t be with us because his wife is ill.

And finally, the manager that’s been with Charlie and me the longest, Harry Bottle from K&W. Harry, you here? There’s Harry.

Harry saved our bacon back in 19 — what? — 62 or so, when in some mad moment I went into the windmill business. And Harry got me out of it. (Laughter)

That's our group of managers and I appreciate it if you give them a hand. (Applause)

WARREN BUFFETT: I have one piece of good news about next year for you.

In addition to moving to larger quarters, they're going to add nonstop air service from New York, Washington, and Los Angeles here in the next few months, Midwest Express.

So, I hope they do very well with it and I hope that makes it easier for you to get into town.

WARREN BUFFETT: Now, in this — for the next two hours and 15 minutes or so, we'll have a session where we will take questions.

We have seven zones, three on the main floor. We’ll go start over there with zone one and work across.

On the main floor, if you'll raise your hand, the person who is handling the mic will pass it to you and we'll try to not repeat any individual in any one zone till everyone in that zone has had a chance to ask one question. So, after you've been on once, let other people get a shot.

When we move up to the loge, we have one person there and in the case — and then we have three in the balcony, which is essentially full now.

And we would, up there, we would appreciate it if you would you leave your seat and go to the person with the mic. It’ll be a little easier in both the loge and the balcony to handle it that way.

And if you'll go a little ahead of time, that way if there's a line of two or three you can you can line up for questions in both the loge and balcony.

So, whatever you’d care to ask. If you want an optimistic answer you'll, of course, direct your question to Charlie. If you’d like a little more realism you'll come to me and — (laughter).

WARREN BUFFETT: Let's start over in zone 1.

Sometimes we can't see too well from up here, but —

In fact, I can't even see the monitor right now, but do we have one over there?

And if you’ll identify yourself by name and your hometown, we'd appreciate it.

AUDIENCE MEMBER: My name is Michael Mullen (PH) from Omaha.

Would you comment on the use of derivatives? I noticed that Dell computer stock was off 2 1/2 points Friday with the loss of derivatives.

WARREN BUFFETT: Question is about derivatives. We have in this room the author of the best thing you can read on that. There was an article in Fortune about a month ago or so by Carol Loomis on derivatives, and far and away it's the best article that has been written.

We also have some people in the room that do business in derivatives from Salomon.

And it's a very broad subject. It — as we said last year, I think someone asked what might be the big financial story of the '90s and we said we obviously don't know, but that if we had to pick a topic that it could well be derivatives because they lend themselves to the use of unusual amounts of leverage and they're sometimes not completely understood by the people involved.

And any time you combine ignorance and borrowed money — (laughter) — you can get some pretty interesting consequences. (Laughter)

Particularly when the numbers get vague. And you've seen that, of course, recently with the recent Procter and Gamble announcement.

Now, I don't know the details of the P&G derivatives, but I understand, at least from press reports, that what started out as interest rate swaps ended up with P&G writing puts on large quantities of U.S. and, I think, one other country’s bonds. And any time you go from selling soap to writing puts on bonds, you've made a big jump. (Laughter)

And it — the ability to borrow enormous amounts of money combined with a chance to get either very rich or very poor very quickly, has historically been a recipe for trouble at some point.

Derivatives are not going to go away. They serve useful purposes and all that, but I'm just saying that it has that potential. We've seen a little bit of that.

I can't think of anything that we've done that would — can you think of anything we do that approaches derivatives, Charlie? Directly?

CHARLIE MUNGER: No. (Laughter)

WARREN BUFFETT: I may have to cut him off if he talks too long. (Laughter)

Is there anything you would like to add to your already extensive remarks? (Laughter)

CHARLIE MUNGER: No. (Laughter)

WARREN BUFFETT: OK.

WARREN BUFFETT: In that case we’ll go to zone 2. (Laughter)

AUDIENCE MEMBER: My name is Hugh Stevenson (PH). I’m a shareholder from Atlanta.

My question involves the company's investment in the stock of Cap Cities. It's been my understanding in the past that that was regarded as one of the four, quote unquote, "permanent" holdings of the company.

So I was a little bit confused by the disposition of one million shares. Could you clarify that? Was my previous misunderstanding — was my previous understanding incorrect? Or has there been some change or is there a third possibility?

WARREN BUFFETT: Well, we have classified the Washington Post Company and Cap Cities and GEICO and Coke in the category of permanent holdings. And —

But in the case of three of those four, The Washington Post Company, I don't know, maybe seven or eight years ago, GEICO some years back, and now Cap Cities, we have participated in tenders where the company has repurchased shares.

Now the first two, the Post and GEICO, we participated proportionally. That was not feasible, and incidentally, not as attractive taxwise anymore.

The 1968 Tax Act changed the desirability of proportional redemptions of shares, from our standpoint. That point has been missed by a lot of journalists in commenting on it, but it just so happens that the commentary that has been written has been obsolete, in some cases, by six or seven years.

But, we did participate in the Cap Cities tender offer, just as we did in the Post and GEICO.

We still are, by far, the largest shareholder of Cap Cities. We think it's a superbly run operation in a business that looks a little tougher than it did 15 years ago, but looks a little bit better than it did 15 months ago.

Charlie, you have anything?

CHARLIE MUNGER: Uh, no. (Laughter)

WARREN BUFFETT: He’s thinking it over now though before — (Laughter)

WARREN BUFFETT: Zone 3.

AUDIENCE MEMBER: Good morning. My name is Howard Bask (PH) and I’m from Kansas City. And I've got a theoretical value question for you.

If you were to buy a business and you bought it at its intrinsic value, what's the minimum after-tax free cash flow yield you’d need to get?

WARREN BUFFETT: Well, your question is if we were buying all of a business and we're buying at what we thought was intrinsic value, what was the minimum —

AUDIENCE MEMBER: Correct.

WARREN BUFFETT: — present earning power or what the present — the minimum discount rate of future streams?

AUDIENCE MEMBER: No, what's the minimum current after-tax free cash flow yield you’d…

WARREN BUFFETT: We could conceivably buy a business — I don't think we would be likely to — but we could we could conceivably buy a business that had no current after-tax cash flow. But, we would have to think it had a tremendous future.

But we would not find — obviously the current figures, particularly in the kind of businesses we buy, tend to be representative, we think, of what's going to happen in the future.

But that would not necessarily have to be the case. You can argue, for example, in buying stocks, we bought GEICO at a time when it was losing significant money. We didn't expect it to continue to lose significant money.

But if we think the present value of the future earning power is attractive enough compared to the purchase price, we would not be overwhelmed by what the first year’s figure would be.

Charlie, you want to add to that?

CHARLIE MUNGER: Yeah. We don't care what we report in the first year or two of — after buying anything.

AUDIENCE MEMBER OFF MIC: (INAUDIBLE) on average over the years (INAUDIBLE).

WARREN BUFFETT: Well, I would say that in a world of 7 percent long-term bond rates that we would certainly want to think we were discounting future after-tax streams of cash at at least a 10 percent rate.

But that will depend on the certainty we feel about the business. The more certain we feel about a business, the closer we are willing to play it.

We have to feel pretty certain about any business before we're even interested at all. But there are still degrees of certainty, and —

If we thought we were getting a stream of cash over the next 30 years that we felt extremely certain about, we would use a discount rate that would be somewhat less than if it was one where we thought we might get some surprises in five or 10 years — possibility existed. Charlie?

CHARLIE MUNGER: Nothing to add.

WARREN BUFFETT: OK. Zone 4.

AUDIENCE MEMBER: Maurus Spence from Omaha, Nebraska.

You've made comments on several occasions about the intrinsic business value of the insurance operations. And in this year's report you state that the insurance business possesses an intrinsic value that exceeds book value by a large amount, larger, in fact, than is the case at any Berkshire — other Berkshire business.

I was wondering if you would explain in greater detail why you believe that to be true.

WARREN BUFFETT: Well, I — it's very hard to quantify, as we've said many times in the report. But, I think that it's clear that even taking fairly pessimistic assumptions, that the excess of intrinsic value over carrying value is higher, by some margin, for the insurance business.

And I think that the table in the report that shows you what our cost to float has been over the years, and also what the trend of float has been over the years, would, unless you thought that table had no validity for the future, I think that that table would tend to the point you in the direction of saying the insurance business does have a very significant excess of intrinsic value over carrying value.

Very hard number to put something on. But — and you don't want to extrapolate that table out. But I think that table shows that we started with maybe 20 million of float and that we're up to something close to three billion of float. And that that float has come to us at a cost that's extremely attractive, on average, over the years.

And just to pick an example, last year, when we actually had an underwriting profit, the value of that float was something over $200 million. And that figure was a lot bigger than it was 10 years ago or 20 years ago.

So that's — that is a stream — last year was unusually favorable, but that is a — that's a very significant stream of earnings, and it's one we feel we have reasonably good prospects in. So we feel very good about the insurance business.

WARREN BUFFETT: OK. Zone 5?

AUDIENCE MEMBER: My name is Cy Rademacher (PH) from Omaha.

Is there any point at which your stock would rise to the point where you might split the stock?

WARREN BUFFETT: Surprise, surprise. (Laughter)

I think I'll let Charlie answer that this year. (Laughs)

He's so popular with the shareholders that I can afford to let him take the tough questions. (Laughter)

CHARLIE MUNGER: I think the answer is no. (Laughter and applause)

I think the idea of carving ownerships in an enterprise into little, tiny $20 pieces is almost insane. And it's quite inefficient to service a $20 account and I don't see why there shouldn't be a minimum as a condition of joining some enterprise. Certainly we’d all feel that way if we were organizing a private enterprise.

WARREN BUFFETT: Yeah, we would not carve it up in $20 units.

We find it very — it's interesting because every company finds a way to fill up its common shareholder list. And you can start with the As and work through to the Zs and you’ll — every company in the New York Stock Exchange, one way or another, has attracted some constituency of shareholders.

And frankly, we can't imagine a better constituency than is in this room. I mean, we have — we don't think we can improve on this group, and we followed certain policies that we think attracted certain types of shareholders and actually pushed away others.

And that is part of our eugenics program here at Berkshire. (Laughter)

CHARLIE MUNGER: Yeah, just look around this room and as you mingle with one another. This is a very outstanding group of people. And why would anybody want a different kind of a group?

WARREN BUFFETT: Yeah, if we cause — if we follow some policies that cause a whole bunch of people to buy Berkshire for the wrong reason, the only way they can buy it is to replace somebody in this room, or in this larger metaphorical room, of shareholders that we have.

So someone in one of these seats gets up and somebody else walks in. The question is do we have a better audience?

I don't think so. So I think that — I think Charlie said it very well.

WARREN BUFFETT: Zone 6.

AUDIENCE MEMBER: Mr. Buffett, my name is Rob Na (PH) and I'm from Omaha, Nebraska.

My question is, given the recent announcement of Midwest Express and their nonstop jet service between East and West Coasts, will this cut down on your use of "The Indefensible?" (Laughter)

And will you use more commercial air travel?

WARREN BUFFETT: This is a question planted by Charlie. (Laughter)

I think you should know, I take it to the drugstore at the moment, and I — (Laughter)

No, it’s just a question when I start sleeping in it at the hangar.

Nothing will cut back on "The Indefensible." It’s being painted right now, but I told them to make it last a long time.

Charlie, though, was pointing out the merits of other kinds of transportation last night at the meeting of our managers. He might want to repeat those here.

CHARLIE MUNGER: Well, I just pointed out that the back of the plane arrived at the same time as the front of the plane, invariably. (Laughter)

WARREN BUFFETT: He's even more of an authority on buses, incidentally, if anybody has his — (Laughter)

WARREN BUFFETT: Zone 7.

AUDIENCE MEMBER: Mr. Buffett, my name's Allan Maxwell from Omaha. I've got two questions.

What is your next goal in life now that you're the richest man in the country?

WARREN BUFFETT: That's easy. It’s to be the oldest man in the country. (Laughter and applause)

AUDIENCE MEMBER: Secondly, you talk about good management with corporations and that you try and buy companies with good management.

I feel that I have about as much chance of meeting good managers, other than yourself, as I do bringing Richard Nixon back to life.

How do I, as an average investor, find out what good management is?

WARREN BUFFETT: Well, I think you judge management by two yardsticks.

One is how well they run the business and I think you can learn a lot about that by reading about both what they've accomplished and what their competitors have accomplished, and seeing how they have allocated capital over time.

You have to have some understanding of the hand they were dealt when they themselves got a chance to play the hand.

But, if you understand something about the business they’re in — and you can’t understand it in every business, but you can find industries or companies where you can understand it — then you simply want to look at how well they have been doing in playing the hand, essentially, that's been dealt with them.

And then the second thing you want to figure out is how well that they treat their owners. And I think you can get a handle on that, oftentimes. A lot of times you can't. I mean it — they’re many companies that obviously fall in — somewhere — in that 20th to 80th percentile and it's a little hard to pick out where they do fall.

But, I think you can usually figure out — I mean, it's not hard to figure out that, say, Bill Gates, or Tom Murphy, or Don Keough, or people like that, are really outstanding managers. And it's not hard to figure out who they're working for.

And I can give you some cases on the other end of the spectrum, too.

It's interesting how often the ones that, in my view, are the poor managers also turn out to be the ones that really don't think that much about the shareholders, too. The two often go hand in hand.

But, I think reading of reports — reading of competitors’ reports — I think you'll get a fix on that in some cases. You don't have to — you know, you don't have to make a hundred correct judgments in this business or 50 correct judgments. You only have to make a few. And that's all we try to do.

And, generally speaking, the conclusions I've come to about managers have really come about the same way you can make yours. I mean they come about by reading reports rather than any intimate personal knowledge or — and knowing them personally at all.

So it — you know, read the proxy statements, see what they think of — see how they treat themselves versus how they treat the shareholders, look at what they have accomplished, considering what the hand was that they were dealt when they took over compared to what is going on in the industry.

And I think you can figure it out sometimes. You don't have to figure out very often.

Charlie?

CHARLIE MUNGER: Nothing to add.

WARREN BUFFETT: Ok, we're back to zone 1.

AUDIENCE MEMBER: Hi there. My name is Lee. I'm from Palo Alto, California.

In meeting Ajit Jain, I've been very impressed over the years. And I think I even met his parents once they came from India.

Please comment on your deepest impressions of his personality and managerial skills, and also how you go about exactly keeping somebody who has such fine skills within the fold. He might go to Walt Disney someday and, you know, pull down 200 million.

WARREN BUFFETT: Well, if he gets offered 200 million — (laughs) — we may not compete too vigorously at that level. (Laughter)

We basically try to run a business so that — Charlie and I have two jobs. We have to identify and keep good managers interested after we’ve figured out who they are.

And that often is a little different here, because I would say a majority of our managers are financially independent, so that they don't go to work because they are worried about putting kids through school or putting food on the table. So they have to have some reason to go to work aside from that.

They have to be treated fairly in terms of compensation, but they also have to figure it is better than playing golf every day or whatever it may be.

And, so that's one of the jobs we have and we basically attack that the same way — we look at what they do the same way we look at what we do.

We've got a wonderful group of shareholders. Before I ran this, I had a partnership. I had a great group of partners. And essentially, I like to be left alone to do what I did. I like to be judged on the scorecard at the end of the year rather than on every stroke, and not second guessed in a way that was inappropriate.

I like to have people who understood the environment in which I was operating.

And so the important thing we do with managers, generally, is to find the .400 hitters and then not tell them how to swing, as I put in the report.

The second thing we do is allocate capital. And aside from that, we play bridge. (Laughter)

Pretty much what happens at Berkshire.

So, with any of the managers you might name here, we try to make it interesting and fun for them to run their business. We try to have a compensation arrangement that's appropriate for the kind of business they’re in.

We have no company-wide compensation plan. We wouldn't dream of having some compensation expert or consultant come in and screw it up. (Laughter)

We try to — some businesses require a lot of capital that we're in, some require no capital. Some are easy businesses where good profit margins are a cinch to come by, but we're really paying for the extra beyond that. Some are very tough businesses to make money in.

And it would be crazy to have some huge framework that we try to place everybody in that — where one size would fit all.

People, generally, are compensated relating in some manner that relates to how their business does as opposed to — there's no reason to pay anybody based on how Berkshire does, because no one has responsibility for Berkshire except for Charlie and me.

And we try to make them responsible for their own units, compensated based on how those units do.

We try to understand the businesses they’re in, so we know what the difference between a good performance and a bad performance —

And that's about — that's how we work with people.

We've had terrific luck over the years in retaining the managers that we wanted to retain. I think, largely, it's because — particularly if they sell us a business — to a great extent, the next day they're running it just as they were the day before. And they're having as much fun running their business as I am running Berkshire.

Charlie?

CHARLIE MUNGER: Well, I've got nothing to add, but I think that concept of treating the other fellow the way you'd like to be treated if the roles were reversed — it's so simple, when you stop to think about it, but —

It's a rare evening when Ajit and Warren aren't talking once on the phone. It's more than a business relationship, at least it seems that way to me.

WARREN BUFFETT: Yeah, well, it is. It will stay that way, too.

CHARLIE MUNGER: And by the way, we like our businesses — our relationships — to be more than a business relationship

WARREN BUFFETT: Charlie and I are very — we basically — it's a luxury but it's a luxury that we should try to nurture — we get to work with people we like. And it makes life a lot simpler.

It probably helps in that goal of being the oldest living American, too. (Laughter)

CHARLIE MUNGER: Yeah, and we tend to like people we admire. (Laughter)

WARREN BUFFETT: Yeah, who do we like that we don't admire, Charlie? (Laughter)

Start naming names. These people have names. (Laughter)

WARREN BUFFETT: Zone 2.

AUDIENCE MEMBER: My name is Peter Bevelin from Sweden.

How do you perceive Guinness long-term, economics growth-wise?

WARREN BUFFETT: Fitz — would you repeat that please, Fitz. What was it? What firm growth-wise?

VOICE: Guinness.

AUDIENCE MEMBER: Guinness.

WARREN BUFFETT: Oh, Guinness.

I'm not as much of an expert on Guinness' products as Charlie is.

CHARLIE MUNGER: We approved that. (Laughter)

WARREN BUFFETT: You didn't hear him. He said, "I approved that."

I made the decision to buy Guinness and Guinness has — it's down somewhat from — actually, the price in pounds is about the same but the pound is at about $1.46 or -7 against an average of $1.80-something, so we've had a significant exchange loss on that.

The — Guinness' — despite the name — you know, the main product, of course, is scotch. And that's where most of the money is made, although they make good money in brewing.

But, distilling is the main business. And, you know, the usage of scotch, particularly in this country, the trends have not been strong at all, but that was true when we bought it, too.

There are some countries around the world where it's grown and there are certain countries where it's a huge prestige item.

I mean, in certain parts of the Far East, the more you pay for scotch, the better you think people think of you. Which I don't understand completely, but I hope it continues. (Laughter)

But — the scotch — worldwide scotch consumption has not been anything to write home about.

Guinness makes a lot of money in the business. But, I would not — I don't see anything in the — in published history that would lead you to believe that the growth prospects, in terms of physical volume, are high for scotch.

The — Guinness itself, the beer, actually has shown pretty good growth rates in some countries. Actually, from a very tiny base in the U.S. as well.

But, they will have to do well in distilling or — I mean that will govern the outcome of Guinness.

I think Guinness is well run and it's a very important company in that business. But, I wouldn't count on a lot of physical growth.

Charlie, what — any consumer insights?

CHARLIE MUNGER: No. (Laughter)

WARREN BUFFETT: Zone 3.

AUDIENCE MEMBER: Mr. Buffett, my name is Arthur Coleus (PH) from Canton, Massachusetts.

And I'd like to know how you’d respond to the question that my associates ask me when they say that Berkshire Hathaway has been a good investment up to now, but what happens to your investment if, God forbid, something happens to Mr. Warren Buffett?

WARREN BUFFETT: Well, I'm glad you didn't say Charlie Munger. (Laughter)

No, there — Berkshire will do just fine. We've got a wonderful group of businesses.

I've told you the two things I do in life. And, in terms of the managers we have, you have to come in and really want to mess it up, I would think. And we don't have anybody like that, in terms of succession plans at Berkshire.

And then there's the question of allocation of capital. And, you could do worse than just adding it to some of the positions that we already had.

The ownership is — if I die tonight, the ownership structure does not change. So, you've the same large block of stock that has every interest in having good successor management as I would.

I mean, there’s no — there would be no greater interest. And it is not a complicated business. I mean, you ought to worry more about, if you own Microsoft, about Bill Gates, I think, or something of the sort.

But, this place is, you know, we've got a group down here that are running these. You didn’t see me out at Borsheims selling any jewelry the other day. I mean, that's somebody else's job. So, I — it is not — it's not very complicated.

Incidentally, I think I'm in pretty good health. I mean this stuff (Coca-Cola) will do wonders for you if you'll just try it. (Laughter)

Charlie, do you want to add anything as the —?

CHARLIE MUNGER: Yeah. I think the prospects of Berkshire would be diminished — obviously diminished — if Warren were to drop off tomorrow morning. But it would still be one hell of a company and I think it would still do quite well.

I used to do legal work, when I was young, for Charlie Skouras. I heard him once say, my business, which was movie theaters like this one, was off 25 percent last year, and last year was off 25 percent from the year before, and that was off 25 percent from the year before, and then he pounded the table and he’d say, "But it’s still one hell of a business."

WARREN BUFFETT: It’s not a formula we want to test, incidentally.

CHARLIE MUNGER: No, no. (Laughter)

WARREN BUFFETT: It is one hell of a business that we've got here. I mean — and if you saw what happened at Berkshire headquarters, you would not worry as much. There's very little going on there that contributes to things. (Laughter)

We’re, right now, at our peak of activity. This is it.

WARREN BUFFETT: Zone 4.

AUDIENCE MEMBER: First of all, my name is Al Martin (PH) and my wife Terry (PH) is here with me. And I appreciate the invitation to attend this meeting.

I was a little bit dubious and quite excited at that game Saturday night. I didn't know which side was going to throw the game to the other one. But I did find out at the end.

The first question, actually, was somewhat answered, but not fully. Has the board considered a reverse split? My experience has been that —

WARREN BUFFETT: Would you like to make that a motion? There was a motion for a reserve — reverse split. (Laughter)

AUDIENCE MEMBER: I would say a two-for-one because if it were three or four-for-one I might end up with no shares. Or fractional shares.

But, anyway, my experience has been that all of the stocks that have split have gone down in the next two or three months or the next two or three years, including one which you are drinking, which is a flat Coke.

Also, I have observed Merck over the last several years to be hitting a low, which split three-for-one.

So, I think that, you know, the reasons for splitting stocks are to make it affordable. I found that every stock I ever bought was never affordable. I found the reason I bought it was because I couldn't afford not to buy it.

So that's a different philosophy, I guess, as somewhat shared indirectly with the boards running the stock.

The second question, which is — has to do with —

WARREN BUFFETT: Hope it’s as easy as the first question. (Laughter)

AUDIENCE MEMBER: Well, I didn't want to wait for an answer of the first question for that reason, because it could be complicated and confusing and so forth.

AUDIENCE MEMBER: The second question has to do with, could the board consider looking into a commodity broker, or a lawyer, or both, that could take action similar to Hillary Clinton’s?

I think, you know, making your net worth go up by a factor of five overnight is more than enticing. Some of us might even want to wait for ten months to get a 100-to-1 return on the money.

WARREN BUFFETT: Well, I want to say — I want to say to you, when I saw that 530 percent in one day, it — Charlie has never done that for us.

I mean — (laughter) — it really caused me to reassess succession plans at Berkshire. (Laughter)

And Hillary may be free in a few years. (Laughter and applause)

I hope you're applauding over her coming to Berkshire, not — but I’ll leave that up — (Laughter)

OK, that was their second question. (Laughs)

AUDIENCE MEMBER: That was my second question.

Of course, in my experience, it's been that most of us have thought through this situation and I guess it's pretty speculative, but I found out that the rules and laws that are made for trading are interpreted rather than enforced. And I think that applied to this particular case, so let's go on to the third question. (Laughter)

WARREN BUFFETT: Alright. They're getting easier. (Laughter)

AUDIENCE MEMBER: This one is real easy. My wife was a collector of Blue Chip stamps for many, many years. And she brought some stamps with her. What should she do with them?

WARREN BUFFETT: Well, that — we can give you a definitive answer to that. Charlie and I entered the trading stamp business to apply our wizardry to it in what, 1969 or so, Charlie?

CHARLIE MUNGER: Yes.

WARREN BUFFETT: We were doing what then, about 110 million?

CHARLIE MUNGER: No, it went up to 120.

WARREN BUFFETT: OK. And then we arrived on the scene and we're going to do what, about 400,000 this year?

CHARLIE MUNGER: Yes.

WARREN BUFFETT: Yeah. (Laughter)

That shows you what can be done when your management gets active. (Laughter)

CHARLIE MUNGER: We have presided over a decline of 99 1/2 percent. (Laughter)

WARREN BUFFETT: Yeah. Yeah. But, we're waiting for a bounce — (Laughter)

I would say this. The trading stamp business, as those of you who have followed all know, it only works because of the float.

I mean, there — a very, very high percentage of the stamps in the '60s were cashed in. We have some years that we've gone up to 99 percent, I believe — we sampled the returns — because they were given out in such quantity.

But, our advice to anyone who has stamps is to save them because they're going to be collector's items, and besides if you bring them to us we have to give you merchandise for them.

Tell her to keep them. They'll do nothing but gain in value over years. (Laughter)

WARREN BUFFETT: Going back, incidentally, to your point on the split.

I think most people think that the stock would sell for more money split.

A, we wouldn’t necessarily think that was advisable in the first place.

But we — in the second place, we don't think it would necessarily be true over a period of time.

We think our stock is more likely to be rationally priced over time following the present policies than if we were to split it in some major way.

And we don't think the average price would necessarily be higher. We think that the volatility would probably be somewhat greater, and we see no way that volatility helps our shareholders as a group.

WARREN BUFFETT: Zone 5.

AUDIENCE MEMBER: I am Peg Gallagher from Omaha.

Mr. Buffett, are you interested in influencing Mr. Greenspan at the Fed to stop raising interest rates?

WARREN BUFFETT: Well, I wouldn’t have any influence with him. He was on the board of Cap Cities some years ago and I know him a bit. But I don't think anyone would have any influence with Mr. Greenspan on that point.

But, I generally think that his actions have been quite sound during his period as Fed chief.

I mean, it's part of the job of the Fed, as Mr. Martin said many years ago, was to take away the punchbowl at the party, occasionally. And that's a very difficult, difficult policy to quantify working with markets day-by-day.

And, of course, it's always been the job of the Fed, basically, to lean against the wind. Which, of course, means if the wind changes, you fall flat on your face. But that's another question.

But the — I don't — I think what he has done is probably been somewhat appropriate. I think he's probably been surprised, a little bit, as to what has happened with long-term rates as he's nudged up short-term rates.

I think he was hoping that — this is just a guess on my part — that action, sort of early in the cycle on the short-term rate front, would — might make people feel more confident about the longer-term rates and therefore that the yield curve would flatten some. I don't know that. And, he may have been a little surprised on that.

But it's not an easy job he has. So, I would not second guess him myself.

Charlie, how do you feel about him?

CHARLIE MUNGER: Fine. (Laughter)

WARREN BUFFETT: Greenspan is safe. (Laughter)

WARREN BUFFETT: Zone 6.

MILLER: Mr. Buffett, I'm Lee Miller (PH) from St Louis.

There was an article in the April 18th Barron’s that attempted to calculate the value behind each Berkshire Hathaway share.

I'm sure you have some views on that and I’d be very interested in your perspective on that issue.

WARREN BUFFETT: Yeah, there was an article about a week or so ago in Barron's. The same fellow wrote an article about four years ago reaching pretty much the same conclusion, and I hope he hasn't been short in between, but the — (Laughter)

I would say this. It is not the way I would calculate the intrinsic value of Berkshire.

But everyone in securities markets make choices on that. Every day somebody sells a few shares of Berkshire and someone sell — buys — and, you know, they are probably coming to differing opinions about valuation.

I would say that I found it strange that apparently he forgot we were in the insurance business, but that — that's not — (Applause).

It really doesn't make any difference. I mean, what — we don't pay any attention to what people say about Coca-Cola stock or Gillette stock or any of those things.

I mean, on any given day, two million shares of Coca-Cola may trade. That's a lot of people selling, a lot of people buying. If you talk to one person, you’d hear one thing, and you’d talk to another — you really should not make decisions in securities based on what other people think.

If you're doing that, you should think about doing something else, because it's —

A public opinion poll will just — it will not get you rich on Wall Street. So you really want to stick with businesses that you feel you can somehow evaluate yourself.

And, I don't think — I mean Charlie and I, we don't read anything about what business is going to be — the economy is going to do, or the market's going to do, or what anybody —

Anytime I see some article that says, you know, these analysts say this or that about some business, it just — it doesn't mean anything to us.

You cannot get rich with a weather vane.

WARREN BUFFETT: Zone 7.

AUDIENCE MEMBER: I’m Edward Barr from Lexington, Kentucky, and I'd like to ask, given the amount of capital in the banking industry, do you think that more banks should be buying back significant amounts of their stock, like SunTrust, versus just the token amounts that they're buying back or just the authorized amounts?

And then also, related question in banking. Are they — are banks too focused on goodwill amortization when declining to buy other banks for cash, thereby using purchase accounting versus the normal practice in the industry of pooling accounting even when the stock they issue may be depressed or undervalued?

WARREN BUFFETT: Well, the first question about the capital in the industry — that — you really have to look at that on a bank-by-bank basis and there is a lot more repurchasing of shares by banks taking place.

You mentioned SunTrust, but National City is — they bought it back, I think, 5 percent of their — National City of Cleveland — bought back 5 percent of their stock in the first quarter.

There's much more repurchasing going on, and that's simply a judgment call by management that — as to the level of capital they need going forward, and what level of capital enables them to earn the return on equity that they think appropriate and whether they — what they feel like paying for their own shares.

So, I think you have to look at that on case-by-case.

We certainly like it, if we were to own a bank, we would — or own shares in a bank — we would like the idea of the bank repurchasing its stock at a price that we thought was attractive. We would think that they probably knew more about their own bank than some other bank they were going to buy and that if the numbers are right, it's an attractive way to use capital.

WARREN BUFFETT: Your second question about goodwill amortization and purchase accounting versus pooling: we care not — at Berkshire, it absolutely makes no difference to us what accounting treatment we get on something. We are interested in the economics of a transaction.

Some banks — some businesses generally, most businesses perhaps — prefer pooling because they don't like to take a goodwill amortization charge.

We think our shareholders are smart enough, particularly if we make it clear to them — the accounting consequences — we think they're smart enough to look through to the economic reality of what Berkshire's businesses are all about.

And I think that some managements sell short their own ownership group by doing various kinds of financial acrobatics in order to have the charges come in a certain way rather than, as you point out, often they might be better off buying for cash rather than using their own stock as currency, but they may prefer to use their own stock because they avoid goodwill charges.

We've written a few things on goodwill in the past and past annual reports that might get to that subject.

We don't care what accounting — we sort of rewrite the accounting for any business that we're looking at, because in our heads we want to have, in effect, a standardized way of looking at businesses.

And if one company goes through pooling transactions and another goes through purchase transactions, we're going to recast them in our own minds so that there is comparability.

Charlie?

CHARLIE MUNGER: Yeah, the published accounting results are in accordance with standard convention and they’re a place to start economic analysis. The figures are frequently quite silly on a functional basis. I'm not criticizing accounting conventions except for some. (Laughter)

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: But, I think it's just a place to start thinking about economic reality.

By their nature, they can't tie perfectly — they can't even tie very well — to economic reality.

WARREN BUFFETT: We regard it is a negative when we find a management that's preoccupied with accounting considerations. But, we find it so frequent that we can't afford to use it as a total exclusionary factor.

It really surprises me how many managements focus on accounting, and the time they spend on it, the — it's really unproductive.

If you find a management that doesn't care about the accounting but does explain to you in clear terms what's going on, I think you should regard that as a plus in owning a security.

WARREN BUFFETT: Zone 1.

AUDIENCE MEMBER: Mr. Buffett, my name is Bill Ackman. I'm from New York City. And my question relates to the appeal of Salomon Brothers as an investment.

You talked earlier about leverage and the dangers of leverage. Salomon is a business which is levered 30-to-1, which has very narrow margins, and earns a relatively modest return on equity, in light of the amount of leverage that they use. What is the appeal of the business to you?

WARREN BUFFETT: We have here today the chief executive of Salomon, Inc., the parent company, and also the chief executive of Salomon Brothers, the investment banking arm.

And, I would say one of the things we — Charlie and I — feel extraordinarily good about are the two fellows that are running that operation. They did an exceptional job under extraordinarily difficult circumstances, as did John Macfarlane, who's also here today.

The three of them — I mentioned four people in the annual report — and Salomon wouldn't be here today without those three. And it wouldn't be the company in the future that it's going to be without them. They did an absolutely fabulous job.

It's the sort of business that, as you point out, uses a lot of leverage. It doesn't — in one way it doesn't use as much as it looks like and in another way it uses even more than it looks like.

But — it — the test will be: A, whether they control that business in a way that that leverage does not prove dangerous, and secondly, what kind of returns on equity they earn while using it.

You certainly should expect to earn somewhat higher returns on equity when you are necessarily exposed to a small amount of systemic risk and significant amounts of borrowed money, than you would in a business that's an extremely plain vanilla business.

But, I don't know whether you've met Bob and Deryck, but, I think you'd feel better about having a leverage in their hands than about any other hand you can imagine.

Charlie?

CHARLIE MUNGER: Why don't we have those three gentlemen stand up?

WARREN BUFFETT: Yeah, you ought to give them a hand.

CHARLIE MUNGER: They really have done a job for Berkshire in this last year.

WARREN BUFFETT: Yeah, I’ll lead the applause for them. Where are they? There they are. (Applause).

I mentioned this before, but it's worth mentioning again. Deryck took on the job of being the operating head of Salomon Brothers on what, August 18th, 1991.

He didn't know what — he couldn't know what he was getting into, exactly. He — two months later or three months later, we’d never had a conversation about compensation. He did not ask me for Berkshire, or my, guarantee for indemnification because he was walking in not knowing legal problems. We didn't know what we would finally uncover.

And he worked incredible hours to keep that place together, which was not easy.

Bob Denham, I called — I guess on the 23rd or so, 20th. I called him on a Friday. I got home on a Saturday, the 24th of August.

He was living a nice pleasant peaceful life in California. And had a first class law firm, a good group of clients, wife had a good job there.

And I told him I was in a mess and there wasn't any second choice and three days later he was back in New York and living in a small apartment in Battery City and handling the general counsel's job at Salomon.

They found John Macfarlane on that Sunday, on the 18th. I think he was running a triathlon or something.

Not a practice that Charlie and I follow, but, ah — (Laughter)

And he was yanked from that and came down, and I think John was over in New Jersey, but he holed up in the Downtown Athletic Club. And it was his job to keep funding what was then $150 billion balance sheet during a period when people right and left were canceling.

It’s not because we weren't a good credit, but because they just didn't want to have anything to do with us for a while.

And the World Bank and the State of Texas pension fund and CalPERS, all these people were shutting off funding at a time — and funding in a business is — gentleman just indicated — is the lifeblood of an enterprise like Salomon.

And so those three deserve an enormous hand by — really by the Salomon shareholders — but by this group in turn because we have an important investment. So I thank them publicly. (Applause)

WARREN BUFFETT: Zone 2.

AUDIENCE MEMBER: I’m Kelly Ranson from San Antonio, Texas.

And I wondered if you could comment on the Mutual Savings and Loan. There was just a footnote that the deposits have been assumed by a federal savings bank.

And also, what about the annual report for Wesco Financial that I know it used to be in the annual report for Berkshire. Just wondered if you could comment on that, please.

WARREN BUFFETT: The question is about — we — our 80 percent-owned subsidiary Wesco Financial sold its ownership in Mutual Savings and Loan of Pasadena last year. I'll let Charlie comment on that.

And then the second question is about the Wesco report, which is available to any Berkshire shareholder simply by writing Wesco. But, we found that the stapling problems and other things made it a little difficult to keep adding that every year to the report. So, now we just — we make it available to anyone who would, at Berkshire, who would like to have it.

But Charlie, want to comment on the sale of Mutual?

CHARLIE MUNGER: Yes. The savings and loan business became very much more heavily regulated after the huge nationwide collection of scandal and insolvency and so on.

And meanwhile, we had a very small savings and loan association. And the combination of the new regulation, and the fact that it was a very small part of our operation, made us decide that we were better off without it.

That does happen from time to time in Berkshire. We do exit once in a while.

And, by the way, we would reserve the right to change our mind. I always liked Lord Keynes when he said that he got new facts or new insights, why he changed his mind and then he'd say, what do you do? So we changed our mind.

WARREN BUFFETT: They start — they asked our directors at Mutual to start going to school on Saturday, didn't they, Charlie? Or something? I think that helped change our mind about Mutual.

CHARLIE MUNGER: There's a time to vote with your feet. (Laughter)

WARREN BUFFETT: And even your wallet.

WARREN BUFFETT: Zone 3.

AUDIENCE MEMBER: (Inaudible) Chicago. Can you speak to some of the economic characteristics of the shoe industry that allow the business to be profitable and, in your view, attractive?

WARREN BUFFETT: I didn’t hear that. Did you hear that, Charlie?

CHARLIE MUNGER: He wanted you to comment on the merits of the shoe industry.

WARREN BUFFETT: Well, I think our feelings for the shoe industry are very clear from what’s been happening the last few years.

We think it's a great business to be in as long as you're in with Frank Rooney and Jim Issler and Peter Lunder and Harold Alfond. Otherwise, it hasn't been too good.

The — we have a couple of extraordinary shoe operations, but they're not extraordinary because we get our leather from different steers or anything of the sort.

It's — we have two companies, really three now that Lowell's been brought in, too, but that have truly extraordinary records. I think those same managements would have been enormous successes in any business they'd gone into.

But, they have gone into the — they are in the shoe business and the companies earn unusual returns on equity. They earn unusual returns on sale. They've got terrific trade reputations.

And I think that to the extent we can find ways to expand in the shoe business while employing those managements, we’ll be very excited about doing so.

It isn't because we think that the shoe industry is any cinch, you know, per se, or anything of the sort. But we've got a lot of talent employed in the shoe business and whenever we've got talent we like to try and figure out a way to give them as big a domain as we can.

And it's not inconceivable that we would expand the shoe business, perhaps even significantly over time.

WARREN BUFFETT: Zone 4.

AUDIENCE MEMBER: Yeah, thanks Mr. Buffett. My name is Stewart Hartman from Sioux City. After the brevity of the last question from section 4, I'll try to be extremely brief.

The — given the scrutiny that the tobacco business is going under right now, number one, what do you see as the business prospects for those huge cash cows? And, at any point, would that be attractive to you given their liability?

WARREN BUFFETT: The question is about the future of the tobacco business?

I don't — I probably know no more about that then you do because it's fraught with questions that relate to societal attitudes and you can form an opinion on that just as well as I could.

But, I would not like to have a significant percentage of my net worth in the tobacco business myself, but —

They may have better futures than I envision. I don't really think that I have special insights on that.

Charlie, you —?

CHARLIE MUNGER: No.

WARREN BUFFETT: You have to come to a conclusion as to how society is going to want to treat — and the present administration for that matter. And the economics of the business may be fine, but that doesn't mean it has a great future.

WARREN BUFFETT: Zone 5.

AUDIENCE MEMBER: I'm Harriet Morton from Seattle, Washington.

I'm wondering, when you are considering an acquisition, how you look at the usefulness of the product?

WARREN BUFFETT: In looking at any business?

AUDIENCE MEMBER: Yes.

WARREN BUFFETT: Yeah. Well, obviously we look at what the market says is the utility. And the market has voted very heavily for Dexter Shoe, just to be an example.

I don't know many how many pairs of shoes they were turning out back in 1958 or thereabouts, but year after year, people have essentially voted for the utility of that product.

There are 750 million or so 8-ounce servings of one product or another from the Coca-Cola Company consumed every day around the world. And there are those of us who think the utility is very high. I can't make it through the day without a few. But there are other people that might rate it differently.

But essentially, people are going to get thirsty and if this is the way they take care of their thirst better than — and they prefer that to other forms — then I would rate the utility high of the product. But, I think it's hard to argue with the market on that.

I mean, people — some people may think that, you know, listening to a rock concert is not something of high utility. Other people might think it's terrific.

And so, we would judge that — I don't think we would come to an independent decision that there was some great utility residing in some product that had been available to the public for a long time, but that the public and not endorsed in any way.

Charlie?

CHARLIE MUNGER: Well, I think that's right. But, that's averaged out.

We’re in a bunch of high-utility products. I mean, nurses’ shoes, work shoes, casual shoes. We don't have a lot of, what, Italian pumps? (Laughter)

WARREN BUFFETT: Don't rule it out, Charlie. We may be here next year defending it. (Laughter)

CHARLIE MUNGER: Yeah, right, well.

No, I’m just saying, if you judge the existing portfolio as indicating what the future's likely to be like, why —

WARREN BUFFETT: Well, certainly a lot of essentials were sold out of Borsheims yesterday.

CHARLIE MUNGER: Yes. (Laughter and applause)

WARREN BUFFETT: I hear my family clapping.

WARREN BUFFETT: Zone 6.

VOICE: We have no question up here.

WARREN BUFFETT: OK, zone 7.

AUDIENCE MEMBER: Good morning, Mr. Berkshire, uh, Buffett. (Laughter)

WARREN BUFFETT: I have a niece here who has a son named Berkshire so it —

AUDIENCE MEMBER: I'm Chris Blunt (PH) from Omaha.

My first question is, in years past, we've had samples of various products. When are we going to have some Guinness?

WARREN BUFFETT: Some what now?

AUDIENCE MEMBER: Guinness samples?

WARREN BUFFETT: (Laughs)

AUDIENCE MEMBER: And my second question is, in light of the multiple disasters that have taken place in LA, has that had any impact on the cats for Berkshire?

WARREN BUFFETT: On our super-cat business?

AUDIENCE MEMBER: Yes.

WARREN BUFFETT: The LA earthquake, which is originally — I believe the first estimate of insured damage was a billion-five, which struck us as kind of ludicrous, but has now escalated.

The last official estimate, the one we use that’s a trigger in our policies, I think is either 4.5 billion or 4.8 billion. But it's going to be higher than that.

Our losses are fairly minor. If it gets to eight billion of insured damage, that would trigger another policy or two. But, I would say that the LA quake — which did considerably more damage, I think, than people would have anticipated from a 6.7 for various reasons having to do with how quakes operate — that quake is not going to turn out to be of any real — it's not the kind of super-cat that a 15 or $20 billion hurricane which hit Florida or Long Island or New England would be.

That’s the kind of — we could lose — or we could pay out — 6 or $700 million in sort of a worst case super-cat. Now our total premiums this year might be, say, 250 million or something in that area.

So one super-cat in the wrong place would produce — and there could be more than one — could produce, we’ll say, a $400 million or thereabouts underwriting loss from that business.

The LA quake is peanuts on that scale, but it wouldn’t have taken a whole lot more in terms of numbers on the Richter scale, if it happened to have an epicenter where it did, and be of the type that it was, relatively shallow, that we could have had that sort of thing happen.

I think that the insurance industry has vastly underestimated — maybe not now, but up till a few years ago — the full potential of what a super-cat could do. But Hurricane Andrew and the LA quake may have been something of a wake-up call.

They were far from a worst-case situation. A really big Type Five hurricane on Long Island would end up leaving a lot of very major insurance companies in significant trouble.

We define our losses — essentially, 700 million sounds like a lot of money. It is a lot of money. But, there are limits on our policies. That is not true of people that are just writing the basic homeowners or business. Those losses could go off the chart.

There were certain companies in the LA quake that thought they had a — what they call a "probable maximum loss" for California quakes. And the LA quake, which was far from the worst case you can imagine, turned out to far exceed those probable maximum losses.

So, I think the industry has had, and may still have, its head in the sand a little bit, in terms of what can happen, either in terms of a quake in California or, more probably, in terms of a hurricane along the East Coast.

So far this year we're in reasonable shape, but that doesn't mean much because, by far, the larger exposure is in hurricanes and essentially 50 percent of the hurricanes hit in September. And about — I think it's about 15 percent would be in August. Close to 15 percent in October. So you have 80 percent, roughly, in those three months and there's a little tail on both sides.

But that's when you find out whether you've had a good or bad year in the super-cat business, basically.

It's a business we like at the right rates because there are very few people who can afford to write it at the level that the underlying company, the reinsured companies, need it. And we're in a position, if the rates are right, to do significant business.

Charlie?

CHARLIE MUNGER: Nothing to add.

WARREN BUFFETT: Zone 1,

AUDIENCE MEMBER: Clayton Riley (PH) from Jacksonville, Florida.

This is a little different than all the other questions, but what were the three best books you read last year outside of the investment field? Why don’t — even one will do.

WARREN BUFFETT: I'll give you — I’ll tout a book first that I've read but that isn't available yet. But it will be in September.

The woman who wrote it, I believe, is in the audience and it's Ben Graham’s biography, which will be available in September, by Janet Lowe. And I've read it and I think those of you who are interested in investments, for sure, will enjoy it. She’s done a good job of capturing Ben.

One of the books I enjoyed a lot was written also by a shareholder who is not here because he's being sworn in, I believe today or tomorrow, maybe tomorrow, as head of the Voice of America.

And that's Geoff Cowan’s book, which is on "The People v. Clarence Darrow." It's the story of the Clarence Darrow trial for, essentially, jury bribery in Los Angeles back around 1912, when the McNamara brothers had bombed the LA Times.

It's a fascinating book. Geoff uncovered a lot of information that the previous biographies of Darrow didn't have. I think you'd enjoy that.

Charlie?

CHARLIE MUNGER: Well, I very much enjoyed Connie Bruck’s biography Master of the Game, which was a biography of Steve Ross, who headed Warner and later was, what, co-chairman of Time Warner.

WARREN BUFFETT: Yeah, he’s a little more than co-chairman. (Laughs)

CHARLIE MUNGER: Yeah, and — she's a very insightful writer and it's a very interesting story.

I am rereading a book I really like, which is Van Doren's biography of Benjamin Franklin, which came out in 1952, and I'd almost forgotten how good a book it was. And that's available in paperback everywhere. We’ve never had anybody quite like Franklin in this country. Never again.

WARREN BUFFETT: He believed in compound interest, too, incidentally, as you may remember. (Laughter)

What did he — he set up those two little funds, one in Philadelphia, one in Boston?

CHARLIE MUNGER: Right.

WARREN BUFFETT: Yeah, to demonstrate the advantages of compound interest. I think that's the part Charlie's rereading. (Laughter)

WARREN BUFFETT: Zone 2.

AUDIENCE MEMBER: Thank you for teaching me — teaching so much to all of us about business. My name is Mike Assail (PH) from New York City.

You mentioned earlier that Berkshire’s shoe business was great, but that other shoe businesses were not so good.

What are the uncertainties of the global brand leaders that Berkshire seems to like? They like Coke and Gillette. The global brand leaders in the shoe business being Nike and Reebok.

What are their uncertainties, in terms of long-term competitive advantage, business economics, consumer behavior, and the other risk factors that you mentioned in the annual report this year? Thank you.

WARREN BUFFETT: So, you're really asking about the future prospects of Nike and Reebok?

Yeah. I don't know that much about those businesses. We do have one person in this audience, at least, who owns a lot of Reebok.

But I am not expressing a negative view in any way on that. I just — I don't understand that — I don't understand their competitive position and the likelihood of permanence of their competitive position over a 10 or 20 year period as well as I think I understand the position of Brown and Dexter.

That doesn't mean I think that it's inferior. Doesn't mean I think that we've got better businesses or anything.

I think we've got very good businesses. But I — I'm not — I haven't done the work and I'm not sure if I did the work I would understand them.

I think they are harder to understand, frankly, and to develop a fix on, than our kinds. But, they may be easier for other people who just have a better insight into that kind of business.

WARREN BUFFETT: Some businesses are a lot easier to understand than others. And Charlie and I don't like difficult problems. I mean, we — if something is hard to figure, you know, we’d rather multiply by three than by pi. I mean it's just easier for us. (Laughter)

Charlie, you have any —?

CHARLIE MUNGER: Well, that is such an obvious point. And yet so many people think if they just hire somebody with the appropriate labels they can do something very difficult. That is one of the most dangerous ideas a human being can have.

All kinds of things just intrinsically create problems. The other day I was dealing with a problem and I said, this thing — it's a new building — and I said this thing has three things I've learned to fear: an architect, a contractor, and a hill. (Laughter)

And — if you go at life like that, I think you, at least, make fewer mistakes than people who think they can do anything by just hiring somebody with a label.

WARREN BUFFETT: We don't comment — excuse me, go ahead.

CHARLIE MUNGER: You don’t have to hire out your thinking if you keep it simple.

WARREN BUFFETT: You don't have to do — we've said this before — but you don't have to do exceptional things to get exceptional results.

And some people think that if you jump over a seven-foot bar that the ribbon they pin on you is going to be worth more money than if you step over a one-foot bar. And it just isn't true in the investment world, at all.

So, you can do very ordinary things. I mean, what is complicated about this? But, you know, we're $3 billion pretax better off than we were a few years ago because of it.

There’s nothing that I know about that product, or its distribution system, its finances, or anything, that, really, hundreds of thousands — or millions — of people aren't capable of, that they don't already know. They just don't do anything about it.

And similarly, if you get into some complicated business, you can get a report that's a thousand pages thick and you got Ph.D.s working on it, but it doesn't mean anything.

You know, what you've got is a report but you don't — it — you won't understand that business, what it's going to look like in 10 or 15 years.

The big thing to do is avoid being wrong. (Laughter)

CHARLIE MUNGER: There are some things that are so intrinsically dangerous. Another of my heroes is Mark Twain, who looked at the promoters of his day and he said, "A mine is a hole in the ground owned by a liar." (Laughter)

And that's the way I've come to look at projections. I mean, basically, I can remember, Warren and I were offered $2 million worth of projections once in the course of buying a business and the book was this thick.

WARREN BUFFETT: For nothing.

CHARLIE MUNGER: And, if we were given it for nothing, and we wouldn’t open it.

WARREN BUFFETT: We almost paid 2 million not to look at it. (Laughter)

It’s ridiculous. I do not understand why any buyer of a business looks at a bunch of projections put together by a seller or —

CHARLIE MUNGER: Or his agent.

WARREN BUFFETT: — or his agent.

I mean, it — you can almost say that it's naive to think that that has any utility whatsoever. We just are not interested.

If we don't have some idea ourselves of what we think the future is, to sit there and listen to some other guy who's trying to sell us the business or get a commission on it tell us what the future's going to be — it — like I say, it's very naïve.

CHARLIE MUNGER: Yeah, and five years out.

WARREN BUFFETT: Yeah. We had a line in the report one time, "Don't ask the barber whether you need a haircut." And — (laughter) — it's quite applicable to projections of — by sellers — of businesses.

WARREN BUFFETT: Zone 3.

AUDIENCE MEMBER: Mr. Buffett, Greg Elright (PH) from Washington, DC.

In the last year, United Airlines and Northwest have resolved some of their financial problems by moving ownership over to the employees.

With USAir’s current positions — uh, problems — what do you see as occurring with USAir and do you see any movement toward employee ownership? And how will that affect Berkshire's interest in the company?

WARREN BUFFETT: USAir has a cost structure which is non-viable in today's airline business. Now that, in an important way, involves its labor cost, but it involves other things, too. But it certainly involves its labor costs.

And they've stated this publicly. And I think — and they have — they are talking with their unions about it and they're talking with other people about other parts of their cost structure.

And I think you'll just see what unfolds in the next relatively few months, because there isn’t any question that the cost structure is out of line. I think the cost structure could be brought into line. But whether it will be brought into line or not is another is another question.

And, looking backwards, the answer is not to get into businesses that need to solve problems like that. It’s to — but — that was a mistake I made.

And I think in Seth Schofield you've got a manager who understands that business extremely well, who probably is as — in my view, anyway — is as well regarded and trusted by people who are going to have to make changes as anyone could be in that position. But that may not be enough. I mean that — there's enormous tensions when you need to take hundreds and hundreds of millions of dollars out of the cost structure of any business.

And when you need cooperative action, all by various groups, each one of which feels that maybe they're having to give a little more than some other group, and understandably feels that way, you know that is an enormously tough negotiating job.

I think Seth is as well-equipped for that as anyone. But I would not want to — you know, I cannot predict the outcome.

WARREN BUFFETT: Charlie, do you —?

CHARLIE MUNGER: Well, if I were a union leader, I would give Seth whatever he wants because he's not the kind of a fellow who would ask for more than he needs. And, it's perfectly obvious that’s the correct decision on the labor side. But whether the obvious will be done or not is in the lap of the gods.

WARREN BUFFETT: It's a lot of people with a lot of different motivations and, I mean, those are really tough questions. I mean, we — Charlie and I've been involved in that sort of thing a few times and frequently it works out, but it's not preordained.

WARREN BUFFETT: Zone 4.

AUDIENCE MEMBER: My name is Sheldon Scizick (PH) from Chicago, Illinois. I have two questions.

The first one is concerning Mr. Munger. We know what Mr. Buffett's retirement plans are. I was wondering what yours — your plans for the future concerning Berkshire are?

CHARLIE MUNGER: I have always preferred the system of retirement where you can't quite tell from observing from the outside whether the man is working or retired. (Laughter)

WARREN BUFFETT: He does it well, too. (Laughter)

CHARLIE MUNGER: You know, a problem in many businesses, particularly the more bureaucratic ones, is that your employees retire, but they don't tell you. (Laughter)

WARREN BUFFETT: I think I can speak for Charlie on this one.

Charlie and I are not in any hurry to retire. He's trying to outlast me, actually. (Laughter)

AUDIENCE MEMBER: Thank you.

AUDIENCE MEMBER: My second question is, I was just curious why you sold a portion of Cap Cities?

WARREN BUFFETT: We thought that — we thought it was a good idea for Cap Cities to have a tender offer. They had cash that we thought that they could not use in any — they were not likely to be able to use — in a better way than repurchasing their own shares because they do have some very good businesses.

They, and we, felt that a tender offer would not be successful, in terms of attracting a number of shares unless Berkshire were tendering. We felt the price was reasonable to tender at.

It turned out that the business was getting stronger during that period and various things were happening in media, so there were only 100,000 shares or so tendered outside of our million. That isn't necessarily what we thought was going to happen going in, but that is what happened.

It's acceptable to us, but that doesn't mean that it was the desired outcome. We would not have tendered all of our shares or anything of the sort.

We want to remain a substantial shareholder of Cap Cities. We've always — most of the time we favored Cap Cities buying in its stock and it's bought in a fair amount of stock since the ABC merger took place in 19 — started in 1986.

WARREN BUFFETT: Zone 5.

AUDIENCE MEMBER: Good morning. My name is Matt Voke (PH). I'm from Omaha.

In last year's meeting you made reference to structured settlements. I was wondering, how is that business progressing for you?

WARREN BUFFETT: Question’s about the structured settlement business, which is a business in which Berkshire guarantees, in effect, an annuity to some claimant of another — usually — of another insurance company, who suffered an injury and instead of getting a lump sum now wants to get a stream of payments over many years in the future, sometimes going out 75 years.

We have set up a life company to do that business. We formerly did it all through our property-casualty companies. And, we have done some business, but it's not been a big business yet, and it may never be a big business.

It's a perfectly satisfactory business, but it's not an important item at present in the analysis of Berkshire's value.

Are you getting — having a problem with sound out there on this or no? Just — no?

WARREN BUFFETT: Zone 6.

AUDIENCE MEMBER: My name is David Samra. I’m from San Francisco, California.

In your annual report, I noticed you mention Wrigley as being a company that has worldwide dominance, somewhat like Coca-Cola and Gillette. And, was curious to know if you had looked at the company in any detail. And, if so, whether or not — if you decided not to invest, what were the reasons why?

WARREN BUFFETT: Well, we wouldn’t want to comment on a company like that because we might or might not be buying it. We might or might not be selling it. We might or might not buy or sell it in the future. (Laughter)

And, since it falls under that narrow definition of things that we don't talk about —

It's a good illustration of a company that has a high market share worldwide, but you can understand the Wrigley Company just as well as I can. I have no insights in the — into the Wrigley Company that you wouldn't have and I don't — I wouldn't want to go beyond that in giving you our evaluation of the company.

I hate to disappoint you on those, but on specific securities, we are not too forthcoming sometimes.

Charlie?

CHARLIE MUNGER: I'm good at not being forthcoming. (Laughter)

WARREN BUFFETT: Zone 7.

AUDIENCE MEMBER: Mr. Buffett, Kathleen Ambrose (PH) from Omaha.

I have a question regarding global diversification. Just in general, what do you look for in a company and, if so, as far as Europe or Latin America, if you'd like to be specific?

WARREN BUFFETT: The question is about global diversification.

All we want to be in is businesses that we understand, run by people that we like, and priced attractively compared to the future prospects.

So, there is no specific desire to either be in the rest of Europe, or the rest of the world, or Far East, or to avoid it.

It's simply a factor that — it’s not a big factor. There may be more chances for growth in some countries.

We — 80 percent of Coca-Cola's earnings, roughly, will come from outside the United States. Eighty percent of Guinness’s earnings will come from outside the United States, but they’re domiciled outside the United States, whereas Coca-Cola is domiciled here.

Certainly, in many cases, there are markets outside the United States that have way better prospects for growth than the U.S. market would have, but they probably have some other risks to them that this market may not have.

But, we, you know, we like the international prospects, obviously, of a company like Coke. We like the international prospects of a company like Gillette. Gillette earned 70 percent of its money outside this country.

So, if you look — on a look-through basis — Coke — we might this year get something like $150 million of earnings, indirectly, for Berkshire's interest from the rest of the world just through Coca-Cola alone.

But, we don't make any specific — we don't think in terms of, I like this region so I want to be there or something of a sort.

It’s something that's specific to the companies we're looking at, then we'll try to evaluate that.

Coke is expanding in China. Well, it — you know — I think that — I forget what they showed last year, maybe 38 percent growth, or something like that, in cases. Maybe —

It's nice to have markets like that that are relatively untapped.

Actually, Gillette is expanding in China in a big way and the Chinese don't shave as often. And more of them are what they call "dry shavers" than "wet shavers" there, which is electric shavers.

But you know, maybe we could stick something in the Coke that would — (laughter)

Maybe a little synergy at Berkshire, finally. Who knows?

WARREN BUFFETT: Zone 1.

AUDIENCE MEMBER: Good morning. I'm Marshall Patton (PH) from Bandera, Texas.

And back to the insurance losses. What is the comparison between natural disasters, such as the earthquake, and so on, and the LA riots?

WARREN BUFFETT: Well, I'm not sure what the connection —

They, you know, they obviously can both lead to super-cats that we insure against, because if there is enough insured damage, it's likely to trigger a payment under some of our policies.

It would take some really big riot damage to get to our levels, because normally we don't kick in now until an event gets up to at least, you know, $5 billion or so of insured damage under a very large majority of our policies.

Something like a quake causes a fair amount of damage that is not insured, because of the extent that it's highways and things of that sort, public buildings. A lot of that is not insured.

But you get interesting questions on this. Usually we insure an event, but what's an event? If you go back to the riots that occurred after Martin Luther King was shot, you had riots in dozens of cities.

Is that one event or is that a multiple number of events? I mean, it was started by different people, but maybe arising from a common cause. Some of those things aren't actually very well-defined, even after hundreds of years of insurance law and custom, the experience of that. But I would say that rioting is very unlikely to get to a level that triggers our policy.

The big risks we face are quake and hurricanes, and hurricanes are a more significant risk than quake. They call them typhoons in the Pacific Ocean.

But floods, tremendous damage from floods last year. But basically there's not a lot of private flood insurance bought, so the insured losses do not get large.

Just watch the Weather Channel. (Laughter)

WARREN BUFFETT: Zone 2.

AUDIENCE MEMBER: Diane West (PH) from Corona Del Mar, California.

I know, Mr. Buffett, that you said that you don't read what other people say about the market or the economy, but do either you or Charlie have an opinion about how you think things are going to go? Are you bullish or bearish?

WARREN BUFFETT: You may have trouble believing this, but Charlie and I never have an opinion about the market because it wouldn't be any good and it might interfere with the opinions we have that are good. (Laughter)

If we're right about a business, if we think a business is attractive, it would be very foolish for us to not take action on that because we thought something about what the market was going to do, or anything of that sort.

Because we just don't know. And to give up something that you do know and that is profitable for something that you don't know and won't know because of that, it just doesn't make any sense to us, and it doesn't really make any difference to us.

I mean, I bought my first stock in, probably, April of 1942 when I was 11. And since then, I mean, actually World War II didn't look so good at that time. I mean, the prospects, they really didn't. I mean, you know, we were not doing well in the Pacific. I'm not sure I calculated that into my purchase of my three shares. (Laughter)

But I mean, just think of all the things that have happened since then, you know? Atomic weapons and major wars, presidents resigning, and all kinds of things, massive inflation at certain times.

To give up what you're doing well because of guesses about what's going to happen in some macro way just doesn't make any sense to us. The best thing that can happen from Berkshire's standpoint — we don't wish this on anybody — but is that over time is to have markets that go down a tremendous amount.

I mean, we are going to be buyers of things over time. And if you're going to be buyers of groceries over time, you like grocery prices to go down. If you're going to be buying cars over time, you like car prices to go down.

We buy businesses. We buy pieces of businesses: stocks. And we're going to be much better off if we can buy those things at an attractive price than if we can't.

So we don't have any fear at all. I mean, what we fear is an irrational bull market that's sustained for some long period of time.

You, as shareholders of Berkshire, unless you own your shares on borrowed money or are going to sell them in a very short period of time, are better off if stocks get cheaper, because it means that we can be doing more intelligent things on your behalf than would be the case otherwise.

But we have no idea what — and we wouldn't care what anybody thought about it. I mean, most of all ourselves. (Laughter)

Charlie, do you have anything?

CHARLIE MUNGER: No. I think the — if you're agnostic about those macro factors and therefore devote all your time to thinking about the individual businesses and the individual opportunities, it's just, it's a way more efficient way to behave, at least with our particular talents and lacks thereof.

WARREN BUFFETT: If you're right about the businesses, you'll end up doing fine.

We don't know, and we don't think about when something will happen. We think about what will happen. It's fairly, it's not so difficult to figure out what will happen. It's impossible, in our view, to figure out when it will happen. So we focus on what will happen.

This company in 1890 or thereabouts, the whole company sold for $2,000. It's got a market value now of about 50-odd-billion, you know?

Somebody could've said to the fellow who was buying this in 1890, you know, "You're going to have a couple of great World Wars, and you know, you'll have the panic of 1907, all these things will happen. And wouldn't it be a better idea to wait?" (Laughter)

We can't afford that mistake, basically. Yeah.

WARREN BUFFETT: Zone 3.

AUDIENCE MEMBER: Mr. Buffett, Mr. Munger, last year — I'm Tim Medley from Jackson, Mississippi — last year the question was asked about your preference for purchasing entire businesses versus parts of public companies.

You mentioned you prefer to buy private businesses because of the tax advantages and your attraction to the people in those businesses.

Are you finding today that there are better purchases within the private market versus in the public securities market?

WARREN BUFFETT: Well, I would answer that no.

We do not — we very seldom find something to buy on a negotiated basis for an entire business. We have certain size requirements. A big limiting factor is it has to be something we can understand. I mean, that eliminates 95 percent of the businesses.

And we don't pay any attention to them, but we get lots of proposals for things that just are totally outside the boundaries of what we've already said we're interested in.

We prefer to buy entire businesses, or 80 percent or greater interest in businesses, partly for the tax reasons you mentioned, and frankly, we like it better. We just, it's the kind of business we would like to build if we had our absolute druthers on it.

Counter to that is we can usually get more for our money in wonderful businesses, in terms of buying little pieces of them in the market, because the market is far more inefficient in pricing businesses than is the negotiated market.

You're not going to buy any bargains, and I mean, you shouldn't even approach the idea of buying a bargain in a negotiated purchase.

You want to buy it from people who are going to run it for you. You want to buy it from people who are intelligent enough to price their business properly, and they are. I mean, that's the way things are.

The market does not do that. The market — in the stock market, you get a chance to buy businesses at foolish prices, and that is why we end up with a lot of money in marketable securities.

If we absolutely had our choice, we would own a group of — we would own three times the number of businesses we own outright.

We're unlikely to get that opportunity over time, but periodically we'll get the chance to find something that fits our test.

And in between we will, when the market offers us the right prices, we will buy more, either businesses we already own pieces of, or we'll buy one or two new ones. Something's usually going on.

There are tax advantages to owning all of them, but that's more than offset by the fact that you'll never get a chance to buy the whole Coca-Cola Company or the whole Gillette company.

I mean, businesses like that, sensational businesses, are just not available. Sometimes you get a chance to make a sensible purchase in the market of such businesses.

Charlie?

CHARLIE MUNGER: Well, I think that's exactly right. And if you stop to think about it, if a hundred percent of a business is for sale, you've got — the average corporate buyer is being run by people who have the mindset of people buying with somebody else's money. And we have the mindset of people buying with our own money.

And there's also a class of buyers for a hundred percent of businesses who are basically able and assured financial promoters. I'm talking about the leveraged buyout funds and so on.

And those people tend to have the upside, but not the downside, in the private arrangements they've made with their investors. And naturally, they tend to be somewhat optimistic.

And so we have formidable competition when we try and buy a hundred percent of businesses.

WARREN BUFFETT: Most managers are better off, in terms of their personal equation, if they're running something larger. And they're also better off if they're running something larger and more profitable.

But the first condition alone will usually leave them better off. We're only better off if we're running something that's more profitable. We also like it if it's larger, too.

But our equation, actually, our personal equation is actually different than a great many managers in that respect. Even if that didn't operate, I think most managers psychically would enjoy running something larger. And if you can pay for it with other people's money, I mean, that gets pretty attractive.

You know, how much would — and let's just say you're a baseball fan — well, how much would you pay to own whatever your hometown, the Yankees?

You might pay more if you were writing a check on someone else's bank account than if you were writing it on your own. It's been known to happen. (Laughter)

And in corporate America, animal spirits are there. And those are our competitors on buying entire businesses. In terms of buying securities, most managers don't even think about it.

It's very interesting to me, because they'll say that — they'll have somebody else manage their money in terms of portfolio securities. Well, all that is is a portfolio of businesses.

And I'll say, "Well, why don't you pick out your own portfolio?" And they'll say, "That's much too difficult."

And then some guy will come along with some business that they never heard of a week before and give them some figures and a few projections, and the guy thinks he knows enough to buy that business. It's very puzzling to me sometimes.

WARREN BUFFETT: Zone 4.

Could you hold it a little closer to you? I can't hear too well.

It's hard to hear. Is the mic on there?

AUDIENCE MEMBER: It's on.

WARREN BUFFETT: OK, I can hear that fine.

AUDIENCE MEMBER: Let's try it one more time. Dan Raider (PH) —

WARREN BUFFETT: Got it.

AUDIENCE MEMBER: — San Mateo, California. This is a question for Mr. Munger.

In your most recent letter to shareholders in Wesco's annual report, you calculated the intrinsic value of Wesco at about $100 per share, and compared that to the then-current market price of Wesco of about $130 per share.

In the same letter, you stated that it was unclear whether at then-current market prices Berkshire or Wesco presented a better value to prospective purchasers.

In light of that, would you compare the intrinsic value of Berkshire to its current market price?

CHARLIE MUNGER: Well, the answer to that is no. (Laughter)

Berkshire has never calculated intrinsic value per share and reported it to the shareholders, and Wesco never did before this year.

We changed our mind at Wesco because we really thought some of the buyers had gone a little crazy, and a lot of things were being said to prospective shareholders that, in our opinion, were unwise.

And we don't really like attracting — even though we've had nothing to do with it — we don't like attracting people in at high prices that may not be wise.

So we departed from our long precedent, and we did in the Wesco report make an estimate of intrinsic value per share.

But we're not changing the general policy. That was just a one-time quirk.

WARREN BUFFETT: Well, and also I think it's true that the Wesco intrinsic value per share can be estimated by anyone within fairly close limits.

It just isn't that complicated because there aren't a number of businesses there that have values different than carrying values, or where they are, they're all footnoted, in terms of numbers.

So it would be almost impossible to come up with numbers that are significantly different than the number Charlie put in there.

Berkshire has assets that, number one of which would be the insurance business, that it's clear have very significant excess values, but one person might estimate those at maybe three times what somebody else would estimate them at. That's less true of our other businesses, but it's still true in a way, so that Berkshire's range would be somewhat greater.

And as Charlie — we basically — we don't want to disappoint people, but we also don't want to disappoint ourselves. But we have our own yardsticks for what we think is doable.

We try to convey that as well as we can to the people who are partners in the business, and I think that we saw some things being published about Wesco that simply might have led to, and probably did lead to, some expectations that simply weren't consonant with our own personal expectations. And that leaves us uncomfortable.

WARREN BUFFETT: Zone 5.

AUDIENCE MEMBER: Hello, my name is Charles Pyle (PH) from Ann Arbor, Michigan.

I'd like to ask you to expound on your view of risk in the financial world, and I ask that against the background of what appear to be a number of inconsistencies between your view of risk and the conventional view of risk.

I mention that in a recent article you pointed out inconsistency in the use of beta as a measure of risk, which is a common standard.

And I mention that derivatives are dangerous, and yet you feel comfortable playing at derivatives through Salomon Brothers. And betting on hurricanes is dangerous, and yet you feel comfortable playing with hurricanes through insurance companies.

So it appears that you have some view of risk that's inconsistent with what would appear on the face of it to be the conventional view of risk.

WARREN BUFFETT: Well, we do define risk as the possibility of harm or injury. And in that respect we think it's inextricably wound up in your time horizon for holding an asset.

I mean, if your risk is that you're going — if you intend to buy XYZ Corporation at 11:30 this morning and sell it out before the close today, I mean, that is, in our view, that is a very risky transaction. Because we think 50 percent of the time you're going to suffer some harm or injury.

If you have a time horizon on a business, we think the risk of buying something like Coca-Cola at the price we bought it at a few years ago is essentially, is so close to nil, in terms of our perspective holding period. But if you asked me the risk of buying Coca-Cola this morning and you're going to sell it tomorrow morning, I say that is a very risky transaction.

Now, as I pointed out in the annual report, it became very fashionable in the academic world, and then that spilled over into the financial markets, to define risk in terms of volatility, of which beta became a measure.

But that is no measure of risk to us. The risk, in terms of our super-cat business, is not that we lose money in any given year. We know we're going to lose money in some given day, that is for certain. And we're extremely likely to lose money in a given year.

Our time horizon of writing that business, you know, would be at least a decade. And we think the probability of losing money over a decade is low. So we feel that, in terms of our horizon of investment, that that is not a risky business. And it's a whole lot less risky than writing something that's much more predictable.

Interesting thing is that using conventional measures of risk, something whose return varies from year to year between plus-20 percent and plus-80 percent is riskier, as defined, than something whose return is 5 percent a year every year.

We just think the financial world has gone haywire in terms of measures of risk.

We look at what we do — we are perfectly willing to lose money on a given transaction, arbitrage being an example, any given insurance policy being another example. We are perfectly willing to lose money on any given transaction.

We are not willing to enter into transactions in which we think the probability of doing a number of mutually independent events, but of a similar type, has an expectancy of loss. And we hope that we are entering into our transactions where our calculations of those probabilities have validity.

And to do so, we try to narrow it down. There are a whole bunch of things we just won't do because we don't think we can write the equation on them.

But we, basically, Charlie and I by nature are pretty risk-averse. But we are very willing to enter into transactions —

We, if we knew it was an honest coin, and someone wanted to give us seven-to-five or something of the sort on one flip, how much of Berkshire's net worth would we put on that flip?

Well we would — it would sound like a big number to you. It would not be a huge percentage of the net worth, but it would be a significant number. We will do things when probabilities favor us.

Charlie?

CHARLIE MUNGER: Yeah, we, I would say we try and think like Fermat and Pascal as if they'd never heard of modern finance theory.

I really think that a lot of modern finance theory can only be described as disgusting. (Laughter)

WARREN BUFFETT: Zone 6.

AUDIENCE MEMBER: Good morning, I'm Paul Miller (PH) from Kansas City, Missouri. I've got two questions.

First, not too long ago, I believe it was Fortune Magazine that ran an article regarding personal tax rates.

And at the risk of misquoting you, my recollection is that you favored higher personal rates, rates even higher than those proposed by those in Washington.

The second question is, I've heard Berkshire Hathaway referred to as nothing more than a high-priced rich man's mutual fund. Would you care to comment on that also?

WARREN BUFFETT: Well, on tax rates, if you ask me what I personally favor, I personally favor a steeply progressive consumption tax.

That has a little more attention being paid to it now, although the "steeply progressive" might be modified by most of the advocates of the consumption tax, maybe to "mildly progressive" or something of the sort.

There's a Nunn-Domenici proposal along that line, and there are other people that are talking about it more. It may be examined by the new Kerrey-Danforth Commission, of which we've got a member in the audience.

But I believe, in one way or another, I believe in progressive taxes. So I am not shocked in terms of my own situation, and I don't think Charlie is particularly, about having a progressive income tax.

Although, like I say, I think society would run better over time if it were a progressive consumption tax instead.

Do you want the comment on the tax situation, Charlie?

CHARLIE MUNGER: Well, I think there is a point at which income taxes become quite counterproductive if their progression is too high. But I don't think we're there yet.

WARREN BUFFETT: We think — at least I think — I'm extraordinarily well treated by this society, and I think most people with high incomes are. I think if you transported most of them to Bangladesh or Peru or something, they would find out how much of it is them and how much is the society.

And I think there's nothing better than a market system, in terms of motivating people and in terms of producing the goods and services that the society wants.

But I do think it gets a little out of whack, in terms of what the productivity may be of an outstanding teacher compared to somebody who is good at figuring out the intrinsic value of businesses.

I don't have a better system on the income side, but I think society should figure out some way to make those who are particularly blessed, in a sense, that have talents that get paid off enormously in a market system, to give back a fair amount of that to the society that produces that.

WARREN BUFFETT: The question about Berkshire being I think it was, was it rich man's mutual fund or something like that?

We don't look at it that way at all. We look at it as a collection of businesses, and ideally we would own all of those businesses.

So it's, to the extent that a mutual fund owns stock in a lot of companies and diversifies among businesses and we try to own a lot of businesses ourselves, I guess that's true. But I guess you could say the same thing of General Electric, or an operation like that.

We are more prone to buy pieces of businesses than the typical manager, but we are trying to do, in a sense, the same thing Jack Welch is trying to do at General Electric, which is try to own a number of first-class businesses.

He gets to put the imprint of his own management, which I think is very good, on those businesses, and we are more hands-off, both in the businesses we own outright and in the ones that we own pieces of.

But we're going at it the same way. And General Electric has been very successful under Jack's leadership, and doing it his way.

We think, in terms of what we bring to the game, and the problems of putting money to work all the time, that our own system will work best for us.

Charlie?

CHARLIE MUNGER: Yeah, I've got nothing to add to that.

WARREN BUFFETT: Zone 1.

CHRISTOPHER DAVIS: Hello, I'm Christopher Davis from New York City.

I'm interested in that many of the holdings of Berkshire are in industries that are perceived as interest rate-sensitive industries, including Wells Fargo, Salomon, Freddie Mac, even GEICO. And yet you have an admitted sort of ambivalence towards interest rates or changes in interest rates.

And it therefore seems that you don't feel that those changes affect the fundamental attractiveness of those businesses.

I thought maybe you could share your thoughts on what you see in these businesses that the investment community as a whole is ignoring.

WARREN BUFFETT: Well, the value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100 percent sensitive to interest rates, because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in, over a period of time. And the higher interest rates are, the less that present value is going to be.

So every business, by its nature, whether it's Coca-Cola or Gillette or Wells Fargo, is in its intrinsic valuation, is a hundred percent sensitive to interest rates.

Now, the question as to whether a Wells Fargo or a Freddie Mac or whatever it may be, whether their business gets better or worse internally, as opposed to the valuation process, because of higher interest rates, that is not easy to figure.

I mean, GEICO, if they write their insurance business at the same underwriting ratio — in other words they have the same loss and expense experience relative to premiums — they benefit by higher interest rates, obviously, over time, because they're a float business, and the float is worth more to them.

Now, externally, getting back to the valuation part, the present value of those earnings also becomes less then.

But the present value of Coke's earnings becomes less in a higher interest rate environment.

Wells Fargo, it's — whether they earn more or less money under any given interest rate scenario is hard to figure. There may be one short-term effect and there may be another long-term effect.

So I do not have to have a view on interest rates — and I don't have a view on interest rates — to make a decision as to an insurance business, or a mortgage guarantor business, or a banking business, or something of the sort, relative to making a judgment about Coke or Gillette.

Charlie?

CHARLIE MUNGER: I've got nothing to add.

WARREN BUFFETT: Zone two?

AUDIENCE MEMBER: Hello, I'm Benjamin Baron (PH) from New York.

Could you speak about your insurance business a little bit? And especially the retroactive policies you've been writing.

WARREN BUFFETT: Can we speak about the — you say the reinsurance business?

CHARLIE MUNGER: Retroactive —

WARREN BUFFETT: I heard the retroactive part, but the first part.

BENJAMIN BARON: The reinsurance and the retroactive, and also the market in Bermuda and how you see it as one of your potential markets.

WARREN BUFFETT: I think the retroactive market is, what's called "retroactive insurance," has been pretty well eliminated by developments in accounting.

So I would not expect us to really have any volume in retroactive-type policies.

Now, when we write workers' comp with a policy holder dividend, in effect that's a retroactive policy. But that's a relative — that's small part of Berkshire's business.

Did I answer what you were driving at there?

AUDIENCE MEMBER: (Inaudible)

WARREN BUFFETT: Pardon me?

AUDIENCE MEMBER: (Inaudible)

WARREN BUFFETT: Did you get that, Charlie?

CHARLIE MUNGER: Just comment on the development of the insurance business in Bermuda.

WARREN BUFFETT: Oh, Bermuda is simply a, you know, a new competitor. They're not so new, I mean, there've been companies in Bermuda before.

But in the last 15 months, 18 months, maybe there's been 4 billion-plus raised. And because, for tax reasons — maybe other reasons as well, but certainly for tax reasons — that capacity has been concentrated in Bermuda-based, Bermuda-domiciled reinsurers.

But essentially there's no great difference between that type of competition and other reinsurers competition, except for the fact that that capacity is new and the money's just been raised, and so there may be some greater pressure on the managers of those businesses to go out and write business promptly than on somebody that's been around for 50 years.

But it's no plus for us any time new capacity enters any business that we're in, and that certainly goes for the reinsurance business.

Reinsurance business, by its nature, will be a business in which some very stupid things are done en masse periodically. I mean, you can be doing dumb things and not know it in reinsurance, and then all of a sudden wake up and find out, you know, the money is gone.

And it's what people have found out — and I used that line in the report a year ago — it's what people have found out that were speculating on bonds with (inaudible) margins recently, that, you know, you don't find out who's been swimming naked until the tide goes out. And — (laughter) — essentially that's what happens in reinsurance. You don't, you really don't find out who's been swimming naked until the wind blows at them.

WARREN BUFFETT: Zone 3.

AUDIENCE MEMBER: I'm Whitney Anderson (PH) from Miami, Florida. And my question is, right now, we are reading about various analysts and how you should, in their individual opinion, adjust your more cash, more stocks, more bonds because of …

How does Berkshire Hathaway feel about times of relative financial insecurity? Do you arrange for more cash reserves looking forward to a time when you might be able to buy? Or do you go along your path?

WARREN BUFFETT: I think the question is do we sort of get into asset allocation by maintaining given levels of cash, depending on some kind of outlook or something of the sort?

We don't really think that way at all. If we have cash, it's because we haven't found anything intelligent to do with it that day, in the way of buying into the kind of businesses we like.

And when we can't find anything for a while, the cash piles up. But that's not through choice, that's because we're failing at what we essentially are trying to do, which is to find things to buy, and —

We make no attempt to guess whether cash is going to be worth more three months from now or six months from now or a year from now.

So it is — you will never see — we don't have any meetings of any kind anyway at Berkshire, but we would never have an asset allocation meeting. We would — (laughter) — keep looking. I mean, Charlie's looking, I'm looking. Some of our managers are looking.

We're looking for things to buy that meet our tests, and if we showed no cash or short-term securities at year-end, we would love it, because it would mean that we'd found ways to employ the money in ways that we like.

I think I would have to admit that if we have a lot of money around, we are a little dumber than usual. I mean, it tends to make you careless.

And I would say that the best purchases are usually made when you have to sell something to raise the money to get them, because it just raises the bar a little bit that you jump over in the mental decisions.

But we have, I don't know what we'll show, but certainly well over a billion dollars of cash around, and that's not through choice. That is a — you can look at that as an index of failure on the part of your management.

And we will be happy when we can buy businesses, or small pieces of businesses, that use up that money.

WARREN BUFFETT: Zone 4.

AUDIENCE MEMBER: Gentlemen, my name is Richard Sercer from Tucson, Arizona.

I understand that 40 percent of all home mortgages have been securitized by Fannie Mae and Freddie Mac, the duopoly.

I would, at the risk of asking you for a projection, since you've talked about projections before, I'd be interested in understanding what you think will happen to that market share over time for this duopoly. Thank you.

WARREN BUFFETT: Well, the answer to that doesn't involve much of a prediction. That market share is essentially certain to go up.

That doesn't mean that those are wonderful businesses to buy, but the market share is essentially certain to go up because the economics that those two entities possess, compared to other ways of intermediating money between investors and people who want to borrow, no one else has those economics.

So what holds the share of Freddie Mac and Fannie Mae down is the fact that they are only allowed to loan roughly $200,000 on any mortgage. That's a limiting factor. It's probably been a good thing for them that it has been a limiting factor, but they are shut out of part of the market.

But the market that they are in, they essentially have economics that other people can't touch for intermediating money, including the savings and loan business that we were in.

We had a business that intermediated money, went out and got it from depositors and lent it to people who wanted to borrow on a home.

Freddie Mac and Fannie Mae do it the same way. They don't do it exactly the same way, but they perform the same function. And they could do it so much more cheaply than we could do it by having branches or anything of the sort and paying the insurance fee we paid.

They're going to get the business. They should get the business. And so their market share will grow.

Charlie?

CHARLIE MUNGER: Well, I think that's right. (Laughter)

WARREN BUFFETT: You're doing great. (Laughter)

WARREN BUFFETT: Zone 5.

AUDIENCE MEMBER: Good morning, I'm Sarah Pruitt (PH) from Milwaukee, Wisconsin.

And I wondered if you feel that the speed with which information is available and disseminated today has affected your business-buying decision process. And do you believe that speed has caused you to miss opportunities?

WARREN BUFFETT: Question about seas expanding?

CHARLIE MUNGER: No. Does the speed of information today affect our decision-making process?

WARREN BUFFETT: No, we — I would say that we perform about like we were doing 30 or 40 years ago.

I mean — (laughter) — we read annual reports.

It isn't the — the speed of information really doesn't make any difference to us. It's the processing and finally coming to some judgment that actually has some utility, that is, that it's a judgment about the price of a business or a part of a business, a security, versus what it's essentially worth.

And none of that involves anything to do, really, with quick information. It involves getting good information.

But usually that — it's not — we're not looking for needles in haystacks or anything of the sort. You know, we like haystacks, not needles, basically. And we want it to shout at us.

And I would say that, well, virtually everything we've done has been reading public reports, and then maybe asking questions around to ascertain trade positions or product strengths or something of that sort.

But we never have to — we can make decisions very fast. I mean, we get called on a business — or we can make up our mind whether we're interested in two or three minutes. That takes no time. We may have to do a little checking on a few things subsequently.

But we don't need to get — I can't think of anything where we really need lots of price data or things like that extremely fast to make any decisions.

We've got good management information systems in our operating businesses, but that's just another — that's a question of keeping inventories where they should be and all of that sort of thing.

I don't think the invest — I think you could be in someplace where the mails were delayed three weeks, and the quotations were delayed three weeks, and I think you could do just fine in investing.

WARREN BUFFETT: Zone 6.

AUDIENCE MEMBER: James Pan (PH), New York City. I have a two-parter question.

One, do you think the stock price of Berkshire Hathaway is trading within 15 percent of its intrinsic value currently?

And two, if you think Berkshire Hathaway is undervalued with the amount of cash you have on your balance sheet, would you consider a buyback?

WARREN BUFFETT: The answer about a buyback is that we generally have felt that market conditions that would make Berkshire attractively priced is probably going to make other things even more attractively priced, because we think our shareholders are more rational than the shareholders of many companies.

It's more likely that we will find some wonderful business at a silly price than we will find Berkshire at a silly price as we go along. So — (applause) that tends to eliminate repurchases.

But it doesn't rule them out, but it explains why the circumstances will not arise very often where repurchases would make good sense.

WARREN BUFFETT: In terms of giving you a number on intrinsic value, I don't want to spoil your fun. I mean, you really should work that one out for yourself. (Laughter)

Charlie is the expert on intrinsic —

Do you have any comment for him, Charlie?

CHARLIE MUNGER: Well, your attitude on that subject reminds me of a famous headmaster who used to address the graduating class every year. And he'd say, "You know," he says, "Five percent of you people are going to end up criminals." And he says, "I know exactly who you are." (Laughter)

And he said, "But I'm not going to tell you, because it would deprive your lives of a sense of excitement." (Laughter)

If you stop to think about it, the companies that constantly told their shareholders what the intrinsic value was were the real estate holding companies in corporate form.

And I must say, that the amount of folly and misbehavior that crept into that process was disgusting. We would be just associating with a bad group if we were to change our ways.

WARREN BUFFETT: Bill Zeckendorf Sr. I think was probably the first one to do that, with Webb and Knapp back in the late '50s. I still have those annual reports. And he would announce, you know, like, to eight decimal places what the intrinsic value of Webb and Knapp was. And he did it right till the day they filed for Chapter 11. (Laughter)

CHARLIE MUNGER: I remember that well, because somebody said that he fell into bankruptcy. And somebody else said, "How can you fall off a pancake?" (Laughter)

WARREN BUFFETT: Beware of people that give you a lot of numbers about their businesses. I mean, in terms of projections or valuations or that sort of thing.

We try to give you all of the numbers that we would use ourselves in making our own calculations of value.

We really — if you read the Berkshire reports, you essentially — you have all the information that Charlie and I would use in making a decision about the security.

And if there's anything really lacking in that respect, you know, we would actually — we would truly appreciate hearing from you, because we want to have that kind of information in the report. But then we want you to make the calculation.

But we've stuck, I mean, that material, for example, on the float in the insurance business, we consider that quite relevant, obviously, because we use up almost a page printing it. It's pretty serious stuff at Berkshire. (Laughter)

But that is relevant. I mean, your interpretation may be different than mine or Charlie's, but those are important numbers.

And we could give you a lot of baloney about satisfied policyholders, you know, in Lincoln, Nebraska. It wouldn't tell you a thing about what the company's worth — and have pictures of them, and happy, you know, receiving the check from the agent and all of that. (Laughter)

We're not going to do that.

WARREN BUFFETT: Zone 1.

AUDIENCE MEMBER: Mike Macy (PH) from Indianapolis.

I have really enjoyed reading your annual letters and your annual report, and I've gone back and read all of the older ones, too. They're terrific.

I have also enjoyed reading the two books by Peter Lynch, and I see a lot of commonalities between the two of you, the way you think, your philosophy, et cetera.

I'd certainly appreciate it if you'd make a few comments on what you think of Peter Lynch, the things he says in his two books, and the advice that he gives to investors. Thank you.

WARREN BUFFETT: Well, I know Peter. I don't know him well, but we've played bridge together in Omaha as a matter of fact.

I like him personally, and obviously he has an outstanding record. And he has written those two books, which have been bestsellers, about his investment philosophy. I don't really have anything — you know, I'm not going to embroider on his.

There's certainly a fair amount of overlap. There's some difference.

Peter, obviously, likes to diversify a lot more than I do. He owns more stocks than the names of companies I can remember. I mean, but that's Peter. (Laughter)

And, you know, I've said in investing, in the past, that there's more than one way to get to heaven. And there isn't a true religion in this, but there's some very useful religions.

And Peter's got one, and I think we've got one that's useful, too. And there is a lot of overlap.

But I would not do as well if I tried to do it the way Peter does it, and he probably wouldn't do as well if he tried to do it exactly the way I'd do it.

I like him personally very much. He's a high-grade guy.

WARREN BUFFETT: Zone 2.

AUDIENCE MEMBER: Mr. Buffett, Mr. Munger, my name is Dave Lankes (PH). I'm a senior editor at Business Insurance Magazine.

A two-part question for you. Can you explain a little bit regarding your primary insurance operations? What drove up written premiums by more than 50 percent last year, and if you expect that to continue this year?

And then regarding your earlier comments on the stupid things reinsurers can do en masse, can you explain what potential pitfalls that the new cat facilities in Bermuda will have to avoid that you feel Berkshire Hathaway won't fall into?

WARREN BUFFETT: Well, the first question about our primary insurance figures, you'll find it way in the back someplace. But they're a little distorted because we bought Central States Indemnity, what would it be, late in the year '92. So there's a lot more premium volume in there for Central States in '93 than there was in '92.

Our basic — National Indemnity's basic insurance, which is commercial, auto, and general liability, premium volume was fairly flat, the Homestate operation fairly flat, Cypress up somewhat. But those numbers were not anything like the changes —

So our business last year, pro forma for including Central States Indemnity for all of '92, would not have shown a dramatic change. There really hasn't been much happening in our primary business, except that it's been run, it's done very well, but it is not growing or exploding. And that's true this year as well as last year.

It's a good business. And it could grow in certain kinds of markets very substantially, but it is not growing in this market, and it did not grow last year, although its underwriting was very good.

In the reinsurance business, I think, essentially, the difference in our reinsurance business from many others, you know — it doesn't include them all in a place like Bermuda — is essentially the difference that may exist in our operations and securities versus other people.

We will offer reinsurance at any time in very large quantities at prices we think make sense. But we won't do business if we don't think it makes sense, just like we will buy securities, to the extent of the cash we have available, if they make sense. But we have no interest in being in the stock market per say just to be in it. We want to own securities that make sense to us.

I think for most managements, if the only thing they're in is the reinsurance business, they may like it better when prices make sense, but they will, I think they will be prone to do quite a bit of business when prices don't make sense as well, because there's no alternative, except to give the money back to the owners. And that is not something that most managements, you know, do somersaults over. (Laughter)

So, I think we are in a favored position, essentially being — having the flexibility of capital allocation that lets us take the lack of business with a certain equanimity that most managements probably can't, because of their sole focus on the business.

Rates will get silly, in all likelihood, after a period when nothing much happens, when you've had a couple of years of good experience.

We price to what we think is exposure. We don't price to experience. I mean, the fact that there was no big hurricane last year — I forget the name of the one that was coming in at North Carolina and then veered out essentially — but to us, it has nothing to do with the rates next year whether that hurricane actually came in in a big way or veered out into the Atlantic again. I mean, we are pricing to exposure.

And everyone says that, but the market tends to price and respond to experience, and generally to recent experience. That's why all the retrocessional operations in London, you know, in the spiral, went busted, because they priced, in our view, they priced to experience rather than to exposure.

It's very hard not to do that, to be there year after year with business coming by and investors expecting this of you and not do that.

But we will never knowingly do that. We may get influenced subconsciously in some way to do that, but we will not do that any more than we will accept stock market norms as being the proper way for us to invest money and equities.

Basically, when you lay out money or accept insurance risks, you really have to think for yourself. You cannot let the market think for you.

Charlie?

CHARLIE MUNGER: Yeah, I think Berkshire is basically a very old-fashioned kind of a place. And it tries to exert discipline to stay old-fashioned.

And I don't mean old-fashioned stupid, I mean, you know, the eternal verity, so to speak, basic mathematics, you know, basic horse sense, basic fear, basic discriminations regarding human nature, all very old-fashioned. And if you just do that with a certain amount of discipline, I think it's likely to work out quite well.

WARREN BUFFETT: Zone 3.

DAVID GOTTESMAN: David Gottesman from New York.

It's no wonder that this meeting draws stockholders from all over the country. And despite the talk about age today, I'm happy to say this meeting gets better every year.

Berkshire stands unique in American business as a company whose name has become synonymous with management excellence.

Unlike many American corporations, we, as stockholders, don't have to worry about reorganizations, large write-offs, massive restructurings, overstated earnings, and overpaid executives with strategic visions.

Instead, year in and year out, we enjoy the benefits of the common sense and brilliance of Charlie and Warren. (APPLAUSE)

WARREN BUFFETT: What did you say your name was? (Laughter)

DAVID GOTTESMAN: I want to add to that, to say nothing of your good humor.

It's easy to take such consistently outstanding results for granted, but we in this room are the direct beneficiaries of their efforts.

By our presence here today, we show our appreciation to them for their exceptional performance. But we can also demonstrate in another way. I would like to suggest we give them a rousing hand of applause for a job well done. Thank you. (APPLAUSE)

WARREN BUFFETT: Thank you. That was Sandy Gottesman. We've worked together for 30-odd years, and he's finally got that down. I appreciate that, Sandy. (Laughter)

WARREN BUFFETT: With that, we will adjourn. And anyone who wants to stay around, we'll reconvene in 15 minutes, and then we'll be here till about 1:15.