WARREN BUFFETT: Good morning.

Well, first thing I'd like to do is to thank everybody that's helped us put this on.

As you saw in the movie, I think, at the time, we may have had 45,000 or so people working with Berkshire, with 12.8 at headquarters.

We're probably up to about 60,000 now, and we still have 12.8, and they take care of putting on this whole meeting.

We get help from people in internal audit, and we get terrific help from the people at all of our companies who work very hard to put on the exhibits. And we hope that you not only visit them, but patronize them, and we'll give you ample time to do that.

As you can see, I enlisted my family for the movie, and I want to thank them. I want to particularly thank Kelly Muchemore and Marc Hamburg for their work in putting this on. It's a real project to — (Applause)

A lot of companies have a whole department that does this and, at Berkshire, Kelly processes 25,000 requests for tickets, and coordinates everything with the exhibitors, and it's a fabulous job.

Now, we'll follow our usual routine. We do have a surprise at — a small surprise — at 11:45. It's not that Charlie's going to say anything — that would be a big surprise, but — (laughter) — we'll — well, we'll have this small surprise for you at 11:45.

The plan is to go through the business part of the meeting here in just a second, and we'll run from 9:30 to 12:00. Then, after conducting the business meeting, we'll take your questions. We'll go around the room. We have 10 stations. I guess we'll probably only be using eight stations in this room.

And we have microphones everyplace that the eight stations — that you'll see, and you can step up to those. And we'll just keep answering questions.

And we'll break at 12 o'clock, and there will be food available down below, where you can also purchase things from us.

And we'll reconvene about 12:45, and then we'll stay until 3:30 and we'll try and answer whatever questions you have. And then we will have to cut it off at 3:30.

We have — we had about the same number of ticket requests as in the past, but we had a different mix this year. We — as most of you know — we had change the venue, and the time, because Ak-Sar-Ben is winding down.

And so, there's a little different rhythm to this meeting. A much higher percentage of our tickets than usual were requested by people from Omaha.

And, of course, you've heard me say before that we're a little suspicious of these figures because we know that a lot of people claim to be from Omaha that aren't, for status reasons, and so — (laughter) — we can't really give you the geographical breakdown we normally would.

WARREN BUFFETT: I'd like to introduce, first, our directors, and then we'll proceed into the formal business of the meeting. On my left here is the ever-animated Charlie Munger, our vice chairman. (Applause)

And if the other directors will stand up as I announce their names. We have the better voice in the movie, my wife, Susan Buffett. Susie? (Applause)

We have Howard Buffett. (Applause)

You can see we find these names in the phone book, I mean —

And Kim Chace. Kim? (Applause)

Walter Scott, the star of "How to be a Gillionaire." (Applause)

And Ron Olson. Ron? (Applause)

OK, we'll now take on the formal part of the meeting.

We're going to try to set a new record, I think, 5:38.4, but the four-minute mile has always been our ambition on this. So I will go through this and then we'll get to the questions.

The meeting will now come to order. I'm Warren Buffett, chairman of the board of directors of this company.

I welcome you to this 2000 annual meeting of shareholders. I've introduced the directors. Also with us today are partners in the firm of Deloitte & Touche, our auditors. They are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire.

Mr. Forrest Krutter is secretary of Berkshire. He will make a written record of the proceedings. Miss Becki Amick has been appointed inspector of elections at this meeting. She will certify to the count of votes cast in the election for directors.

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

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

FORREST KRUTTER: I do. 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, 3, 2000, being the record date for this meeting, there are 1,341,174 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 5,385,320 shares of Class B Berkshire Hathaway common stock outstanding, with each share entitled to 1/200th of one vote on motions considered at the meeting.

Of that number, 1,116,151 Class A shares and 4,342,959 Class B shares are represented at this meeting by proxies returned through Thursday evening, April 27th.

WARREN BUFFETT: Thank you. That number represents a quorum and we will therefore directly proceed with the meeting.

The first order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott Jr., who will place a motion before the meeting.

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

WARREN BUFFETT: Do I hear a second?

VOICE: I second the motion.

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

VOICES: Aye.

WARREN BUFFETT: Opposed? You can signify by saying, "I'm leaving." The motion is carried. (Laughter)

The one item of business of this meeting is to elect directors. If a shareholder is present who wishes to withdraw a proxy previously sent in and vote in person on the election of directors, he or she may do so.

Also, if any shareholder that is present has not turned in a proxy, and desires a ballot in order to vote in person, you may do so.

If you wish to do this, please identify yourself to the meeting officials in the aisles who will furnish a ballot for you. Would those persons desiring ballots please identify themselves, so that we may distribute them?

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

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

WARREN BUFFETT: Is there a second?

VOICE: I second the vote.

WARREN BUFFETT: It's been moved and seconded that Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chace, Charles T. Munger, Ronald L. Olson, and Walter Scott Jr. be elected as directors.

Are there any other nominations? Is there any discussion? The nominations are ready to be acted upon. If there are any shareholders voting in person that should — they should now mark their ballots on the election of directors and allow the ballots to be delivered to the inspector of election.

Would the proxy holders please also submit to the inspector of elections a ballot on the election of directors voting the proxies, in accordance with instructions they have received? Miss Amick, when you are ready, you may give your report.

BECKI AMICK: My report is ready. The ballot of the proxy holders, in response to proxies that were received through last Thursday evening, cast not less than 1,136,497 votes for each nominee.

That number far exceeds a majority of the number of the total votes related to all Class A and Class B shares outstanding.

The certification required by Delaware law of the precise count of the votes, including the additional votes to be cast by the proxy holders in response to proxies delivered at this meeting, as well as those cast in person at this meeting, if any, will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Becki. Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chace, Charles T. Munger, Ronald L. Olson, and Walter Scott Jr. have been elected as directors.

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

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

WARREN BUFFETT: Is there a second? A motion to adjourn has been made and seconded. We will vote by voice. Is there any discussion? If not, all in favor say, "Aye."

VOICES: Aye.

WARREN BUFFETT: All opposed, "No." This meeting's adjourned. Thank you. (Applause)

We will advise Guinness of those results, and maybe we'll get in the book.

Just want to make one more announcement and then we'll start in the questions with area 1, which I believe will be right over here.

About — I think about 3,500 of you are attending the ballgame tonight. You know what you're supposed to do, incidentally.

And we — in the past, we've had some traffic jams at — where the interstate goes off into 13th Street. So, the police, who are wonderfully cooperative throughout this whole weekend, in many ways, are going to do their darnedest to make sure that we don't have much of a jam.

But if those of you who are attending the game would like to go a little early, that will probably be quite helpful.

And I might say that we have probably got — well, we think it's probably the best zoo in the world here, thanks in very large part to our director, Walter Scott, and his wife Sue, who have really turned our zoo into a huge attraction, draws well over a million people a year.

It's right adjacent to the ballpark. So if you get out a little early, and you want to go to the zoo, and then you won't even have to move your car. You can come over to the ballpark, and then there's also food there. And we have a — we serve Coca-Cola products.

And if you don't all try to come at 6:45, it will be a help to us.

I will be pitching at 7:05, but my fastball will arrive at the plate almost instantaneously with the moment that it leaves my hand, so unless you're there, you'll miss it. And — (Laughter)

WARREN BUFFETT: So look with that, let's start in area 1, and we will go around. And feel free to ask any questions. You might identify yourself and where you're from before asking your question. Area 1?

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

My name is Steve Yates (PH), I'm from Chicago. I'm a Berkshire shareholder and this is my sixth year coming to this meeting. I'd like to thank you for all your time and advice through the years. It's been great.

I'd also like to thank all those wonderful people who sold Berkshire this year for giving us an opportunity to purchase more of the world's greatest company for dirt-cheap prices. (Applause)

WARREN BUFFETT: We will convey your thanks. (Laughter)

AUDIENCE MEMBER: I own another stock, which sells for four times current trailing earnings. Every quarter we get a report. Earnings go up, sales go up, cash flow goes up, the equity base expands, they gain market share, and the stock goes down.

The company has a 60 percent five-year annualized growth rate and sells at four times earnings. I have two related questions.

First, is this is a growth stock or a value stock, and could you please give us your definitions of these terms?

Second, the company sells recreational vehicles. Demographic trends in the recreation and leisure areas, RVs, cruise lines, golf equipment, et cetera, seem to be quite good. Do you see any opportunities for Berkshire here? Thanks.

WARREN BUFFETT: Well, the question about growth and value, we've addressed in past annual reports. But they are not two distinct categories of business. Every business is worth the present —

If you knew what it was going to be able to disgorge in cash between now and Judgment Day, you could come to a precise figure as to what it is worth today.

Now, elements of that can be the ability to use additional capital at good rates, and most growth companies that are characterized as growth companies have that as a characteristic.

But there is no distinction in our minds between growth and value. Every business we look at as being a value proposition. The potential for growth and the likelihood of good economics being attached to that growth are part of the equation in evaluation.

But they're all value decisions. A company that pays no dividends growing a hundred percent a year, you know, is losing money. Now, that's a value decision. You have to decide how much value you're going to get.

Actually, it's very simple. The first investment primer, when would you guess it was written?

The first investment primer that I know of, and it was pretty good advice, was delivered in about 600 B.C. by Aesop. And Aesop, you'll remember, said, "A bird in the hand is worth two in the bush."

Now incidentally, Aesop did not know it was 600 BC. He was smart, but he wasn't that smart. (Laughter)

Now, Aesop was onto something, but he didn't finish it, because there's a couple of other questions that go along with that.

But it is an investment equation, a bird in the hand is worth two in the bush. He forgot to say exactly when you were going to get the two in the — from the bush — and he forgot to say what interest rates were that you had to measure this against.

But if he'd given those two factors, he would have defined investment for the next 2,600 years. Because a bird in the hand is — you know, you will trade a bird in the hand, which is investing. You lay out cash today.

And then the question is, as an investment decision, you have to evaluate how many birds are in the bush. You may think there are two birds in the bush, or three birds in the bush, and you have to decide when they're going to come out, and when you're going to acquire them.

Now, if interest rates are five percent, and you're going to get two birds from the bush in five years, we'll say, versus one now, two birds in the bush are much better than a bird in the hand now.

So you want to trade your bird in the hand and say, "I'll take two birds in the bush," because if you're going to get them in five years, that's roughly 14 percent compounded annually and interest rates are only five percent.

But if interest rates were 20 percent, you would decline to take two birds in the bush five years from now. You would say that's not good enough, because at 20 percent, if I just keep this bird in my hand and compound it, I'll have more birds than two birds in the bush in five years.

Now, what's all that got to do with growth? Well, usually growth, people associate with a lot more birds in the bush, but you still have to decide when you're going to get them.

And you have to measure that against interest rates, and you have to measure it against other bushes, and other, you know, other equations.

And that's all investing is. It's a value decision based on, you know, what it is worth, how many birds are in that bush, when you're going to get them, and what interest rates are.

Now, if you pay $500 billion — and when we buy a stock, we always think in terms of buying the whole enterprise, because it enables us to think as businessmen, rather than as stock speculators.

So let's just take a company that has marvelous prospects, is paying you nothing now, and you buy it at a valuation of 500 billion.

Now, if you feel that 10 percent is the appropriate rate of return — and you can pick your figure — that means that if it pays you nothing this year, but starts paying next year, it has to be able to pay you 55 billion in perpetuity, each year.

But if it's not going to pay until the third year, then it has to pay you 60.5 billion in perpetuity — in perpetuity — to justify the present price.

Every year that you wait to take a bird out of the bush means that you have to take out more birds. It's that simple.

And I question, in my mind, whether — sometimes, whether people who pay $500 billion implicitly for a business by buying 10 shares of stock at some price, are really thinking of the mathematical — the mathematics — implicit in what they are doing.

To deliver, let's just assume that's — there's only going to be a one-year delay before the business starts paying out to you, and you want to get a 10 percent return and you pay 500 billion. That means 55 billion of cash that they have to be able to disgorge to you year, after year, after year.

To do that, they have to make perhaps $80 billion, or close to it, pretax.

Now, you might look around at the universe of businesses in this world and see how many are earning 80 billion pretax, or 70, or 60, or 50, or 40, or 30. And you won't find any.

So it requires a rather extraordinary change in profitability to give you enough birds out of that particular bush to make it worthwhile to give up the one that you have in your hand.

Second part of your question, about whether we'd be willing to buy a wonderful business at four times earnings, I think I could get even Charlie interested in that. But let's hear it from Charlie.

CHARLIE MUNGER: I'd like to know what that is. (Laughter)

WARREN BUFFETT: He was hoping you would ask that. That fellow that's got all his net worth in this stock — (laughter) — and who has a captive audience.

Tell us what it is. You've got to tell us. We're begging you. (Laughter)

AUDIENCE MEMBER: You want the name of the company?

WARREN BUFFETT: We want the name of the company. We're dying to get the name. Wait till I get my pencil out. (Laughter)

AUDIENCE MEMBER: It's called National RV, and it's based in California, and they sell recreational vehicles.

WARREN BUFFETT: OK, well, you've got a crowd of people with — who have birds in the hand, and we will see what they do — (laughter) — in terms of National RV.

Charlie, do you have anything further on growth and value, et cetera?

Watch him carefully, folks. (Laughter)

CHARLIE MUNGER: Well, I agree that all intelligent investing is value investing. You have to acquire more than you really pay for, and that's a value judgment. But you can look for more than you're paying for in a lot of different ways.

You can use filters to sift the investment universe. And if you stick with stocks that can't possibly be wonderful to just put away in your safe deposit box for 40 years, but are underpriced, then you have to keep moving around all the time.

As they get closer to what you think the real value is, you have to sell them, and then find others. And so, it's an active kind of investing.

The investing where you find a few great companies and just sit on your ass because you've correctly predicted the future, that is what it's very nice to be good at.

WARREN BUFFETT: The movie was G-rated even though — (Laughter)

Is that it, Charlie? (Laughter)

WARREN BUFFETT: OK. We will move to area 2.

AUDIENCE MEMBER: Good morning, gentlemen. Wayne Peters. And where I come from our ladies are referred to as birds. (Laughter)

And I'm sure I know a lot that would trade one in the hand for two in the bush — (laughter) — irrespective of the interest rate. (Laughter)

I have two small questions.

Firstly, with the speculation, and some would say rampant speculation, in the high tech and internet arenas, could you share your views on the potential fallout from the speculation for the general economy?

And secondly, how long did it actually take you to perfect that curveball, and are we going to see it tonight?

WARREN BUFFETT: The — I don't think I want to give anything away about my pitches tonight. (Laughter)

Ernie Banks may be in the audience, I know he's in town, and I just can't afford to do that. But you'll see it tonight, and you can describe it anyway you'd like.

The question about the high tech stocks and possible fallout, any time there have been real bursts of speculation in the market, you know that — it does get corrected, eventually.

Ben Graham was right when he said that in the short run it's a voting machine, and the long run it's a weighing machine. Sooner or later, the amount of cash that a business can disgorge in the future governs the value it has — that the stock commands — in the market. But it can take a long time.

And, I mean, it's a very interesting proposition. For example, if you take a company that, in the end, never makes any money, but trades — changes hands — representing a valuation of 10 or $20 billion for some time, there's no wealth created. There's a tremendous amount of wealth transferred.

And I think you will see, when we look back on this era, you will see this as a period of enormous amounts of wealth transfer, but in the end the only wealth creation comes about through what the business creates.

There's no magic to it. If a company that's not worth anything sells for 20 billion and 5 percent of it changes hands, somebody takes a billion dollars from somebody else. But investors as whole gain nothing.

They all feel richer. It's a very interesting phenomenon. But they can't be richer except — as a group — unless the company makes them richer.

And it's the same principle as a chain letter. If you're very early on a chain letter you can make money. There's no money created by chain letters. In fact, there's the frictional cost of envelopes, and postage, and that sort of thing.

So the net, there's some money destroyed a little bit. And there's money destroyed by the frictional cost of trading and investing, and that comes out of investor's pockets.

But the manias that periodically take place — and not just in stocks. We had a similar mania — not necessarily similar — we certainly had a mania in farmland here in Nebraska 20 years ago.

And land which couldn't produce, we'll say, more than 70 or $80 an acre would sell for 2,000 an acre at times when interest rates were 10 percent.

Well, that math will kill you. And it killed the people who bought it at those prices, and it killed a great many banks here in Nebraska who lent based on that sort of thing.

But while it was going on everybody thought it was wonderful, because every farm was selling for more than the similar farm had sold for a month earlier. And it was momentum investing in farmland.

And, in the end, valuation does count. But it can go on a long time, and when you get a huge number of participants playing with ever increasing sums, you know, it creates its own apparent truth for a — what can be for a very considerable period of time.

It doesn't go on forever. And whether it has fallout to the whole economy, like it probably did in the late '20s, or whether it's just an isolated industry where the — or sector — where the bubble bursts and it really doesn't affect other values, who knows? But five or 10 years from now, you will know.

Charlie?

CHARLIE MUNGER: Well, I think the reason we use the phrase "wretched excess" is that there are wretched consequences.

If you mix the mathematics of the chain letter or the Ponzi scheme with some legitimate development, like the development of the internet, you are mixing something which is wretched and irrational, and has bad consequences, with something that has very good consequences.

But, you know, if you mix raisins with turds, they're still turds. (Laughter)

WARREN BUFFETT: That's why they have me write the annual report. (Laughter)

WARREN BUFFETT: So, I think we better move on to sector 3. (Laughter)

Way back there.

AUDIENCE MEMBER: My name —

WARREN BUFFETT: Yeah.

AUDIENCE MEMBER: My name is Thomas Kamay (PH). I am 10 years old and I go to Bacich School in Kentfield, California. I have been a shareholder for two years. This is my third annual meeting. Here's my question.

I know you won't invest in technology companies, but are you afraid that the internet will hurt some of the companies that you do invest in, such as The Washington Post or Wells Fargo? Thank you.

WARREN BUFFETT: Well, that's an absolutely terrific question. You know, I may turn my money over to you. (Laughter and applause)

There's probably no better question we'll get.

And I hope Charlie answers in an appropriate vein considering your age. (Laughter)

We do not — we have no — you know, it's no religious belief that we don't buy into tech companies.

We just don't — we have never found one — as conventionally defined — we've never found one where we think we know enough about what the business will look like in 10 years that we can make a rational decision as to how much we pay now for that business.

In other words, we have not been able to find a business where we think we know what that bush will look like in 10 years, and how many birds will be in it, so that we know how many birds we can give up today to participate in that future.

Not any — there will be wonderful things, as Charlie so colorfully explained, that will evolve from many of these companies, but we don't know how to make that decision.

And you're absolutely right that we should be thinking all of the time about whether developments in that tech area threaten the businesses that we're in now, how you might counter those threats, how we might capitalize in opportunities because of it.

It's a very, very, very important part of business now and will become more important in the years to come, including many of our businesses.

For example, you mentioned The Washington Post. Even closer to home, we own a newspaper called The Buffalo News in Buffalo, New York. We own all of that. So we're in a position to make our own decisions of an operating nature as to what we should do in respect to the internet.

And believe me, Stan Lipsey, who's here today, who runs that paper, and I have talked many, many hours, including considerable time yesterday about what we are doing on the internet, what we should be doing, what other people are doing, how it threatens us, how we can counter those threats, all of that sort of thing.

And newspapers are a category that, in my view, are very threatened by the internet because we had an example —

The internet is terrific for delivering information. We have a product, World Book, that's terrific for delivering information. And 15 years ago, print encyclopedias were the best tool, probably, for educating not only young children, but for educating me or Charlie when we wanted to look up something on a subject.

And the World Book is a marvelous product. But it requires chopping down trees, and it requires operating paper mills, and it requires binding it and printing, and it requires a delivery of a 70 pound, you know, UPS package. And it's a —

It was put together in a way that was, for 4- or 500 years, the best technique for taking that information and moving it from those who assembled it to those who wanted to use it. And then the internet changed that in a very major way.

So we have seen firsthand, and experienced the business consequences of the improvement offered by the internet and the delivery of information.

And newspapers, although not as immediately susceptible to that problem, still face that overpowering factor.

When you eliminate the delivery cost — I mean, we pay a significant percentage of our circulation revenue to our carriers, and we pay additional money to the district managers, and we pay for the trucks to deliver the product out, and we pay for huge printing presses, and all of that sort of thing.

And people do chop down trees in order to give us the raw material to transmit information in Buffalo, you know, about what the Buffalo Bills did yesterday, on Sunday, with all the details.

And now you have the internet that has virtually no incremental unit cost to anything and can deliver the information instantaneously. So it's a big factor for newspapers.

And the newspaper world in my view will look very, very, very different in not that many years.

And I find it kind of interesting, because the people in the newspaper business are a little schizophrenic about this. They see this. They're afraid of it. They're, in almost all cases, trying to combat it on some way operationally.

But some of them, at least, continue to go out and buy papers at a price that sort of reflects the economics that used to exist 20 years ago, when it's — to me it's very clear that it doesn't exist anymore.

So they sort of have their billfold, you know, in the past, even though they see the future. And, you know, I think, probably, they're making mistakes in many cases.

All of our businesses, virtually — Coca-Cola will not be affected in any significant way by the internet, you know? The razor and blade business won't be. Although you could dream up things about distribution or so on, but I think that it's very unlikely.

But other businesses we have — our insurance business, particularly at GEICO, will be very affected by the internet. Now, that may turn out to be a big advantage to us over time. I wouldn't be surprised if it is.

But our retailing businesses are all threatened in one way or another by internet developments, and there may be some opportunities there, too. But it's a change.

It's a change in — it's going to be change in the world — how the world gets entertainment. It's going to be a change in the world — how the world gets information. And it is incredibly low cost compared to the — most of the methods of conveying entertainment and information now.

Charlie?

CHARLIE MUNGER: Well, he asked if we were afraid that the internet would hurt some of our business and I think the answer is yes. (Laughter)

WARREN BUFFETT: I'm learning to appreciate these short answers, though, more as the day goes by. (Laughter)

I want to thank you for coming to our meeting, incidentally. You're way ahead of me. I didn't buy my first stock until I was 11, and so you've got a real jump on me. And I wish you well.

WARREN BUFFETT: OK. Area 4.

AUDIENCE MEMBER: Warren and Charlie, good morning. This is Mo Spence, Waterloo, Nebraska.

In 1999, Berkshire Hathaway managed to produce a positive gain in net worth of one-half of one percent.

That means that since present management took over 35 years ago, Berkshire Hathaway has realized a positive gain each and every year, and produced an average annual gain of 24 percent.

Including the years you ran the Buffett Limited Partnership, you have had a run of 48 consecutive years of positive gains and net worth without one single down year, producing a compounded rate of return of almost 26 percent annually.

On behalf of the long-term shareholders of Berkshire Hathaway, we want to thank you from the bottom of our pocketbooks. (Applause)

WARREN BUFFETT: Well, thank you. I hope your question isn't going to be whether we can continue that, but go — you have a question?

AUDIENCE MEMBER: My question is, don't you think you could have ended the millennium with a bigger bang than one-half of one percent? (Laughter)

WARREN BUFFETT: Well, I certainly wish we could have. But the interesting thing about those figures — and, actually, the figures go back before that, because the very best period was pre-the partnership days, because the amount I was working with was so small.

But the — there's nothing magic about a one-year period. I mean, it's the way the measurements come out. We've — if you took all the half-year periods, for example, I'm sure — well, I know that there were a number that were down, you know —

There're going to be lots of years in the future — assuming I live long enough, that — we will have plenty of down years. It's been a fluke, to some degree, that we have not had any down years in terms of underlying value.

The stock has gone up and down in ways that are not related to intrinsic value a few times, but that is totally a fluke. I mean, we're not going to be up every day. We're not going to be up every week. We're not going to be up every month, or even every year.

And it's — the fact that, you know, the Earth revolves around the sun really is not totally connected to most business activities, or the fruition of most investment ideas, or anything of the sort.

So we have to report every year, and, you know, I care about the yearly figures in that sense. I don't really care about them, totally, as a measure of what we're doing.

And, like I say, if we could've — we were — the capital allocation job that I did in 1999 was very, very poor. And it was partly because some of our main businesses did poorly.

I mean, Coca-Cola and Gillette had bad years last year. They'll have good years over time.

I wrote a few years ago — it's interesting, I called their soft drink business and their razor and blade business as "Inevitables."

And the truth is they've got a higher market share now than they've ever had in history. They're selling more units than any year in history. But certain other factors hurt their business and therefore hurt their stock performance.

But I would still call the soft drink — Coca-Cola's position in the soft drink business, and Gillette's position in the razor and blade business — I would characterize them as "inevitable," that they will gain share over time.

Gillette has over 70 percent of the blade and razor business in the world, which is — measured by value. And that's an extraordinary share.

Coke has 50 percent of the soft drink business in the world. That's well over a billion eight-ounce servings per day. A billion per day.

Eight percent of those are for the account of Berkshire, so over 80 million eight-ounce servings of soft drinks per day are being consumed by people for — where the economic benefit comes to Berkshire Hathaway.

In effect, we have over six percent of the — for Berkshire Hathaway's account — of the blade and razor business in the world. And it'll go up.

So I don't worry about the businesses in the least, long term. They will have bad years from time to time. And when they do, our performance will not look good in those years.

Charlie?

CHARLIE MUNGER: Well, it's been a very interesting stretch. One of the most interesting things about the stretch is that, during pretty much the whole period, the company has owned marketable securities in excess of its net worth.

And so you have this extraordinary liquidity in a company that has performed very well, to boot. That advantage has not gone away and, in fact, it's been augmented.

Give us reasonable opportunities and we are prepared.

WARREN BUFFETT: Well you've heard what you're supposed to do, now we'll do the rest. Just give us the opportunities.

WARREN BUFFETT: Area 5.

AUDIENCE MEMBER: My name is Greg Blevins (PH) from Bargetown, Kentucky.

I have a question about intrinsic value. It comes from comments that you made in your annual report this year. In there, you describe the extraordinary skills of [Berkshire reinsurance chief] Ajit Jain in judging risk.

When I think about Berkshire and its ability to increase intrinsic value, it seems to me that judging risk has been at least as important as an ability to calculate a net present value.

So my question to each of you is, would you give us some comments on how you think about risk?

WARREN BUFFETT: Well, we think of business risk in terms of what can happen — say five, 10, 15 years from now — that will destroy, or modify, or reduce the economic strengths that we perceive currently exist in a business.

In some businesses that's very — it's impossible — to figure — at least it's impossible for us to figure — and then we just — we don't even think about it then.

We are enormously risk averse. We are not risk adverse, in terms of losing a billion dollars if there were an earthquake in California today. And we're thinking of writing a policy, for example, in the next week or so, on a primary insurance risk of over a billion dollars.

That doesn't bother us as long as the math is in our favor. But in terms of doing a group of transactions like that, we are very risk averse. In other words, we want to think that we've got a mathematical edge in every transaction.

And we think that we'll do enough transactions over a lifetime so that, no matter what the result of any single one, that the group expectancy would — gets almost to certainty.

When we look at businesses, we try to think of what can go wrong with them. We try to look [for] businesses that are good businesses now, and we think about what can go wrong with them.

If we can think of very much that can go wrong with them, we just forget it. We are not in the business of assuming a lot of risk in businesses.

That doesn't mean we don't do it inadvertently and make mistakes, because we do. But we don't intentionally, or willingly, voluntarily, go into situations where we perceive really significant risk that the business is going to change in a major way.

And that gets down to what you probably heard me talk about before, is, what kind of a moat is around the business?

Every business that we look at we think of as an economic castle. And castles are subject to marauders. And in capitalism, any castle you have, whether it's razor blades, or soft drinks, or whatever, you have to expect the —

And you want the capitalistic system to work in a way that millions of people are out there with capital thinking about ways to take your castle away from you, and appropriate it for their own use. And then the question is, what kind of a moat do you have around that castle that protects it?

See's Candy has a wonderful moat around its castle. And Chuck Huggins has taken that moat, which he took charge of in 1972, and he has widened that moat every year. He throws crocodiles, and sharks, and piranhas in the moat, and it gets harder and harder for people to swim across and attack the castle. So they don't do it.

If you look, since 1972, Forrest Mars tried with Ethel M — I don't know, 20 years ago. And I hate to think of how much money it cost him to try that. And he was a very experienced businessman.

So we think of the — we think in terms of that moat and the ability to keep its width and its impossibility of being crossed as the primary criterion of a great business.

And to our managers, we say we want the moat widened every year. You know, that does not necessarily mean that the profit is more this year than last year, because it won't be sometimes. But if the moat is widened every year, the business will do very well.

When we don't have a — when we see a moat that's tenuous in any way — getting back to your question — it's just too risky. We don't know how to valuate that, and therefore we leave it alone.

We think all of our businesses — virtually all of our businesses — have pretty darn good moats, and we think the managers are widening them.

Charlie?

CHARLIE MUNGER: How could you say it better? (Laughter)

WARREN BUFFETT: Here, have a — have some peanut brittle on that one. (Laughter)

WARREN BUFFETT: OK, 6.

AUDIENCE MEMBER: Good morning.

WARREN BUFFETT: Good morning.

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

WARREN BUFFETT (to Munger): Why don't you open that?

AUDIENCE MEMBER: My question involves the company's activities before and shortly after the Gen Re acquisition.

I remember you saying once that, in insurance, virtually all surprises are negative ones. And I'm wondering, given the company's operating experience in insurance over long period of time, could you tell us what happened in the Unicover situation?

How come in Gen — with Gen Re's experience and the company's experience, that it happened, they didn't foresee it, we didn't foresee it? What has the company done? I know they've taken a large reserve for the situation.

And how do they plan to operate in the future to prevent these things, find them out, and strengthen the company from these kind of situations in the future?

WARREN BUFFETT: Yeah, the Unicover situation was discovered in about, I don't know, February of last year, or thereabouts. And it was a mistake, I mean, it should not have been made. A lot of other people made the same mistake, but that still didn't mean that we should have made that mistake.

We set up a reserve of $275 million when the mistake was discovered, and that reserve looks like it's about right still. There have been quite a few developments at Unicover that have defined the limits of it better and resulted in the resolutions of many of the issues attached to it. Still looks like about a $275 million mistake.

Now, that's a big mistake, but we've made bigger ones. We had one in the mid-'70s that probably cost Berkshire, measuring opportunity cost and everything, because we didn't know how bad it was going to be —

I would say that Berkshire would now be worth at least 10 percent more if that mistake hadn't occurred. Wouldn't you say so, Charlie? The Omni situation?

CHARLIE MUNGER: Absolutely.

WARREN BUFFETT: Yeah, so we had a mistake whose present value would be 8 or $9 billion. It cost us at least that.

CHARLIE MUNGER: Yeah, it cost us less than 4 million at the time.

WARREN BUFFETT: Yeah. Though, it — but we didn't know it for sure it was 4 million, so it tied our hands in other respects, too.

In insurance you will get surprises. Now, the test of good management is how many surprises you get. But there's no way you'll get no surprises.

And if you look at our history, you will see some years when our float cost us a lot of money. You will also see a history where over 33 or so years that it's been a very, very attractive business.

But we have had cases, I mean, our name causes problems. I think National Indemnity — we had a fraud, as I remember, down in Texas where an agent was using our paper, which incidentally was the same problem we had, the one that cost us so much.

And some guy is out there writing bonds on — surety bonds — on construction of schools. And he says he represents National Indemnity and the contract proceeds, and of course, we've never heard of the guy.

But if you get a school district in Texas with a half-finished school, and the choice is whether the taxpayers ante up more or whether you find that this guy had apparent authority as an agent, and so on, and therefore we should pay on a policy we never heard of, written by a guy we never heard of, you know, on a school we never heard of. You know, we'll end up paying.

So the surprises are unpleasant nine times out of 10. We'll have more. We had another one last year that shouldn't have happened. But they do happen.

And General Re has a terrific record over time.

We knew last year would not be a good business in the reinsurance business. It was worse than we thought it would be. But that had nothing to do — if you told me the figures that General Re would have at the end of the year, we would have made the same deal in a moment.

And, you know, we didn't do so well with Coke and Gillette ourselves. So that the ratio of mistakes was probably fairly equal between the two organizations with me contributing our — my share.

I think insurance, which will continue to have surprises in it, will turn out to be a very, very good business for Berkshire over time. It's the best one I know about that we can do in increasing scale over time.

As a matter of fact, some of you may not have noticed but we announced another small insurance acquisition just last week.

It's a tough field. The average company is going to do poorly. We think we have some very special companies, and we really do think, over time, we will acquire and utilize float at a cost that's very, very attractive.

It won't be zero like it's been in the past. I mean, we are in some lines of business where intentionally — I mean, we would be crazy to try to hold it to zero, because it's way better to have twice as much money at one or two percent as have half as much money at 0 percent.

But we will fully acknowledge that — I mean, Unicover was a surprise. But I don't know how many surprises I've had in insurance over the 33 years or so we've been in it.

One of the surprises, incidentally, you know, worked to our incredible benefit.

GEICO has been a great, great company since I first went down to Washington, and even before that, and met Lorimer Davidson almost 50 years ago. But they made a mistake in the early '70s that really did bankrupt the company.

But fortunately, there was an insurance commissioner named Max Wallach in the District of Columbia, who saw that it could be resuscitated, and that mistake enabled us to make many, many billions of dollars. So mistakes can be useful on occasion, too.

Charlie?

CHARLIE MUNGER: All that said, it is perhaps the most irritating way to lose money there is, is to be taken by a sort of obvious lie. And — but it happens.

I don't think it's likely to happen again on that scale.

WARREN BUFFETT: Well, I wouldn't say that. (Laughs)

I would say that it's unlikely that — in any 20 year period, or anything like that, we will get a big surprise. And it will come about, very often, through one form or another of three or four methods of obvious fraud that we've observed in the past.

But they spring up again. And there are plenty of people that are, I'd have to say, "crooked," in insurance because it's a product where you deliver a piece of paper and somebody hands you money.

And that intrigues people. You know, you don't even hand them a Dilly bar, you know, or — (laughter) — or anything in exchange. They hand you a lot of money and you give them a little piece of paper.

And of course, when you get into reinsurance and all that, then you hand that little piece of paper to somebody else and try and get them to hand you money.

And all the way along the line you have brokers who are getting big chunks of money for sort of papering over some of the weaknesses in the project, and sometimes they may even be in on it.

So it's a field that attracts chicanery. And often they — the same people — come back again and again. It's amazing to me.

So, I would say that we will get a surprise or two over any 10-year period in insurance. It's almost impossible to avoid.

We should try to minimize it. We do try to minimize it, but I would not want to bet my life that we've seen the last of a Unicover-type situation.

They're always just a little bit different enough so that it doesn't get spotted, or somebody down the line doesn't get the message, but —

I don't know. Don't you think, Charlie, we'll see another one? (Laughs)

CHARLIE MUNGER: Well, perhaps so, but it was a long time from one to the other, and maybe I'll be able to get through without another. (Laughter)

One of these fraud artists, Warren caused me to meet years ago, and his proposition was that he had this perfectly marvelous business.

He says, "I — we only write fire insurance on concrete bridges that are under water." He says, — (laughter) — "It's like taking candy from babies." And —

WARREN BUFFETT: We were the babies. (Laughter)

CHARLIE MUNGER: I looked in his eye. I thought he was kidding or something. He wasn't kidding. I mean, these people believe this kind of stuff.

WARREN BUFFETT: The truth is Charlie — if Charlie and I could see everybody we dealt with, we would screen out some perfectly honest people, too. I think we could probably screen out the crooked propositions. I mean, they do have similar characteristics to them.

And what happens is you get somebody out in the field who is eager to write business or is being wooed by producers, and the intermediaries get very good at it. It's the same way lousy stocks get sold.

I mean, you'll get people who are getting paid very well to part, you know, separate you from your money. And that's worked over the years. The good salesmen find out they can make more money, you know, selling phony products with big tickets attached to them than they can selling lollipops.

WARREN BUFFETT: Number 7.

AUDIENCE MEMBER: Good morning Mr. Buffett, and good morning Mr. Munger. My name is Mohnish Pabrai and I'm from Long Grove, Illinois.

I have been a student and disciple of yourself, Mr. Buffett, for some time, and especially Mr. Munger. And I have adopted, quite intensely, your theories of capital allocation, in the manner in which I run my business, as well as my portfolio, and quite pleased with the results so far.

My question has to do with the original 1950s Buffett partnerships. There is some conflicting data in the various books about you pertaining to the rules of the partnership and the fees of the partnership.

What I wanted to understand is, I think some of the books allude to the principle being guaranteed — I think six percent a year being guaranteed — and then you took a fourth, and the partners got three-fourths.

In some cases they talk about four percent, and some cases they say there was no guarantee. I would just appreciate a clarification on that.

WARREN BUFFETT: OK, we'll make it short because I'm not sure how much general interest there is to that. But there was never any guarantee.

There was a guarantee that I wouldn't get a penny myself — there was none of this one percent fee and all that sort of thing that hedge funds now normally have. After a short period of time I told people I'd have all my capital in it, basically.

So there was a guarantee I would follow — have a common destiny. There was never any guarantee of principle of any sort.

Originally, the thing started by accident, so that there 11 different partnerships before they all got put together on January 1st, 1962, into Buffett Partnerships.

So with the 11 different partnerships, they had different — some different arrangements — based on the preferences of the limited partners. I offered them an option of three or four different choices, and different families made different choices.

When we put them together we settled on the 6 percent preferential with a quarter of the profits over that, with a carry forward of all deficiencies. Nobody was guaranteed anything on them.

Charlie had a much better partnership. His was a third, as I remember, wasn't it Charlie? (Laughter) ?

CHARLIE MUNGER: Yes, but we were smaller and operating specialist posts on the stock exchange. (Buffett laughs)

The facts were different.

WARREN BUFFETT: Yeah.

WARREN BUFFETT: OK. Let's go to 8.

AUDIENCE MEMBER: Mr. Buffett, Mr. Munger, good morning. My name is Pete Banner (PH), and I'm from Boulder, Colorado.

In the 1996 annual report, Mr. Buffett, you stated companies such as Coca-Cola and Gillette might well be labeled "The Inevitables," and you just reaffirmed your view of Coca-Cola and Gillette.

My question to you is, do you have the same view of American Express? That is, do you view American Express as, quote, "The Inevitable"?

WARREN BUFFETT: Yeah. I would like to clarify one point, too. I didn't really say I regard the companies as "Inevitables." I regarded the businesses, their dominance of soft drinks, or their competitive strength in soft drinks and in razors and blades.

And as a matter of fact, I actually pointed out in talking about that — a few paragraphs later, I pointed out the danger of having a wonderful business is the temptation to go into less wonderful businesses.

And to some extent, for example, Gillette's stumble in the last year or two has not been the product of their razor and blade business, but it has been some other businesses, which are not at all inevitable.

And that, you know, that is always a risk. And it's a risk I pointed out, that when a company with a wonderful business gets into a mediocre business, that usually the reputation of the mediocre business prevails over the supposed invincibility of the management of the wonderful business.

American Express, an interesting case study, because it does have a — we always think in terms of share of mind versus share of market because, if share of mind is there, market will follow.

People — virtually — probably 75 percent of the people in the world — have something in their mind about Coca-Cola. And overwhelmingly it's favorable. Everybody in California has something in their mind about See's Candy, and overwhelmingly it's favorable.

The job is to have it in a few more California minds — or world minds in the case of Coke — over the years, and have it even be a little more favorable as the years go by. If we have that, everything else follows. And consumer product organizations understand that.

American Express was — had a very special position in people's mind about financial integrity over the years, and ubiquity of acceptance. When the banks closed in the early '30s, American Express traveler's checks actually substituted, to some extent, for bank activity during that period.

The worldwide acceptance of this name meant that when American Express sold traveler's checks — for many years, their two primary competitors were what are now Citicorp — First National City — and the Bank of America.

And, despite the fact that American Express charged you one percent when you bought your traveler's checks, and you had two other premier organizations, Citicorp, imagine, and BofA, and — actually, Barclays had one and Thomas Cook had one.

And American Express still had two-thirds of the market after 60 or 70 years — two-thirds of the worldwide market — while charging more for the product than these other very well-known competitors charged.

Anytime you can charge more for a product and maintain or increase market share against well-entrenched, well-known competitors, you have something very special in people's minds. Same thing came about when the credit card came around.

Originally, American Express wanted the credit card because they thought they were going to get killed on traveler's checks. And they thought it was going to be a substitute, and therefore, they had to go into — it was a defensive move.

It came about because a fellow named Ralph Schneider, and Al Bloomingdale, and a couple people came up with the Diners Club idea. And the Diners Club idea was sweeping, well, initially New York, and then the country in the mid-'50s.

And American Express got very worried because they thought, you know, people are going to use these cards. Nobody had ever heard of Visa at that point, or anything of the sort.

But people were going to use these cards instead of traveler's checks. So they backed into the traveler's check business — I mean, it backed into the credit card business.

Immediately, despite the jump the Diners Club had on the — on this business — because Diners Club had the restaurants signed up already, and they already had the high rollers carrying around their card, and nobody had an American Express card.

But American Express went in and they started charging more than Diners Club for the card, and they kept taking market share away.

Well, that is a great position to be in people's minds where they are willing to — when faced with a choice — they're willing to go with the newer product, at a higher price, and leave behind the entrenched product.

And it just showed the power of American Express. American Express had a special cache. It identified you as something special.

When you pulled out your American Express, as opposed to your Diners Club card, and as opposed to the Carte Blanche card, which was the third main competitor at the time. Visa still did not exist. And you could see this dominance prevail.

That told you what was in people's minds. It's why I bought into the stock in 1964. We bought 5 percent of the company for — a huge investment at the time for us. I was only managing $20 million at the time.

But you could see that this share of mind, this consumer franchise had not been lost.

In the — considerable period of time, American Express got into other businesses, they got into — Fireman's Fund Insurance was a very big acquisition. And, to some extent, they let the Visas of the world and all of those get established. They still had this preeminent cache position, but it was eroding.

But I would say that Harvey Golub, along with a lot of other people in the management, have done an extremely good job of reaffirming — intensifying — the cache. There will be probably $300 billion worth of charges, something in that area, put on American Express this year.

The — 300 billion, those are big numbers, even in today's world. The average discount fee is about 2.73 percent. If you look at the average discount fee on Visa, MasterCharge, you know, it's going to be a —probably, a full percentage point beneath that.

So you've got a percentage point on $300 billion, which is $3 billion of revenue that your competitor doesn't get. You can do a lot of things for your clientele.

And they've segmented the card, as you know. They've even recently gone to this black card, and — which sells for a thousand dollars. It's got a very special cache.

I would say that — I wouldn't use the word "inevitable," but I would say that nourished properly, that the American Express name has had — excuse me — has huge value and is very, very likely to get stronger and stronger as the years go by.

But I don't — I think that what they went through showed that it could take quite a beating and come back. But I don't want to — I don't think you'd want to test it that way indefinitely.

Incidentally, that's one of the things we look for in businesses, is how — you know, if you see a business take a lot of adversity and still do well, that tells you something about the underlying strength of the business.

The classic case was on that was — to me, is AOL. Four or five years ago — you know, I'm no expert on this, but I got the impression there for a period of time when they were having a lot of problems, that a very significant percentage of AOL's customers were mad at them.

But the number of customers went up every month. And that's a terrific business. I mean, if you have a business where your customers are mad at you and you're growing, you know, that has met a certain test, in my mind, of utility.

And you might argue that American Express had that, to some degree. It wasn't that bad. But they had a lot of merchant unrest and all of that. So, occasionally, you will find that an interesting test of the strength of a business.

Coca-Cola had some problems, you know, in Europe. But it comes back stronger than ever. They certainly had problems with New Coke, and they came back stronger than ever.

So you do see that underlying strength. And that's very impressive as a way of evaluating the depth and impenetrability of the moat that we talked about earlier.

Charlie?

CHARLIE MUNGER: Well, I think it would be easier to screw up American Express than it would Coke or Gillette. But it's an immensely strong business, and it's wonderful to have it.

WARREN BUFFETT: We own about 11 percent of American Express. So when there are 300 billion of charges, we're getting 33 billion of those for the account of Berkshire, and it's growing at a pretty good clip. The first quarter, it grew very substantially in both cardholders and charges.

My guess is that our 11 percent becomes more valuable over time. It's hard to think of anything that would destroy it.

CHARLIE MUNGER: The business is very interesting. They made a deal to put American Express cards into Costco. I think that is a very intelligent thing for American Express to have done. And it's a very aggressive place that does a lot of interesting things.

WARREN BUFFETT: Charlie is a director of Costco, so he's a — Costco is an absolutely fabulous organization. We should have owned a lot of Costco over the years and we — I blew it. Charlie was for it, but I blew it.

WARREN BUFFETT: OK, we'll go to number 1 again.

AUDIENCE MEMBER: My name is Jin Xi Wan (PH) from San Diego, California.

First, I would thank both of you. My question is also about growth and value.

If you look at the business in this country, most of them, if not all of them, are cyclical to various degrees. Certain businesses are, of course, more cyclical than other businesses.

So when you buy a business or make a investment in a new stock, do you ever cut off — like if a business lose money in a downturn, we are not going to buy.

If its earning begin to decline or downturn, we're not going to buy. But if the earning growth slows down, then we can look at a business and make an investment. So do you have a cutoff, in terms of this cyclical factor?

And also, when you buy a business — in terms of the current P/E ratio, also do you have a cutoff? Let's say, if it's P/E ratio is more than 15, 16, we are not going to buy the business, no matter how much the earning will grow in the future. So basically, it's about the growth and the value.

WARREN BUFFETT: Yeah, we have — to answer your question directly — we have no cutoff, whatsoever.

We don't think in terms of absolutes that way because, again, we are trying to think of how many birds are in the bush. And sometimes the number that are currently being shown could be negative.

One of the best buys we ever made was in 1976 when we bought a significant percentage — what became through repurchases — 50 percent of GEICO at a time when the company was losing a lot of money and was destined to lose a lot of money in the immediate future.

And, you know, the fact they were losing money was not lost on us, but we thought we saw a future there that was significantly different than the current situation.

So it would not bother us in the least to buy into a business that currently was losing money for some reason that we understood, and where we thought that the future was going to be significantly different.

Similarly, if a business is making some money — there's no P/E ratio that we have in mind as being a cutoff point at all. There are businesses — I mean, you could have some business making a sliver of money on which you would pay a very, very high P/E ratio. But it's basically —

We look at all of these as businesses. We're, for example, in — at Executive Jet — NetJets — we're losing money in Europe. Well, we expect to lose money in Europe getting established.

So does that mean it's a bad thing to buy a hundred percent of, if you own the whole company, or three percent of, if Executive Jet was a public company and you were buying into? No. I mean, it —

There are all kinds of decisions that involve the future looking different, in some important way, than the present. Most of our decisions relate to things where we expect the future not to change much.

But you get this — well, American Express was a good example. And when we bought it in 1964, a fellow named Tino DeAngelis had caused them incredible trouble. You know, it was one of those decisions that looked, for a time, as if it could break the company.

So, we knew — if you'd been charging for what Tino had stolen from the company against the income account that year, or the legal costs that were going to be attached to it, you were looking at a significant loss.

But the question was, what was American Express going to look like 10 or 20 years later? And we felt very good about that.

So there are no arbitrary cutoff points. But there is that focus on, how much cash will this business deliver, you know, between now and kingdom come? Now as a practical matter, if you estimate it for 20 years or so, the terminal values get less important.

So — but you do want to have, in your mind, a stream of cash that will be thrown off over, say, a 20-year period, that makes sense discounted at a proper interest rate, compared to what you're paying today. And that's what investment's all about.

Charlie?

CHARLIE MUNGER: Yeah, the answer is almost the exact reverse of what you were pointing toward. A business with something glorious underneath, disguised by terrible numbers that cause cutoff points in other people's minds, is ideal for us, if we can figure it out.

WARREN BUFFETT: And we've had a couple of those in our history that have made us a lot of money. I mean, we don't want to wish anybody ill, but —

CHARLIE MUNGER: Oh, I wouldn't go that far —

WARREN BUFFETT: OK, well Charlie — (Laughter)

I think he's speaking for both of us. (Laughter)

WARREN BUFFETT: OK, we'll move on to number 2.

AUDIENCE MEMBER: Mr. Buffett, I would like to start my question by giving you and Charlie 10 lashes with a wet noodle, not because of 1999 and what happened to your net worth or our net worth, but because you have spoiled your shareholders into expecting 25 percent growth every year, since 1965.

And then comes the bad, bad 199[9] and it hits all of us. But by my calculations, you personally, Mr. Buffett, have lost over 10 billion dollar — not million — billion dollars during 1999.

So I don't think we should get too mad at you because probably all of us have, at this point in our life, increased our net worth and made a lot of money. So you don't get a wet noodle today. (Laughter)

WARREN BUFFETT: Hmm.

AUDIENCE MEMBER: And the shareholders have, I'm sure, lost thousands. And some have lost millions of dollars during the year 1999.

Now after reading your biography in November of 1998 — unfortunately I didn't know about you earlier — I started investing on November the 24th of '98. And of course, I'm a poor little investor, so I bought your B stock at 23.08.

Then, because the market dropped, I bought some more on the 4th of December at 22.29. And then I bought, on January the 24th of 2000 at 16.89, so I do believe in dollar-cost averaging and I've been doing that for probably 30 years of my life.

My January investment, I'm happy to say, is up 15 percent, so the worst may be over.

Now, I read your annual report and I want to compliment you that that is the easiest and most entertaining annual report I think created in the whole world. And your — and I hope you continue that kind of a report. (Applause)

WARREN BUFFETT: Thank you.

VOICE: (Inaudible) Your name and —

AUDIENCE MEMBER: Oh!

VOICE: — where you're from

AUDIENCE MEMBER: I'm sorry. I was just told that I should have said who I am. My name is Gaylord Hanson and I'm from Santa Barbara, California — where investor Munger puts his big, multimillion-dollar boat in the water. (Laughter)

WARREN BUFFETT: I'm not going to make any comment on that.

AUDIENCE MEMBER: Please don't. (Laughter)

Now, with technology, computers, electronics, and software transforming our entire world — not just here — the world, I must admit that I personally invested in four technology computer software and aggressive growth mutual funds and made up all of my 1999 losses on Berkshire Hathaway. (Laughter and applause)

Are we asking too much as shareholders of Berkshire Hathaway for you men to put your brains to work and possibly speculate a little bit, maybe 10 percent of our money, into the only play in town, which seems to be technology, electronic?

And I read your report, and I understand a lot of your reasoning that it's difficult — and it is difficult — to project earnings of a lot — people are going to be a little bankrupt. Are they going to out of business?

But isn't there enough left in your brainpower to maybe pick a few and — (laughter) — see what's going on? Because I made over a hundred percent profit in 1999 on my aggressive position in the technology field, so that's —

WARREN BUFFETT: OK, well —

AUDIENCE MEMBER: — my question.

WARREN BUFFETT: The answer is we will never buy anything we don't think we understand. And our definition of understanding is thinking that we have a reasonable probability of being able to asses where the business will be in 10 years.

But, you know, we'd be delighted — we have a man here who's done very well. And if he has any business cards, you know, you could always invest with him, and — (Laughter)

And we'd welcome — you know — you can — we'll give you a booth in our exhibitor's section. And anybody that wants to do that is perfectly — obviously — free to do it with you or through any other — through anybody else that they select.

Now, you have a whole bunch of people out there that say they can do this. And maybe they can and maybe they can't and maybe you can spot which ones can and can't. The only way we know how to make money is to try and evaluate businesses.

And if we can't evaluate a carbon steel company, we don't buy it. It doesn't mean it isn't a good buy. It doesn't mean it isn't selling for a fraction of its worth. It just means that we don't know how to evaluate it.

If we can't evaluate the sensibilities of putting in a chemical plant or something in Brazil, we don't do it. If somebody else knows how to do it, you know, more power to them.

There are all kinds of people that know how to make money in ways that we don't. But, you know, it's a free world and everybody can invest in those sort of things. But they would be making a mistake, a big mistake, to do it through us.

I mean, why pick a couple of guys like Charlie and me to do something like that with — when you can pick all kinds of other people that say they know how to do it.

I would say this. Incidentally, you mentioned a point earlier, which is how the popular press tends to think of things. But we don't consider ourselves — Charlie and I don't — richer or poorer based on what the stock does. We do feel richer or poorer based on what the business does.

So we look at the business as to how much we're worth. And we do not look at the stock price, because the stock price doesn't mean a thing to us. I mean, it doesn't for a variety of reasons, but beyond that, imagine trying to sell hundreds of thousands of shares at the stock price.

We can always sell the business — we're not going to do it — but we could always sell it for what the business is worth. We can't sell our stock for what the — necessarily — what the stock price is. So we look at the business, entirely, in terms of evaluating our net worth.

We figure our net worth went up very, very, slightly — very slightly — in 1999. And we would figure that no matter what the stock was selling for — it just doesn't make any difference — because we do look at the businesses.

We really look at it as if there wasn't any quote on the stock. Because we don't know what the stock is going to do.

If we do — if the business gets worth more at a reasonable rate, the stock will follow, over time. But it won't necessarily follow week by week, or month by month, or year by year.

We had a lousy year in 1999, but the stock price did not calibrate with that in any perfect, or close to perfect, manner.

And we've had good years other times, when the stock price is way overpriced or over-described what happened during the year.

So we really measure all the time by the business. We think of it as a private business, basically, for which there's a quotation. And if it's handy to use that quotation, either in buying more stock or something of the sort, we may do it. But it does not govern our ideas of value.

Charlie?

CHARLIE MUNGER: Yeah. Generally, I would say that if you have a lot of lovely wealth in a form that makes you comfortable, and somebody down the street has found a way to make money a lot faster, in a way you don't understand, you should not be made miserable by that process.

There are worse things in life than being left behind in possession of a lot of lovely money. I mean — (Laughter)

WARREN BUFFETT: Would you want to name a couple? (Laughter)

No, Charlie made — I mean, when farmland was — went from — farmland probably tripled here in the late '70s, without any real change in yields per acre or the price of the commodity.

You know, are we going to sit around and stew because, you know, they — we didn't buy farmland at the start?

You know, are we going to stew because all kinds of stuff — uranium stocks in the '50s — or you can go back — all kinds of things that have — the conglomerates in the late '60s, the leasing companies, I mean, you can just go down the line.

And it just doesn't make any — we're not in that game.

We would know how to create a chain letter, believe me. I mean, we've seen it down some many times. You know, we know the game. But it just isn't our game.

Charlie? (Applause)

WARREN BUFFETT: Number 3?

AUDIENCE MEMBER: Good morning Mr. Buffett, Mr. Munger. My name is Stacy Braverman (PH). I'm 15 years old, and I'm from South Setauket, New York. It was very nice meeting you Mr. Buffett, yesterday.

WARREN BUFFETT: Thank you.

AUDIENCE MEMBER: I especially appreciated your internet stock tips. (Laughter)

WARREN BUFFETT: (Laughs) Yeah, keep it — keep it to yourself now, Stacey. That's our deal. (Laughs)

AUDIENCE MEMBER: I bought the B shares two years ago, when I decided that I needed to save some money for college. When the share price dipped below 1,500 I decided to investigate correspondence courses. (Laughter)

WARREN BUFFETT: Maybe you can get a scholarship. (Laughs)

AUDIENCE MEMBER: So I'm glad to see that things are back on track now.

My question is, a lot of the companies that you invest in, like Coca-Cola and Gillette, seem to do better when the dollar is weak and interest rates are falling. That seems to be the opposite of what's happening now.

So how is Berkshire positioning itself to take advantage of the current economic position, with that assessment in mind?

WARREN BUFFETT: Yeah, well, that's a good question. But if we thought we knew what the dollar was going to do, or interest rates were going to do, we would — we won't do it — but we would just engage in transactions involving those commodities, in effect, or futures directly.

In other words, it would not be — if we thought that the dollar was going to weaken dramatically — and we won't get those kind of thoughts — but if we did, you know, we would buy other currencies.

And it would be — it might benefit Coke, in dollar terms, if that happened.

But it would be so much more efficient, directly, to pursue a currency play or an interest rate play than an indirect way through companies that have big international exposure. We would probably do it directly.

We don't really think much about that. Because — just take currency. If you look at what the yen has traded at, you know over the last — well, since World War II, you know. From — what was it? Three-sixty down to — what? Seventy-some, Charlie? At lowest?

CHARLIE MUNGER: Uh-huh.

WARREN BUFFETT: And, you know, back up to 140-some. And now, I don't know, 105, or wherever it may be. I mean, those moves are huge.

But, in the end, we're really more interested in whether more people in Japan are going to drink Coca-Cola. And, over time, we're better at predicting that than we are at predicting what the yen will do.

And if Coca-Cola satisfies people's needs — liquid needs — for more and more people, we will probably get a reasonable percentage of their purchasing power of those people around the world for their right to drink Coca-Cola, or for shaving, or whatever it may be.

So, if the world's standard of living improves, bit by bit over time, in an irregular fashion, and we supply something the world wants, we will get our share in dollars, eventually.

And what it — quarter-to-quarter or year-to-year — how that moves around, because of currency moves, really doesn't make any difference to us.

It makes a difference to reported earnings in that quarter or — but in terms of where Coca-Cola's going to be 10 or 20 years from now, it would be a big mistake, I think, to focus on currency moves as opposed to focusing on the product itself.

And Japan offers a good example of that because you had this — I mean, you really had a move from 360, or whatever it was, to the high 70s or thereabouts. I mean, that is an incredible move in currency, and it can overshadow in the short run, even, what's happening in the business.

But long-range, what's really made Coca-Cola strong in Japan is the fact that the Japanese people have accepted their products in a big way. And Coca-Cola's built this tremendous, for example, vending machine presence.

And the Japanese market is very different than all the rest of the markets in the world, virtually, in that such a high percentage flows through vending machines.

And my memory is that, you know, we may have something like 900-and-some thousand, out of something over 2 million, vending machines in the country.

So we've got this tremendously dominant position. It's a little like billboards might be in this country. Plus, we have this terrific product, Georgia Coffee, which is huge over there.

And that's the sort of thing we focus on, because that's something we understand.

We don't understand what currencies are going to do week-to-week or month-to-month or year-to-year. And we always try to figure on what — focus on what's knowable and what's important.

Now, currency might be important, but we don't think it's knowable. Other things are unimportant, but knowable. But what really counts is what's knowable and important.

And what's knowable and important about Coca-Cola is the fact that more and more people are going to consume soft drinks around the world, and have been doing so year after year after year, and that Coca-Cola's going to gain share, and that the product is extraordinarily inexpensive relative to the pleasure it brings to people.

Coca-Cola — in the '30s, when I was kid, I bought, you know, for — six for a quarter and sold them for a nickel each. That was a 6 1/2 ounce bottle for a nickel, at Coke.

And you can buy a 12-ounce can now at — pick a supermarket sale — for not much more than twice per ounce what it was selling for in the '30s. You won't find many products where that kind of value proposition has developed over the years.

So that's the kind of thing we focus on. And interest rates and foreign exchange rates, important as they may be in the short term, really are not going to determine whether we get rich over time.

The best time to buy stocks, actually was, in recent years, you know, has been when interest rates were sky high and it looked like a very safe thing to do to put your money into Treasury bills at — well, actually the primary got up to 21 1/2 percent — but you could put out money at huge rates in the early '80s.

And, as attractive as that appeared, it was exactly the wrong thing to be doing. It was better to be buying equities at that time, because when interest rates changed, their values changed even much more.

Charlie?

CHARLIE MUNGER: Yeah, we have a willful agnosticism on all kinds of things. And that makes us concentrate on certain other things. This is a very good way to think, if you're as lazy as we are. (Laughter)

WARREN BUFFETT: We'll go to 4, please.

AUDIENCE MEMBER: Jerry Zucker (PH), Los Angeles, California. Good morning, boss. (Laughter)

Calling your attention to the annual report and major investments, I'd appreciate your comments on two companies.

Number one, M&T Bank, a new name to that list, but not exactly a household name, at least on the West Coast.

And company number two, definitely a household name, but missing from the list this year, the Walt Disney Corporation.

WARREN BUFFETT: Well, we don't comment much on our holdings, particularly as to purchases or sales, but we do have the CEO — longtime CEO — of M&T here today, Bob Wilmers. Bob, would you stand up? He should be up here somewhere. There he is. (Applause)

Bob is a terrific businessman, a terrific banker, and a terrific citizen. I've known him a long time. A good friend of Stan Lipsey, our publisher in Buffalo. Bob runs the kind of a bank that allows Charlie and me to sleep very comfortably.

Someone once said there are more banks than bankers, which is something worth thinking about a little bit. But believe me, Bob is a banker and he's done a lot for Buffalo.

And he runs — he's got a — he has a very big ownership position, which he achieved, at least in very large part, through purchase with his own money, as opposed to having options.

He's got one of the largest ownership positions, probably, among the hundred largest banks in the United States.

And it's just a very attractive business for us to be in, and we're very comfortable with it. And 10 years from now, Bob will be here, and I hope I'm here. We will — we'll probably own M&T.

The Disney Company, our ownership in that fell below the threshold level which we used, although we had ownership. And we think Disney is a terrific business. Michael Eisner's done a great job there.

We have — as we put in the annual report — we have mildly reduced equities as prices began to — generally — began to get more and more full.

We do not think the general ownership of equities is going to be very exciting over the next 10 or 15 years, so we would like to buy businesses.

We bought a few last year. We had this one we announced last week in the insurance field. We got another small acquisition where we've got an agreement with somebody. It's very small.

But we would love it if those were 10 times that size or 20 times that size, because — you will see more of that, relative to marketable securities, as we go along.

Charlie?

CHARLIE MUNGER: Yeah, regarding equities generally, I think that Fortune article, which was sent out to the Berkshire shareholders this year, should be absolutely must-reading for everybody. In fact, it would be a good thing to read two or three times.

The ideas there sound so simple, that — you know, people have the theory that they must understand it. But I think the world is more complicated than that. I think we are in for reduced expectations eventually, with respect to the kind of returns people have had from investing in stocks.

WARREN BUFFETT: You want to offer any thoughts as to what — that might — what the corollary might be?

CHARLIE MUNGER: Well, I think if you have very unreasonable expectations of life, it makes life much more miserable. Much better to get your expectations within reason.

It's much easier to reduce expectations to some reasonable level than it is to get superhuman achievements.

WARREN BUFFETT: That's why my kids were almost delirious when they heard that announcement I was going to give them $300 each and they — (Laughter)

How to be — do you want to be a zillionaire, or whatever it was.

Incidentally, that was terrific of Regis Philbin to do something like that. I mean, all of those appearances [in the video shown to shareholders] are nonpaid, I can assure you. (Laughter)

And those people are good — very, very, good sports. And I thank them.

WARREN BUFFETT: OK, we'll go to zone 5.

AUDIENCE MEMBER: My name is Monte Lefholtz from Omaha, Nebraska.

I have a two-part question. What is Berkshire's philosophy on paying dividends and under what circumstances would Berkshire pay a dividend in the future?

WARREN BUFFETT: Well, that's a good question. We paid a dividend in — what, 1969, Charlie? At 10 cents a share. The — I can't remember it, but it's in the records.

We would pay — we would be very likely to pay either very large dividends or none at all, because our test is whether we think we can use money at a rate — in a way — that it creates more than a dollar of market value for every dollar we retain.

Obviously, if we can keep a dollar and it becomes, on a present-value basis, worth more than a dollar, it's foolish to pay it out.

Forget all about taxes. Assume it's a tax-free society. We would have exactly the same dividend policy up to this point, whether there was any tax on dividends, capital gains, or anything else, or whether we were entirely tax-free.

Because we have retained money because, to date, we have felt that if we keep a dollar and use it in buying other businesses, or whatever it may be, that it becomes worth more than a dollar on a present-value basis — I mean, not that it's going to be worth a dollar-ten four years from now — but that it's worth more than a dollar when we look at what it'll be four years from now.

That's subjective, but any given decision like that is subjective. Over time, you get an objective test as whether that's met by — whether we do indeed create more value than — each dollar retained earnings, we create an extra dollar-plus of value.

If that changed — and it could change — then we would give the money to the shareholders. And it might be done through repurchases or it might be done through dividends, but we would — there's no reason to keep a dollar in the business that's worth 90 cents if you keep it in the business.

And there are companies that do that, but they don't — they're not necessarily intentionally doing it. They may have higher aspirations as they go along, but they're not realized.

We, I think, would be fairly objective about trying to figure out whether we are indeed creating value or destroying value by retaining earnings.

We would never have a conventional dividend policy. I mean, the idea of paying out 20 percent of your earnings, or 10 percent, or 30 percent of earnings in dividends strikes us as nuts. I mean, you may get yourself in a position where you have to do it because you build these expectations in people's minds, but it is — there is no logic to it whatsoever.

The logic is basic. If you create more than a dollar value for a dollar retained, why in the world would you pay it out, because the people who want to get that dollar as a dividend can instead get a dollar-ten by selling the stock for — or whatever it may be — a dollar-twenty— for the value that was maintained — or retained.

So, that — it's a very simple dividend philosophy, and one, I think, that's in one of the past annual reports. We explain the logic of it. And I see no — nothing that would change, in terms of the principles of it.

Evaluating whether that's the case — I mean, obviously we aren't going to make a decision every week based on whether we can employ money that week at a higher rate of return, or every month.

But in terms of a reasonable expectancy over a couple-year period, whether we think we can use retained earnings advantageously, that's our yardstick.

Charlie?

CHARLIE MUNGER: Yeah, what's interesting about what Warren is saying about logical dividend policy is that if you went to all the leading business schools of the United States, all the leading economics departments, all the professors of corporate finance — this wasn't — wouldn't be the way they teach the subject.

In other words, we're basically saying we're right and all the rest of academia is wrong. (Laughter)

WARREN BUFFETT: We love it when we do that. (Laughter)

WARREN BUFFETT: OK, we'll go to 6.

AUDIENCE MEMBER: I'm Mark Chere (PH) from Hong Kong.

And Mr. Buffett, I'd like to ask you a couple of questions. The first one is how many insurance companies does Berkshire Hathaway own?

WARREN BUFFETT: Let me —

AUDIENCE MEMBER: I can't figure out the total.

WARREN BUFFETT: Let me answer that and then you go on to your second one.

We have a great number of companies because, in many cases, a given strategy or a given operation operates through multiple companies.

The company we announced the purchase of the other day is really one business, but it has three companies.

I wouldn't be surprised — I've never looked at the number — but it wouldn't surprise me if we have 20 insurance companies or something. Maybe 25 or 30, who knows?

We have about nine or 10 basic insurance operations for which a given management has responsibility, but there's a lot of state laws applicable to insurance companies and different regulations.

It's often advantageous to have a number of companies operating under one management to achieve one operational goal.

The big operations are General Re, and GEICO, and the National Indemnity reinsurance operation run by Ajit [Jain].

And then we have a group of about five different operations that are all very decent businesses, but are not as big as the three I mentioned. Go ahead.

AUDIENCE MEMBER: Thank you. Yeah, my main question is this. Much has been written by you, and a lot more by other people, about your criteria, or the criteria you use when you make a purchase of a company, either in full or in part.

But almost nothing has been written by you, at any rate as far as I can tell, on your criteria for selling a company that you have already — you have previously purchased.

And I wonder if you could outline the criteria you might apply today to a sale of a company, and whether you would go — well, the simplest way to put it is this: Would you agree with Philip Fisher, who said there were two reasons to sell a company — or a stock?

One was when you'd discovered you've made a mistake in your analysis and the company was not what you thought it was.

And the second when — was when the — something within the company had changed, the management had changed or so on, so it no longer met your original criteria.

Would you — are those the principles that you apply or would you say there are different ones or others? Thank you.

WARREN BUFFETT: I'm glad you brought up Phil Fisher, because he is a terrific mind and investor. He's probably in his 90s now, and — but his —

A couple of books he wrote in the early '60s are classics and I advise everybody here who's really interested in investments to read those two books from the earlier '60s.

And he's a nice man. I went out to — 40 years ago, I dropped into his office in San Francisco, a tiny office. And he was kind enough to spend some time with me. And I'm a huge admirer of his.

The criteria that we use for selling a business that we own control of are articulated in the annual report, under the ground rules.

So in terms of businesses that we own, we have set forth — and I direct you there — we've written those same ground rules every year since 1983. And actually, we had those in our head for decades before that.

And we have this quirk, which you should understand, and we want our shareholders to understand it, that even though we got offered a price that was far above its economic value, as we might calculate it going in — but if we got offered a price for that for a business that we have now, we have no interest in selling it.

You know, we just — we don't break off the relationships that we develop simply because we get offered a fancy price for something. And we've had a chance to do that sometimes.

That may help us, actually, in acquiring businesses, because both of the companies that I've committed to buy in the last few weeks, both of them are very concerned about whether they have found a permanent home or not.

And people who build their businesses lovingly over 30, or 40, or 50 years, frequently care about that. A lot of people don't care about that.

And that's one of the things we evaluate when buying a business. We look at the owner, and we say, "Do you love the — " in effect, we ask ourselves, "Does he love the business or does he love the money?"

Nothing wrong with liking the money. In fact, we'd be a little disappointed if most of them didn't like the money. But in terms of whether the primacy is loving the money or loving the business, that's very important to us.

And when we find somebody that loves their business — and likes the money — but loves their business, we are a very, very desirable home for them, because we're just about the only people that they can deal with, of size, where we can commit that they are going to be part of this operation, really, forever, and be able to deliver on that promise.

I tell sellers that the only person that can double-cross them is me. I can double-cross them. But there's never going to be a takeover of Berkshire. There's never going to be a management consultant come in and say, "I think you'd better do this."

There's never going to be a response to Wall Street saying, "Why aren't you a pure play on this or that and therefore you ought to spin this off the—?" None of that's going to happen.

And we can tell them, with a hundred percent assuredness, that for a very long time — that if they make a decision to come with Berkshire, they — that decision will be the final decision as to where their company resides.

So, unless those couple conditions, which are extremely unusual, that are described in the ground rules prevail, we will not be selling operating businesses, even though someone might offer us far more than, logically, they're worth.

The question about stocks is, we're not quite with Phil Fisher on that, but we're very close. We love buying stocks where we think the businesses are so solid, have such economic advantage, that we can essentially ride with them forever.

But you've heard me talk about newspapers earlier today. We would have thought newspapers — 20, 25 years ago, I think Charlie and I probably thought a daily newspaper, you know, in a single newspaper town — which practically all are — is probably about the solidest investment you could find.

We might have thought a network TV-affiliated station was about as solid as you could find. And they were very solid.

But events have, over the last 20 or 25 years, have certainly changed that to some degree and maybe to a very, very big degree.

So we will occasionally reevaluate the economic characteristics that we see 10 years out from the ones that we saw 10 years ago and maybe come to a somewhat different conclusion.

The first 20 years of investing for me — or maybe more — my decision to sell almost always was based on the fact that I found something else I was dying to buy.

I mean, I sold stocks at — you know, at three times earnings to buy stocks at two times earnings 45 years ago, because I was always running out of money. Now, I run out of ideas. I've got a lot of money but no ideas, and — (Laughter)

You know, I'd — I'm not sure which is better. What do you think, Charlie? (Laughter)

CHARLIE MUNGER: I think you were way better off when you had 50 years ahead of you — (laughter) — and less money.

WARREN BUFFETT: I still think I have 50 years ahead of me, Charlie. (Laughter)

You want to elaborate any more on selling?

CHARLIE MUNGER: Yeah. We almost never sell an operating business. And when it does happen, it's usually because we've got some trouble we can't fix.

WARREN BUFFETT: OK, number 7.

AUDIENCE MEMBER: Hello, I'm Martin Wiegand from Chevy Chase, Maryland.

And, though you've given yourself a D in capital allocation, on behalf of the shareholders, we would like to give you an A-plus in honesty and accounting, temperament for a long-term investing view, and hosting an annual meeting.

WARREN BUFFETT: Thanks. (Applause)

I went to school with Martin's father. Good to see you here.

AUDIENCE MEMBER: Thank you. Now my question. Do General Re's competitors pay their employees with a rational incentive plan aimed at growing float and reducing its cost, or do they use something similar to General Re's old plan, and is this a new, sustainable, competitive advantage for General Re?

WARREN BUFFETT: Well, I think a rational compensation plan — and I think we have rational compensation plans — we certainly aim at that, and we don't care what convention is.

Over time, we'll select for people who are rational themselves, who have confidence in their abilities to deliver under a rational plan, and who really appreciate operating in that kind of an environment.

Now, who wouldn't want a lottery ticket, you know? I mean, if anybody here wants to buy a few lottery tickets at the lunch break and come up and present them to me, I'll be glad to take them.

I don't think it will have anything to do with, you know, my performance at Berkshire Hathaway or anything in the future.

And so, we try to make plans that are very rational. And incidentally, we've never had any real problems at all in working with managements to do just that.

The two operations that I've just recently agreed to buy, we will have rational compensation plans at those places. And they'll be somewhat different, perhaps, than the ones they've had in the past, although not much different, as I think about it.

I think it's been a huge advantage at GEICO to have a plan that is far more rational than the one that preceded it. And I think that advantage will do nothing but grow stronger over time because, in effect, compensation is our way of speaking to employees, generally.

And with a place as large as GEICO, you can't speak to them all directly. But it speaks to them all the time. It says what we think the rational measurement of productivity and performance in the business is.

And over time, that gets absorbed by thousands and thousands of people. And it's the best way to get them to buy into their goals.

Whereas, if you use as your test what the stock market is going to do, people, I think, inherently know they got a lottery ticket. I mean, you've seen that in a lot of tech stocks in the last three or four months.

You will find all kinds of options being repriced, or issued in great abundance at lower prices without repricing them because they don't want to have the accounting consequences. Those people know they're getting lottery tickets, basically.

And, you know, the market's attitude toward tech stocks is what's going to determine results far more than their own individual results.

So, it's silly to think of somebody working very hard at some very small job at Berkshire, with our aggregate market value of 90 billion, thinking that their efforts are going to move the stock.

But their efforts may very well move the number of policy holders we gain or the satisfaction of policy holders. And if we can find ways to pay them based on that, we are far more in sync with what they can do. And they know it makes more sense.

So, I hope our competitors do all kinds of crazy things on comp and everything else. I mean, the more dumb things they do, the better life is for us. And I think that —

Well, we've had incredible success at keeping managers. I don't think there's probably any company in the United States of size that has had better luck on that than Berkshire.

And partly, it's because we appreciate, in terms of the comp plan, and partly because we just appreciate, generally, managers that do a terrific job for us. And we've got the best group in the world.

Charlie?

CHARLIE MUNGER: Yeah, here again, we're very much out of step with the conventions of the world.

When I read annual reports, and I read a lot of them, I'm very frequently irritated by the presence of things that are totally absent from the Berkshire Hathaway annual report.

I think promising people free medical care forever, between age 60 and the grave, and maybe for a younger spouse after the grave, but the first one, regardless of what's invented and regardless of what it cost, I don't see how anybody who cared about the shareholders would be making promises like that.

There's a lot of insanity in conventional corporate conduct on the pay front. And — but if convention determined what was sane and what was insane, we're the oddballs. I mean, we're the unusual example.

WARREN BUFFETT: I think per — and I think it's very subconscious, but I think, sometimes, that the desires of the top person to get an outrageous amount gets pyramided through the organization.

Because if they're going to have some scheme that rewards them based on a lottery ticket, they feel they have to give lottery tickets to everybody else, although on a much-reduced scale.

And they really do. I mean, it's just — it becomes accepted in the course. And then you hire consultants who come around and say, "Well, you're getting more lottery tickets at someplace else. And we've got some added new schemes." It becomes very, very reinforcing.

But what has happened at the top level is really unbelievable. I mean, it — if an executive said to his company, "I want an option on 300 — just for working here — I want an option on $300 million worth of S&P futures for the next 10 years," you know, people would regard that as outrageous. They'd say, "What have you got to do with that?"

But in effect, if they get one on their own stock and it goes up based on the fact the S&P appreciates over 10 years, they think that that's perfectly acceptable to have that kind of a ride.

So I would say that, you know, there's been a lot of talk about the huge gap between, you know — that exists in pay. But it seems to me that the primary gap that is eating at American CEOs is the gap between the rich and the super-rich. That seems to be motivating the adoption of many plans.

It's really — it's gotten out of hand, but it isn't going to change. The CEO has his hand on the switch as a practical matter. I know people, and I've been on them myself, but on comp committees. And as a practical matter, you don't stand a chance.

CHARLIE MUNGER: Yeah, a lot of the corporate compensation plans of the modern era worked just about the way things would work for a farmer or if you put a rat colony in the grainery. It — (Laughter)

WARREN BUFFETT: Put him down as undecided. (Laughter)

Good to see you, Martin.

WARREN BUFFETT: OK, let's go to 8.

AUDIENCE MEMBER: Good morning Mr. Buffett and Mr. Munger. My name is Ram Tarecard (PH) from Sugar Land, Texas.

I've been a Berkshire shareholder since 1987 and always battling with the idea of what really is the intrinsic value for the company.

We have seen that, over time, a change in book value is a big indicator of the change in intrinsic value of Berkshire. Although in absolute terms, you have said again and again, that intrinsic value far exceeds book value.

In calculating the book value of Berkshire, our partly-owned businesses, like Coke and Gillette, are valued at their market value. This component of book value fluctuates, often irrationally, depending on the mood of the market.

Do you think that using a look-through book value, just like you used look-through earnings, is a superior measure for tracking changes in intrinsic value?

In fact, I had written a letter to you last August and I was very pleased to get a response from you personally saying that this approach makes sense.

My question is, does this approach really give you a better measure for tracking intrinsic value? And if so, would you consider publishing it in the annual report? Thank you.

WARREN BUFFETT: Yeah, thanks for the question. I would say that — I'm not sure how you phrased it when you wrote me and how I phrased it going back, but look-through book value would not mean much, actually.

The very best businesses, the really wonderful businesses, require no book value. They — and we are — we want to buy businesses, really, that will deliver more and more cash and not need to retain cash, which is what builds up book value over time.

Admittedly, the prices of marketable securities, at any given time, are not a great indication of their intrinsic value. They are far better, though, than the book value of those companies in indicating intrinsic value.

Berkshire's book — Berkshire's intrinsic value, in a very general way, and trends in it, are better reflected in book value than is the case at a very high percentage of companies. It's still a very — it's not a great proxy.

It's the best — it's a proxy that is useful in terms of direction, in terms of degree, in a general way over time. But it's not a substitute for intrinsic value.

It — in our case, when we started with Berkshire, intrinsic value was below book value. Our company was not worth book value in early 1965. You could not have sold the assets for that price that they were carried on the books, you could not have — no one could make a calculation, in terms of future cash flows that would indicate that those assets were worth their carrying value.

Now it is true that our businesses are worth a great deal more than book value. And that's occurred gradually over time. So obviously, there are a number of years when our intrinsic value grew greater than our book value to get where we are today.

Book value is not a bad starting point in the case of Berkshire. It's far from the finishing point. It's no starting point at all of any kind in — you know, whether it's The Washington Post or Coca-Cola or Gillette.

It's a factor we ignore. We do look at what a company is able to earn on invested assets and what it can earn on incremental invested assets. But the book value, we do not give a thought to.

Charlie?

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

WARREN BUFFETT: Oh. He'll come back next year.

WARREN BUFFETT: Number 1. (Laughter)

AUDIENCE MEMBER: Hello, gentleman. My name's Dan Sheehan. I'm from Toronto, Canada.

First of all, I'd like to thank you for this weekend. It's become more and more important to me as it's become more and more difficult to find a rational discussion about the stock market. And this weekend really is a breath of fresh air for most of us, I think.

One of the places I refer to a lot is Benjamin Graham. And what worries me now is what he referred to — is a period in 1929, in the early '30s — as a lab experiment that — where normal intrinsic values and margins of safety broke down, or seemed to, anyway.

And I wonder how much you think that might happen now or in the next few years, and how much you worry about that with the investments you're making.

WARREN BUFFETT: Well, we generally believe you can just see anything in markets. I mean, just extraordinary what happens in markets over time. It gets sorted out, you know, eventually.

But, I mean, we have seen companies sell for tens of billion dollars that are worthless. And at times, we have seen things sell for 20 percent — a number of things, not hard to find, perfectly decent running them — sell for literally 20 percent or 25 percent of what they were worth.

So we have seen and will continue to see everything. It's just the nature of markets. They produce wild, wild things over time.

And the trick is, occasionally, to take advantage of one of those wild things and not to get carried away when other wild things happen.

Because the wild things create their own truth for a while and you have to — you know, you — that's the reason they're happening, and people are getting pleasant experiences and all that. You'll see everything if you're around markets for a reasonable period of time.

We don't see any great cases of dramatic undervaluation by this market. So it isn't like we're seeing — because there's this — perhaps this speculative mania in a particular area of the market, we do not see that creating incredible undervaluation other places.

What's happening there may lead to undervaluation, you know, a few years from now. Or it may not, I don't know that, but we're —

It isn't like you can find things that are worth double or thereabouts what you're paying because, frankly, there's so much money sloshing around that if you found such a thing, it would be very likely corrected by some buyout types.

I mean, we would love to find businesses that are selling for half of what they're intrinsically worth. We don't find that. We do find a lot of cases where we think the evaluations on the high side are just — are unbelievable.

We have been in periods in the past where we felt almost everything was being given away, too. So you'll get those extremes. Most of the time the market's in a position where there's a little of both, but every now and then, it gets into a position where there's a lot of one or the other.

And we would — you know, we would love it if we could find a lot of reasonable-sized companies that were selling at what we thought were half of the intrinsic value. We're not finding them.

Charlie?

CHARLIE MUNGER: Well, I do think that the present time is a very unusual period. It's hard to think of a time when residential real estate, and common stocks, and so on, rose so rapidly in price and there was so much easy money floating around. I mean, this is a very unusual period.

WARREN BUFFETT: What's fascinating — and I'm sure you've thought of it — is that you can now have a business — we saw a few of them, you know, earlier this year we'll say — that might've been selling for $10 billion where the business itself could not have borrowed, probably, a hundred million dollars in debt, with an equity evaluation of 10 billion.

But the business itself would not — as a private business — would not have been able to borrow a hundred million. But the owners of that business, because it's public, can borrow many billions of dollars on their little pieces of paper, because they have this market valuation.

If it's a private business, the company itself couldn't borrow one-twentieth or so of what individuals could borrow.

That's happened, to a degree, before. But this has probably been as extreme as anything that's happened, probably, including the '20s. That doesn't mean there's a parallel to it, but it's been pretty extreme.

Charlie?

CHARLIE MUNGER: I think it probably is the most extreme that has happened in modern capitalism. In my lifetime, I would say the '30s were the — it created the worst recession in the English-speaking world in 600 years.

And it was very extreme. You could buy a "all-you-can-eat" in Omaha through the '30s for a quarter from Henderson's Cafeteria.

And now we're seeing the other face of what capitalism can do. And this is almost as extreme as the '30s were, but in a different direction.

It's zero unemployment, rampant speculation, et cetera, et cetera. It's an amazing period.

WARREN BUFFETT: That does not make it easy to predict, however, the outcome.

It says to us, though, certain things we want to stay away from. I mean, basically that's — it's precautionary to us. It does not spell opportunity.

Although, there's no question that the — in the last year, the ability to monetize shareholder ignorance has never been exceeded, I think. Wouldn't you say so, Charlie? (Laughter)

WARREN BUFFETT: OK, number 2.

AUDIENCE MEMBER: Good morning, gentleman. David Winters, Mountain Lakes, New Jersey.

Thanks again for Berkshire Fest 2000 and having it on Saturday, for those of us who tap dance to work on Monday. (Buffett laughs)

You know, over the previous 30 years or so, Berkshire has been a tactical participant in the insurance business. With the acquisition of Gen Re and the broadening of GEICO's scope, the company's been transformed into a mainstream activity.

How will this transformation result in growth and low cost float over time? I.e., how do you avoid becoming average?

And to follow on with the very perceptive 10-year-old from California's question, will Berkshire's newspaper interest be able to make the successful transformation to the new electronic world, especially the unique content of the Washington Post? Thank you.

WARREN BUFFETT: Those are both good questions. I think, to answer your second one, I think the Buffalo News will do just as well as, if you take the top 50 papers in the country, in making a transition. How well the top 50 will do is really an open question.

And — but there is — you know, the industry factors will, in my view, just overwhelm any specific strategy. Because any strategy is —

It's so easy to copy in the internet. That's one of the problems of the internet. It's one of the problems of capitalism.

I mean, if you open a restaurant that's successful, somebody's going to come in and figure out what your menu is and how — you know, the whole thing. And then they're going to try to do it in a little bit better location, or at a lower price, or whatever. That's what capitalism's all about and it's terrific for consumers.

The internet accentuates that process. I mean, it gives everybody in the world real estate. You know, there are no prime locations to speak of. I mean, I can give you the argument for how you develop one and all of that, but it really changes the world in a big way.

You know, if you were at 16th and Farnam in Omaha in the '20s, with Woolworth — that's the place where the streetcar tracks crossed, you know, and a whole bunch of them were going north/south there and east/west — and there wasn't any better real estate in town.

I'm not sure if that's worth as much now in nominal dollars as it was in the 1920s. But — and that looked permanent, incidentally. Who was going to rip up the streetcar tracks or — in 1910 or whenever it was?

So now, you rip up the tracks every day. You know, and so the fluidity is incredible, in terms of moving economic resources around compared to what it was.

The newspaper industry is going to try and figure out how to be a very important information source in a new medium. And it may solve that problem, to a degree, and still have lousy economics. That's — you know, that's — unfortunately, the newspaper industry's always —

Historically, the way the industry structure worked, once you got into the majority of households and everything, somebody else could bring out a way better paper, but it wasn't going to go any place against you.

I mean, you had such structural advantages that you could, you know — you could put your idiot nephew in and he would do fine — wonderfully — you know. And nothing could happen to him except when this different medium came along.

Now you can put in a genius and whether that will make any difference is an open question. I would say that it's quite doubtful. If you own a newspaper, you want to do everything that you can think of and, fortunately, everything anybody else can think of, because you can copy them so fast.

And it may work in terms of product and it may not work in terms of product. And it may work in terms of product and still not work in terms of economics very well. And I don't know the answer to that question.

I know that we will play it out — at the Buffalo News, for example — as strongly as we can. I don't think other people are going to get way better results than we are. I don't know what the other people are — what their results are going to be and how it will work.

It would be crazy to sit on the sidelines and simply ignore what's going on. So we will do our darnedest to have good economics when this is all through. But nobody knows how it's going to play out, in my view.

WARREN BUFFETT: The question about insurance, about whether we become average — average is not going to be good [in] insurance. Average is going be terrible in insurance over time. It's not —

It's a commodity businesss, in many respects. And if you are average, you're going to have a very poor business. You may limp along because you got a lot of capital that's supporting the lousy business, but it's not — it won't be a good business, per se.

But I think in GEICO, and in General Re, and some — and our other operations as well — we do not have average businesses, and there is nothing about the way the industry is going that would force us or lead us to have average operations.

I mean, we have special things we bring to the party in both cases I've named, and actually, in other cases as well. We have things we bring to the party that should make us considerably better than average.

It'll show more in some periods than others, and it'll be different in the way it is applied at GEICO or at General Re or at National Indemnity's reinsurance operation. But none of those, in my view, will be average.

But average — and there will be a lot of average, by definition — average is not going to be good.

The other problem about it is average is not going to go away, either. So that is an anchoring effect, to some extent, on what even the skillful operator can achieve. I think insurance will be a very good business for us over time.

Charlie?

CHARLIE MUNGER: Yeah. Every once in a while, we have a business sort of die under us. Trading stamps is now off 99 3/4 percent from its peak volume, and we were able to do nothing to prevent that except wring all the money out and multiply it by about 100. (Laughter)

WARREN BUFFETT: We actually did about, what, 120 million, in the late '60s, per year in trading stamps, far more dominant in our area than S&H was nationally.

And we have — by skillful management, Charlie and my constant attention to detail — have taken that business from 120 million a year down to, what, about 300,000 a year or so?

CHARLIE MUNGER: Oh, way less than that. (Laughter)

WARREN BUFFETT: We thought of having the sales chart here and turning it upside down to impress you, but it wouldn't have worked very well.

CHARLIE MUNGER: I think it's the nature of things that some businesses die. It's also in the nature of things that, in some cases, you shouldn't fight it. There is no logical answer, in some cases, except to wring the money out and go elsewhere.

WARREN BUFFETT: Yeah, and that's very tough for managements, too. In fact, they almost never face up to that. It's very, very rare.

And it's logical that it'd be rare. In a private business, you can understand why people face up to it. In a public company, if you take the equation of the manager, he or she may be far better off ignoring that reality than accepting it.

WARREN BUFFETT: Let's go to number 3.

AUDIENCE MEMBER: Good morning, gentleman. My name's Marc Rabinov from Melbourne, Australia.

You've emphasized the importance of the moat around a business, or the sustainable competitive advantage. My question really relates to learning more about that.

Professor Michael Porter at Harvard has made a detailed study of this. Did you find his work useful and can you recommend any other sources of information on this?

WARREN BUFFETT: Yeah, I've never really read Porter, although I've read enough about him to know that we think alike, in a general way. So I can't refer you to specific books or anything. But my guess is that what he writes would be very useful for an investor to read.

I mean, I — again, I've never — I've just seen him referred to in some commentary. But I think he talks about durable or sustainable competitive advantage as being the core of any business. And I can tell you that that is exactly the way we think.

I mean, that — in the end, you — if you are evaluating a business year-to-year, you want to — the number one question you want to ask yourself is whether the — could the competitive advantage have been made stronger and more durable before — and that's more important than the P&L for a given year.

So I would suggest that you read anything that you find that's helpful or —

Actually, the best way to do it is study the people that have achieved that and ask yourself how they did it and why they did it. I mean, why is it that in razor blades, which could —

I mean, everybody grows up in business school hearing that as a great example of a product that's very profitable and why —

With it obvious that there's going to be no reduction in demand for the next hundred years for the product, why are there no new entrants into the field? What it is that gives you that moat around the razor blade business?

Normally, if you've got a profitable business, you know, a dozen people want to go into it. If you've got a dress shop here in town and it looks like it's doing well, you know, a couple of other people are going to want to open up a shop next door to it.

And here's a worldwide business, nothing can go wrong with the demand, to speak of. And yet, people don't go into it.

So, we like to ask ourselves questions like that. We like to ourselves, "Why was State Farm successful, you know, against people that had incredible agency plants and lots of capital?"

And here's some farmer out in Bloomington, Illinois named George Mecherle , you know, who's in his forties. And he sets up a company that defies capitalistic imperatives.

I mean, it has no stock, it has no stock options, it has no big rewards. It's, you know, it's kind of half socialistic. And all it does is take 25 percent of the market away from all of these companies that had all these characteristics.

We believe you should study things like that. We think you should study things like Mrs. B out at the Nebraska Furniture Mart, who takes $500 and turns it, you know, over time, into the largest home furnishing store in the world. There has to be some lessons in things like that. What gives you that kind of a result and that kind of competitive advantage over time?

And that is the key to investing. I mean, if you can spot that — particularly if you can spot it when others don't spot it so well — you're on the — you know, you will do very well. And we focus on that.

Charlie?

CHARLIE MUNGER: Yeah, it — these factors — every business tries to turn this year's success into next year's greater success. And they all use pretty much every advantage they have in every direction from this year to make next year's better.

Microsoft did exactly that, year after year after year and happened to win big.

And it's hard to see — for me at least — to see why Microsoft is sinful because they tried to improve the products all the time and make next year's business position stronger than last year's business position. (Applause)

If that's a sin, every subsidiary at Berkshire is a sinner, I hope. (Laughter)

WARREN BUFFETT: Yeah, yeah, yeah. We declare ourselves for sin. (Laughter)

WARREN BUFFETT: At this moment, I think we have a small interruption in the program here.

Charlie, on your left. (Laughs)

It's just a sample of what it's like to be an officer at Berkshire. (Laughter)

Oh, OK.

This is the new See's Barbie doll. And — never before seen, it will be in the exhibitors section, lower level.

And believe it or not, we've come up with three more just like this young woman. And they will be down there to take your orders. We can't ship them now, we won't charge your credit card until they — until they're available for shipment, which will probably be, I guess, around September or so.

But we wanted our shareholders to be the first ones to have a shot at this new product, and —

The model is not included in the — (laughter) — delivered price.