Annual Meetings

Morning Session - 1996 Meeting

Warren Buffett and Charlie Munger discuss in detail why Berkshire created its lower-priced B shares and answer a number of questions about the new stock class. They also explain why the company isn't a "one-man show."

Mon, May 6 1996 • 9:00 AM EDT
Key Chapters —
1. Welcome

WARREN BUFFETT: Just a little early, but I think everyone's had a chance to take their seats.

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I must say, this is the first time I've seen this program. They told me they'd surprise me, and they certainly did. (Laughter)

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Marc Hamburg, our chief financial officer, who is now known around the office as CB, was in charge of putting all this together. And we — I want you to know, we have no multimedia (inaudible). (Applause)

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This entire meeting is handled by a regular staff. We have no public relations department, or investor relations, or multimedia department, or anything of the sort. So, everybody just pitches in. And Marc will, forevermore, be in charge of the pregame ceremonies. (Laughter)

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We have a very large crowd today. I hope everybody has found a seat, either in this main room or in the three overflow rooms. I think we can handle around 5,400. And historically, 62 percent or just about exactly 62 percent, every year, of the people who request tickets have come to the meeting.

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And if that percentage holds true today, we have just filled the rooms. And we will have a problem in the future, which we haven't figured out the answer to yet. But we've got another year.

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The way we'll run the meeting is that we'll get the business out of way — out of the way — at the start. And we'll talk about the Class B issuance, then, too. So, it'll take a little longer than historically has been the case.

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And, then, we'll have Q & A for — until about noon. We'll have a short break at noon. There'll be sandwiches outside, which you can buy. (Laughter)

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And Charlie and I will have a couple of sandwiches up here at the podium.

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And, then, we will stay around until about 3 o'clock to answer more questions. And at that time, after noon, I'm sure everybody in the overflow rooms will be able to find a seat here in the main room.

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But people have come from great distances to attend this meeting. So, we really want to get a — give everyone a chance to get their questions asked. And Charlie and I are delighted to — but we'll have to break it up at three, no matter what. But we'll be delighted to stick around.

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You can leave anytime, obviously. As I've explained in the past, it's much better form to leave while Charlie is talking. (Laughter)

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But the — feel free to do that. And then at noon you'll get a chance to do it en masse.

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We have buses available to take you to — if you have any money left at all after yesterday — to take you to other business establishments of Berkshire, locally.

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So that will be the plan. I hope everyone does get their questions answered.

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We've got a system where we break this room into six zones. And we have a couple of zones in other rooms. And then this afternoon, everybody will be able to be here in the main room. So, that is the procedure.

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I'm sure you recognize Charlie Munger, the vice chairman of Berkshire Hathaway, who also had not seen that movie before. (Laughs)

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And showed — we were — I think Marc was afraid to show it to us. But in any event — (laughter) — we will go on.

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I thought you might be interested. This is a list of people that came in for tickets. And we had, in addition to 99 from Canada and, of course, the U.S., we had Australia, the Channel Islands, England, Greece, Hong Kong, Israel, Portugal, Puerto Rico, Singapore, Sweden, and Switzerland.

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I'm not sure all of those people are with us today. But they did send for tickets. And I've met a number that did come in from a distance.

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2. Election of directors

WARREN BUFFETT: So, with that introduction, I will call the meeting to order.

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I'm Warren Buffett, chairman of the board of the directors. And I do welcome you to this meeting. I hope everybody has a good time this weekend.

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And I'd like to introduce the directors, in addition to myself and to Charlie.

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Now, you don't get quite your money's worth this year from our directors. They’ve — collectively, they've lost 100 pounds since last — our last meeting. I think they've been trying to live on the director's fees. (Laughter)

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We have with us Howard Buffett — let's stand. (Applause)

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Susan T. Buffett. (Applause)

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Malcolm G. Chace III. (Applause)

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And Walter Scott Jr. (Applause)

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Along with us today are partners in the firm of Deloitte & Touche, our auditors, Mr. Ron Burgess and Mr. Craig Christiansen (PH). They're available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire.

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

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

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The named proxy holders for this meeting are Walter Scott Jr. and Marc D. Hamburg. Proxy cards have been returned through last Friday representing, it says “number to come.” (Laughter)

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VOICE: There’s another script.

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WARREN BUFFETT: Ah, OK, there’s another — oh, yeah. Here's the script on that one: 1,041,567 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 proceed — directly proceed — with the meeting.

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We will conduct the business of the meeting, then adjourn the formal meeting. After that, we will entertain questions that you may have.

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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.

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

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WARREN BUFFETT: Do I hear a second?

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VOICE: I second the motion.

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

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VOICES: Aye.

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WARREN BUFFETT: Opposed? Motion's carried.

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Does the secretary have a report of the number of Berkshire shares outstanding, entitled to vote, and represented at the meeting?

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ROBERT M. FITZSIMMONS: 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, 1996, being the record date for this meeting, there were 1,193,512 shares of Berkshire Hathaway common stock outstanding with each share entitled to one vote on motions considered at the meeting.

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Of that number, 1,041,567 shares are represented at this meeting by proxies returned through last Friday.

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WARREN BUFFETT: Thank you. If a shareholder is present who wishes to withdraw a proxy previously sent in and vote in person on the two items of business provided for in the proxy statement, he or she may do so.

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Also, if any shareholder that's present has not turned in a proxy and desires a ballot in order to vote in person on those two items, you may do so.

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If you wish to do this, please identify yourself to meeting officials in the aisles who will furnish two ballots to you, one for each item.

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Will those persons desiring ballots please identify themselves, so that we may distribute them?

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First item of business at this meeting is to elect directors. And I'll recognize Mr. Walter Scott Jr. to place a motion before the meeting, with respect to election of directors.

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WALTER SCOTT JR.: I move that Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chace III, Charles T. Munger, and Walter Scott Jr. be elected as directors.

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WARREN BUFFETT: Is there a second?

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VOICE: I second the motion.

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WARREN BUFFETT: Are there any other nominations? Is there any discussion?

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I learned a lot in China. We did so — (Laughter)

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The nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the election of directors and allow the ballots to be delivered to the inspector of elections.

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Will the proxy holders please also submit to the inspector of elections a ballot on the election of directors, voting the proxies in accordance with the instructions they have received?

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

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ROBERT M. FITZSIMMONS: My report is ready. The ballot of the proxy holders received through last Friday cast not less than 1,040,667 votes for each nominee. That number far exceeds the majority of the number of all shares outstanding.

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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 in the minutes of this meeting.

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WARREN BUFFETT: Thank you, Mr. Fitzsimmons.

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Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcom G. Chace III, Charles T. Munger, and Walter Scott Jr. have been elected as directors.

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3. Why Class B shares were created

WARREN BUFFETT: The second item of business of this meeting is to consider the recommendation of the board of directors to amend the company's restated certificate of incorporation.

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The proposed amendment would add a provision to the restated certificate of incorporation authorizing the board of directors to issue up to 50 million shares of a new Class B common stock, with each Class B share having economic rights equivalent to 1/30th of a share of the current common stock, and with 1/200th of the vote, and to re-designate the company's current common stock as Class A common stock and to make each share of Class A common stock convertible into 30 shares of the new Class B stock at the option of the holder.

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I think, before we get into moving that motion — I think this would be a good time to have discussion and take your questions regarding the issuance of the Class B. And I should give you a little background.

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I think many of you know the background on this. But over the years, we've had probably half a dozen people, one time or another, propose that the creation of an all-Berkshire investment company or unit trust.

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In other words, an entity that would hold nothing but Berkshire stock, and then would parcel out its own shares in smaller denomination pieces to the public.

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And we have generally discouraged that because we felt that there was considerable potential for abuse in such an arrangement.

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And our discouragement has been successful up until last fall, when there was one — there were two proposals — that went as far as submission to the SEC for clearance, that involved unit trusts.

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And these unit trusts would've owned nothing but Berkshire shares and, then, been sold to the public in small denominations, probably with a minimum investment of around a thousand dollars or so.

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And holders of those trusts would've bought into an entity that had a defined life, but that had considerable, in the way of costs and some tax consequences, that they might not anticipate when they came in.

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And Charlie and I were worried that a combination of Berkshire's past record — which cannot be repeated — and high sales commissions, and a low denomination, and a lot of publicity about Berkshire and myself, which, as you've seen this morning, we attempt to discourage (Laughter) —

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The — that the — a great many people would end up buying these unit trust holdings without any idea, really, of what they were buying, and with unrealistic expectations as to the future.

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And that that would, in turn, create a considerable demand — because these unit trusts would go out and buy Berkshire shares — that would create a considerable demand against a fixed supply, much of which is almost unavailable because people have a low tax basis and are reluctant to sell, and I hope they're reluctant to sell for other reasons.

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And that the very action of the creation of these, and that push on the demand, would — might very well create some speculative spurt in the stock, which in turn, would induce people who had been approached about the trust to feel they were missing even more of a good thing by rushing in.

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Rising prices in certain kinds of markets create their own kind of demand. It's not a sustained demand. And it's a demand that the reversal of which, later on, when people become disillusioned, can cause a lot of problems.

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But that potential was there with a flood of buyers with unrealistic expectations, high commissions, and a fixed supply. So, we attempted to dissuade both of the promoters.

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One backed away and then came out a few months later with something that was a combination of Berkshire and some other securities, which were at least thought to be in our portfolio.

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And we started hearing from people that it was clear had no understanding of what they were buying, or the costs involved, or the potential tax implications, or anything of the sort.

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So, at that time, we faced — we had to make a decision, and we had to make it rather quickly, as to what would be the best solution to this problem that, in turn, wouldn't create the same sort of thing that we felt had potential harm when being done by these promoters.

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Obviously, we considered a split of the stock. But we were worried that a split would send out signals to all kinds of people who want to believe in things that may not be too believable about future performance and that they would look at it as some grand chance to buy in at a lower price.

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Of course, it wouldn't really be a lower price in relation to value. But it would be a lower denomination.

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And that, again, against a fixed supply, might very well have created the same kind of problem, maybe even a greater problem, than would occur with the unit trusts.

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So, we came upon the idea of the Class B shares, which would create a supply that would match the demand for, in effect, split shares, and that would be offered in a way that did not create special inducements, or to create false inducements to people thinking of buying.

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And one of the things we did was we stuck a commission on it, on the issuance of the Class B shares, that was about as low as any I've ever seen in many years in Wall Street, because we did not want salespeople to have a great inducement — we — to go out and sell the shares.

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We wanted anyone that was interested to read the prospectus, and think about it, and make their own decisions.

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And we did another thing, which is quite counter to the normal commercial approach, which is that we said we would issue as many shares as people wanted to buy.

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And, you know, you do much better in this world if you're selling something, to say "only one to a customer," and "you have to get in early," or "you have to know somebody in order to get shares." And many new issues are sold that way, and it's very effective.

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I mean, you know, it's like those old stories in Russia where there'd be lines, and people would get in them without knowing what they were going to buy when they got to the front of the line.

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And that's a very effective selling tool. And it's one that Wall Street is not unfamiliar with.

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But we decided that, to reduce any of that feeling that you have to get in early, or only the big guy's going to get it, or something of the sort, that we would announce loud and clearly that we would have shares available for everyone that wanted.

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So, there was no reason to assume that — it couldn't be a hot stock, in effect. And we've done various other things.

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So, I — our hope is that the Class B shareholders that we attract are of the same quality as the people in this room, that they have an investment attitude where they feel they are buying into part of a business, that they expect to stay with it for the indefinite future, maybe the rest of their lives.

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And they do not think of it as a little piece of paper that may be hot because it's a new issue or something of the sort.

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It lets the people who are happy with the present shares stay in exactly the same position, which is what I'm going to do, what Charlie will do.

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We have made the B very slightly disadvantageous, in two respects, to the A. It has a lower vote, and it will not participate in the shareholder contributions programs.

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There were reasons for both of those, but in addition to the — the explicit reasons, there also is the desire that the B not be made fully — it’s just a slight bit inferior —but it’s not fully as attractive as the A, because we did not want to do anything that pushed everybody into converting into the B.

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If that started in a big way, the B would then enjoy the better market, and it would create its own dynamic where it made sense for everybody to do it.

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So we have left it so there's no reason for you, if you own the A, to convert to the B, unless you wish to sell or give away some portion of your holding that would be less than a full A share.

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And it will be convenient for that reason. But beyond that, there should be no incentive.

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If the B should trade slightly above 1/30th of the price of the A, there will be arbitrage activity that will keep that from being anything other than a negligible amount.

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It, of course, could trade well below 1/30th because the B is not convertible into the A.

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Charlie, would you like to add anything before we start taking questions on this? And I —

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CHARLIE MUNGER: No. (Laughter)

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WARREN BUFFETT: — I encourage everyone to ask.

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Charlie, as you will note during the meeting, does not get paid by the word. (Laughter)

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But we — I encourage every — anyone to ask any question. There are no bad questions about this. I mean, it — last year, we talked about a preferred issue. And people had very valid questions.

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I might take those two points of difference between the A and B, just to start with, on the shareholder-designated contributions program, which was $12 a share last year.

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In addition to wanting the A to have a very small edge over the B, which would be a reason for not having the B participate, it also would get very impractical, in terms of taking $12, and dividing it by 30, and soliciting the names of charities and to designate contributions.

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We can handle the present program fairly efficiently. But we would not want to be sending out checks for a dollar or two, and it would get very inefficient.

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So, we have told prospective B holders that that's not going to happen. And so, they're fully informed coming in.

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In connection with the vote, the issuance of the B does create more votes outstanding. So, absent any change in the situation, through the issuance of shares which we are not particularly eager to issue, the vote — my vote — will be diluted, somewhat, by this.

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And, frankly, I had no desire to create a lot more shares which would dilute the vote of the Buffett family. It will be diluted, somewhat, by this action because we will have all the present votes outstanding, plus some votes from the B.

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If there is a lot of conversion to the B, it is true that our holding will go up, percentage-wise. But I see no reason why people really should convert. So, I don't think that's likely. I think, in the end, it'll stay very much the same.

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And as I mentioned earlier, we want there to be a slight disadvantage to the B.

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In all other respects, we will treat the B just as the A. We have a problem with numbers at this annual meeting. We're going to have to do something next year. And we haven't figured it out yet, either.

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But the suggestion was made by someone that maybe the B would get second-class seating or something. We're not going to have any of that. (Laughter)

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But from this point forward, with the point — with the exception of two things we put in the prospectus, the B shares will be treated, in every way, as equivalent to A. There —

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So, with that, and with Charlie's reluctance to elaborate, we have a six-zone system in here. And then we have another two zones in the overflow rooms.

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So, if there are any questions in zone 1, somebody — just raise your hand and somebody will bring a microphone.

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Zone 1 is over there. Two is back in the corner. Three, four, five, and six. So it just goes right around clockwise. Just raise your hand and somebody will bring a microphone to you.

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4. Class B IPO price is the same for everyone

WARREN BUFFETT: We've got a question, I think, in zone 1.

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

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And when the price is struck on the Class B shares, those of us who buy our shares through computer programs, do we have assurance that, whoever we buy from, that that will be the price that we pay for these shares?

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WARREN BUFFETT: Yeah, the — well, the price — there'll be a price established, probably, Wednesday night or thereabouts of this week. And everybody will pay the same price. And a very high percentage of that price, incidentally, will come to Berkshire.

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I mean, there is a very, very low underwriting spread, compared to any other offering.

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Now, once the initial offering is — everybody will pay the same price: large institutions, the buyer of one share will pay the same price.

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Subsequently, the stock will, we expect, will be listed on the New York Stock Exchange, probably, Thursday morning. And we have the world's greatest specialist here, I believe, Jimmy Maguire, who handles the trading, now, of the common and will handle the trading of both the A and B.

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Jimmy, are you here? Do you want to stand up? Just so — there he is. The world's greatest specialist, Jimmy Maguire. (Applause)

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I think he leads the singing of “Wait 'Till the Sun Shines, Nellie,” too, annually. You can see him on CNBC occasionally, and the Nightly Business Report. I want to give equal time here. The —

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But Jimmy will be trading both classes of stock starting Thursday. As I say — as I said, the — it will be impossible, after the first few days, it would be impossible for the B to sell much above 1/30th of the A, because people would buy the A and sell the B if more than a very small — with even the smallest of arbitrage differentials.

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But there will be markets in two shares and — in two classes. They will both trade in 10-share lots. That will be the round lot — so-called round lot. Usually the round lot on the New York Stock Exchange is 100 shares. But in the case of both Berkshire shares, the round lot will be ten shares.

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Now, I read one or two press accounts that said, therefore, the minimum purchase is ten shares. That's not true. The minimum purchase of each stock — each class of stock — is one share. I mean, you can buy one share or two shares. Or you can sell one share or two shares.

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And you have an odd lot differential, just as you would if you were working with less than 100 shares of a company whose stock traded in 100 share round lots. But there's no minimum size in the case of either share.

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And you will see, when they get mechanics straightened out, and they may have a little bit trouble with it, but you will see Berkshire A and Berkshire B in — quoted in the papers. And I think that you’re — that it'll be quite clear after Thursday what is going on, on that.

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I don't know about the computer purchases. But I don’t that — certainly, in terms of the initial offering, that will be through one of, I think, 137 people — or brokers — in the selling group. And it's the same, no matter who you deal with.

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5. Downside of Berkshire unit trusts

WARREN BUFFETT: Zone 2?

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AUDIENCE MEMBER: My name is David Hendel (PH). I'm from Boca Raton, Florida.

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To your knowledge, will this program effectively discourage the unit trusts?

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WARREN BUFFETT: Well, it's certainly designed to. And I think the answer to that is yes, because I see no way that a unit trust — either in connection with the initial offering or with the subsequent trading — I see no way that the unit trust could offer people as an efficient and inexpensive way of participating in Berkshire as direct purchase of the B.

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Bear in mind, if a unit trust were established, it would have to buy Berkshire shares in the market. So, it would have the costs that people have in buying shares. And, then, on top of it, it would superimpose these other costs. And in addition to the initial commission, they even had a valuation fee.

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That was a job I wanted to have because every — (laughter) — three months or however often, maybe every day, somebody, their job was to evaluate this trust value which involved the great skill of being able to locate it alphabetically — (laughter) — in the newspaper.

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The figure was left blank as to what the evaluator's fee would be. But I had a feeling that it was one of the more cushy jobs available. (Laughter)

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There was an added problem, too. I mean, if these unit trusts started and did not get off the ground very far, they could've become something in the way of orphans. And they certainly would've become expensive to operate.

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And, then, with Berkshire paying nothing in the way of dividends, but with the trust incurring expenses, including this evaluator's fee, among others — but with the trust incurring expenses, they would have to sell small amounts periodically to pay the expenses. And that would create tax consequences for every unit trust holder.

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I mean, people would not know what — we felt they would not know what they were getting into.

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The more serious problem is that somebody would flash our past record in front of them or show them some chart on Berkshire's stock price and say, "You know, this is your chance to do the same thing." And it, obviously, isn’t — wouldn't have been.

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And — but based on what we have seen, right now, we anticipate the offering being 350,000 shares. But the extent to which the number of tickets involved, that even seeking out informed purchasers only, there's very substantial demand.

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So I think if you widen that circle to include uninformed, it might have been quite an experience.

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I think the answer is that we will not have a problem with the unit trusts in the future.

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6. No plans for Class B secondary offering

WARREN BUFFETT: Zone 3?

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AUDIENCE MEMBER: I'm Adam Ingle (PH) from Boulder, Colorado.

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In terms of the number of shares that you're going to issue, B shares, do you plan to just look at the book on Wednesday and issue enough to totally satisfy the demand? And do you have any plans to do a secondary if it starts becoming a hot number?

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WARREN BUFFETT: Yeah. Well, I think what we plan is to tailor the size of the offering to fit the demand that appears Tuesday night or Wednesday morning, or whenever the exact moment will be on that. But the offering will be designed to do that.

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Like most offerings, I would anticipate that the underwriter will — and this is a supposition at the moment — but I — it's frequently done — would sell some more shares than the initial offering with the intention of creating some short position in the security.

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And, then, they have an option to take — from the company — for 30 days up to 15 percent of whatever we initially sell, which protects them on their short position. But the short position also helps in terms of having an orderly market in the stock, subsequently.

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But we will, essentially, tailor the size of the issue to the demand as it appears to us midweek.

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We have no plans for any secondary offering. I think this has been sufficiently publicized. There's a large network of selling group members. So that people that are interested, but wanted to buy in a smaller denomination, will have had their chance.

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I think there will be a — well, present indications, there'd be 350,000 shares out. There would be a fairly large — a large — number of holders based on what we're seeing.

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So, the market should, starting Thursday morning on the exchange, there should be, in my opinion, a reasonable market based on that kind of quantity and the number of people buying. And so, I anticipate nothing subsequently.

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7. We don't think Berkshire shares are "undervalued"

WARREN BUFFETT: Zone 4?

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AUDIENCE MEMBER: Can you hear me?

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WARREN BUFFETT: Yep.

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AUDIENCE MEMBER: My name’s Tom Conrad (PH). I’m from McLean, Virginia, and I (inaudible) to this meeting and tell all my friends and family members to buy it last week. But I’ve been reading in some publications that you said that you would not advise your friends and family members to buy it at its current pricing.

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And I’m just concerned, if I go out and run and tell them why you’re saying — what your feeling would be, should I go tell my friends and family members? — (Laughter)

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WARREN BUFFETT: I think I'll leave that one up to you. What I said — (laughter) — I said, at present prices, Charlie and I do not think Berkshire stock is undervalued. And that, now that is not what's gotten reported sometimes. I mean, sometimes people have said we thought it was overvalued.

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We did not — if you look at the prospectus or if you look at the — if you look at the prospectus, you will see that what we said was we do not think it's undervalued.

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Now, I find it somewhat entertaining that people regard that as kind of an amazing statement by somebody making a public offering.

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But if you think about it a bit, can you imagine a management that goes out and says to the world, "We are selling you something — in a new stock — and it's way undervalued."

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What do you say to your present shareholders if you go out and say to the public, "We're selling you something that's worth a dollar, and we're going to sell it to you for 80 cents?" Now, that would leave me very unhappy.

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So, I feel that any management that is talking about selling their stock and they say it's very undervalued, either doesn't know what's good for their present shareholders or they may have their tongue in cheek.

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We would not be selling — we would not sell a part of your interest in Berkshire at a price which we did not feel was adequate for the present shareholders. It's that simple.

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If we sell 1 percent of the company, and 350,000 shares is close to that figure of B, we are selling 1 percent of your ownership in See's Candy. We're selling 1 percent of your ownership in GEICO. We're selling 1 percent of your ownership in The Buffalo News. Those are all valuable assets.

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We have no intention of selling 1 percent, or 10 percent, or the hundred percent of any of those entities at a price that is not fair to present shareholders.

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That doesn't mean it's unfair to new shareholders, but we’re not going to — we would not be selling the stock if we thought it was undervalued.

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I'm not sure what we would've done if we'd had that position when the unit trust came along. But we have — and put in the prospectus — but we are not selling any of our shares. Frequently, on a new offering you see present holders. But, you know, I have very close to 100 percent of my net worth in Berkshire and it leaves me quite happy.

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I've got a trust I run set up in 1964. I'm the sole trustee. I can do anything in that trust I want. And I'm freed by the person who set up the trust of responsibility for a concentration of investments. And I have some members of my family who are beneficiaries of that trust.

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That trust owns nothing but Berkshire Hathaway stock. That doesn't bother me at all. That — I'm not recommending purchase. But I'm perfectly happy owning Berkshire.

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But we do not want — (applause) — we do not want people to think, when they buy into Berkshire, that they're buying something that's undervalued, because it's not.

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And we say in that fourth caveat on the prospectus that we want people to buy it only if they expect to be holders for a very long time.

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Charlie and I expect to be holders for a very long time. And, in fact, you may see us up here sometime where we don't know who the guy next to us is. (Laughter)

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But we'll put on an act, though. (Laughter) The — we —

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You know, that is our attitude toward Berkshire. We do not want people to come in who think it's going to be a hot stock or selling for more a year from now, because we don't have the faintest idea whether it's going to be selling for more or less a year from now. Never have had.

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We do think that to the extent that Berkshire attracts a special class of shareholder that really looks at themselves as owning a part interest in a business, like they'd own a part of a farm or part of an apartment house, and they expect to hold it, really, for the rest of their lives, we think that it's a perfectly sensible thing to do because we're doing it ourselves. But we don't want to go beyond that.

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8. No plans for the Class B proceeds

WARREN BUFFETT: I'm not sure whether we got zone 4. Can we go back there?

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AUDIENCE MEMBER: My name is Gordon Shepherd (PH) from Montreal.

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I wondered whether you had any plans for what to do with the money? (Laughter)

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WARREN BUFFETT: Well, the answer to that is in the prospectus, but the — we have no immediate plans for the money. But we’ve faced that situation a number of times.

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I mean, the money — the inflow of money and outflow of money should not be, in our view, attempted to be matched too carefully in this world, because you get investment and business opportunities at times that differ from the times that funds come in.

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And one of the most important disciplines in running a business or managing investments is that — is to not get your — not to try to coordinate your actions simply with the availability of cash.

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Over time, we found a way to use money. It's much tougher for us to run 17 billion than it was when we had 20 million in the business. There's no question about that. And we pointed that out many times. And it'll get tougher still if we get larger, which I hope we do.

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But the fact that, if 400 million comes in on this offering or whatever, that's really no different than 400 million coming in in some other manner.

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And when our float grows, we take in more money. When our earnings are retained, we take in more money. When we have — I forget what the check would've been on the Cap Cities transaction, but it was certainly well over a billion dollars that came in on a single day.

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So, money's fungible, and we have to keep looking for bigger and bigger things as we go along. And that's what we do focus on.

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But it doesn't bother me to take it. It wouldn't bother me if we weren't taking it. It wouldn't bother me if we took in three times as much. It doesn't make a lot of difference.

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And we will have — we — the constant challenge for Charlie and me is to allocate capital is we go along. And it's a nice challenge. (Laughter)

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9. Discouraging buyers with unreasonable expectations

WARREN BUFFETT: Zone 5?

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AUDIENCE MEMBER: Hi there. Lee Debroff (PH), long-time shareholder, I think, going back a number of years now to when it was a little more intimate affair. Not quite sure whether I should look at you in the TV here or in real life, on stage. But anyway, I'm on the very right of you.

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And I see all the guards around you, and I see all the security and that sort of thing. And then, I see this offering of the Class B. And I sort of wonder whether, from your perspective, you feel you might be in the same boat that the pope and the president are?

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And I mean this absolutely sincerely, because I don't think that you have, perhaps, as good a handle as some of us do on the renown that you carry outside of Omaha, Nebraska. People who have no idea what investments are about are fully aware of who you are.

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And when they see this offering, I think you may find that there are substantially more people who are interested in just having a piece of you for the sake of saying they have a piece of you than having absolutely any idea what they're doing.

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And I notice that on — I try to read the fine print here — on page 14, first paragraph, second line, that you indicate some 50 million shares of Class B common stock may be offered.

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And so, I'd like you to comment on this situation that you find yourself in, where you may be, perhaps, out of touch with the popularity that you have.

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WARREN BUFFETT: Well, my first reaction: maybe I should tell my barber we could save the clippings and sell them. (Laughter)

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The — I don't think it's quite as extreme as you say.

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But, you know, I — in relation to the 50 million first, we have to authorize enough shares, because we are going to allow every share of class A — or present common stock — but the class A, to convert to B.

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So we have to have the shares authorized to take care of 30 times the present one point almost two million shares. So, 36 million shares, in effect, are reserved for the present common stock. And, as long as we were authorizing it —

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Well, we need that much, or we wouldn't have the shares actually available if everybody came around to convert. That's not going to happen. But we still have to be prepared for it.

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We have no plans to issue a lot of shares. The — but the point you mention, which I think you stressed a little more than I would've, but the — that is what we were worried about, in terms of the unit trusts.

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There are people that think that it can all happen again from this kind of a base which, you know, is mathematically a joke. And Charlie and I would settle for one whole lot less, you know, right today.

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And we have done everything we can — I mean, if we hadn't done this, the unit trusts would've moved forward. And I think they would've cashed in on that phenomenon you suggested.

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And in a few years, you know, it would not — I would've been in a somewhat different position because people can get very disillusioned if they have hopes that aren't realized.

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And we have done everything possible, I think, to filter out those who might have an unrealistic belief.

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And everyone should read a prospectus before they buy shares, and —

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I think we have tailored — we’ve designed what we're doing about as well as we can to moderate that phenomenon you’re talking about. There may be a few come in but not too many.

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Charlie, do you have any thoughts on that?

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CHARLIE MUNGER: Well, if we only issue the amount we're now talking about, it's sort of a non-event around Berkshire. It’d be 1 percent —

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WARREN BUFFETT: Yeah. It's 1 percent.

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CHARLIE MUNGER: — or something like that of the —

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It solves the problem of these disreputable followers — (laughter) — and 1 percent, what does it matter? (Applause)

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WARREN BUFFETT: Wait, you heard that remark, referring to Charlie earlier, about all I want to know is where I'm going to die, so I'll never go there. (Laughter)

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Well, we think about that, in terms — we believe in reverse engineering.

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And how do we keep people from buying it, who really are going to be unhappy, you know, a few years later?

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You know, it's a little like singing country songs. You all — you should sing them backwards. That way, you get your home back and your auto back and — (laughter) — your wife back, and —

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10. Almost like buying direct from Berkshire

WARREN BUFFETT: Zone 6? Have we got —?

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VOICE: There was a hand over here, wasn’t there? Here. Right here.

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AUDIENCE MEMBER: Good morning. I'm Rena Lowie (PH) from Chicago, proud to be here. At mic —

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WARREN BUFFETT: Where are we? Oh, over here. OK.

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AUDIENCE MEMBER: I have a question that's been asked me, and I really don't know. Several people wanted to know if they could buy directly from the company.

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WARREN BUFFETT: The answer to that is no. But Salomon Brothers is the underwriter of the issue. They have a hundred and, I think, 37-or-something broker-dealers, all — virtually all — the major ones in the country, in the selling group.

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The cost to the company of doing this are really very, very low compared to any issue I've seen. When AT&T had their spinoff — or sale of Lucent — which was close to a $3 billion deal — you know, their percentage costs were more than double what our costs will be, for example, on this offering of Berkshire.

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So, it's almost as if you’re buying it — a Class B holder — is buying it from us, in terms of the, what I would call the frictional costs involved of getting the issue done. In fact, if we handled it ourselves, it might cost more.

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But the company, itself, is not a broker-dealer. And it’s — it would require a whole group of different hoops to jump through in order to have a direct issue. It will be sold only through broker-dealers.

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11. All-Berkshire mutual fund for retirement plans?

WARREN BUFFETT: Zone 7?

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This will come in from another room. Here we are.

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VOICE: There aren't any questions in zone 7.

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WARREN BUFFETT: No questions in zone 7. Zone 8?

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VOICE: No questions from zone 8.

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WARREN BUFFETT: OK. Then, we'll go back to zone 1.

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AUDIENCE MEMBER: Mike Rocker (PH) from Flint, Michigan, God's country.

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I noticed in the press, when this issue of the unit trust was going on, that there apparently also were some people trying to form mutual funds to carry Berkshire stock, which I kind of thought was a good idea, because there's one potential class of Berkshire owners that could only own Berkshire stock via either an open-end mutual fund or a closed-end mutual fund.

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And that is those thousands of teachers and hospital employees whose future retirement money is in 403(b) plans that are limited to investing in mutual funds only. And so, I wonder if, first of all, if you were aware of that? And if so, if you considered that? And if not, if you might?

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WARREN BUFFETT: Well, the answer is I wasn't aware of that. So it wasn't considered.

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There are, of course, some mutual funds that own Berkshire shares. But there's no all-Berkshire fund, outstanding.

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I would say this: that if the law was set up to, in some way, to restrict investments of this group you're talking about to options that involve mutual funds but that don't involve individual stocks, I would think it might even be regarded as a way around it, if a fund owned nothing but one stock.

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Because, if you can't buy General Motors directly under, I assume, the relevant rules or statutes on that, it would seem that a fund that owned nothing but General Motors might be regarded as a way of getting around that.

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But the answer is that it was not considered. I don't know where the rules are derived, whether there — whether they can be changed by some organization or they're part of some statute.

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But if they're part of some organization, by a vote of their directors, they might be able to allow purchase of individual stocks within those plans that you describe. But if not, it does seem to me that an all one-stock fund is — might be regarded as simply a way around the rules.

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12. Suggestion for Class B symbol

WARREN BUFFETT: Zone 2?

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AUDIENCE MEMBER: Alan Rank, Pittsburgh, Pennsylvania.

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Have you determined what the symbol will be for the Class B?

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WARREN BUFFETT: The symbol? No, we haven't.

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AUDIENCE MEMBER: May I make a suggestion? As a broker, the stocks that have come out and given theirselves Class A and Class B cause massive confusion.

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If there'd be any way to make symbol something like BRB and just keep it a simple, three-letter symbol, it aids people both in following it on the tape on CNBC. As brokers, four-letter symbols on the New York restrict a lot of things we can do as far as punching them in.

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If there's any way you could keep the symbol for the B a simple one, two or three-letter symbol, it would be greatly appreciated.

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WARREN BUFFETT: Well, thanks for the suggestion. Now, the exchange has generally been exceptionally cooperative in trying to work with us. I mean, a 10-share trading unit is no piece of cake for them.

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And I'm sure, at times, that they have wished we were a little more like some of the other companies that list on the exchange. But they've been very cooperative and helpful. And we are — they’ll — they listen to things we suggest. We listen to things they suggest.

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So, we will try to do whatever facilitates things at the exchange and the reporting of prices. And it's nothing we will try to impose on them, believe me.

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I have no favorite name that I'm looking for. So, we'll see what they — what ideas they have. And we'll include that suggestion.

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13. Not expecting big change in Class B offering size

WARREN BUFFETT: Zone 3?

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AUDIENCE MEMBER: Paula Finster (PH) from Tulsa, Oklahoma. Very glad to be here. I'm one of those few second generation, finally finagled a ticket out of my dad. (Clears throat)

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Three years ago —

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WARREN BUFFETT: Her dad has a soda fountain, incidentally. If you're ever in Tulsa, be sure to see him. (Laughter)

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AUDIENCE MEMBER: He certainly does. And you're certainly invited to come back. (Laughter)

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I was here three years ago for the movie theater. And considering the growth — I know you won't leave your beloved Omaha — but maybe you could build a stadium with — that's covered — (laughter) — considering the growth — (Buffett laughs) — with adequate parking. (Laughter)

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Here's my question. You said there's going to be unlimited offering, as much as they want. This question is not designed to get a rise out of Mr. Munger, however —

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WARREN BUFFETT: That's not easy to do. (Laughter)

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AUDIENCE MEMBER: Understood, considering the bridge game of yesterday.

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Anyway, my question is, you're authorizing up to 1 percent. What happens if it goes bananas, as zone 5 suggested, and it goes greater?

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You said this 1 percent is yours. Is the next 1 percent yours? Is the next 1 percent ours? Do — I know we are limited partners. And you're a controlling partner. But how far does this ballgame go?

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WARREN BUFFETT: Well, in terms of the size of the offering, it — whatever the size of the offering, it affects everybody economically the same. I mean, our shares are no different than the ones than the people in this room.

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So, we do not care, from an economic standpoint, whether the issue turns out to be approximately 1 percent or whether it was 1 1/2 or 3/4 of 1 percent.

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It simply — as long as we're not selling the stock below its true value, we are not going to be hurt by it. So, that —it's inconsequential to us. We're not going to be helped in any significant way by a large sale.

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The — it would appear, to me —we're just a few days away from the offering, and it's been out there awhile.

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So, I would doubt if there's huge changes. But I don't know the answer to that. I mean, that could depend on what happens in the general stock market.

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But I don't think you'll see any huge change in the offering. If there were a big change, we, obviously, would very promptly let the SEC know. The SEC has wanted us, as we have seen changes in demand as we've gone along, promptly change the size of the offering. And the covering page gets modified.

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And we’ve done that. Every day as indications come along, we've tried to be responsive to their instructions on that. And the 350,000 shares is our best estimate, as of last Friday, and —

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We'll look at it the next day or two. But I don't think it's going to change dramatically. I don't know, though. I don’t want to — I'm giving you a definitive answer on that. But it's just my — it’s a strong impression. Thank you.

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14. Only Class B questions

WARREN BUFFETT: Zone 4?

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AUDIENCE MEMBER: Mike Assail (PH) from New York City with a question for Charlie —

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WARREN BUFFETT: Good.

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AUDIENCE MEMBER: — about his investment models.

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I'd like to know the most useful models on industry consolidation, vertical integration, and models which explain the special cases when it makes sense to invest in retailing stocks —

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WARREN BUFFETT: Ah, well, I think —

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AUDIENCE MEMBER: — and if —

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WARREN BUFFETT: — I don't want to interrupt you now, but I think we'll save those to the general question and answer. This is only on the issuance of the Class B right now.

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AUDIENCE MEMBER: Oh. Sorry, sorry.

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WARREN BUFFETT: But we're glad to have that question later on.

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AUDIENCE MEMBER: Sorry.

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WARREN BUFFETT: It'll give Charlie time to figure out the answer for one thing. (Laughter and applause)

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We'll go through all of the questions regarding the Class B. And, then, we'll have a vote on the class —authorization of the Class B. And, then, we'll get into general questions and answers.

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15. Do B shares penalize Class A shareholders?

AUDIENCE MEMBER: Sir —

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WARREN BUFFETT: Somebody over there — we'll take another one from zone 4 if there's somebody — monitor.

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AUDIENCE MEMBER: Mark Findidi (PH) from Connecticut. I'll apologize ahead. This isn't meant to be an impudent question or — in any way, shape, or form.

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Do you think that the issuance of the B, in any way, might — in an effort to protect the folks who might be out there suckered in by the trust, if you will — in any way penalizes the A shareholders, either, one — or might penalize them — either, one, financially or, two, philosophically in the BRK experience?

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I don't mean that in any kind of elitist fashion, because I don't think you've ever propagated that. BRK doesn't propagate that. But clearly, there's a room full of people — or rooms full of people — who have made a commitment financially to show that their philosophy is with you. Does that get diminished?

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The other part of the question is the trusts, as you portrayed them, didn't sound terribly attractive. In a longer term, would they, perhaps, have ultimately failed as folks realize that they hadn't gotten into what they thought?

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WARREN BUFFETT: Well, they might've. But I think the rub off would've been on us rather than the promoters of the trust — might've been on the promoters, too. But in terms of the failure of the trust, I don't mean failure in an absolute sense, but in terms of disappointing their investors.

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I really think if tens of thousands or hundreds of thousands of people had come into something that was sold as being an all-Berkshire-type trust, if people came away disappointed in some years, I think they would tend to project that disappointment upon Berkshire fully as much as the promoter who sold the trust, who they might not even be able to find at that time.

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The first question, you know, this — I don’t think — we wouldn't be doing this if we thought it would hurt present shareholders, we — as much as we might detest something else that was going on. And we designed it so it — we felt that it wouldn't hurt present shareholders.

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In terms of them having a philosophy — the new shareholders having a philosophy similar to the present ones — we've tried to filter those out coming in.

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But I intend, after the offering, to send out a booklet, you know, kind of like freshmen at college, you know, orientation, greetings to Siwash U.

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And we'll send it to everybody, new shareholders and the old shareholders, explaining our philosophy, just as an orientation course on the company. And we'll get that out, probably, in a month or so after the offering settles down.

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I don’t see any reason that — you know, Berkshire has evolved over a long period of time. We had 12 shareholders at the annual meeting 15 years ago. And it — we seem to be able to retain the same class and group of shareholders, in terms of people who really understand the business. It's a different group than you find at other companies.

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And I think we can — as long as we've had this filter in effect, operating as new people join us, I think we can keep it.

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Charlie?

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CHARLIE MUNGER: Yeah. If the offering went wild and you issued 3 percent of the company, new, you're also taking in a billion-odd dollars. It is a — it's a non-event for us. (Laughter)

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WARREN BUFFETT: He's very excitable. Don’t say anything to him. (Laughter)

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16. Berkshire can't match previous gains

WARREN BUFFETT: Zone 5.

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AUDIENCE MEMBER: Ed Johnson (PH) from Park City, Utah.

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As you receive the proceeds of the Class B sale and generate other cash, are you seeing opportunities out in the marketplace to continue to provide the kinds of returns that we've been fortunate enough to experience in the past?

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WARREN BUFFETT: With or without the sale of the B, we don't see things to do that can maintain anything close to the average returns of the past. We've tried to convey that.

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And it becomes a mathematical absurdity. Money just won't compound at that rate in this world, absent extraordinary inflation. It certainly won't compound in real terms.

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So, absent the issue of the B, we are not looking at them. We're not seeing things. We're not hoping to find things that match some of the things that we have found in the past, relative to the capital base we've had in the past.

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But we have that problem with or without the B. And it has not changed in any, even very minor degree, by the issuance of the B.

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We are looking for things all of the time. Anytime we find anything that makes sense to us, we will do it.

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The harder part is to make sure that we don't do something when we don't find something that makes sense. I mean, that's the bigger worry.

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And when we find them, you know, they'll come along. And you never have — you never know when it's going to happen.

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We run into businesses — I described a little bit of that in the annual report — almost by accident that we've had — contracted to make one purchase this year. The people who run it are here today. And it came about because I was attending a birthday party. And, you know, I'll go to more in the future. (Laughter)

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So, things have not ended around here. We'll find interesting things to do over time. But they can't remotely be as profitable as the things we've found in the past, simply because of the large capital base.

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17. Not expecting volume spike for B shares

WARREN BUFFETT: Zone 6?

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AUDIENCE MEMBER: Hi. I'm Matt Zuckerman from Miami.

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I don't know, I think Charlie is the same class as Ev Dirksen. You know, $3 billion, we'll soon be talking about real money. (Laughter)

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WARREN BUFFETT: Yeah.

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AUDIENCE MEMBER: The two questions I have, basically, are, one — number one, referring to the gentleman over here before who commented on your popularity, which will definitely affect the stock, don’t you think —?

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And the second part of that is that even my wife's beautician has put in for some shares of this stock, and he represents a small tip of a large group who are probably doing the same thing on the one hand, so that there's going to be a large popular demand for the stock, which probably is not reflected in the numbers that the selling brokers are getting from institutions.

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And number two, mutual funds themselves, in order to lend some panache or glamour or whatever to their portfolios will certainly be sucking up Berkshire stock after this.

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And have you taken all of this into consideration when you decided upon the number of shares to go — that you're sending out, number one?

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And number two, that the reaction, at least in the first 14 days, of the public to the shares, which will probably be in the range of $1,100, might not send the B shares up high enough to make a very, very interesting spike in the price of the A stock.

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WARREN BUFFETT: Well, I — we've considered what you're talking about. I think that the issue has been well enough publicized that the demand will largely be reflected on the books of the underwriter in a day or two.

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And I see no reason at all for a spike in the stock. I mean, the way we've designed it should really prevent that. We — and we tell people not to expect it.

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If any institution wants to buy it, if any individual wants to buy it, they're going to have a chance to do it.

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And I don't see any reason why there should be some huge influx of people immediately subsequent to the offering that didn't hear about it during the offering period.

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It's interesting. I think most of the demand will be retail and smaller holdings, not so much institutional.

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The — most new offerings are done in a manner where the idea is to have far more demand than supply, and therefore cause people to, maybe, order stock they didn't even want, and just on the idea that this restricted supply will cause a big jump the first day, whether, you know — you've seen Yahoo or a number of other offerings.

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I think — I don't personally like that sort of distribution arrangement because you'll find that 30 to 40 percent of the issue will, perhaps, trade the first day. Well, I think — and, perhaps, at a lot higher price.

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I think there's something a little wrong with that kind of an offering, because the company obviously isn't getting the proceeds that are equivalent to what people are willing to pay. And favored customers get the chance to flip the stock and really are getting paid an exorbitant underwriting fee themselves, even though they're called purchasers, because they sell it the first day.

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We will be very interested in seeing the volume in the B stock the first couple of days, relative to the amount of the issuance.

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And I will be disappointed and I'll be surprised if the trading volume in the B stock the first couple days, related to whatever the size of the issue is, turns out to be anywhere near as high as with most new issues.

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I think that we will have a better success in finding people who really want to own it and who did not buy it to flip it, I think, by this method of distribution. But we'll have a test of that. We will see what happens in trading volume.

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And I invite you to look at the volume and compare it to the amount we issue and, then, look at that relative to other new issues this year and just see how successful we were in finding real investors rather than people who were buying it to sell it to somebody else the next day.

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18. Buffett's visibility and safety concerns

WARREN BUFFETT: Let’s see, was that zone 6? I guess we go to zone 1.

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(Long pause)

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CHARLIE MUNGER (quietly to Buffett): Maybe we can vote.

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WARREN BUFFETT (quietly to Munger): Yeah, but I don’t want to cut off —

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VOICE: Uh —

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WARREN BUFFETT: Charlie says maybe we can vote, but I do — I want people to have their questions — (Applause)

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It just encourages him when you do that. (Laughter)

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I want to be sure people get their questions answered on this. I don’t want to prolong it beyond —

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If you feel your question has been 95 percent answered by an earlier question, I hope you'll skip asking it.

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But we do want to have people that have questions about it answered, because I can tell by commentary and letters I've received that some people have genuine concerns. Yes?

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AUDIENCE MEMBER: My concern — oh, my name is Jan Anglin (PH). I'm from Southern Indiana. And this is my first Berkshire meeting.

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WARREN BUFFETT: Good.

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AUDIENCE MEMBER: I did have a concern about the B shares that's less business and more — I guess it would be concerned with your and Mr. Munger's personal safety.

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I often see your picture in the newspaper. And I certainly don't mind seeing it on financial magazines, but now, it's kind of, like, proliferating. I don't like the idea that you are so visible. (Laughter)

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That bothers me. It’s — I mean, do you understand what I'm saying?

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WARREN BUFFETT: No. I understand exactly.

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AUDIENCE MEMBER: This isn’t —

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WARREN BUFFETT: It's occurred to me. (Laughter)

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I appreciate that, and I — but the answer is there's no other way, I mean, if —

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AUDIENCE MEMBER: OK.

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WARREN BUFFETT: — over time

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AUDIENCE MEMBER: But can —

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WARREN BUFFETT: — in terms of what happens. And —

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AUDIENCE MEMBER: So —

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WARREN BUFFETT: — as it grows, you get more visible, basically.

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AUDIENCE MEMBER: Oh, I know. But along with the B shares and things, can you, kind of, like, be quotable but less available for photos? (Laughter)

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WARREN BUFFETT: Well, I normally am. I — if you've noticed, in terms of interviews or anything of the sort, I do not do them. I've been invited to go on all of the news shows. And I, basically, don't do it.

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Frankly, with the shareholders, I feel differently about this group. I'm delighted to see everybody come here. And I enjoy getting together with the shareholders. (Applause)

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I think the real protection is, if we'd done something that had caused the stock to balloon way up and then come way down, I might have had to be a little more careful. (Laughter)

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CHARLIE MUNGER: I think she has a very good idea. Having seen that acting — (Laughter)

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I think hereafter, maybe you should be the voice of Mickey Mouse. (Laughter)

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WARREN BUFFETT: I do appreciate the sentiment out of everybody. And there is a — it is unavoidable, to a fair degree. Although, Charlie may have thought I wasn't pushed into those acting jobs.

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19. Class A "forever" convertible to Class B

WARREN BUFFETT: Zone 2.

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AUDIENCE MEMBER: This Joe Greer (PH) from Omaha, Nebraska of all places. (Laughter)

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Regarding the conversion privilege, is there a time limit on the converting from the A to a B?

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WARREN BUFFETT: No. That's a good — I'm glad you asked that question.

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The first five days or so after issuance — business days — there's no conversion. But after that, you'll be able to convert until judgment day. It's forever convertible from A to B. But it's not convertible from B to A.

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So there's no need to convert it until you have a reason to do so. It — and as I've pointed out, there's a very slight disadvantage in converting. And I wouldn't — until I had a need, I would not convert it.

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20. How to convert Class A shares to B

WARREN BUFFETT: Zone 3?

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AUDIENCE MEMBER: Scott Dowling from Redmond, Washington.

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Kind of related to this question, as an A shareholder, I can only see really two reasons to convert A shares into B shares, one of them being gifting reasons.

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In regard to that, how does one convert A shares into B?

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WARREN BUFFETT: Yeah. That — yeah, there are instructions on that in the proxy statement as to how that — I guess it's in the annual report, too, that it describes how to do it.

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But, basically, you get in touch with the Bank of Boston to do that and proceed from there. Or if you have your shares with a broker, you would instruct your broker to do it.

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21. Class B price meant to discourage unreasonable expectations

WARREN BUFFETT: Zone 4?

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AUDIENCE MEMBER: Good morning. I'm Ruth Owades from San Francisco.

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I wondered, how did you decide that the ratio of the Bs should be 30-to-1 instead of 300-to-1 or something in between?

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WARREN BUFFETT: Yeah. We wanted to have something that was roughly — would trade, initially, at least, in the thousand-dollar range.

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We thought it very unlikely that anyone would find it commercially feasible to set up a trust that offered units that were denominated much below that.

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So, that's as low as we felt we had to go. And we did not want to signal, in any way, that, you know, some sort of last chance, or something like that, to get in for some very low sum for people that, you know, just had some wishes that they could turn a hundred dollars into 100,000 or something.

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I get letters from people that, you know, think that somehow that can be done. It can't be done.

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And we don't want to appeal subliminally or any other way to people who harbor those hopes.

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I'm sympathetic with them. But we don't have the answer to that. So, we went down to the level to match the unit trusts.

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22. B shares will increase book value, but not intrinsic value

WARREN BUFFETT: Zone 5?

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We'll try and do — we'll try to end the questions on the B fairly soon. But I don't want anybody that feels that they've got a — got some reservations about this — not to have a shot at asking their question.

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AUDIENCE MEMBER: My name is Bob McClure (PH). I live in Singapore.

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And the way I figure it, the sale of the B shares at the price they will probably be sold, will give an immediate boost to the book value of Berkshire Hathaway. So, as far as I'm concerned, the more the merrier.

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Can you give us your thinking on that, the accounting treatment, how this will affect the book value of Berkshire?

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WARREN BUFFETT: Well, any sell — shares we sell at the equivalent per A share of in the range of 33,000 or thereabouts, where the stock is selling now, will increase the book value per share.

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But that does not mean it increases the intrinsic value per share.

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I've said many times in the report, we use book value as a proxy in tracking movement of intrinsic value. But it does not represent anything like intrinsic value per share.

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And the key is not what it does to book value per share, but what it does to intrinsic value per share. And, you know, we believe the intrinsic value is materially higher than the book value.

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We don't spoil your fun by ever giving you a number. But — (laughter) — we do not regard the fact that it increases the book value per share as being any kind of a determinant in deciding to issue the shares.

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But it will have that consequence mathematically. The key is the relation to intrinsic value.

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23. "The facts are out on what we do"

WARREN BUFFETT: Zone 6?

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VOICE: I think there was a question over here.

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WARREN BUFFETT: Any questions in six?

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VOICE: Behind you.

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AUDIENCE MEMBER: Your problem seems to be that you’ve attracted a fair number of potential shareholders that don't have a way of estimating intrinsic value or developing expectations about what Berkshire's future prospects are.

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Now, do you have any suggestions about how they might do that, short of the general guidance that you can't continue to compound your intrinsic value at the same high rate that you have in the past because of your asset base, and that you don't believe the share is undervalued?

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WARREN BUFFETT: Yeah. Well, we'll probably talk more in the general question and answer period about our various businesses, but we simply try to give you all of the information about our businesses in a large, general way that Charlie and I consider important and that we would want if our positions were reversed.

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I can assure you that if all Charlie and I knew about our businesses, what we've publicly disclosed, it would not change our estimates from what they might be from being intimately involved with the businesses. The facts are out regarding what we do.

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So, you are in the same position to the extent that you have followed our kind of businesses and understand industry conditions and all of that.

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And we'll continue to do that. We essentially regard you as our partners. And we tell — we try to tell you exactly what we, as partners, would want to know if you were running the place. And we'll continue to do that.

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We won't tell you a number because we don't know the number. We have a range in our mind. Things change that range over time. And we'd probably get in all kinds of trouble if we tried to put out that range.

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And Charlie and I would not come up with exactly the same range. But they'd be pretty close. We'll talk more about that a little later.

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24. Shareholders approve Class B shares

WARREN BUFFETT: We do have questions now from zone 7 and 8 in the other room. So, we'll take on zone 7, please.

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VOICE: I guess you've answered our questions in seven.

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WARREN BUFFETT: Oh, took care of zone 7. How about zone 8?

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VOICE: No questions from zone 8.

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WARREN BUFFETT: Oh, OK. (Applause)

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I think, at this point, we can move on to general questions after we have this vote.

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And then, if you have another question or two that comes up during the general question and answer period, I’ll be glad to — we'll be glad to work those in at that time.

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So, we are now at the point: is there a motion to adopt the board of directors’ recommendation?

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WALTER SCOTT JR.: I move the adoption of the amendment to the fourth article of the restated certificate of incorporation that's set forth in exhibit A of the company's proxy statement for this meeting.

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VOICE: I second the motion.

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WARREN BUFFETT: The motion has been made and seconded to adopt the proposed amendment to the certificate of incorporation. It says here, “Is there any discussion?” but I'm not going to say that. We are ready to act upon the motion.

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

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Would the proxy holders please also submit to the inspector of elections a ballot on the proposed amendment, voting the proxies in accordance with the instructions they have received?

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

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ROBERT M. FITZSIMMONS: My report is ready. The ballot of the proxy holders received through last Friday cast not less than 970,495 votes in favor of the proposed amendment. That number far exceeds the majority of the number of all shares outstanding.

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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.

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WARREN BUFFETT: Thank you, Mr. Fitzsimmons.

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The amendment to the certificate of incorporation, as set forth in exhibit A to the proxy statement for this meeting, is approved.

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After adjournment of the business meeting, I will respond to questions that you may have that relate to the business Berkshire but do not call for any action at this meeting.

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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.

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WALTER SCOTT JR.: I move this meeting be adjourned.

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VOICE: I second the motion.

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WARREN BUFFETT: 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."

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VOICES: Aye.

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WARREN BUFFETT: All opposed say, "No." The meeting's adjourned. (Applause)

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25. Berkshire is more than its breakup value

WARREN BUFFETT: Now we'll to move to a — to general questions. And we'll do it by the same zone system.

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As I said earlier, any of you are free, obviously, to leave at any time. We will break formally at noon and reconvene about 15 minutes later, after you've all had a chance to buy a sandwich, and you can — (Laughter).

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Those in the other rooms can come in here. And we will go from then until about 3 o'clock.

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So, we'll start in with zone 1.

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AUDIENCE MEMBER: I'm Will Jacks (PH) from Chicago. I'm sort of representing Benjamin Graham today, the question he might ask.

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You talked earlier about how you — about the value of your shares, the A shares, let's say, because the B is tied to the A.

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But — and I know it — I don't expect a complete answer, but generally, how would you go about placing a value on the A shares?

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WARREN BUFFETT: Yeah. Well, that's obviously a key question. As I've said, we try to give you the information.

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But I think people, to the extent they've made a mistake in the past in valuing Berkshire — and they have made this mistake over time, including many commentators, including some institutions — is to look at it as simply a breakup value to our businesses.

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I mean, you know, you can — you could do the same with General Electric, we — a magnificently run operation by Jack Welch. But I don't think the way you should look at a business like General Electric is to think about what would happen if they sold each division today, paid the taxes, and then distributed the proceeds.

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And that has tended to be the case with many people looking at Berkshire, looking at it on a static basis. And that is not the way that Charlie and I have looked at it over time.

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It lends itself a little more to that kind of analysis because we have a lot of money in marketable securities. But we have a lot of money in other things, too.

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And the question of Berkshire, in valuing the intrinsic of any business, of course, is what is going to be the stream of cash over many years in the future — in fact, all of the years in the future, discounted back at an appropriate interest rate. I've talked about that in the past in the annual report.

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Berkshire is a collection of businesses. And some of which we own in their entirety, some of which we own part of. And some of those businesses have very interesting dynamics to them.

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And they — the value of our insurance business, for example, if you go back 26 — what was it? Twenty-eight years or so since we — 29, I guess — since we bought it from Jack Ringwalt. We paid 8.7 million, I believe, 8.4 — 8.7 million for two companies that Jack controlled.

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If you had the foresight at that time to — and I didn't, but — if you had the foresight at that time to see what that would develop out of that insurance business, you would've come to the conclusion that their value to us was going to be far, far greater than the value at which they were then carried on our balance sheet. They were part of a business which had enormous potential.

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And that's been, probably, the most significant asset that's been developed at Berkshire. But right now, we have over seven — right at 7 billion — over 7 billion — of float that's been developed from our insurance business.

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We couldn't foresee that 25 or 30 years ago. But it would've been a big mistake to think in terms of the book value of that business being representative of its actual value to us over time, if it was run right.

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And that situation probably prevails today.

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So, it’s a — Berkshire is a group of, on balance, very fine businesses to which we hope to add.

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The intrinsic value will be affected by the job we do in allocating capital. It'll be affected by the job our managers do in running their businesses. It'll be affected by some items that we don't foresee now and, perhaps, have no control over.

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But it is not measured, essentially, by what we could sell each separate business for and pay the tax on now. We haven't run it that way. We've run it so that we get the use of a lot of capital at very low cost.

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Between deferred taxes and our insurance float, we have some 12 billion or so on the liability side that we think will be a very low cost. And that’s — doesn't show as an asset, but it can be quite valuable.

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Charlie, you want to —?

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CHARLIE MUNGER: No. I don't think I've got anything to add to that.

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WARREN BUFFETT: Oh. I was all set to write it down, too. (Laughter)

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26. Buybacks at what appear to be high stock prices

WARREN BUFFETT: Zone 2, please.

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AUDIENCE MEMBER: Mr. Buffett, Mr. Munger, I'm Tim Medley from Jackson, Mississippi.

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My question is an allocation of capital one. You've indicated that one thing you like in companies is a willingness on the part of management to repurchase its own shares.

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I wonder if you would talk for a minute about your own frame of reference on repurchases when it appears that the current price of the stock is rich in relation to its intrinsic value.

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And some have said that, with the right company, ongoing repurchases of stock should be made, irrespective of the price.

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So, would you speak for a moment, as to how you think it pencils out when the current price of the stock is rich in relation to its intrinsic value?

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WARREN BUFFETT: Yeah. If you're repurchasing shares above a rationally calculated intrinsic value, you are harming your shareholders, just as if you issue shares beneath that figure, you are harming your shareholders.

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That's a truism. Now, the tough part of that, of course, is coming up with the intrinsic value.

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And, for example — a good example might be Coca-Cola.

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I think a number of people might have thought Coca-Cola was repurchasing shares at a very high price, because they'll look at book value or P/E ratios. But there's a lot more to intrinsic value than book value and P/E ratios. And anytime anybody gives you some simplified formula for figuring it out, forget it.

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You have to understand the business. The people who understood that business well, the management, have understood and been very forthright about saying so over the years, that by repurchasing their shares, they are adding to the value per share for remaining shareholders.

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And like I say, people who didn't understand Coca-Cola, or who thought mechanistic methods of valuation could — should take precedence, really misjudged the value to the Coca-Cola Company of those repurchases.

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So we favor — when you have a wonderful business — we favor using funds that are generated out of that business to make the business even more wonderful. And we favor repurchasing shares if those shares are below intrinsic value.

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And I would say that if it's a really wonderful business, we probably come up with higher intrinsic values than most people do.

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We have great respect, Charlie and I with — I think it's developed over the years — we have enormous respect for the power of a really outstanding business. And we recognize how scarce they are. And if a management wishes to further intensify our ownership by repurchasing shares, we applaud.

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We own — we just went over 8 percent of the Coca-Cola Company, probably, in the last three or so months, by a very tiny fraction. But we had a second purchase one time.

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But our percentage interest in the Coca-Cola Company has gone up significantly through their repurchases. And we are better off because they have bought those shares at what looked like, to some people, perhaps, high prices. And we thought they were wrong at the time, and I think now it's been indicated or proven.

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So, I urge you, if you're trying to decide on the wisdom of repurchases, or of share issuances, that you don't think in terms of book value. You don't think in terms of specific P/Es. You don't think in terms of any little model.

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But you think in terms of what would you really, A, pick businesses you can understand and, then, think what you really would pay to be in those businesses. And that's what counts over time, is whether the repurchases are made at a discount from that figure.

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And I would say with the companies that we own shares in, we — our interest in GEICO went from 33 or so percent to 50 percent over a 15-year or so period, simply through repurchases. And we benefitted significantly.

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So, did every other shareholder, I might add, that stayed with the company. And we benefited in no way disproportionate to them.

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But that was a very wise action on their part. And there too, they were all — usually buying that stock at at least double book value. And you could compare it to other insurance stocks and say, "Well, that's too much to pay."

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But GEICO wasn't an insurance company that was comparable to other insurance companies. It was a very different sort of business. And they were very wise, in my view, to be following that course of action.

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Charlie? No?

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27. B shares won't dilute value of A shares

WARREN BUFFETT: Zone 3?

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VOICE: That’s you.

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AUDIENCE MEMBER: Oh, sorry. I'm Elaine Cohen (PH) from San Diego.

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I'm a little confused about how the B shares are going to be moving if they're at 1/30th of the A shares when they get out on the market.

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Are they always going to be 1/30th of the A shares? And if they are, is that going to dilute the earnings of the A shares? Could you just explain that?

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WARREN BUFFETT: Yeah. It won't dilute the earnings or value of the A shares as long as we use the money reasonably effectively that is produced.

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As I mentioned earlier, if it happens to be 1 percent, you'll own 1 percent less of all these other things — on the other hand, will have close to $400 million more of cash. So, it will not — in our view, it will not dilute the value of the A.

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I expect, over time, that the B, a very large percentage of the time, will be selling very close to a 30th. But it could sell for less than that ratio. It can't sell for any significant amount more than that ratio, or arbitrage will eat away at any slight premium. I think that takes care of that.

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28. No "secret formulas" for Wells Fargo

WARREN BUFFETT: Zone 4.

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AUDIENCE MEMBER: Mr. Buffett, my name is Hugh Stephenson. I'm a shareholder from Atlanta, Georgia.

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My question involves the company's interest in Wells Fargo. As you know, Wells Fargo, like most banks, has a very expensive branch system for deposit-gathering and servicing their customers.

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As I guess you know, they also have moved more into branches in supermarkets and in online banking that seems to have the potential to very significantly reduce their costs, relative to the branch system.

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Would you comment on how you think that might play out and how significant it might be?

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WARREN BUFFETT: Well, the question — you're right. Wells Fargo has been a leader in moving into supermarkets. They've got a couple different formats they've used. And they've been a — they’ve certainly been a leader in the online banking services.

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Unfortunately, in banking, you know, it's a little hard to have any secret formulas. Coca-Cola has 7X down there in the vaults of the, what used to be the Trust Company of Georgia, now SunTrust. But in the banking business, anything you do, your competitors can copy.

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Nevertheless, there’s a — there is an advantage. And sometimes it can be a quite — a significant advantage in being first and learning more about different distribution methods. And I think Wells Fargo has done a terrific job in learning that.

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I think they've got some advantages. They — but they aren't advantages that other people can't work at copying and chipping away at.

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But it's a good management. They've done a very good job of seizing on that particular trend in supermarkets.

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And as such, they are — they have the potential, perhaps, for having a relatively low-cost deposit-gathering operation. And every other bank in the world will be looking, noticing how that works, not only there but at other banks, to figure out whether they can copy it.

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Charlie? OK.

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29. GEICO benefits from being entirely owned by Berkshire

WARREN BUFFETT: Zone 5.

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AUDIENCE MEMBER: My name's Alan Parsow from Omaha.

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Berkshire has increased the rate of growth in its insurance float in excess of 20 percent a year since 1967.

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In regards to GEICO, its rate of growth, what is its historic rate of growth been in its insurance float? And what impact will it have on the rate of growth in the overall Berkshire insurance float?

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WARREN BUFFETT: Well, I would say that GEICO is a huge plus to Berkshire. Now, we owned 50 percent of it before. I mean, we’ve had a — we've benefitted from our GEICO investment in a big way, ever since 1976. So, it's not entirely a new benefit that's coming in.

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We paid a good price for GEICO, but it is a terrific company. It has outstanding management. It has a low-cost method of distribution, which is very difficult for people to — I mean, everybody wants to have that. But they — very few come close to it.

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The management is focused on bringing costs down even further and widening that competitive moat.

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GEICO — I personally think that, just from what I see, that GEICO — I would think GEICO's growth rate is likely to be greater, at least, in the future, that I can see, over where it has been in the past. But it's been perfectly satisfactory in the past.

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I think there are some advantages to it being part of Berkshire, in that there are costs attached to bringing new business on the books. And we care not at all about reported quarterly earnings.

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GEICO was relatively insensitive to those before. And that's a compliment when I say that. But they had some more pressure on them in respect to reported earnings than they will have, as part of Berkshire.

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And I think there's some really big opportunities, in terms of what can be done with GEICO as part of Berkshire.

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So, I think five years from now, you'll be very happy with the fact that we own a hundred percent of GEICO.

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And I think you will see that as marvelous a company as GEICO was independently — as an independent company — it will flourish maybe even a bit more as being part of Berkshire.

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Not because we bring anything to the party. I mean, the management will continue to run it autonomously. But there’s — there are some advantages for it in being part of a larger enterprise.

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30. Berkshire businesses worth more than book value

WARREN BUFFETT: Zone 6.

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AUDIENCE MEMBER: Mr. Buffett, my name is Steven Tuchner. I'm a shareholder from Toronto, Canada. And my question concerns the valuation of Berkshire shares.

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Given the large number and dollar size of the private businesses recorded at historic cost, which Berkshire owns, shouldn't the multiple to book that the stock trades at, essentially, expand over time to reflect the increases in intrinsic value of the private holdings?

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And I cite Buffalo News on the books at, essentially, I think around zero. And even GEICO now will be on the books at, probably, between 3 and 4 billion — worth more than that — as examples of the disparity between intrinsic value and book value?

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WARREN BUFFETT: Most of the businesses that we own all of, or at least 80 percent of, are carried on the books at considerably less than they're now worth.

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And with some of them, it's dramatic, although it's not dramatic compared to a $40 billion total market valuation for Berkshire. It's dramatic relative to the carrying price.

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Because when we bought See's Candy for an effective $25 million in 1972, it was earning 4 million, pretax. It earned over 50 million, pretax, last year. When we bought the Buffalo News, it was making nothing. Paid 30 and a fraction million. And it's now earning, maybe, 45 million. And we've got a number of businesses. And GEICO's worth more than we carry it for because of the accounting peculiarities of the first 50 percent.

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So, it is true that, overwhelmingly, our businesses are worth something more than intrinsic value — than book value — and, in many cases, very substantially more, although that's reflected in the market price of our stock.

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I don't think you can go from year to year and trace the intrinsic value precisely by changes in book value. We use changes in book value as a very rough guide as to movement, and sometimes I comment.

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There have been certain annual reports where I've said our intrinsic values grew more than the proportional change in book value, and there's been others where I've said I thought it was roughly the same.

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So, I don't think you can use it as a — stick some multiplier on it and come up with a precise guide — a precise number. But I do think it's a guide to movement.

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Our insurance business, though, is the most dramatic case of dollar difference between book value and intrinsic value. I mean, the number has gotten very big over time there. I personally think it will tend to get bigger, because I think GEICO will grow, and I think our other businesses will do well.

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The trick, of course, is to take the new capital as it comes along — and not from the issuance of the B, because that's relatively small compared to the amount of capital we will just generate from operations.

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Our float will grow from year to year. Our earnings will be retained. And we've got to go out and find things to do that three or five years from now that people say, "Well, that's worth more than the book value." And that's a job. It's a tougher job than it was. But it's kind of fun.

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31. Not expecting B shares to affect price of A shares

WARREN BUFFETT: Zone 7?

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AUDIENCE MEMBER: Yes. My name is Jim Elliot (PH). I'm from Minneapolis.

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I wonder if you could help me with an upside scenario where the B shares, after they're issued, are limited and there's not a significant reissue afterwards. The A shareholders are somewhat reluctant to convert. And you have a run on the B shares where, let's say, it goes to $2,000 a share.

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Do we then have the tail wagging the dog, where the 2,000 command a $60,000 price on the A shares? And, you know, what — does the — this arbitrage take care of that? Or —

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WARREN BUFFETT: Well —

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AUDIENCE MEMBER: — what do we do in that case?

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WARREN BUFFETT: If there is demand for the B that pushes the price up somewhat, it will produce conversion from the A. I mean, the only way the B will be able to get — we'll just pick a figure — if it were to get to $1,200 — there is no way that the A could be selling appreciably below 36,000.

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And I don’t think — I think that introducing the B into the equation, may mean — it will mean — that there will be some people who like a lower denomination stock and come in.

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But it takes a lot of that to, in an appreciable way, affect $40 billion worth of what is now A stock.

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So, you know, if there were incremental demand of a hundred million dollars a year or something like that, that's a little more than the demand that might otherwise go into the A. But I do not see it producing anything in the way of a big movement.

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But you're quite correct in that there's no way that the B stock can go up and not really force some conversion from the A. It’ll — I think it'll be minor.

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32. World Book Encyclopedia business won't be sold

WARREN BUFFETT: Zone 8?

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AUDIENCE MEMBER: Hello. This is Rick Merliof (PH) from Oakland, California.

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I wanted to ask you about World Book Encyclopedia. World Book seems to me to be an example where Berkshire has invested in technology without necessarily intending to.

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I would expect that in five or 10 years it's going to be real tough to sell a paper encyclopedia, because at that time, you'll probably be able to buy the computer and the electronic encyclopedia for less than the paper encyclopedia.

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Up till now, I haven't had the impression that World Book has been as aggressive as its competitors in marketing and developing its electronic product.

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It's been the highest price that I have seen of the competition. It’s — it asked at least — a year ago, its list price was 600 and the competition was 8,200.

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You sold as low as a hundred on special promotions. But it — I don't think that was the list.

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A year ago, you were still selling by direct sales. I have not yet seen it in a mass market software store. I've never seen it bundled with a computer.

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And I have seen one newspaper review of electronic encyclopedias that mention the World Book print version but didn't seem to be aware that a World Book electronic version was available, which it was at that time.

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In terms of the product itself, we have both the World Book and the Grolier's at our house. The Grolier's came with the computer. And both encyclopedias, in this last year, solicited us to buy an upgrade. World Book was asking $85. Grolier's was asking 30.

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But in addition, I ended up buying only the Grolier's, because it addressed my biggest disappointment on the original version of both of them, which — it’s sort of a — in a way, a minor issue. But I thought it was relevant for kids doing school reports.

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Neither one allows you to print out a very big percentage of the pictures in the encyclopedia. They have a lot of pictures. But you can't print them. And you can get a color inkjet printer for under 200 bucks these days, so it's real practical to print things out.

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The World Book made no mention of having any improvement in this area. The Grolier's said you can print out almost all the pictures. And I have found — since we got the upgrade — I found that to be true.

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So, I'm concerned that — I'm not an expert on this, but I don't think World Book is as aggressive in either developing or marketing its electronic encyclopedia.

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So, my question is, do you plan to become aggressive in this area and a leader in the electronic technology? Or have you considered selling your electronic business and just getting out of it?

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WARREN BUFFETT: Yeah. We won't sell the electronic business. That, I can tell you.

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You're quite correct. Some of the technical stuff I'm not very good at. I have a little trouble turning on the light switch.

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But the — (laughter) — in terms of the bundled product, which is the encyclopedia that is offered with the purchase of a new computer, there's no question that that's become a large business in units.

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It's not so large in terms of dollars, because those units, bundled with an original equipment sale, are very low. Actually, Encarta's probably — well I'm sure has sold, you know, many, many millions of units bundled with a new encyclopedia. It doesn't necessarily produce a lot of dollars. But it produces a lot of units out there.

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We, at World Book — Encyclopedia — some of you may not have noticed, but Encyclopedia Britannica has, within the last couple of weeks, announced the cessation of direct distribution of the print product.

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And unit sales of encyclopedias — print encyclopedias — in the country have gone down very significantly in the last few years, as they have at World Book.

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We changed the — we are in the process of changing, and have already changed in some parts of the country — the distribution system because we are going to see what can be made to work, if anything, in the direct distribution.

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There are some indications that we may be able to make money in that business but with a different cost structure than before. And it — well, we'll know more about that. We're not that far along, because we changed the distribution within the last — or partially changed it — within the last few months.

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We — it's not easy to figure out how to make money in either the electronic or print encyclopedia end of the business. And we have some ideas in the electronic end that we'll know a lot more about in about six months or so, but I can’t really — I don't want to go into any detail on those at present.

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I've got the electronic product myself. It's a first-class product. We’ve got ideas about how to make it an even better product. And we have taken a lot of costs out of the print end of the business. We'll be putting some of those into the electronic end. But we've taken a lot of costs out.

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It may well be that it'll be a workable business for us, even though it isn't for anybody else, but the jury's still out on that.

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It is not the business it was five years ago. And I don't think it will be the business that it was five years ago, because the world is changed in some ways on that.

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But we’re — we will not sell World Book. That I can just — I'll state that unequivocally. We will not sell electronic World Book. We are in the business to stay.

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But we are groping a bit in terms of figuring out a configuration that will produce decent profits for us and sell a lot of World Books in the process.

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Charlie?

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CHARLIE MUNGER: We don't have any way of avoiding declines in some of our businesses some of the time.

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Blue Chip Stamps once sold stamps at the rate of $120 million year. Now, it's about $200,000 a year. So, we lose some. (Laughter)

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WARREN BUFFETT: We were in the windmill business many years ago. (Laughter)

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We try to make — you know, we think plenty about the problems. But there are industry problems.

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I was in anthracite coal at one time, too. Street railways. I've seen them all.

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But World Book is a first-class product. It's a product I use, a product Charlie uses. And there is — through an electronic means, you can deliver information at costs far, far less than — I mean, unbelievably less — than was the case not that many years ago.

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And the world, in many forms, will be adjusting to that, not just in encyclopedias. And it affects some of the businesses we're in. And it's something we think about. But it's very unlikely that Charlie and I are going to be smarter than the rest of the world, in terms of the electronic world.

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I mean, we are looking at it as something where we’re looking for the obvious, and something that is within our capability of doing something about. But we're not trying to beat people at their own game, where we're not very good at the game.

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33. Protecting public shows "tremendous integrity"

WARREN BUFFETT: Zone 1?

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AUDIENCE MEMBER: Mr. Buffett, Richard Charlton from Canada. One of the highlights of — good afternoon, Mr. Munger, also. (Laughter)

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One of the highlights, for me, in coming to the annual meeting for the past seven or eight years was the way that you dealt with the question that was inevitably asked by a new shareholder as to why you will not split your shares.

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I know how much it has meant to you to keep the shares trading in an exclusive way. And you have been my mentor for the last 17 years.

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And I think that what you're doing in splitting these shares in order to protect the public, and indirectly, Berkshire shareholders, but mostly to protect the public, is just another expression of your and Mr. Munger's tremendous integrity.

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And you're setting a fantastic example for corporate America. And I salute you, sir. And I thank you very much. (Applause)

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WARREN BUFFETT: Thank you. Thank you.

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34. "The fairer, the better" for Berkshire's stock price

WARREN BUFFETT: Well, I hate to leave zone one after that, but we'll go on to zone 2. (Laughter) Thank you.

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AUDIENCE MEMBER: Wesley Jack from Oklahoma City, Oklahoma.

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As a stock broker, I can say I definitely don't like UITs and I appreciate your plan for the B shares.

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But as long — with the rest of the shareholders, what we hope — that the shares go up in value in the future. Don't you see a problem with them coming back with this idea in the future?

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WARREN BUFFETT: On the unit — you mean on the issuance of unit trusts?

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AUDIENCE MEMBER: Yes.

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WARREN BUFFETT: Oh, I don't see any problem because the B will be out there. And it is a superior product, whatever its absolute merits may be. On a relative basis, it is a superior product to anything that is going to carry a big commission to a salesperson and a lot of annual costs.

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So, I think — my guess is we've taken care of that problem. I wish it hadn't come up, but it — I would think that it would be very difficult for anyone to honestly offer a product — a derivative-type product — through a unit trust that would be superior to buying the product that will be available.

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CHARLIE MUNGER: I think he's afraid that the B will go up to the place where the whole story comes again. And I must say that if that were to happen, we'd like it. (Laughter)

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WARREN BUFFETT: Well, we'd like it, only if it reflected underlying values, but — (Laughs)

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CHARLIE: Yeah.

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WARREN BUFFETT: Yeah. We have a very strange attitude on that. I mean, most managements feel that the — on the price of their shares — that the higher, the better. And that's an understandable feeling. But the trouble is the game isn't over at any time.

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We really feel the fairer, the better. Our goal is that every shareholder participates in the progress that Berkshire makes, during — as a business — during their holding period. In other words, we don't want one party getting wealthy off the other. We want them to share based on the gain in value of the business.

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And to the extent that the stock got way overvalued or way undervalued, you know, that may make one party — in the first case, the seller, in the second case, the buyer — very happy. But there's somebody on the other side of the transaction.

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In economics, you know, the most important question — maybe important beyond economics, too — but whenever somebody tells you something, you know, the first question to ask yourself is, "And then what?" And we tend to do that around Berkshire.

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And so, the stock going up is not an end of itself, because it’s — the next question is, “And then what?”

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And to the extent that the stock goes up because the intrinsic value goes up, everyone is getting their fair share of the pie as they go along.

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To the extent it exceeds that in some way, the selling shareholder gets a benefit. But the entering shareholder is at a disadvantage. And we really like the idea of the price tracking intrinsic value over time.

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And we think that, by having the right kind of shareholders and by communicating with them properly and following the right kind of policies, that we can come as close to that as is attainable in a world where markets, essentially, are fairly volatile. And so far, I think it's worked out pretty well that way.

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But the intention is to — and the goal — is to keep it that way.

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One thing to remember: in the end, the owners of businesses, in aggregate, cannot come out anyway better than the businesses come out.

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I mean, you can — the businesses are the — and not just our businesses, I'm talking about all American business — the profitability of American business determines the profitability of what the owners of American business have, and you can forget all about the little ticker symbols and everything else.

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The owners suffer to the extent that they have some extra costs imposed in broker's commissions, fees, all kinds of things. That diminishes the return from the business. But no one has figured out yet how to perpetually have owners do better than their businesses.

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And our idea is to have them do it as they go long in proportion to the gain that occurs during their tenure as a shareholder. And that isn't easy to do. And it's not attained perfectly. But that's the goal as we go along.

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35. Insurance float: "Above all, get it cheap"

WARREN BUFFETT: Zone 3?

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AUDIENCE MEMBER: Maurus Spence. And I have a serious question and, then, a less serious question first.

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The less serious: you said that you and Charlie had lost, between you, a hundred pounds. I was curious who had lost more?

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WARREN BUFFETT: No, no. I said the board had lost a hundred pounds. (Laughter)

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I have some members of the board who would take umbrage of the fact that they weren't included in that total. (Laughter)

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AUDIENCE MEMBER: OK, Who lost —?

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WARREN BUFFETT: Charlie and I, we're pretty close at the moment, aren't we? Modesty prevents — (Laughs)

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AUDIENCE MEMBER: I must say you're both looking very good, anyway.

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WARREN BUFFETT: We’re feeling good.

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AUDIENCE MEMBER: I was wondering who lost the most and what your diet secrets were. (Laughter) And, then, the more serious question was about float.

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You touched on this a little bit earlier. But you've often said that your insurance business is probably the most important business that you own.

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On page 12 of the annual report, you said, "We have benefitted greatly to a degree that has not been generally understood, because our liabilities have cost us very little."

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I was wondering if you could describe this a little bit better so we can understand it.

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WARREN BUFFETT: Yeah, the — Charlie and I have lost about the same amount, at about 20 pounds each.

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The insurance business provides us with float. And float is money that we hold that doesn't belong to us.

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It's like a bank having deposits. A bank has deposits. The money doesn't belong to it. But it holds the money.

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Now, when a bank holds deposits, on everything except demand deposits, there's an explicit cost, an interest rate attached to it. And, then, there are the costs of running the system and gathering the money which is — also must be attributed both to demand and time deposit.

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So there's a cost to getting what they would call deposits and we could call float.

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In the insurance business, a similar phenomenon takes place in that policy holders give us their money at the start of the policy period. And therefore, we get the money paid in advance for the product.

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And secondly, it takes time to settle losses, particularly in the liability area. If you bang up a fender on your car, you — it's going to get settled very quickly, so there’s — but if there's a complicated injury or something, it may take some years to settle. And during that period, we hold the money.

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So, we have, in effect, something that is tantamount to the deposits of a bank. But whereas the deposits of a bank, it's quite easy to calculate the approximate cost, in the case of the float that the insurance company has, you don't really know what the cost of that float is until all your policies and losses — policies have expired and your losses have all been settled. Well, that's forever, in some cases.

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So, you're only making an estimate, as you go along, of what that float is costing.

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To date with Berkshire, in the 29 years we've been in the business, it appears — never certain, because you don't know for sure what's going to happen — but it appears that our float has not cost us anything, in — on average.

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There's been years when we've had an underwriting loss when there's a cost. There's been years when we had an underwriting profit. And so, we had a reverse cost.

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So we have obtained that float on very advantageous terms over the years. Far more than — fully as important as that— it's important to get it at a low cost, in our case, no cost. But the other important thing is that we've grown it dramatically.

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And so, we've gotten more and more money without having any cost attached to it. And if we still had our 16 — or 17 million, I guess — of float that we had in 1967 and it was no cost, it would be very nice.

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But 17 million of free money is worth something, but it's not worth a ton.

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Having seven billion, if we can achieve that as free money, it's worth a lot of money. And that growth has not, probably, generally, been appreciated fully in connection with Berkshire nor has the interplay of how having zero-cost money, in terms of affecting our gain in value over time.

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People have looked at — always looked at our asset side, but they haven't paid as much attention to the liability side. Charlie and I pay a lot of attention to that.

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And, I mean, this — it's not entirely an accident that the business has developed in this manner. And we have intentions of trying to make it continue to develop in this manner, and in that manner, in the future. But we've got competitors out there, too.

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Float, per se, is not a blessing. We can show you many insurance companies that thought it was wonderful to generate float. And they have lost so much money in underwriting that they'd be better off if they'd never heard of the insurance business.

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But, you know, the job is to get it, get it in increasing quantities, but above all, get it cheap. And that's what we work at.

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And you do that in the business through having some kind of competitive advantages. You won't do it just by having an ordinary insurance company. The ordinary insurance company is not a good business.

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We have it, in certain respects, because of our attitude toward the business. We have it because of our financial strength gives us certain competitive advantages, and we have it in the case of GEICO, because of a very low-cost operation.

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And it's us — up to us — to try and figure out ways to maximize each one of those competitive advantages over time.

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We've built those advantages. I mean, in 1967, we were not looked at that way in the insurance business. We were — we've built a position of competitive strengths. And in the case of GEICO, they had it without us. But we have bought into it over time.

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It's a very important asset. And you ought to pay a lot of attention over the years as to what is happening in — with that asset as to both growth and costs. And that will aid you in calculating intrinsic value.

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Charlie?

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CHARLIE MUNGER: Nothing to add.

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WARREN BUFFETT: OK.

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36. Intrinsic value isn't above current stock price

WARREN BUFFETT: Zone 4 is the next.

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AUDIENCE MEMBER: Henry Neuhoff (PH), shareholder, Dallas, Texas.

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My guess is that you consider the intrinsic value of the shares to be more than that represented by the price.

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WARREN BUFFETT: By more than represented by what?

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AUDIENCE MEMBER: More than represented by the current price of the shares.

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If that be the case, what would be your thoughts about Berkshire repurchasing its own shares?

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WARREN BUFFETT: Yeah, no. We have said we do not consider Berkshire undervalued at this price. We didn't say we thought it was overvalued. But we said we did not consider it undervalued.

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So, a repurchase based on our estimate would not be in the interests of shareholders.

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It's conceivable it could be at some time, but we do not think that's the case. We think intrinsic value far exceeds book value, but we do not think it exceeds present price.

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We're not selling any shares, though, either. (Laughter)

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(Break in tape)

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37. Complications from "street name" shareholders

WARREN BUFFETT: Zone 6?

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AUDIENCE MEMBER: My name is Carlos Lucera (PH). I'm from Idaho. And my question relates to street names.

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Our stock at Berkshire Hathaway is in a family limited partnership. And in addition to that, it's in a street name.

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Now, what is the reason, and the rationale behind the reason, for street name shares not being able to participate in the charitable contributions by Berkshire Hathaway?

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WARREN BUFFETT: Yeah. We submitted a request for ruling to the IRS — I don't know, 15 or so years ago, in connection with the shareholder-designated contribution program.

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And the ruling we received specifies record holders and not street name holders. Now, that doesn't mean that a different ruling might not be obtained.

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But frankly, when we get into the multitude of indirect holdings and the problems we have with those indirect holdings in other respects, I think it would be a bit of a nightmare for us to attempt to get that program extended through — into street name holders.

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I think the costs would far exceed the benefits. And I think that it is the situation, and anybody with it in street name can move it into their own name if they want to.

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So I think, with very small amount of effort on the part of an individual shareholder, it would offset an enormous set of problems that we would encounter at Berkshire.

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We can handle the present system. We've got 12 people there. And they run the annual meeting. They make movies. They do all kinds of things. (Laughter)

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And it would be — it would be very tough and — you know, if an extra 10,000 shares participated, it'd be $120,000 of contributions. I just don't think it would be worthwhile.

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Our ruling doesn't presently cover the subject, in any event. It's something we've thought about.

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Charlie?

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CHARLIE MUNGER: Yeah. I think even if they changed the ruling, we wouldn't change the policy. It would be, administratively, very difficult.

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WARREN BUFFETT: We run into other problems, in terms of people getting their material — just the material on the annual meeting.

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And we've heard from a number of shareholders that they can't get it from their broker, and they’re — they don't know what the B is all about because they didn't get their proxies. And it just — street name posed more problems.

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Although, we have a — now we have — probably have more than — forget about the B. We have more than twice as many, I believe, holders in street name as in direct ownership. Although, the number of shares is far, far — I mean it’s — it'd be less than 20 percent of the shares. But it's probably double the number of holders.

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38. No "look-through earnings" in annual report

WARREN BUFFETT: Zone 7?

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AUDIENCE MEMBER: Good afternoon. My name is Bill Guerra (PH). I'm from the San Francisco Bay area. I've owned your shares for many years and appreciate the good job you've done.

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However, in this year's chairman's letter — you developed a concept a few years ago called look-through earnings.

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WARREN BUFFETT: Right.

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AUDIENCE MEMBER: And I failed to see that this year. And I'm wondering if that no longer is a valid concept or why you refrained from showing the data?

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WARREN BUFFETT: Yeah. That's a good question. I should have actually covered that in the annual report, in terms of mentioning — because I've talked about it, and we'll talk about it in the future.

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And we do have a goal on look-through earnings of $2 billion in the year 2000. And that's going to be adjusted upward to allow for the fact there are more shares outstanding. It'll be the same basic goal.

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But there were two reasons that it was skipped this year. And like I said, I should've mentioned it.

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One was it was the longest letter we've ever had. And having that section in there would've elongated it even a bit more. And that, coupled with the fact — and this is the important part of it — we had major changes in our — the composition of the company — immediately after the end of the year.

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So, our Capital City stock disappeared. At the time it disappeared, we didn't know whether it was going into cash, or all Disney stock, or a combination.

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We had the acquisition of the other half of GEICO where, even now, the accounting treatment isn't clear. And I felt that —

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The look-through earnings last year were fine. But I felt that, by the time I got through explaining all of the adjustments you would have to make for the transactions then pending, that adding it to the — to already the longest letter I've written, would've slowed things down a lot and not been particularly helpful.

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It will be back in this year, this upcoming report, and future reports, because it's a very important concept. And it's something that we're focused on.

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It's just that last year's number — it would've been a mess by the time I got through trying to explain it.

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You know, I normally — the accounting stuff, I know, puts a lot of you to sleep. But believe me, it isn't so much fun writing it either. (Laughter)

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So, I skipped it this year. We'll have it next year. And the number would've been OK last year, but there would've been a lot of asterisks attached.

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39. Discount rate for estimating intrinsic value

WARREN BUFFETT: Zone 8, please.

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AUDIENCE MEMBER: Yes. Mr. Buffett, good morning. My name's Ed Walzak (PH) from New York. I'm a student and an admirer of your investment philosophy. I have a question.

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In determining a company's intrinsic value, you seem to write or indicate that you project out a company's owner earnings for a number of years, and then discount that back by prevailing rates.

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My question is, how much of a premium, if any, to prevailing risk-free rates do you demand when you discount back the owner earnings of a company?

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Or stated differently, for example, today, with loan rates at about 7 percent, if you did the same exercise with Coca-Cola, at what rate of interest would you discount back their owner earnings?

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WARREN BUFFETT: Yeah. We get asked that question a lot. And we've answered it to some extent in past annual reports about what discount rate to use.

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We basically think in terms of the long-term government rate.

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And there may be times, when in a very — because we don't think we're any good at predicting interest rates, but probably in times of very — what would seem like very low rates — we might use a little higher rate.

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But we don't put the risk factor in, per se, because essentially, the purity of the idea is that you're discounting future cash. And it doesn't make any difference whether cash comes from a risky business or a safe business — so-called safe business.

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So, the value of the cash delivered by a water company, which is going to be around for a hundred years, is not different than the value of the cash derived from some high-tech company, if any, that — (laughter) — you might be looking at.

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It may be harder for you to make the estimate. And you may, therefore, want a bigger discount when you get all through with the calculation. But up to the point where you decide what you're willing to pay — you may decide you can't estimate it at all. I mean, that's what happens with us with most companies.

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But we believe in using a government bond-type interest rate. We believe in trying to stick with businesses where we think we can see the future reasonably well — you never see it perfectly, obviously — but where we think we have a reasonable handle on it.

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And we would differentiate to some extent. We don't want to go below a certain threshold of understanding. So, we want to stick with businesses we think we understand quite well, and not try to have the whole panoply with all different kinds of risk rates, because, frankly, we think that'd just be playing games with numbers.

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I mean, we — I don't think you can stick something — numbers on a highly speculative business, where the whole industry's going to change in five years, and have it mean anything when you get through.

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If you say I'm going to stick an extra 6 percent in on the interest rate to allow for the fact — I tend to think that's kind of nonsense. I mean, it may look mathematical. But it's mathematical gibberish in my view.

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You better just stick with businesses that you can understand, use the government bond rate. And when you can buy them — something you understand well — at a significant discount, then, you should start getting excited.

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Charlie? (Laughter)

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CHARLIE MUNGER: Yeah. The discounts were once greater than we now see.

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WARREN BUFFETT: That's all you're going to get, folks. (Laughter)

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40. See's Candies not going fat-free anytime soon

WARREN BUFFETT: Zone 1?

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AUDIENCE MEMBER: Hi. Warren, it's Peter Newman, Nick and Racky's son. You can't see me because I'm on your hard left over here.

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And by the way, Racky says to send her love to you —

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WARREN BUFFETT: Great.

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AUDIENCE MEMBER: — and Susie.

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I'm going to take a cue from something that the guy who asked the questions about the World Book —

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I know you're loathe to, normally, interfere in the running of your individual corporations, because they do so well on their own. And I am particularly fond of See's Candy and their products. And you may or may not know that we have a chocoholic in our family, as you do in yours.

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WARREN BUFFETT: Yeah. Makes good chocolate syrup, too. (Laughs)

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AUDIENC MEMBER: Yeah, I won't mention who.

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However, when I was in there this Christmas buying some gifts, I noted that, with the exception of the little candy canes, there's nothing in that store that is fat-free.

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And we are facing a trend — (laughter) — in the world, especially in dessert items and ice cream and candy items, of fat-freeness.

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And I just thought that, perhaps, it would be a word — worth a word to management to consider expanding the hard candy line.

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WARREN BUFFETT: Well, we look at a lot of things. One of the problems, as you probably know, for example, in using aspartame is it doesn't interact well with heat. And so that's been sort of tough.

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Now, Charlie and I have kept getting our regular boxes of candy during this weight loss-program. And we've — (laughter) — devoured them.

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And candy, you know, it may be, on average, a hundred and — depends on whether it’s a sugar product or not.

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But, take the lollipop, it'd be about 110 calories per ounce. But there’s — that's one and a half, or one and a quarter lollipops, or something like that.

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Most things are, you know, in that hundred per ounce to 150 per ounce range. So, candy is not a specific no-no.

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If we can find something that the customer likes, that makes them think they're getting skinnier by eating it — (laughter) — you know, that will be a breakthrough.

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And we look forward — and we test everything that comes along. I can assure you. (Laughter)

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In fact, Charlie and I may be the main testers.

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Chuck Huggins is here today — and if you’ve got any ideas on it — who runs See's. Done a terrific job of running See's ever since we took over in 1972. He'd appreciate ideas.

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But we are looking for things that appeal to the consumer that taste good and that they'll go for. I mean, just as is, you know, the Coca-Cola Company, in terms of carbonated soft drinks. So, it's a constant subject.

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And, you know, there were high hopes on aspartame originally. But it just hasn't panned out in terms of candy. And I've read a few articles about the fat-free stuff.

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Well, it should be the fat substitute, which didn't get me too excited about trying it. But I'm not sure whether some of you read those articles or not. We'll keep looking, Peter, I appreciate it.

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41. GEICO's price: "We gulped a few times and paid it."

WARREN BUFFETT: Zone 2.

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AUDIENCE MEMBER: Good morning, Mr. Buffett and Mr. Munger.

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As an aspiring shareholder, I'm very happy and proud to be here. Maybe I can encourage Mr. Munger to respond to my question this morning.

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In regards to your purchase of the other half of GEICO, would you comment on your reasoning behind paying the premium above market value and why you, instead, did not purchase shares in the open market?

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CHARLIE MUNGER: Well, we couldn't have purchased very many shares in the open market at the quoted price. And the price we paid, with the large number of shares we got, we thought was a very satisfactory price.

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WARREN BUFFETT: Yeah. We — what Charlie said is a hundred percent right. We also had a restriction that we agreed to many, many years ago — almost 20 years ago — as to the number of shares we would own without the consent — of the directors and, I believe, the Insurance Department.

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So, we actually had some special restrictions on us in the case of GEICO. But if we hadn't have had those restrictions, we'd have behaved in exactly the same manner.

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And we didn't think we could buy it any cheaper than that price. And we gulped a few times and paid it. And I think we will be happy that we did, as it's turning out.

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GEICO is doing very well. It — I mean, I knew it would do well. But I feel very good about it.

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42. Newspaper business is still good, but not as good

WARREN BUFFETT: Zone 3.

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AUDIENCE MEMBER: Mr. Buffett, my name is David Lowe (PH) from Ventura, California.

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My first Berkshire meeting, and I want to mention that I'm very intrigued at the influence you have over the shareholders here. I note that the first beverage they ran out of in the lobby was Cherry Coke. (Laughter)

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My question is about The Buffalo News. You say, in the letter for the '95 report, that the newspaper industry has lost another notch in its economic attractiveness. Can you elaborate on that?

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WARREN BUFFETT: Yeah. The — what you are seeing in newspapers is a circulation trend that has been prevalent for a long time, in terms of newspapers per household.

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But that has been declining, and that — daily newspapers — and that I would say the trends of the last couple years are somewhat worse, in that respect.

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I would say that the ability to price, both at the circulation and advertising level, is — has weakened a bit in recent years — not dramatically, but it's weakened a bit.

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At one time, newspapers really — daily newspapers in single-newspaper towns were probably as attractive, economically, as any business you could find. I mean, it — a large percentage of advertisers had very little choice, in terms of using them as an advertising medium.

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People had less options, in the way of learning what was going on around them other than the daily newspaper. So, the — they started from a position of extraordinary strength.

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They still have a very strong position. And I've tried to emphasize that in the report. I mean, they're a bargain at the price they sell for. They give you all kinds of information with very low price. And they're a magnificent way for most merchants to reach their customers.

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But they are not — they do not have the exclusive advantages, in many cases, that they had 15 or 20 years ago.

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Third-class mail has become more of an option. People have more ways of obtaining information. As we talked earlier, information can be processed electronically and delivered at far lower cost than people dreamt of 20 years ago.

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So, all of those things eat away a little bit. It's still a very fine business. But those — I don't see anything that will reverse those trends. I don't think that they will necessarily accelerate.

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But I think that, if the only thing you owned in life was a daily newspaper in a single-newspaper town 20 years ago, you would feel slightly less secure today than you did at that time. But you'd still be a lot better off than owning virtually any other business.

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Charlie?

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CHARLIE MUNGER: Nothing to add.

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43. "Outside information" in annual reports

WARREN BUFFETT: How about zone 4?

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AUDIENCE MEMBER: Mr. Buffett, my name is Hutch Vernon. I'm from Baltimore, Maryland.

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I know that you read lots and lots of annual reports. And I'm curious what you are reading for, if you would share that with us.

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But I'm more curious — because I think I know what you're reading for — if there are any disclosures — any further disclosures — that you would like to see companies make in their financial reporting, or that the SEC require in financial reporting or proxies or other communications with their shareholders? And that would be for both you and for Mr. Munger.

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WARREN BUFFETT: Yeah. The main thing that they can't mandate in annual reports: I really like to have — I like to know as much as I can about the person that's running it and how they think about the business and what's really going on in the business.

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In other words, I would like to have a report that would be identical to what — if I owned half of a company but was away for a year, and I had a partner who owned the other half — when I came back, that he would tell me about what had taken place during the past year and what he foresaw coming up and all of that.

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I — that is what I think the purpose of the report is. Now, the SEC mandates a lot of information, and —

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VOICE: — side on?

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WARREN BUFFETT: — some of that is helpful. But there's an intent behind the report. I mean, if it's a sales document I'm, you know, I'm less interested. I’m — and —

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I don't see any way to mandate what I'm talking about. But that's the kind of report I'm looking for.

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What I'm trying to do as I read reports, A, I like to understand just generally what's going on in all kinds of businesses.

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If we own stock in a company and in an industry, and there are eight other companies that are in the same industry, I want to own or be on the mailing list for the reports for the other eight, because I can't understand how my company is doing unless I understand what the other eight are doing.

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I want to have the perspective of, in terms of market share, what's going on in the business or their margins or the trend of margins, all kinds of things that I can’t get unless I know —

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I can't be an intelligent owner of a business unless I know what all the other businesses in that industry are doing. And so, I try to get that information out of a report.

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If I'm thinking about investing in a specific company, I try to size up their business and the people that are running it.

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And over the years, I have found reading a lot of reports to be quite useful in terms of making business decisions at Berkshire.

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If we own all of a business, I want to own shares in all of the competitors just to keep track of what's going on. And I want to be able to intelligently evaluate how our managers are doing that. And I can't do that unless I know the industry backdrop against which they're working.

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It's amazing, you know, what — how well you can do in investing, really, with what I would call outside information. I find inside information — I'm not sure how useful that is.

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But outside information — there's all kinds of information around, as to businesses. And you don't have to understand all of them. You just have to understand the ones that you're thinking about getting in. And you can do it, if you just — nobody will do it for you.

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You can't read — in my view — you can't read Wall Street reports and get anything out of them. You have to do it yourself and get your arms around it.

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I don't think we've ever gotten an idea, you know, in 40 years from a Wall Street report. But we've gotten a lot of ideas from annual reports.

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Charlie?

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CHARLIE MUNGER: What I find is that it takes a long time to read the annual report even if it's a comparatively simple business, because if you really are trying to understand it, it's not a bit easy.

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WARREN BUFFETT: Yeah. I would say that, on average, in a business we're really interested in, even though we know what to skip, to some extent, and what to read, I mean, it's going to be 45 minutes or an hour on a report.

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And if there are six or eight companies in the industry, that's going to be six or eight hours, perhaps, and then their quarterlies and a lot of other —

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I mean, it — the way you learn about businesses is by absorbing information about them, thinking, deciding what counts and what doesn't count, relating one thing to another. And, you know, that's the job.

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And you can't get that by looking at a bunch of little numbers on a chart bobbing up and down about a — or reading, you know, market commentary and periodicals or anything of the sort. That just won't do it. You've got to understand the businesses. That's where it all begins and ends.

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44. "Berkshire is not a one-man show"

WARREN BUFFETT: Zone 5?

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AUDIENCE MEMBER: Mr. Buffett, my name is Hank Strickland (PH). I'm from Fairfax, Virginia, which, if it were a city, would be the tenth largest in the United States. I'm here as a stockholder. And my daughter, who's also my broker, is here with me.

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We were also out there Friday night when we watched you warming up for the beginning of the ballgame. And we noted that you didn't drop the ball. You seemed to be able to get it to the guy that was warming you up.

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We noticed your first pitch, which I had difficulty characterizing as either being a passed ball or a wild pitch.

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WARREN BUFFETT: It was a premature sinker, actually. (Laughter)

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Very hard to hit, I might add. (Laughter)

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AUDIENCE MEMBER: And, then, you moved spritely into the stands, did a lot of picture taking, photo opportunities, signed autographs, vaulted over a rail or two. And we noted, with great enthusiasm, your fitness.

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Now that all having been said, many people would characterize Berkshire as a one-man company, with all due respect to Charlie. And many of this audience here, I'm sure, are retired or semi-retired. It's not unthinkable that, perhaps, you might want to retire, or for good — God’s sakes —

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WARREN BUFFETT: It's unthinkable. I don't want that one to go by. (Applause)

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AUDIENCE MEMBER: Or for something — something worse could happen. And for those of us —

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WARREN BUFFETT: That would be the worst, I think — (Laughter)

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AUDIENCE MEMBER: Well I —

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WARREN BUFFETT: I think death would be second. (Laughter)

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AUDIENCE MEMBER: I could think of some things some of us might want to do to protect our sizeable investments, say, having owned Berkshire since Blue Shamp — Blue Chip Stamp days. But anyway, we could put in a stop order, might take out an insurance policy.

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We might ask Charlie to masquerade as Warren after you've moved on. Those don't seem like very attractive options. So, I'm very serious now.

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How would you respond to the question of a stockholder that's really concerned about Berkshire being a one-man show?

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WARREN BUFFETT: Yeah. Well, Berkshire is not a one-man show. It's a two-man show, in terms of capital allocation. There's no question about that, at present.

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But it's run by many managers that are doing an outstanding job and that don't need any guidance from Charlie or me as they go along.

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But I might say that, you know, I will die with all of my Berkshire stock, essentially. And that will — stock will be held, either in the family or in a foundation, depending on the order of death, for a long time thereafter.

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So, there's no one that's more concerned about the subsequent management issue than I. I mean, this is not something that ends, at all, on my death. And it doesn't end for the Buffett family or The Buffett Foundation. So, it's a subject that Charlie and I have both thought about.

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The most likely situation — you got to get away from the idea that it's a one-man show because, right now, we've got 33,000 people working for Berkshire out there, you know, as we speak.

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And I'm sitting around, you know, watching movies about myself or something. I mean, you can see how vital I am to the place. (Laughter) So the — but the question —

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And the other thing we do, besides allocate capital, is we do identify these managers. And hopefully, we make it attractive for them to stay and work for Berkshire.

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But that — you know, that doesn't require 150 IQ or anything to do that. It does require a certain sensitivity to why people want to get up in the morning and do what they do.

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And when I’m not around, the logical, at some point — it depends on exactly when it happens, again. But Charlie's a little older than I am. And it's likely that it will be broken into a two-person function again, but not exactly the way Charlie and I function.

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And that is that there will be someone in charge of investments and capital allocation. I mentioned Lou Simpson’s position, because he is younger than I am, in the annual report, and then someone in charge of operations. And we have that person in the organization now.

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Now, I don't know what the situation will be when I die, because it could be in 20 minutes or it could be in 20 years. And when that — so, I can't specifically name the individuals.

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We have the individuals now for both those functions. We'll have the individuals for the same functions 20 years from now. I don't know whether they'll be the same people.

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But it's quite a logical way to run the business. GEICO was run that way and still is run that way and has been for some years.

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It's always struck me as terribly illogical, the way property-casualty insurance companies are run, because they've been dominated by the underwriting side of the business. And here they have this important investment side, but it’s always been — virtually every company's been subservient to the underwriting.

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And GEICO, very logically, set up a co-CEO arrangement some years back where — originally Bill Snyder before that — but Tony Nicely ran the underwriting end of the business and Lou Simpson ran the investment side.

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And those are two very different functions. Same person, logically, doesn't fit both functions in most cases. I mean, it's a rarity when the same person happens to hit for both functions.

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So GEICO worked very well that way. Still works that way. Lou runs investments. Tony runs underwriting.

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And Berkshire — slightly different — it's a variant on it. But, essentially, at Berkshire headquarters, you need someone overseeing and not meddling in them too much, but making sure you've got the right manager and you're treating him fairly.

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You need someone on the operating side. You need someone on the investment/capital allocation side. We've got those people now. And we'll have them, you know, whenever it happens, too.

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That's the — that is the structure. And we've got some very good businesses.

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And, you know, nobody's buying See's Candy because they think I'm sitting in some office in Omaha. And no one's buying a GEICO insurance policy because, you know, my name is there as chairman or CEO. The businesses are marvelous businesses. They'll continue very well.

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And there will be a capital allocation problem then just like there is now. And there will be the problem of keeping good managers in place and treating them fairly. And that's a solvable problem.

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So, that's the future as seen from Kiewit Plaza.

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Charlie?

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CHARLIE MUNGER: Yes. If you just run your mind through all the assets, I think you will quickly decide that there are large momentums in place that would do very well without us.

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I mean, is Coca-Cola going to suddenly stop selling because some manager's dead at Berkshire Hathaway?

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You know, are the people going to stop using Gillette razor blades? Is GEICO suddenly going to stop being intelligently run? Are — is the Nebraska Furniture Mart going to try any less hard?

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So, the existing assets, you can argue, have been lovingly put together, so as not to require continuing intelligence at headquarters. (Laughter)

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And what — there would be a disadvantage in that I think it would be unreasonable to expect that a successor would be as good at making new investments as Warren has been in the past. Well, that's just too damn bad. (Laughter and applause)

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WARREN BUFFETT: The sympathetic ear over here. (Laughter)

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45. Buffett doesn't answer individual letters

WARREN BUFFETT: Let's see, where are we? Zone 6 now?

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AUDIENCE MEMBER: Mr. Buffett, I'm indebted to Walter Schloss for introducing me to you some 40 years ago. And finally in the early '80s, I became a stockholder.

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My question is, now that you've expanded headquarters 9 percent from 11 people to 12 people — (laughter) — do you now more frequently answer letters from stockholders?

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As a specific, had you looked at my letter from January 1986? (Laughter)

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WARREN BUFFETT: We haven't gotten to January yet. (Laughter)

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AUDIENCE MEMBER: Relating to Cap Cities/ABC and talk radio, the problem that occurred last month at cape — Cap Cities might have been prevented.

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WARREN BUFFETT: You should get a form letter from us. But the — we do not — A, we do not get into the activities of our investee companies.

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I mean, it — if people are unhappy about Coca-Cola or Gillette, and they shouldn't be — (laughs) — but if they happen to be, they should talk to the companies themselves. I don't interject myself into the management or operations of the investee companies.

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In terms of questions about Berkshire — I put in the annual report a few years back — just running Berkshire takes up a fair amount of time, in terms of keeping track of a lot of businesses.

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And it doesn't need to take up as much time as it does with me. But I enjoy it. But the — I feel that the annual report, the annual meeting, are the time to take up everything on shareholder's minds. And so, I don't answer one-on-one questions.

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I get all kinds of letters. They want career guidance. They want advice on their business. I mean, there's a million letters that come in.

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And it would really be — it would take a significant amount of time, that otherwise would be spent on Berkshire, to reply to that sort of thing. I may note them, in terms of what I address in subsequent annual reports.

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But the annual meeting and the annual report, I feel, are the best ways to communicate with shareholders. And I really don't do it the rest of the year, although you will get some form reply or you should get some form reply on it.

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AUDIENCE MEMBER: Thank you.

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WARREN BUFFETT: Thanks. It's noon now. And I'd like to give everybody a chance to visit our other stores and everything. But we will be back here at 12:15.

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