WARREN BUFFETT: OK. If you're ready, we are.

We're going to keep going in the same order because there's people in the other rooms that have been waiting. So we will go to number 11.

AUDIENCE MEMBER: Hi. My name is Christian Baha from Superfund. I have a question for you, Mr. Buffett.

What do you think about managed futures funds?

WARREN BUFFETT: About which fund?

CHARLIE MUNGER: I didn't quite get that. What kind of fund?

AUDIENCE MEMBER: Managed futures funds.

CHARLIE MUNGER: Oh, managed —

AUDIENCE MEMBER: Like a very diversified portfolio in stocks and bonds going long and short, all the different markets, based on the most natural human behavior, trying following a herd behavior?

CHARLIE MUNGER: Managed futures funds.

WARREN BUFFETT: Well, I would say that we think the most logical fund is the one we have at Berkshire where, essentially, we can do anything that makes sense and are not compelled to do anything that we don't think makes sense.

So any entity that is devoted to a limited segment of the financial market we would regard as being at a disadvantage to one that has total authority if you have the right person in charge.

But you — that's an assumption you're going to make under any fund. So we would not want to devote our funds to something that was only going to buy bonds, something that was only going to buy futures, or anything of the sort.

We would — we buy futures at Berkshire. We buy bonds at Berkshire. We've bought — we buy currencies. We buy businesses.

So I think it's a mistake to shrink the universe of possibilities. Ours is shrunk simply by size, but we don't try to — we don't set out to circumscribe our actions in any way.

But in the end, there's no form that produces investment results.

Hedge funds don't produce investment results. Private equity doesn't produce investment results. Mutual funds don't produce it.

If it was simply a matter of form, we'd all call ourselves, you know, whatever that form happened to be.

What really makes the difference is whether the person that's running it knows what their limitations are, knows where their strengths are, plays when they have the opportunity to play advantageously, and stays out when they don't see any opportunities.

Charlie?

CHARLIE MUNGER: Yeah. I'd go further. I'd say averaged out, I would expect that the return per dollar per year in managed futures funds would be somewhere between lousy and negative. (Laughter)

WARREN BUFFETT: And I would agree with that. Yeah.

Usually those are sales tools. I mean, people find out something that will sell, and it can be — you know, it can be bond funds at some point, it could be — but when they find something to sell, it will get sold to the public. That will be — it will sell until it stops selling.

And that means lots of money comes in and lots of competition for a limited number of opportunities.

And I think it's a mistake to get sold something on the basis that here is a great area of opportunity.

Areas don't make opportunities; brains make opportunities, basically.

WARREN BUFFETT: Number 12.

AUDIENCE MEMBER: Matthew Monahan (PH) from Palo Alto, California.

Mr. Buffett, Mr. Munger, first of all, I want to thank both of you for so freely sharing your wisdom and knowledge over the years.

Even though we've never met in person, I consider you both to be close personal mentors and attribute your teachings and philosophies to any success I've had in business so far. So thank you.

Here's my question: for a 23-year-old with high ambitions, some initial working capital, and a genetic wiring, as you call it, for disciplines like investments, mathematics, and technology, what do you foresee as the significant areas of opportunity over the next 50, even 100, years?

And, if you were in my shoes, what would be your approach and methodology for really learning, tackling, and mastering these areas of opportunity for the purpose of massive value creation?

WARREN BUFFETT: Well, I remain very big on the idea of reading everything in sight.

And, frankly, when you get the chance to talk to somebody like Lorimer Davidson, as I did when I was 20 years old — I probably learned more from Lorimer Davidson in those four or five hours than I learned in college, with the exception of learning some accounting and one or two subjects like that.

So you just want to soak it up. If you have those qualities you talked about, you'll see the areas as you go along. I mean, we have — Charlie and I probably — you know, we've made money in a lot of different ways, some of which we didn't anticipate, you know, when we were — 30 or 40 years ago.

But we did have the ability to recognize some; we didn't have the ability to recognize others. But we did know when we knew what we were doing and when we didn't, and we just kept looking.

We had a curiosity about things. You would know at a time like the Long-Term Capital Management crisis, for example, that there were going to be ways to make money.

I mean, they were going to be out there, and all you had to do was just read and think eight or ten hours a day and you were going to cover a lot of possibilities, probably a very high percentage of them good, and some of them sensational.

So you can't really lay it out ahead of time. You can't have a defined roadmap. But you can have a reservoir of thinking, looking at different kinds of businesses, looking at different kinds of securities, looking at markets in different places, and you will then spot a reasonable number of things that come along.

You won't spot every one of them. We've missed all kinds of things.

But the biggest thing, too, is to have something in the way you're programmed so that you don't ever do anything where you can lose a lot.

I mean, we — our best ideas have not been better than other people's best ideas, but we've never had a lot of things that pulled us way back.

So we never went two steps forward and one step back. We probably went two steps forward and a fraction of a step back.

But avoiding the catastrophes is a very important thing, and it will be important in the future. I mean, you will have your chance to participate in catastrophes.

Charlie?

CHARLIE MUNGER: Yeah. And, of course, the place to look when you're young is in the inefficient markets.

You shouldn't be trying to guess whether, you know, one drug company has a better drug pipeline than another. You want to go, when you're young, someplace that's very inefficient.

WARREN BUFFETT: And you shouldn't be trying to guess whether the stock market is going to go up or whether long-term bonds are going to change in yield.

I mean, you don't have anything going in that kind of a game, but you can have a lot going in games that very few people are playing, and maybe where they've even got their heads screwed on wrong, in terms of how they're thinking about the subject.

The RTC was a great example of a chance to make a lot of money.

I mean, here was a seller of hundreds of billions of dollars' worth of real estate where the people that were selling it had no economic interest in it, were eager to wind up the thing, you know, and they were selling at a terrible time when the people who had been venturesome in lending were no longer lending, the people who had been venturesome in the equity end of real estate had gotten cleaned out.

So you had a great background of environment, and then you had an imbalance of intensity, in terms of analyzing situations between the seller, which was the government, with a bunch of people who had no economic interest in it and were probably eager to wind up the job, and buyers on the other side who were of the generally cautious type. Because the more venturesome type had taken themselves out of action. And there were huge amounts of property.

So you get these opportunities, and you'll get more. I mean, there won't be any scarcity of opportunities in your life, although there will be days when you feel that way.

WARREN BUFFETT: OK. Let's go to the other rooms now. They've been waiting. Number 13.

AUDIENCE MEMBER: John Goss (PH), Key West, Florida.

Katrina created litigation that resulted in some rulings that combined flood damage and wind damage where the insurance companies thought they covered wind only.

As a result, some insurance companies are significantly reducing coverage in those states.

Florida recently empowered their insurance company called Citizens to be more aggressive not only with wind storms, but also with homeowners, while at the same time not allowing requested rate increases of other insurance companies.

The result is that some solid insurance companies have announced reducing their coverage or pulling out of Florida.

Is this type of government interference a random fluctuation in insurance or a major cause of concern for the future?

WARREN BUFFETT: Well, that's an easy one to understand both sides of the question on.

I mean, the average homeowner is not going to sit there and read line-by-line what is in his insurance policy, and a lot of times the agent is not going to explain it carefully to them.

So when something comes along and he thinks it's insured and it turns out that he bought a policy where it wasn't insured, he's going to feel very unhappy about it.

And when tens of thousands of people feel unhappy about it, you're very likely to get some kind of governmental interference, and probably an inflation by judicial degree or by threats of the government to, in effect, extend the terms of the policy beyond what the insurance company thought it was insuring.

Now, an insurance company that's had that kind of experience is going to be very reluctant to write insurance policies in the future, if they don't think that the words will be adhered to.

And, on the other hand, I can fully understand some guy who's had his house blown away in a storm and a lot of it was water damage and a lot of it was wind damage, thinking that, you know, he's been wiped out and the insurance company comes around waving a policy that's got a lot of small print in it, you know, he's going to be unhappy.

So it's a real tussle on that. And, you know, I guess I would — if I were writing policies, I would put the exclusions in very big type and very easy to understand.

But I still would expect that if thousands of people suffered losses, that courts and legislators would probably seek to stretch the terms, or even abrogate the terms of the contract, in order to take care of their own constituents and figure that guys like me or institutional investors who own insurance companies can afford it better than the homeowner.

When you get into the question of whether you should, in effect, have all of the people in the country pay premiums for, we'll say, hurricanes, in a way, subsidize it through policies in Nebraska or Minnesota or someplace, for hurricanes in Florida, that gets very tough.

I mean, it can be very expensive to insure against hurricanes if hurricanes become more frequent and more intense. In fact, it can become so expensive that people really will not want to bear the cost of insurance, and they'll want to socialize it some way.

And, of course, the guy in Nebraska says, "Look it. You went down there to live on the ocean and you thought it was wonderful, and we're back here with these terrible winters, but why should we pay a portion of your insurance?"

So you're going to have that tussle go on, and you'll really have that tussle go on if you get a hundred billion dollar or $150 billion insured loss in Florida.

Because that will mean a huge change in taxation if the State of Florida steps in to compensate people. There will be calls for Washington to pay for it.

But, you know, it's how much people who are not exposed to a risk should pay for the people who have elected to be exposed to the risk is — you know, it becomes a political question.

And my guess is that sometime in the next five or 10 years, you'll see a struggle on that subject that exceeds — far exceeds — what we saw on Katrina. Charlie?

CHARLIE MUNGER: I've got nothing to add.

WARREN BUFFETT: Number 14?

AUDIENCE MEMBER: Hi. My name is Glenn Tongue, and I'm a shareholder from New York.

I'd like to congratulate you on Berkshire's newest director. Sue is a terrific addition. My question is —

WARREN BUFFETT: We agree with you.

AUDIENCE MEMBER: My question is, according to the 10-Q filed yesterday, you purchased about 5.3 billion in shares in the first quarter.

This acceleration in activity is occurring while the general market levels are getting more expensive.

Does this indicate some shift in your thinking about hurdle rates of return for your ever-growing asset base and/or your prospects for an elephant-sized acquisition?

WARREN BUFFETT: Well, that's a good question. I would — incidentally, I would say in the first quarter, actually, stocks didn't rise. But they've risen a lot in April.

But they didn't go down, either. I mean, they were pretty much flat. And we did invest 5 billion or so in equities.

Did we change our standards? You know, I don't think so. But, you know, you can't be a hundred percent sure that you have — you know, if you haven't had a date for a month, you know, you may say that was a girl you would have dated the first day, but who knows. (Laughter)

So, I don't know for sure the answer, but I think we would have dated that girl the first day.

And the second question, in terms — does it reflect giving up on finding an elephant to acquire in terms of a business? The answer to that is no. We've got plenty of money available.

And we would sell stocks if we really — I mean, that would not be a problem — if we really needed to, to buy a really big business.

So we're as prepared as we've ever been prepared to buy a big business outright. We hope we do. We hope we buy relatively small ones if they're attractive.

We bought a very attractive business, TTI, run by Paul Andrews — terrific business — in the first quarter.

And, you know, I wish it was five times the size, but maybe it will be some day. But we know that we're in with the kind of person we want and the kind of business we want. And if we find larger ones, one way or another, we'll swing them.

Charlie?

CHARLIE MUNGER: Yeah. The one thing I think we can promise you is that we won't make returns, on average, in the kind of stuff we're buying now like those that we made 10 or 15 years ago.

WARREN BUFFETT: Yeah. We won't come close, no.

CHARLIE MUNGER: No. It's a different world with more modest expectations.

WARREN BUFFETT: And we hope you share them.

WARREN BUFFETT: Let's go to number 1.

AUDIENCE MEMBER: Hello, Charlie, Warren. Bill Paparella (PH) from St. James, New York.

Warren, I brought my ten-year-old daughter, Gina, with me. She asked me last summer, "How do I get rich?"

So I gave her your letters, writings, even gave her "Charlie's Almanack."

So she's been reading it ever since, asking me a lot of questions. So I said, "Maybe we'll go to our first meeting together."

WARREN BUFFETT: Is she married? I mean, she's the kind of girl I want my granddaughter — or grandson — to meet. (Laughs)

AUDIENCE MEMBER: So we're learning together.

Warren, my question for you is in regards to your recent charitable gifts. And if I could start by saying that I mean no disrespect. You're my hero. So — and nor is it political.

WARREN BUFFETT: You're doing fine so far. (Laughter)

AUDIENCE MEMBER: OK. I am, as a father of five daughters, perplexed and upset that one — or I've read — that one or more of these foundations is a big supporter of Planned Parenthood and abortion rights. (Scattered applause)

If you were to go on the Planned Parenthood website, you would see a website that promotes promiscuity, goes out of its way to support internet porn — (audience noises)

WARREN BUFFETT: Yeah. Let's get to the question, please. Do you have a question?

AUDIENCE MEMBER: The question is, Warren, I was hoping that you could speak to the billions of dollars that's been allocated with an agency as Planned Parenthood that is very well-funded.

It just doesn't seem to jive with the hero that I study, and I was hoping that you could speak to it.

WARREN BUFFETT: Yeah. Well, I'll be glad to speak to it. I think it's a terrific organization. (Applause with some boos)

And I really think it's too bad that for millennia, you know, women, not only in the United States, but all over the world, you know, have had involuntary bearing of babies forced upon them, and usually by a government run by men. (Applause)

So I don't think we want to get into a — we don't want to get into a cheering contest here — but, you know, I think that it's a very important issue.

I think it tends to have a small natural funding constituency because it isn't a popular-type thing where it's like sticking your name on a hospital or something like that.

But I would say that if we'd had a Supreme Court with nine women on it starting when the country became the United States, that by now I don't think a question like yours would even be being raised.

You know, men set the rules for a lot of years — (applause) — and I think it's wonderful that a woman can make reproductive choices.

But, you know, I've got a lot of people that disagree with me on that. I've got a lot of people that agree with me on it. And I hope you'll respect my opinion as I do yours. Thank you. (Applause)

WARREN BUFFETT: Number 2, please.

AUDIENCE MEMBER: Hi. I'm Bob Kline (PH) from Los Angeles.

Pursuing your earlier comments on sigmas from a different angle, the conventional wisdom in the investment world is that an investment risk can be measured by the volatility of the price of the investment in the marketplace.

To me, this approach has it backwards. Since changes in price are determined by the changes in the opinions of investors in the marketplace, why would a rational investor substitute the opinions of the marketplace, as reflected in the volatility of the price, for his own assessment of the risk of the investment?

And consultants take this idea further by tracking the volatility of a portfolio manager's results in an attempt to measure risk. So could you guys expand on your thoughts on this?

WARREN BUFFETT: Yes. Volatility is not a measure of risk.

And the problem is that the people who have written and taught about volatility do not know how to measure — or, I mean, taught about risk — do not know how to measure risk.

And the nice thing about beta, which is a measure of volatility, is that it's nice and mathematical and wrong in terms of measuring risk. It's a measure of volatility, but past volatility does not determine the risk of investing.

I mean, actually, take it with farmland. Here in 1980, or in the early 1980s, farms that sold for $2,000 an acre went to $600 an acre. I bought one of them when the banking and farm crash took place.

And the beta of farms shot way up. And, according to standard economic theory or market theory, I was buying a much more risky asset at $600 an acre than the same farm was at 2,000 an acre.

Now, people, because farmland doesn't trade often and prices don't get recorded, you know, they would regard that as nonsense, that my purchase at $600 an acre of the same farm that sold for 2,000 an acre a few years ago was riskier.

But in stocks, because the prices jiggle around every minute, and because it lets the people who teach finance use the mathematics they've learned, they have — in effect, they would explain this a way a little more technically — but they have, in effect, translated volatility into all kinds of — past volatility — in terms of all kinds of measures of risk.

And it's nonsense. Risk comes from the nature of certain kinds of businesses. It can be risky to be in some businesses just by the simple economics of the type of business you're in, and it comes from not knowing what you're doing.

And, you know, if you understand the economics of the business in which you are engaged, and you know the people with whom you're doing business, and you know the price you pay is sensible, you don't run any real risk.

And I don't think Charlie and I — certainly Berkshire — I don't think we've ever had a permanent loss in marketable securities that was, what, 1 percent, maybe, half a percent of net worth.

I made a terrible mistake in buying Dexter Shoe, which cost us significantly more than 1 percent of net worth where I bought an entire business then.

But I was wrong about the business. It had nothing to do with the volatility of shoe prices or leather or anything else. It just was wrong.

But in terms of marketable securities, I cannot recall a case where we've lost that kind of — I mean, we've done a lot of things in things — in securities — that had a very high beta. We've dealt with a lot of things in securities that had a low beta.

It's just the whole development of volatility as a measure of risk, it has really occurred in my lifetime. And it's been very useful for people who wanted a career in teaching, but it is not — we've never found a way for it to be useful to us.

Charlie?

CHARLIE MUNGER: Well, it's been amazing that both corporate finance and investment management courses, as taught in the major universities — we would argue it's at least 50 percent twaddle, and yet these people have very high IQs.

One of the reasons we've been able to do pretty well is that we early recognized that very smart people do very dumb things, and we tried to figure out why, and also wanted to know, who so we could avoid them. And — (Laughter)

WARREN BUFFETT: We will not run big risks at Berkshire. Now, we will be willing to lose, as I put in the annual report, $6 billion in a given catastrophe, but our catastrophe business, run over many years, is not risky.

You know, a roulette wheel will occasionally pay off at 35-to-1, and that sounds like you're paying out an awful lot of money compared to the amount bet on one number, but I would love to own a lot of roulette wheels.

WARREN BUFFETT: Number 3.

AUDIENCE MEMBER: Hi. My name is Stuart Kaye, and I'm from New York City.

Warren and Charlie, you spend a lot of time evaluating the management quality and integrity of the companies that you may invest in.

In my current job, I do not have the opportunity to do that. As I read through annual reports and financial statements, what do you suggest I focus on to help me to determine the quality and integrity of management?

WARREN BUFFETT: Well, you can — we've spent many, many years — and we've bought many things. I mean, I — without meeting managements at all, having any entree to them.

The stocks — the 5 billion of stocks — that we may have bought in the first quarter, most of those were companies I never met the management, never talked to them.

We read a lot. We read annual reports. We read about competitors. We read about the industries they're in.

In terms of sizing up managements — obviously if we're going to buy the whole business, that's a different question. Then you — because you — we're going to buy it, be in bed with them, they're going to run them, and we care very much about whether they're going to behave in the future as they have in the past once we own the business. And we've had very good luck on that.

But in terms of marketable securities, we read the reports. Now, Charlie and I were just talking about one the other day where we read an annual report of a large oil company.

And the company — you know, hundred pages, public relations people, lots of pictures — spent a fortune on it. And you can't find in that report what their finding cost per McF or per barrel of oil was last year. That's the most important figure in an oil and gas company over a period of years, but every year counts.

The fact it wouldn't even be discussed — the reason it wasn't discussed, it was absolutely terrible — but the fact it wouldn't even be discussed — and to the extent it was touched on, it was done in a dishonest manner.

When we read things where we basically are getting dishonest messages from the management, it makes a difference to us.

You know, like I say, in marketable securities we can solve that by selling the stock, and it's not the same thing as buying the entire business.

But I think you can learn a lot by reading the annual letters. I mean, for one thing, if it's clearly the product of some investor relations department or outside consultant or something of the sort, you know, that tells you something about the individual.

If he's not willing to talk once a year through a few pages to the people that gave him their money to invest, I mean, that — I've really got — I've got some questions about people like that.

So I like that feeling that I'm hearing directly from somebody who regards me as a partner.

And you may not get it all the way, but when I get it 0 percent of the way, I don't like it.

I've still bought — we've still bought into some — in marketable securities — we've bought into some extremely good businesses where we thought they were run by people we didn't really like very well, because we didn't feel they could screw them up.

Charlie?

CHARLIE MUNGER: Yeah. I think that's exactly right. There are two things: the quality of the business and the quality of the management.

And if the business is good enough, it will carry a lousy manager. And the converse case, where a really good manager gets in a really lousy business, he'll ordinarily have a very imperfect record.

In other words, it's a rare person that can take over a textile business, totally doomed, which is what Warren did in his youthful folly —

WARREN BUFFETT: Right.

CHARLIE MUNGER: — and turn it into what's happened here. You should not be looking for other Warrens on the theory they're under every bush.

WARREN BUFFETT: I figured it out in 20 years, though. I'll have to say that for myself. (Laughs)

Twenty years, and I finally figured out I was in the wrong business.

But there are businesses — if you gave me first draft pick of all the CEOs in America and said it's your job to run Ford Motor now or, you know, pick a company that's in a terribly tough business, you know, I wouldn't do it.

I mean, that it's just too tough. They may get it solved, you know, if they get cooperation from unions and a whole bunch of things, but it will not be solely in the control of the CEO who has that job.

He is dependent on too many good things happening outside to say that he alone can get the job, even if he's the best in the world.

WARREN BUFFETT: Number 4.

AUDIENCE MEMBER: Hi, Warren. Hi, Charlie. I'm Walter Chang (PH) from San Jose, California. My wife and I are expecting our first baby boy in July, and we're going to name him Warren after you. (Laughter)

WARREN BUFFETT: You're trying to get into my will again.

AUDIENCE MEMBER: Charlie, I'm rooting for you, for the next one.

WARREN BUFFETT: I'd move him further down the line, maybe to number five. (Laughter)

AUDIENCE MEMBER: Warren and Charlie — Warren, if you were writing a follow-up to the very prescient Fortune magazine article from November 1999 in which you were talking about the lean and fat 17-year periods, what would you be writing?

And since we're halfway through the third 17-year period, how is it turning out, based on your expectations from back in 1999?

WARREN BUFFETT: Yeah. The 17 years, of course, I had a little fun with because of the fact there were two 17-year periods and there are also 17-year locusts. So I stretched it a little from a literary standpoint.

But there's nothing magic about given spans of time. There was something very different between the first 17 years of that 34-year period and the second 17, and I used that for kind of a dramatic contrast.

If I were writing something now, I would say what I said just a little earlier in response to Frank Martin's question, that it is — if I had to own long bonds or long-term position equities, I'd rather have equities. But I would not have high expectations for them, but I would have expectations beyond 4 3/4 percent.

How much beyond, I'm not sure, but something enough beyond four 3/4 percent that I would rather own equities than bonds.

I did not feel — I felt, in 1999, that people were extrapolating the experience of the previous 17 years and assuming there was something magic about owning equities.

And expectations of the people were bound to be — that they were — people were bound to be disappointed. They simply had an unrealistic view by extrapolation, and that was the main purpose of that article.

But if I were writing something now, I would not have high expectations for equities, but I would have better expectations for equities than for bonds.

Charlie?

CHARLIE MUNGER: Yeah. And I would say that since that article was written, the results from owning equities have been pretty lean, at least compared to what happened in the glorious 17 years that preceded.

So Warren has been right so far, and he's probably right now when he says modest expectations.

WARREN BUFFETT: Yeah. You really don't have — in markets you can't say something terribly important or intelligent every day or every week or every month.

That's one of the problems of — if you went on television too often or had to write weekly letters or something of the sort.

Every now and then you get something extreme. I mean, I did close down the partnership in 1969, and an article appeared. I did give an interview in '74. I gave another interview in '81 or '2.

I mean, every now and then, things really get out of whack. But the gradations in between, they're too tough.

But the nice thing about it is you don't have to have an opinion every day or every week or every month. If you own some good businesses and you bought them at the right price, if they get to a silly price, you probably should sell them.

And if you find that everything is extremely cheap, like in '74, you should put every available dime into equities. And that's what we've tried to do.

WARREN BUFFETT: Number 5.

AUDIENCE MEMBER: Yes. Thank you, gentlemen, for this opportunity to ask you a question. My name is Ronnie Pellagreen (PH), and this is my 14-year-old daughter, Mikayla (PH).

We are here representing hundreds of ocean, commercial, hook-and-line salmon fishermen, and their families from the West Coast. They are barely hanging on to their livelihoods because of the Klamath River crisis.

My husband is a fourth-generation hook-and-line commercial fisherman from Eureka, California. His family has fished for the last 100 years.

Last year, our commercial salmon season was completely shut down because of the crisis in the Klamath River. It is caused by the four lower hydroelectric dams owned by your subsidiary PacifiCorp.

We personally took a 95 percent hit in our income — excuse me — and we had no way to make up that loss. We have used our savings and were forced to take out a Small Business Administration disaster loan to meet our financial needs.

Our daughters were so upset after overhearing my husband and I last Christmas, they came to us wanting to give us all the money in their bank accounts.

I am telling you this, gentlemen and shareholders, because you and the shareholders can help.

Under Klamath Dam relicensing, it is shown that this dam removal makes economic sense for PacifiCorp and MidAmerican.

You are a great businessman who has built an incredible empire. We sure could use your creativity and expertise in solving this crisis situation so the Indian people along the river, and we, in the coastal communities, can continue our long and proud heritage.

People back home are eagerly waiting for me to bring a response back from you.

My question is, what can I tell them is your position on removing the outdated Klamath dams?

WARREN BUFFETT: Yes. Our position on it is quite simple.

The FERC and several of the regulatory commissions have before them 27 different proposals or positions by various interest groups.

Some want — some like hydropower, which is what comes from the dams, because it does not generate the emissions that come from coal or gas-fired generation.

Some like the fact that hydropower is cheaper, several hundred thousand consumers. Some people have been hurt by what you describe in terms of the fish.

And you have a public policy question which will not be determined by PacifiCorp. It will be determined by FERC because they are — they represent the public. In fact, the secretary of Interior has advised FERC that it's a very tough question.

FERC will be having hearings. They will listen to the positions. The Oregon and Utah, California, perhaps, public utility commissions will be listening to the arguments.

And, in the end, we are a public utility responding to public policy. Public policy, weighing both your interests and the interests of others in the matter, will come to a determination, and PacifiCorp will do exactly what they say.

We are responsive to the people that regulate us, just as people have been in that position since the first dam was put in in 1906. So that is entirely a question for FERC and the state commissions.

WARREN BUFFETT: Number 6.

AUDIENCE MEMBER: Good afternoon, Mr. Buffett and Mr. Munger. Thank you for taking my question.

This is my second time at the Berkshire Hathaway meeting that I have attended. My name is Cameron Sparrow (PH). I am 13-years-old and from Boulder, Colorado.

My question is for Mr. Buffett. Mr. Buffett, what is your opinion about the merger of the New York Stock Exchange with the Euronext?

Do you think that the merger will have a positive or negative effect on the market?

WARREN BUFFETT: Well, I really don't know the answer to that. My guess is that — I mean, both of those institutions were very large institutions beforehand, and we would judge a positive effect in terms of narrowness of spreads, as an investor, in terms of costs of execution and that sort of thing.

Both places have been very efficient in the past. I mean, we pay quite low payments. Although my broker is here. We probably should be paying even less.

But the New York Stock Exchange has gotten far more efficient in terms of costs from 30 or — from the days of fixed commissions back in the early '70s and before that. I mean, it's a fraction of the cost.

And the real test from our standpoint is, you know, do we get better executions and less costly executions. And, like I say, both institutions were big, effective institutions before.

And if they get a little more efficient, I hope it gets passed on to the customers, but it may just result in larger profit.

But we're pretty satisfied with — quite satisfied, actually — with the functioning of the New York Stock Exchange where we do most of our business.

But we've done business — we've been buying international stocks, and we've had generally good executions throughout the world. So it's not a source of either concern or enthusiasm to me.

Charlie?

CHARLIE MUNGER: I don't know anything about it. (Laughter)

WARREN BUFFETT: I don't either, but I took longer to say so. (Laughter)

WARREN BUFFETT: Number 7, please.

AUDIENCE MEMBER: Mr. Buffett and Mr. Munger, thanks for hosting this wonderful meeting. My name is Chander Chavla (PH), and I'm visiting from Seattle, Washington.

And I think Berkshire Hathaway can contribute to the reduction of global warming if, for next year shareholder's meeting, Mr. Gates and I fly on the same plane. (Laughter)

My question is, I have made a few mistakes in business by trusting the wrong people. So in — and I don't know where to learn how to trust the right people.

They don't teach you that in business school, and the people who are supposed to teach you in the corporate world sometimes betray you.

So how can I learn who to trust and who not to trust?

WARREN BUFFETT: Boy, that's a great question. But you probably have about as good a chance of getting a good answer from me on that as you have on getting on Bill Gates' plane next year. (Laughter)

I get letters all the time, and I hear from people who have been taken advantage of in financial transactions. And, you know, it really is — it's sad. And a lot of it isn't even — it's not fraud or anything.

For one thing, I mean, just the charges involved, the frictional costs and the baloney that is presented is tough.

Charlie and I have had very good luck in terms of buying businesses and putting our trust in people. It's been just overwhelmingly good.

But we filter out a lot of people. And then you say, "Well, how do you filter them out?"

I would say — I think Charlie will agree with this — people give themselves away fairly often. And maybe it does help to have been around as long as we have in seeing the various ways they give themselves away.

They — when somebody comes to me with a business — and I probably shouldn't tell this publicly because they'll probably tailor their approach subsequently — but when they come, just the very things they talk about, what they regard as important and not important, there are a lot of clues that come as to subsequent behavior.

And, like I say, we've really had a batting average I wouldn't have thought we would have had in the people that we've joined with.

But it hasn't been a hundred percent. It's been well above 90. And I get asked that, you know, I mean, "How do you make those judgments?" And I don't know.

Charlie, can you articulate the way we do it?

CHARLIE MUNGER: Well, partly we're deeply suspicious when the proposition is too good to be true.

Warren once introduced me to a gentleman promoter who wanted to inveigle us into an insurance program. And he said, "We only write fire insurance on concrete bridges that are covered by water." He says, "It's like taking candy from babies." We are able to filter out propositions like that.

WARREN BUFFETT: Yeah. Anybody that, implicit in their comments or what they kind of laugh about or — all kinds of things in terms of the fact — you know, it's so easy and — it ain't that easy, you know, and we get suspicious very quickly.

And the truth is, we rule out 90 percent of the times. And we may be wrong about a fair number that we're ruling out. The important thing is whether the ones we're ruling in we're right about.

And so we don't mind — we're looking for the obvious cases of people you can trust.

I mean, go back to 1969 again. When I was thinking about who to turn my partners over to, all kinds of people with great records. That was a hedge fund — that was the first hay-day of hedge funds. And there were books written about it, "New Breed on Wall Street" and some of those. You can look them up.

And dozens and dozens and dozens of people with good records. And when I sat down and thought about, I'm going to write my partners and tell them who to turn over all their money to — because most of them had a hundred percent or close to it with me — you know, Charlie, Sandy, Bill Ruane.

I couldn't have told you which of the three was going to do the best. And, you know, I couldn't even tell you those three would done better than five others that somebody else might pick.

But the one thing I was sure of is that they were going to be sensational stewards of money.

They were going to care more about those people — the people that were turned over to them — in getting the best result possible than they were going to care about, you know, whether they made X or 2X this year in terms of commissions or fees or any of that sort of thing.

Anytime I find somebody with a — what I regard as an unfair fee structure, and saying, "Well, I can get it," well, you know, I rule them out.

And I may rule out some of the wrong people. But the ones that are left in, I feel very good about. And I wish I could give you better advice than that, but that's all I can do.

WARREN BUFFETT: Eight.

AUDIENCE MEMBER: Yes. Mr. Buffett, Mr. Munger, thank you again for being so generous with your time with us every year.

I'd like to follow up on the question from the gentleman from Australia and from Munich on valuation.

The gentleman from Australia asked about margin of safety, and you replied that a superior business may not require that much of a margin of safety.

And my follow-up would be, does that suggest market rate of returns going forward for superior businesses?

And then on the Munich valuation, in which you cited a farm example on discounted cash flows, I'm very curious how you come up with your discount rate and how you might adjust that discount rate based upon various businesses.

You might want to discuss your discount rates used for Coca-Cola, J&J, or some of your past investments. Thank you.

WARREN BUFFETT: Yeah. We don't formally have discount rates. I mean, every time I start talking about all this stuff, Charlie reminds me that I've never prepared a spreadsheet. But, in effect, in my mind I do.

But we are going to want to get a significantly higher return, obviously — in terms of cash produced relative to the amount we're outlaying now for a business — than we are from a government bond.

I mean, we — you know, we are going to — that has to be the yardstick at a base. And how much more do we want?

Well, if government bond rates were 2 percent, we're not going to buy a business to earn 3 or 3 1/2 percent expectancy over the years. We just don't want to commit our money that way. We'd rather sit around and wait a little while.

If they're 4 3/4 percent, you know, what do we hope to get over time? Well, we want to get a fair amount more than that.

But I can't tell you that we sit down every morning and I call Charlie in Los Angeles and say, "What's our hurdle rate today?" I mean, we've never used the term.

You know, it's a little bit of the — we want enough so that we feel very comfortable if they closed down on the stock market for a couple of years, if interest rates go up another hundred basis points or 200 basis points, we're still happy with what we've bought.

And above that, I really — I know it sounds kind of fuzzy, but it is fuzzy.

Charlie?

CHARLIE MUNGER: Yeah. The concept of a hurdle rate makes nothing but sense, and yet a lot of terrible errors are made by people who are talking about hurdle rates.

Just because you can measure something and guess it, doesn't mean that it's the controlling variable in what you're dealing with in a messy world.

And I don't think there's any substitute for thinking about a whole lot of investment options and thinking about why one is better than another and what the likely returns are from each, et cetera, et cetera.

And the trouble with the hurdle rate concept — not that we don't have one, in a sense — is it doesn't work as well as a system of comparing things.

In other words, if I have something available that I think will give me 8 percent for sure and I can buy all I want of it, and you've got a perfectly good investment that I think will earn 7, I don't have to waste 5 minutes with you.

You're like the mail order service offering the bride through the mail and she's got AIDS. You know, I can go on to some different subject.

And so this — the concept of opportunity cost is — it's so little taught in investment. They teach it in the freshman course in economics in all the major universities, but when you get to the corporate finance departments and so forth, it doesn't lend itself with the kind of mathematics they want to use, so they ignore it.

But in the real world, your opportunity costs are what you want to make your decisions based on.

WARREN BUFFETT: Yeah. And even if you had something you were really familiar with and were very sure on the 8 percent, 8 1/2 wouldn't tempt you if somebody came along, as a practical matter.

CHARLIE MUNGER: Sure.

WARREN BUFFETT: As I mentioned, I've been on 19 corporate boards. I would say that of the presentations I've seen — and I've seen a lot of them — and every one of them had a calculation of internal rate of return, if they'd burned them all, the boards would have been better off.

I mean, there's so much nonsense presented, because the presenters, essentially, know what the listeners are desirous of hearing, and what is needed in order to get through something the CEO wants to do anyway — you just get nonsense figures.

And, you know, we may get nonsense figures, too, but they're ours, and we — (Laughs)

CHARLIE MUNGER: Let me give you an example of that. I have a young friend who sells private partnership interests to investors. And he's in a really tough field where it's hard to get decent returns.

And I said, "What return do you tell them you're aiming for?" And he said, "20 percent." And I said, "How did you pick that number?" And he said, "If I chose any lower number, they wouldn't give me the money." (Laughter)

WARREN BUFFETT: And there's no one in the world we think can earn 20 percent with big money. I mean, it just — so anybody making a promise like that, basically, we're going to write off immediately.

It's amazing to me what — you know, in a sense, how gullible big investors are, pension funds and so on, in that they have people come around and promise them the Holy Grail.

And they want it so badly, you know, that they're willing to believe things that just have to be nonsense.

WARREN BUFFETT: Let's go to number 9.

AUDIENCE MEMBER: Good afternoon, Mr. Buffett, Mr. Munger. My name is Robert Piton (PH), and I'm from Chicago, Illinois.

Over your careers, has there been any question, either personally or professionally, that you haven't been able to get a comfortable answer to that you cannot simply put in your "too difficult" pile? Thank you.

WARREN BUFFETT: Charlie?

CHARLIE MUNGER: Well, sure. You get —

WARREN BUFFETT: You may have just asked one. (Laughter)

CHARLIE MUNGER: Sure. If you've got a child dying of some horrible disease, you have a problem you can't just put in a "too difficult" pile.

So there are lots of things in life that come to you that you — where you have no option to not consider the issue.

But where it's voluntary, like choosing one investment from many, then the "too difficult" pile is a marvelous way of sifting your daily grist.

WARREN BUFFETT: Yeah. I have a file on my desk — Laura Graham gave it to me — that's entitled "too hard." And, as Charlie said, if something is optional and it's too hard, you just throw it in there.

If you've got the problems of weapons of mass destruction, it is too hard, but you have to keep wrestling with it. Because if you even reduce the probabilities a tiny bit, you know, you're doing something. But you're never going to solve it.

You just have to keep working at certain types of problems, and you hope you don't have too many like that.

WARREN BUFFETT: Ten.

AUDIENCE MEMBER: Many greetings from Germany. I am Bernard Yaadan (PH) from (inaudible), a little town close to the Black Forest, and I'm the mayor of it.

My question to Mr. Buffett and Mr. Munger is, how often do you review each single position in your portfolio?

Some look at their stocks every day, sometimes more, some only once a year. What is your frequency? Thank you.

WARREN BUFFETT: Well, that sort of breaks down into two periods in my life. When I had more ideas than money, I was thinking about everyone all the time because I was thinking about buying the next one and which one I would have to sell in order to buy something even more attractive.

So my opportunity cost, as Charlie would put it, then, was the least attractive stock which I would give up to buy something more attractive.

So I — literally, if I had $100,000 and it was all invested and I wanted to put $10,000 or 20,000 into something I felt was more attractive, I would be thinking all the time of which one of these do I unload.

Now our situation is such that we have more money than ideas, and that means that we really aren't re-examining something every minute, because the option is cash and not doing something that we really are excited about.

We still think about the businesses we're in — whether they're wholly owned or whether they're partially owned through stocks — we think about them all the time.

I mean, we've got a lot of information filed away in our minds. And you keep getting little incremental bits about that company or the competition or other things going on.

So it's — you know, it is a continuous process, but it's not a continuous process with the idea that daily activity, or weekly activity, or monthly activity, is going to result.

It's just we want to just keep adding to our thinking and knowledge, refining it further about every business that we're in.

If we needed some money for a very big deal, for example — let's say we needed 20 or 30 or $40 billion and we had to decide to sell 10 billion of equities, just to pick a figure, you know, we would use the information we've been collecting daily, which hasn't really meant much as we've gone along, and we would come to a decision about where we raise that $10 billion.

Charlie?

CHARLIE MUNGER: Yeah. But even in Warren's salad days when he had way more ideas than he had money, he did not spend a lot of time thinking about his number one choice. You know, he could put that aside and devote his efforts to other subjects.

WARREN BUFFETT: Number 11.

AUDIENCE MEMBER: Good afternoon. Charles Fisher (PH) from New York.

In the last 18 months, the company has allocated at least $1 billion to four or five publicly traded companies.

Berkshire has an abundance of capital and a scarcity of ideas. Since these stocks investments were made in large cap companies in which we could have probably made $5 billion investments, have you thought about allocating more capital to each stock investment?

WARREN BUFFETT: Yeah, we do think about that, obviously. And there's certain ones that we have added billions of dollars to that we already had substantial positions in a couple years ago.

Obviously, when we add to the present list, we think we're adding to the ones either that look the most attractive to us, or to the ones that we can just buy. I mean, there's some things where we can't put that much money in, or where we will have reporting thresholds that will cause a problem.

If we own over 10 percent of a company, you know, we can't sell a share of it, then, for six months without it being — if there's a profit — it being recaptured pursuant to a short-swing rule.

So there's some technical things that enter into whether we cross certain thresholds of ownership size.

But if you look at — you know, if you look at the portfolio at the end of 2007, you're going to see that certain positions in there from 2006, there will probably be an increase by billions of dollars.

And that's always something that I'm considering and Charlie is considering.

We like to add to present positions. I mean, those are companies we know, understand, obviously like to some degree.

And if the price gets reasonably attractive and we've got money around, we will add. If we can find a good business to buy, you know, we will sell the least attractive.

Charlie?

CHARLIE MUNGER: Yeah. It isn't as easy as it looks to buy these big positions. When we were buying Coca-Cola, we were buying every share we could. We bought, what, 30 or 40 percent of the daily trading?

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: And it took us a long, long time to get our position. And so there are huge difficulties to managing great, big, common stock portfolios.

We like it way better when we have those problems now than we liked it when we didn't have them early, but it does make it much harder. We have no easy way of moving these elephants around.

WARREN BUFFETT: In general, we think we usually can buy something like 20 percent of the daily trading volume and feel that we're not causing the price to be violently different than it would have been if we hadn't been participating in the market.

So that means if we're going to buy $5 billion worth of something, $25 billion worth of it is going to have to trade, and that's a lot for many stocks.

So we are a big ocean liner, and that has its disadvantages compared to being a smaller boat.

WARREN BUFFETT: Number 12?

AUDIENCE MEMBER: Heya hamalio (PH). My name is Wendy George, and I am from the Hoopa Indian Reservation in northern California. I'm here with the Yurok and Karuk indigenous people who live along —

WARREN BUFFETT: I don't know if the microphone isn't working or not, but we want to make sure it is working.

AUDIENCE MEMBER: — who live along the Klamath River. My people are river people. Our entire culture, religion, and subsistence is centered around the river.

Your subsidiary company PacifiCorp owns dams on our river. Mr. Buffett, I know you care very much about humanity and ethical business. We also understand that you cannot exercise direct control over PacifiCorp's operations.

However, there are things you can do to help us. So we are here to ask you if you would be willing to meet with the tribal representatives, learn more about our issues, and explore ways to help save our salmon?

WARREN BUFFETT: Are you complete? Just take your time here.

AUDIENCE MEMBER: Complete.

WARREN BUFFETT: OK. As I said earlier, we will not make the determination in the end. It will be made by FERC.

It's the same way as if we're going to put in a coal generation plant or a gas generation plant or more wind-powered.

For example, we put in a lot of wind power in Iowa, but that was decided, essentially, by the utility commission in Iowa, that they wished to make that decision.

And, incidentally, sometimes people are unhappy when we put in wind because they don't want the transmission lines that are going to be involved.

They're usually happy to give us the plots on which to put the wind turbines because they get paid very well for it, but they're not happy to have the transmission lines.

Anytime you get into the public utility field, there are people happy and unhappy with decisions. Nobody wants a generating plant built near them, and that's the nature of it.

The world does want electricity. And because it wants electricity, and it wants more electricity, it essentially has to decide the public policy issues through regulatory authorities.

And we will do exactly what FERC, finally — and with the consent of the state commissions — what they finally decide on it.

And all of the arguments will be presented to them. As I say, there are 27 groups, I believe. And then they go and then they get the opinion of the secretary of the interior and so on and a lot of other groups.

And somehow they come out with a decision on public policy, and we will follow it.

It takes a lot of time, too, I must say. Anytime you've got an issue that's got 27 different views and more than one authority, it's going to take significant time.

I'm in a peculiar position on this. Because when we bought PacifiCorp, we had to — Walter Scott and I both signed affidavits. As part of the acquisition of PacifiCorp, the Oregon Public Utility Commission required that we submit these affidavits.

And I'll read to you from this. I don't want you to think I'm ducking behind this, but this was executed several years ago.

And it says, "I agree I will not exercise any control, directly or indirectly, on matters that pertain to PacifiCorp, except for relating to PacifiCorp that are ministerial in nature."

And then, "I agree, as a MidAmerican Holding Company and Berkshire Hathaway director, I will recuse myself from voting on MidAmerican Holding Corp. or Berkshire Hathaway board of director matters concerning PacifiCorp activities or operations."

This is part of the order that came down that allowed MidAmerican to buy PacifiCorp.

I must say, too, that in terms of the Oregon Commission and the five other states, that our application went through in almost record time because MidAmerican does have such a good record in terms of being responsive to the public utility commissions under which it's operated, and we will continue to be responsive.

WARREN BUFFETT: But I appreciate your point. Thank you.

WARREN BUFFETT: Number 13, please.

AUDIENCE MEMBER: Peter Vanden Broeck (PH), Cleveland, Ohio. Mr. Buffett and Mr. Munger, thank you for so eloquently answering some of these tough questions. I know of no other public company that would allow a forum such as this. You're doing a great job. (Applause)

WARREN BUFFETT: Thank you.

AUDIENCE MEMBER: My question is a follow-up question to the Katrina aftermath situation regarding policyholders with insurance companies and the tussle between coverage and what's the proper remedy for those that suffered after such a storm.

Part of that tussle, or one of the results of that tussle, was some legislation that was passed in the state of Florida.

Could you please explain that legislation, as you understand it, to shareholders? And what effect, if any, does that have on Berkshire's insurance subsidiaries? Thank you.

WARREN BUFFETT: Yeah. I can't tell you with precision what the Florida — I don't know whether Joe Brandon, or Ajit [Jain], or Tad Montross — if they're in the managers' group, if somebody could pass the microphone over to them.

Essentially — I should let them explain it — but the state of Florida has gotten more into the business of insuring the citizens by a considerable margin than it did before, but there are some significant limitations on that.

And I think, if we've got a microphone with one of the three of them, they could answer that question better than I.

Do we have somebody over there? Are they all out writing insurance, or — (Laughter)

CHARLIE MUNGER: More likely buying jewelry. (Laughter)

VOICE: Check, one, two.

WARREN BUFFETT: Who do we have?

It's impossible for me to see over there with the lights.

VOICE: I'm getting a mic.

WARREN BUFFETT: What are they yelling?

CHARLIE MUNGER: Seven.

JOE BRANDON: Hello.

WARREN BUFFETT: Ah.

JOE BRANDON: Warren, it's Joe.

WARREN BUFFETT: OK.

JOE BRANDON: Took me a little time to get here.

WARREN BUFFETT: OK. Fine.

JOE BRANDON: I was looking for Ajit. What was the specific question?

WARREN BUFFETT: I think the questioner wanted to know what has really happened in Florida in the last three or four months, in terms of the state getting involved in the homeowner's insurance business.

JOE BRANDON: Well, back in mid-January, the Florida legislature met in a special session and passed legislation, at the urging of the governor, that expanded the reinsurance fund and ultimately is moving a lot of risk, both personal lines and commercial lines, from the private market to the public market.

You know, this is going to, and has manifested itself, in lower prices for wind risks in Florida and has freed up capacity that was dedicated to Florida for other markets.

So ultimately it's going to have a depressing effect on the insurance industry.

Longer term, you know, there is no free lunch, and the state and the citizens of Florida are taking a tremendous amount of risk.

And it will all work out if the wind doesn't blow, but the odds are eventually it will, and Florida is going to have a large public policy issue to deal with.

WARREN BUFFETT: Are they — Joe, are they explicitly taking on about 30 billion and then sort of leaving it in the laps of the gods above that? I'm not sure myself, but —

JOE BRANDON: Yeah. I believe they take out about 30 billion. It's about — the increase was 12 to 16 billion. So they previously had taken about 18 billion out, and they took an additional 12 to 16.

WARREN BUFFETT: Yeah. The real problem will be if there turns out to be a $100 billion insured loss.

And then the — you know, the state may decide to issue 60 or 70 billion of bonds. They may decide to go to the federal government and say, "This really isn't our fault, and therefore the entire country should pay, in some form."

Who knows what will happen? And the truth is, you know, it's very unlikely that a $100 billion storm occurs. The biggest one was Hurricane Andrew, which trended, through inflation to present day, probably wouldn't quite hit 30 billion.

But if that same storm come through as a Category 5 about 20 miles north of where it came — where it hit — you would have — or you could easily have something like $100 billion storm.

So, you know, you're going to have to stay tuned on that. And if they don't have any hurricanes in the next couple of years, the whole matter will die down — big hurricanes.

And if they have a $100 billion storm, they will probably go to Washington, and we will find out whether the whole country has been insuring hurricanes in Florida or whether the federal government will throw it back to the State of Florida, and the State of Florida will, presumably, issue a lot of bonds, and taxes would go up.

And, in effect, you would distribute insurance — insured losses — in relation to the proportion people pay of the general tax revenues of a state like Florida.

It's tough to be where the wind blows a lot, but it's also a very nice place to live, apparently. So we will find out how it plays out.

WARREN BUFFETT: Number 14, please.

AUDIENCE MEMBER: Steve Rosenberg (PH), originally from Michigan. Thank you very much for continuing to serve as excellent role models and for the values that you continue to teach by example.

I'm curious to know who are your present-day role models. And I know that your prior heroes included your father, Ben Graham, and Davy [former GEICO CEO Lorimer Davidson], but would be curious to know who in addition to those three. Thank you.

WARREN BUFFETT: Well, I've had a number of them. And I'm not sure I want to name them because the ones you don't name might feel a little left out.

But the one thing I've been very lucky on is that the ones I've had have never let me down. So I've never had that experience where you've looked up enormously to somebody and then had that person let you down in some way, which would be a terrible experience and very hard to get over it.

And, you know, I'm sure some people have had that in marriage, and they've had it in business.

And the worse situation, of course, is if you have it with your parents, but that did not happen.

In fact, the reverse happened with me. So I can just tell you that choosing your heroes is very important. I tell that to the students when they come. Because you are going to gravitate toward the behavior of those around you.

I tell people to be sure and associate with people who are better than you are. Marry up and hope you find somebody that doesn't mind marrying down. (Laughter)

And it will do wonders for you. It was a huge help to me. I can tell you that.

Charlie?

CHARLIE MUNGER: Yeah. I would say that you're not restricted to living people when picking your mentors. Some of the very best people are dead. (Laughter and applause)

WARREN BUFFETT: Well, with that, we better go to number 1. (Laughter)

AUDIENCE MEMBER: Hello, everyone. My name is Kendall Brubaker (PH). I'm a senior from Purdue University in West Lafayette, Indiana.

I have my resume screen-printed on my shirt. Charlie and Warren, I brought a shirt for each of you, as well as one for (inaudible), who is responsible for my presence today.

Additionally, I have a strong interest in social entrepreneurship and the Gates Foundation and would love to offer a shirt to Bill, if he is willing to accept.

Now, I had an overly technical question about the historic rate of economic growth and why it's 3 percent as opposed to 2 or 5.

However, given my circumstances, I feel it is more appropriate to ask if I made a sound economic decision to make this trip to Omaha to display my own intrinsic value, and to turn down the $500 that the man just offered me for my spot in line to 27,000 people and to learn from you, or if I would have been better off charging the equivalent amount to my American Express card on See's Candy and Coca-Cola?

Thank you. And, again, my name is Kendall Brubaker. (Applause)

WARREN BUFFETT: Thank you. I thought your question was going to be what shirt size we wore, but — (Laughter)

CHARLIE MUNGER: Mine is small. (Laughter)

WARREN BUFFETT: I think we'll move on to number 2. (Laughter)

AUDIENCE MEMBER: Tom Nelson (PH), North Oaks, Minnesota.

This one is for Charlie. What are your current views on the costs and benefits of ethanol production in this country?

CHARLIE MUNGER: Well, you know, even [Sen. John] McCain has had a counter revelation lately. He's decided that ethanol is wonderful now that he realizes that's the way they think in Iowa.

I'm somewhat in his position here, but I won't allow that to stop me. (Laughter)

I think the idea of running automobiles on corn is one of the dumbest ideas — (applause) — that has gotten widespread acceptance that I have ever seen.

But in a government with a lot of political pressures, weird decisions get made. But that has to be about as crazy a decision as was ever made.

You want a social safety net under people, and the most basic safety net of all is food. And you're going to raise the cost of food so you can run these automobiles around? And you use up just about as much hydrocarbons making the corn as you get out of the ethanol.

I would say that — and you don't count in the cost of the ethanol, the cost of the topsoil that goes away forever when you — it's a — I love Nebraska. I'm a Nebraskan to my core. But this was not my home state's finest moment.

WARREN BUFFETT: We're going to try to smuggle him out of town tonight. (Laughter)

WARREN BUFFETT: I should make one announcement.

In terms of the books at the Bookworm outside, Jerry Goodman, a friend of mine from way back, wrote a book many years ago called "Supermoney," which he just brought out a new addition.

They actually flew those in. They arrived here at the auditorium about 9 or 10 — 10 or 11 o'clock — I guess, this morning. And the new revised issue of "Supermoney" is now out there, in addition to all the other titles.

And I would feel remiss, after all the trouble they went to, if I didn't mention that to this group.

It's a very good book. Jerry was a great writer. He wrote "The Money Game," which was a classic. And "Supermoney" is a good book, too.

WARREN BUFFETT: Let's go to number three.

AUDIENCE MEMBER: Good afternoon, gentlemen. Paul Wigdor (PH) from Montclair, New Jersey.

What are you doing to protect our company's portfolio against the perils of inflation? Specifically, are you looking at further currency investing and metals investing?

WARREN BUFFETT: Well, we would not necessarily look at metals investing as being any protection against inflation at all.

But we are — the best protection for inflation is your own earning power. I mean, somebody that is a first-class surgeon, or lawyer, or teacher, or salesperson, or anything else, whether the currency is seashells, or paper money, or whatever, will do all right in terms of commanding the resources of other people.

So your own earning power is your best — is the best hedge against inflation.

The second best hedge is to own a wonderful business, not a metals business, necessarily, not a raw material business, not a minerals business, but a wonderful business.

And the truth is, if you own Coca-Cola, if you own Snickers bars, if you own Hershey bars, if you own anything that people are going to want to give a portion of their current income to keep getting, and it has relatively low capital investment attached to it so that you don't have to keep plowing tremendous amounts of money in just to meet inflationary demands, that's the best investment you can probably have in an inflationary world.

But inflation is bad news for investors under almost any circumstances.

You can argue that if you own some business that required very little capital investment and had real flexibility of price during an inflationary period so that people would continue to give up a half an hour of work — of their own work — every month to buy your product, and you leveraged it, then you might even beat inflation to some extent.

But leverage is not our game, but we try to own good businesses.

I think that the Berkshire would not do as well during high rates of inflation at all as it does — in real terms — as it does in periods of low inflation, but I think we would do better than a good many companies.

Charlie?

CHARLIE MUNGER: I've got nothing to add.

WARREN BUFFETT: Number 4.

AUDIENCE MEMBER: Hello, Warren and Charlie. My name is Felton Jenkins. I'm from Savannah, Georgia.

I've been a shareholder for a number of years. This is my third annual meeting. Thanks to you guys, and thanks to your managers and all your employees for the great job.

Just briefly follow up on one thing. It's been published in the Washington Post, LA Times, a number of media outlets, that the FERC, the California Regulatory Commission, the Department of Interior, have determined that it would save between 100 to $200 million to decommission the dams and find alternative power versus doing the capital retrofit.

But, anyway, my question is, what can you tell us about your views on the future profitability of the railroad industry? And what might make that more exciting going forward versus what it's done historically? Thank you.

WARREN BUFFETT: Yeah. Thank you.

I don't think it will be a lot more exciting. But the relative — the competitive position of the rails has improved somewhat from, really, not a very good competitive position 20 or 25 years ago.

There's been a lot of progress made on the labor front. They benefit in their competitive position vis-a-vis trucking as oil prices go up.

Higher diesel fuel, obviously, raises costs for rails, but it raises costs for their competitors, the truckers, by probably a factor of close to four compared to how it hurts them. And there isn't a whole lot of new capacity being created in the rail industry.

So what was a terrible business 30 years ago, and it was operating under regulation — it's still under — operates under the threat of reregulation, which has a tempering effect on their pricing power — but it's a better business now.

It will never be a sensational business. It's a very capital-intensive business. And when you put tons of capital out every year, it's very hard to earn really extraordinary returns on capital.

But if they earn a decent return on capital, it can be a good business over time, and it can be a lot better business than it was in the past.

Charlie?

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

WARREN BUFFETT: Number 5.

AUDIENCE MEMBER: Hello, Mr. Buffett and Mr. Munger. My name is Marie Blevins, and I am from Bardstown, Kentucky. This is my first shareholder meeting.

My question is, what do you think are the best ways a 10-year-old can earn money? (Laughter and applause)

WARREN BUFFETT: Well, I must say that was a subject I gave a lot of thought to when I was 10 — (laughs) — more than I gave to school and some other things.

You know, you have to — you're probably a little young to deliver papers. That was always my favorite. And I got about half the capital I started with by delivering papers, and I always liked it because I could sort of do it by myself.

I don't know the situation and the town in which you live, but, like I say, 10 is probably a little young, but 12 or 13 would not be.

And almost any — there can be a lot of — I tried to — I must have tried 20 different businesses by the time I got out of high school.

The best one was a pinball machine business, but I'm not sure I want to recommend that you get into that.

When I did it, it was a much purer business where you put a nickel in, and that was about it.

But it is interesting — I read a study a long time ago — I wish I could get my hands on it because I've quoted it a lot but I never quoted it as authoritatively as I would be able to if I could actually find the damn thing that I read 30 years ago.

But it correlated business success with certain variables.

And, you know, they tried grades in school, and they tried what your parents did, and they tried whether you went to business school, all those kind of things.

And they found it correlated best with the age at which you started your first business, got into business, that the younger you were when you did your first piece of business seemed to correlate best with later business success.

And to some extent, that's sort of natural. It's probably true that — that when you see it in athletics, you see it in music and that sort of thing.

So whatever you can figure out that other people will pay you to do that they don't want to do themselves or that they'd like done for them — I advise you to look around the neighborhood and talk to your parents, talk to your friends, see what other people have done that have been 10 or 11 or 12 years old that's worked for them and copy it.

But if you can get a good paper route when you're 12 or 13, that's a sure way to save some money.

I've often wondered about people that are having trouble being in debt, you know, that have a normal eight-hour job.

If they added a route in the morning and just put that aside, you know, it could be the way out of being behind the game instead of being — and getting ahead of the game — and take another hour and a half out of their day, but not too many people seem to do it.

Charlie used to sell — didn't you used to sell yourself the best hour of the day or something, Charlie?

CHARLIE MUNGER: You bet.

WARREN BUFFETT: Yeah. Tell them what you did.

CHARLIE MUNGER: Well, when I was young, I read that savings bank thing, "The Richest Man in Babylon," which taught the joys of underspending your income and investing the difference and how wonderfully it would work over time.

And, lo and behold, I did exactly what this little pamphlet suggested, and it worked. And the other idea — and then so I got the idea that — I had a mental compound interest thing, too.

And so I finally decided I was going to give the best hour of the day to improving my own mind, and then the world could buy the rest of the time. And that may have been a very selfish thing to do, but it worked.

WARREN BUFFETT: Yeah. Charlie was selling his time — I don't know. What you were getting per hour as a lawyer?

CHARLIE MUNGER: Not much.

WARREN BUFFETT: Yeah. He just decided to sell himself the best hour, and not a crazy thing to do.

CHARLIE MUNGER: But I would tell that little girl if you make yourself a very reliable person and stay reliable all your life, faithfully doing whatever you engage to do, it will be very hard for you to fail at anything you want. (Applause)

WARREN BUFFETT: Number 6.

AUDIENCE MEMBER: Good afternoon, everyone. My name is Dennis Batrowski (PH). My hometown is West Point, Nebraska, and I now live in Omaha with my family.

WARREN BUFFETT: As you may know, my mother came from West Point.

AUDIENCE MEMBER: Yes. Thank you, Warren and Charlie, for your incredible education, generosity in this great meeting. I've attended every meeting since 1994.

Warren and Charlie, assuming a necessary margin of safety in the future cash flow estimates and proper adjustments in discount rates, would you discuss which trends of global economic growth that you think will be sustainable, given our holdings in railroads, steel, materials, and energy, with our modest expectations, enormous trade deficit, tight credit spreads, low risk premiums, and explosive growth in emerging economies? Thank you.

WARREN BUFFETT: Yeah. We think we're — we think we're in a pretty good group of businesses for the world we face. You know, we don't know which ones will turn out to be the best. There's a few that we think are real superwinners, and we think a significant number of them will do OK.

And we don't try to buy our businesses with thoughts much of world trends. We certainly think in terms of international — foreign competition.

I mean, we do not want to buy into a business that has a very high labor content and that has a product that can be shipped in from abroad very easily.

Because, sooner or later, that will probably be trouble, just like Charlie and I — really, I bought into an airline — he came along and tried to rescue me — some years ago that had very high seat mile costs and it had protected routes — US Airways — so it was able to operate with 12 cents a seat mile of cost because Southwest hadn't gotten there yet with their 8 cent costs.

But they get there. And you do not want to have something whose competitive position is going to erode over time. But I think most of our businesses have got pretty strong competitive positions.

And, really, the variables you name don't bother us. You know, we will play the hand as well as we can, and we're playing it with terrific people in very good businesses, and we're dealing from strength all the time. You know, we've always got a loaded gun.

And we think we've got the right values with our managers, the people. Think we've got a culture that's owner-oriented.

We've got a lot of things going for us, and they won't produce huge returns, but they're likely to work OK.

Charlie?

CHARLIE MUNGER: Well, we learned about foreign labor competition in our shoe business. And in that, it reminds me of Will Rogers, who didn't think man should have to learn these easy lessons in such a hard fashion.

Will Rogers believed that you should learn not to pee on an electrified fence without actually trying it. (Laughter)

WARREN BUFFETT: Will told Charlie a lot of things he didn't tell me. (Laughter)

WARREN BUFFETT: Number 7.

AUDIENCE MEMBER: Hello, Mr. Buffett and Mr. Munger. I'm Shinydaz Guynadewa (PH) from Fort Lauderdale, Florida.

First of all, I want to thank you for your efforts in making investors aware of the high transaction cost involved with several investments, and I got lot of personal benefit by reading your articles.

My question today is in reference to the declining value of dollars compared to all other major currencies. In last three years, dollar declined as high as 25 to 30 percent.

So I want to understand how it is going to impact individual investors and the how big is the threat? Thank you?

WARREN BUFFETT: The question is about the declining dollar but I didn't get all the —

CHARLIE MUNGER: He asked you for — what do we think about it, what are we going to do about it.

WARREN BUFFETT: We think it — we think the dollar over time is — unless policies are changed in a major way — is likely to decline somewhat more against most major currencies.

And we originally backed that opinion up with transactions that got as high as 21 or -2 billion in the ownership of foreign currencies.

And then the carry on that, the difference between interest rates in the various countries, made that quite an expensive way to express that belief.

So we have focused much more on buying into companies that earn lots of money in other currencies, on the thought that they will be somewhat favored over companies earning just U.S.

But that's not — as I mention in the report — that is not a huge determination of what we buy. It's a factor, but it's not — it's not 50 percent of the decision or anything like that.

We are following policies in this country that are likely to cause the dollar to decline in value against many major currencies. And who knows what speed, whether it happens this year or next year. We don't have any idea on that sort of thing.

But the fundamental forces are fairly strong.

We actually only own one currency now — trade — which would surprise you, actually. We'll tell you about it next year.

Charlie?

CHARLIE MUNGER: Yeah. So far, something peculiar has happened. During this exact period of maximum dollar decline in value versus other currencies, the dollar prices at Costco have showed an inflation factor of approximately zero.

So what really matters, of course, is how things are working in your own country, and it's been perfectly amazing how well we've gotten by so far with the decline of the dollar.

WARREN BUFFETT: Yeah. As Charlie says, you know, we reference everything in terms of our own country.

If you look at oil, for example, which we'll say has gone from roughly $30 a barrel to $60 a barrel over the last few years, you know, during that same time the euro has gone from, like, 83 cents to a $1.35.

So the price of oil, if you're a European, has gone up very little. I mean, we think oil has run wild. But in terms of anybody that's using the euro, the price of oil has gone up about 25 percent, and we feel the price has gone up a hundred percent.

So you do have this anchoring of thought to your own currency, which is understandable.

I do think you'll need to think about currency matters more than Americans traditionally have. I was struck 20, 30, 40 years ago, when I would travel elsewhere, how much more sophisticated most people in Europe and the UK, wherever, were about currency than the United States.

We never really had to think about it. Everything was dollar-based, and an American didn't have to be smart about currency or even think too much about it in terms of their business. But that world has changed.

WARREN BUFFETT: Number 8.

AUDIENCE MEMBER: John Norwood from Des Moines, Iowa. A quick question — a quick comment and then a question.

The comment, following on Charlie's comments on ethanol, I would ask him at least to look at the environmental benefits of ethanol as a fuel blend — octane boosters superior to other types of chemical additives, such as MTBE, which has been so damaging to groundwater.

My question is for Mr. Buffett. And I'm hoping you might be able to tell us a little bit more about your interactions with the board of directors and the types of ideas and idea exchange and, perhaps, a model for how you believe a board of directors is supposed to function with management. Thank you.

WARREN BUFFETT: Yeah. I would say that most writers and most shareholders probably have a little bit of a distorted version, at least, how most corporations — large corporations — have operated over the years.

Usually — for a long time I would say that directors, generally, were sort of potted plants. I mean, you sat there and the management had its agenda and didn't really want input on major matters.

And Charlie and I can certainly testify to the fact that we have had great lack of success, even when we were the largest shareholder of a company, in terms of talking about things that really count.

I mean, if somebody spends their whole lifetime— 25, 30 years — rising to the position of CEO, you know, they want to be boss, and you can't blame them, and the only thing in their way is the board of directors.

So they look for people who are big names and they look for ways to keep them happy, but they don't really want them getting into the business very much.

There's a lot more process now that's been imposed by the recent rules. But I would say still, in terms of the reality of the guts of business and the discussions that take place and all that, I think you might be surprised at the level overall of that throughout corporate America.

As I've written in the report, overwhelmingly, the job of the board of directors is to have the right CEO. I mean, if you've got the right CEO, 90 percent of it takes care of itself. If you were the director of Cap Cities and you had Tom Murphy as the CEO, you know, case closed. It was all you needed.

And if you have that CEO, I think you have an obligation on the board to make sure that there's not overreaching by the CEO, because the CEO can have different interests.

And I think the third thing that the board does — should do — is they really should bring some independent judgment in on major acquisitions. Because there is a natural tendency for people with, usually, big egos, big motors, who get to be CEOs that like to do big things and to become bigger spending other people's money.

And normally, when big deals come along, you know, the management — by the time it gets there, they've made the deal anyway. They have investment bankers there who go through a little ritual. I've never seen one come in and make a presentation that says it's a dumb idea. I mean, they know what the answer is supposed to be, and it just becomes kind of a little game.

So I think in those three respects, a good director will first make an affirmative decision. You've got a very good CEO — not the best in the whole world, not everybody can do that — but a very good CEO.

That that CEO is not overreaching.

And when significant deals come along, that they get a chance to weigh in, and that you really get a balanced discussion about the real economics of what you're doing.

And I would say in that latter point, what I've seen over the years has really been pretty bad. But I can understand it because the CEO wouldn't bring in the deal unless he wants it done.

And once he brings it in, he's going to stack the deck and make the presentation in such a way that it's almost impossible to exercise independent judgment.

Charlie, do you have any thoughts on —

CHARLIE MUNGER: I think big, big deals, on average, in America, are contrary to the shareholders' interest. That's the way to bet. On the acquirer's side, usually the shareholders are worse off.

WARREN BUFFETT: Most stock deals, they think about what they're getting and they don't think about what they're giving.

I mean, I have been involved time after time where people are giving a significant percentage of the business, which they wouldn't sell at the current market price. If somebody came along with a tender offer 20 percent higher, they would say that's inadequate.

But they hand away a piece of the business because they want to own something else. And there's nothing wrong with that, but you just have to be sure that you're getting as much as you're giving.

I have very seldom heard a discussion — in fact, I don't think I've virtually ever heard of a discussion — of weighing what you were actually giving away on a stock deal versus what you're getting.

I've heard a lot of discussion about dilution and when dilution will be overcome and all that sort of thing, but that is not the question.

The real question is are you — if more value is being created, how is it being whacked up between the two companies?

And if not extra value is being created, are you getting more than you're giving?

When I gave away 2 percent of Berkshire Hathaway to acquire Dexter Shoe, that was one of the dumbest deals in the history of the world.

And I did it all by myself. Charlie didn't participate in that one. I wish he had.

But, you know, it was dumb. I mean, here's — it wasn't 2 percent of what I had then at Berkshire, it's 2 percent of the present Berkshire Hathaway company.

You'd all be 2 percent richer — a little more than 2 percent richer — but you'd be a full 2 percent richer if I hadn't done that.

CHARLIE MUNGER: Fortunately, you've made some better decisions.

WARREN BUFFETT: Yeah. Well, I have to, or we wouldn't be here. (Laughs)

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: But, you know, the point is that doesn't show up under conventional accounting at all. You know, it gets brushed under the rug.

At Gillette, literally, we had ten deals in a row that never met — came close to meeting — the case that was presented at the time they were presented to the board. Was that ever mentioned to shareholders? Did it show up in our financial report?

Never. It never will. And that goes on all the time in corporate America.

And, unfortunately, shareholders, to the extent they get unhappy with managements, are complaining about whether they've got diversity on the board or something like that.

But when you're blowing away the company, I mean, that, to me, is a whole lot more important.

Charlie, you want to —

CHARLIE MUNGER: Yeah. The self-serving delusional nature of even some very good minds, in terms of IQ points, is amazing.

I had a friend who sold a business to a government-controlled business in a socialized Scandinavian country.

And my friend had a very nice business, and the people on the other side, after they had bought it for stock in their government corporations, said, "This was such a marvelous deal. We got your whole business, and we didn't have to give anything."

WARREN BUFFETT: Well, we owned stock in the Third National Bank one time down in Nashville. And they got the ability — and they're wonderful people — really wonderful people — but they got the ability to acquire other banks where they formerly had been limited in that ability.

And they went out to some very small bank, and the guy at the very small bank said, "I want stock." And he says, "My stock is worth private market value, and your stock is worth market price."

Well, market price happened to be half of — but he says, "All I'm getting is whatever the market is, so I want you to value your stock at market and value mine at this huge premium."

And he said, "And there's one other condition." He said, "Since I'm going to be putting my whole net worth in your stock," he says, "I want you to promise you'll never do a deal this dumb in the future." (Laughter)

Do you remember that one, Charlie?

CHARLIE MUNGER: Yeah, I remember.

WARREN BUFFETT: Yeah. And that fellow was just being a little — was just getting a little more out in the open than is typically the case.

I've been on some terrific boards. There was a local one here called Data Documents that really functioned with everybody on the board thinking about the business, understanding the business, making decisions as owners.

Every one of them had a significant percentage of their net worth in the business, and probably the best board I've ever been on. I mean, every decision there was made for business reasons.

The worst decisions — at least they have the potential for being the worst — but it's standard procedure now when an acquisition comes up to trot in the, you know, investment bankers and the lawyers, and the momentum is just totally to get the deal done. And, like I say, there will be a lot of slides presented.

And I can — I don't need to look at the slides. I know what the answer is going to be. At the end they're going to say it's a great deal, you know, and there will be nobody arguing the other side.

They're just — you know, it is not like something where you would make a decision and you'd have somebody give pro and con. It just doesn't work that way. I don't know how to improve that a lot.

I think we've got a sensational group at Berkshire. You have a group with almost everybody on the board having a significant percentage of their net worth — Bill's is so big we can't get him to a significant percentage, but that's — he's got hundreds of millions of dollars in it.

We've got a board that is in exactly the same position as the shareholders. They don't have directors' and officers' insurance. They've got the downside as well as the upside. They bought their stock in the open market, so it hasn't been given to them. It is a real owners' board, and I like it that way.

I think it's a terrific group, and I'm glad I can get them to work cheap. (Applause)

WARREN BUFFETT: Number 9, please.

AUDIENCE MEMBER: My name is Eid (PH) and I'm from Kuwait. In response to earlier comment about borrowing from Kuwait, I can tell you that after 40 years we now lend in dollars, and you are always welcome in Kuwait. (Laughter)

My question is, if you would pick your partners to invest with you in big deals, what would be your criteria for choosing partners?

WARREN BUFFETT: Yeah. We — is that — are you complete on that?

AUDIENCE MEMBER: I'm complete.

WARREN BUFFETT: Yeah. We normally don't want to do deals with partners. If we like a deal, we want to own it all.

And we usually have the money to do it all, so almost — in very few cases would there be a need for a money partner.

And then there's a question for a knowledge partner. And we really wouldn't want to be going into something, in most cases, where we were relying on somebody else to be the brains of the deal. We've made exceptions on that, but very seldom.

So we — by our nature, we would like to have a hundred percent of any deal for the benefit of our shareholders. If we're going to spend our time on it, we just as soon get a hundred percent of the rewards. We don't mind taking a hundred percent of the downside.

And we ought to understand it well enough so we don't need a partner.

Charlie?

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

WARREN BUFFETT: Number 10. Wait, I'm just trying to think. Have we done any big partnership deals?

CHARLIE MUNGER: Well, you made that partnership deal with Leucadia, but they brought you the deal.

WARREN BUFFETT: That is true. We made a very good partnership deal with Leucadia. They did way more than their share, but they brought us the deal. And so they asked us to participate in their deal.

Now, in effect, we own less than a hundred percent of some of our businesses, and we're in partnership with the management. But that's perfect. I mean, we've had some great experiences with that, and we'll continue to have great experiences.

But, you know, they came — they're in on the same terms we are, and they're owners.

All of our managers think like owners. But in certain cases, they are real owners directly in those businesses as well.

But just some outside party as a partner, we really haven't done, although I would do another deal with Leucadia if they came to me and I liked the deal. I mean, that was a very good experience.

WARREN BUFFETT: Number 10.

AUDIENCE MEMBER: Good afternoon, ladies and gentlemen. My name is Ari Jahja. I'm a junior from Baruch College, New York City.

And on behalf of the Portfolio Management Club, I would like to thank you, Mr. Buffett, for inviting us to this wonderful event.

And my question is that, first of all, speaking about Berkshire's portfolio, there's an increasing exposure of your investments toward commodities, such as to oil through PetroChina, to steel through POSCO, and to coal and agriculture through the rail stocks that you recently purchased.

So my question is that what is your long-term view on commodities, and how does it impact your view on the geopolitical state of the world in the future? Thank you.

WARREN BUFFETT: Yeah. I — and, to my knowledge, Charlie — we'll hear from him — but we have no opinion on commodities.

We — if we were in an oil stock, it's because we think it offers a lot of value at this price, but it does not mean that we think the price of oil is going up. If we thought oil was going up, we could buy oil futures, which we actually did once.

But very seldom — very, very seldom would we have any opinion on what any given commodity would do.

Owning POSCO, we just think it's one of the — well, it is probably the best steel company in the world and — remarkable record.

When we bought that stock, we were buying it at four or five times earnings, with a debt-free balance sheet, one of the lowest-cost producers around. I mean, it's a fabulous company.

And in addition, it was a play on the Korean won, and we made 20 percent on the won by being invested through a won-denominated security.

So we may occasionally be in those kind of businesses.

We, basically, like best the businesses that require very little capital, because they're the only ones that have a chance of earning really high returns on capital.

You can't have a business that has huge capital expenditures year after year, and end up with a high- return business. It just doesn't work in this world.

But you can find some businesses that really require relatively minimal capital investment.

Here's the case. This is a small one. But See's Candy is not going to require a huge capital investment.

It requires some capital investment, but it's a wonderful business. It's a small business, but it's a wonderful business. And it's far better business, relative to size — adjusted for size — it's a far better business than any steel business is going to be or any oil business is going to be.

It's just that it's not very big. We'd love to have it bigger. And we'll do our share in every way we can, as you may have noticed up here.

But we do not have any — we do not have a bias toward — at all — toward businesses involved in commodities. And if we had any bias, it would be against.

Charlie?

CHARLIE MUNGER: Yeah. We're going to be investors in businesses, not commodities, by and large. And that has to work better over time.

WARREN BUFFETT: Number 11.

AUDIENCE MEMBER: Good afternoon. My name is Andy Peake from Weston, Connecticut.

Recently the newspapers have been in the news: the [Rupert] Murdoch bid for Dow Jones, Morgan Stanley's Hassan Elmasry's push to eliminate the New York Times dual-class share.

Given you are both experts in the dual-class share and newspapers, what advice would you give to the long-suffering New York Times shareholders, and what advice do you have for Arthur Sulzberger, the besieged CEO of the New York Times and head of the family that owns the newspaper?

WARREN BUFFETT: Well, I think the "long suffering," as you put it, shareholder of the New York Times has probably made a mistake — I don't think I'd necessarily blame the Sulzbergers for the woes of the newspaper business.

I mean, we have said for a good many years that we thought — in effect, we thought newspapers were overpriced because they reflected a valuation based on looking in the rearview mirror rather than through the window.

And we — it's interesting. We have this dual-class structure at Berkshire. But because I converted a whole bunch of shares to B, I own about the same percentage of the B as the A, because I converted about six or seven times as much as I needed for present gifts.

I only go down to my safe deposit box when I have to, and I didn't want to go down every year to convert stocks, so I just converted a bunch of stock early on.

And now I own about 30 percent of each. So it has no effect, in terms of voting power at Berkshire.

But the woes of the newspaper business are not connected with the difference in voting structure at the Times or other places. The newspaper business has just gotten a lot tougher.

And if you think about it — I mean, let's assume that Mr. [Johannes] Gutenberg, back there in the 15th century, instead of wasting his time developing movable type and all of those kinds of things, decided to become a day trader or hedge fund operator and really made something of himself, so that we never had print.

But along came the internet, along came cable TV, all kinds of other things. And then now this year, you know, Johannes Gutenberg the 28th or something, came along and said, "I've got this wonderful idea. We're going to chop trees down. We're going to haul them great distances.

"And then we're going to put them through expensive newsprint machines. And then we're going to send them down to someplace where they've got expensive presses.

"And we'll run these things all night. And then we'll send delivery trucks out through the snow to get these little pieces of paper out to people where they can read about what happened yesterday."

Well, I don't think we would be backing him, you know.

Now, it happened, you know. The other one came along first, and people's habits don't change immediately, and, you know, the world doesn't turn over.

But, in effect, you know, the position of newspapers today still reflects the fact that they have inertia and momentum on their side from the past.

And I don't care how smart you are. You know, there was a fellow that came into the LA Times a few years back. He was going to take the circulation up to a million- five, as I remember, Charlie. And the circulation is now 800-and-some thousand of the LA Times, and it's gone down every week.

And I don't know that — you know, I don't know that Joseph Pulitzer or William Randolph Hearst or E.W. Scripps or anybody who were geniuses in their day, maybe, at building circulation, could do much about that.

The truth is that the world has changed in a significant way. We used to sell 300,000 World Books a year. It was a good value. You know, and we sell 22,000 sets or something like that now.

And it isn't because the World Book isn't worth what it sells for. It's just not worth what it sells to for most people who can go on the internet and get an awful lot of that information free.

So I don't think I would blame the dual-class structure on anybody's investment losses in the New York Times.

The companies that have not had dual-class structures — I mean, we own the Buffalo News. And the Buffalo News earnings have been — they're certainly down over 40 percent from the peak.

We have terrific management. We've got a paper that has among the highest penetration in circulation of any large metropolitan paper in the country. But we are — our earnings are going down, and it's a fact of life.

Charlie?

CHARLIE MUNGER: Yeah. He was talking about that dual-class structure as being intrinsically wrong, but I would argue that the Sulzbergers set it up that way when they went public, and so that was in the basic contract.

And once a contract has been made, the idea that you can just stamp your foot and take away the contract strikes me as a — kind of an immature idea.

WARREN BUFFETT: I would add, too, that the Sulzbergers from the start — anybody that bought the New York Times knew that they would not try to maximize earnings in a given quarter or try to minimize the downturn by slashing costs or something of the sort.

They didn't build the New York Times by doing that. It did not have a reputation which allows it, perhaps, to have a decent future on the internet. It did not get to where it is by a policy of, you know, Management 101 as taught as some business school.

And, yet, following that differing course, you know, I don't know how many papers in New York disappeared. But whether it's The Herald Tribune or The Sun or The World-Telegram or you name it, the world — they had a different management approach, and they all fell by the wayside, and the Times is still around.

So I — I'm not sure 10 years from now or 15 years from now that people will regard the Times' playing of their hand as being, necessarily, an inferior one.

They may have a better position going into the internet than almost any newspaper around. Certainly a lot better than, you know, the Philadelphia Inquirer or the LA Times has.

You know, the LA Times will have more trouble monetizing their reputation on the internet than the New York Times will, if there's a national game to be played in that. So we'll see how it plays out.

WARREN BUFFETT: Number 12.

AUDIENCE MEMBER: My name is Betty Stuart Rodgers Jeffreys, and I live in Barrington Hills, Illinois, 35 miles northwest of Chicago.

This is the first time I've ever been to your annual meeting, and I want to thank you both for giving us so much time to answer our questions and give us such words of wisdom.

I would also like to thank you for giving us a wonderful weekend of lunches, brunches, cocktail parties, time at Gorat's and Borsheims.

The problem is that when I told my two adult daughters that I was going to have such a wonderful weekend, they both made me promise to bring them next year.

And if 25,000 people bring two people next year, where are we going to meet?

WARREN BUFFETT: Well, I would — if you get the answer to that, I'm really waiting to hear it. Because we — it's about 27,000, and we are just about maxed out here. We're just about maxed out in terms of hotel rooms. I think we're going to have four new hotels in Omaha —

AUDIENCE MEMBER: Oh, good.

WARREN BUFFETT: — before next year. But, you know, that's a couple thousand people. And, you know, based on the growth, at some point we sort of hit the wall, and I haven't figured out how to handle that.

If anybody has any suggestions, I'll appreciate hearing about them.

But I'm delighted you're having a good time here. I hope you've all had a good time here.

AUDIENCE MEMBER: Thank you.

WARREN BUFFETT: We're now going to take a ten-minute recess, and then we'll reconvene. Thank you.

WARREN BUFFETT: OK.

If you'll please take your seats? We want to finish by 4, so we'd like to move quickly through the rest of the business, and we'll get on to the PetroChina question.

And let's see. Here we are. The meeting will now come to order. I'm Warren Buffett, chairman of the board of directors of the company. I welcome you to this 2007 annual meeting of shareholders.

I will first introduce the Berkshire directors — I've already done that.

So, also today with us are partners in the firm of Deloitte & Touche, our auditors. They are available to respond to appropriate questions you might have concerning the 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 and Marc Hamburg.

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

FORREST KRUTTER: Yes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent to all shareholders of record on March 6, 2007, being the record date of this meeting, there were 1,113,240 shares of Class A Berkshire stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 12,888,424 shares of Class B Berkshire Hathaway common stock outstanding, with each share entitled to one two-hundredth of one vote on motions considered at the meeting.

Of that number, 955,276 Class A shares, and enough — 11,301,274 Class B shares are represented at this meeting by proxies returned through Thursday, May 3rd.

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, who will place a motion before the meeting.

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

WARREN BUFFETT: Do I hear a second?

I guess I heard a second.

The motion has been 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? The motion is carried.

WARREN BUFFETT: The first item of business 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 meeting officials in the aisles, and we'll furnish a ballot to you.

Would those persons desiring ballots please identify themselves so that we may distribute them.

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

WARREN BUFFETT: I move that Warren Buffett, Charles Munger, Howard Buffett, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Don Keough, Tom Murphy, Ron Olson, and Walter Scott be elected as directors.

WARREN BUFFETT: Is there a second?

VOICE: Second.

WARREN BUFFETT: It's been moved and seconded that Warren Buffett, Charles Munger, Howard Buffett, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson, and Walter Scott be elected as directors.

Are there any other nominations? Is there any discussion?

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

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 the instructions they have received.

Miss Amick, when you are ready, you may give your report.

REBECCA 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 1,008,564 votes for each nominee.

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

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

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

WARREN BUFFETT: Now, the next item of business we'll spend more time on, and that is a proposal put by — forth by Berkshire shareholder Judith Porter, the owner of ten Class B shares.

Miss Porter's motion, as set forth in the proxy statement, provides that Berkshire Hathaway not invest in the securities of any foreign corporation, or subsidiary thereof, that engages in activities that would be prohibited for U.S. corporations by executive order of the President of the United States.

The directors have recommended that the shareholders vote against the proposal.

The microphones at zone 1 and 7 are available for those wishing to speak for or against Miss Porter's motion.

These are the only microphone zones in operation; so I ask that you go to either 1 or 7 if you'd like to talk on this.

I ask that you confine your remarks solely to Miss Porter's motion.

Now, we have a number of shareholders who want to the talk about this, and we will let shareholders speak.

If there's sufficient time at the end of that — and we're willing to — certainly willing to — have them speak for half an hour, and Charlie and I will give them, maybe, a couple minutes' response after that.

But you've got a half an hour. Different shareholders can speak. I hope you tailor the length of your remarks, the early ones, so that it gives other people a chance.

And if we have time after the shareholders have spoken and there are other people that are in attendance as visitors that wish to speak, we'll have them also.

But if the shareholders use up the full time until almost 4 o'clock, then we'll have to finish at that time.

So, Miss Porter, if you're available — if we can turn the light on there at station 1 — to speak, you have the floor.

JUDITH PORTER: Thank you. Mr. Buffett, my name is Judith Porter, and I'm the shareholder who introduced the proxy resolution involving Berkshire Hathaway's divestment of PetroChina.

PetroChina is implicated in the genocide in Darfur, Sudan.

I want to thank you for allowing us to speak to this resolution. In many countries it would be impossible for us to do so, but we are indeed fortunate to live in a country where we can express our opinion without fear or without recrimination.

Before my husband formally presents the resolution, I want to explain to you why I have introduced it.

My family is no stranger to genocide. My grandparents were murdered in 1941 in the Nazi genocide, as were other members of my family.

I will never forget the despair my father expressed when my aunt, who was released from Bergen-Belsen concentration camp, sent him a letter telling him what happened to his family.

It deeply affected him for the rest of his life. And I was raised to believe that genocide should never, ever again happen, never again.

The world was silent when my grandparents were murdered. But genocide has continued.

In the genocide in Cambodia, the world was silent. In the genocide in Bosnia, the world was silent until late in the slaughter. The world was again silent in the horrible genocide in Rwanda.

How many times must we say, "Never again?"

Now, there's the first genocide of the 21st century in Darfur. Two and a half million civilians have been driven from their homes. More than 400,000 have been killed, and 1,600 villages have been destroyed.

Berkshire Hathaway can play a role in ending this slaughter by divesting in PetroChina, as we'll shortly describe. As an exemplar of both business ethics and personal integrity, your support of divestment will send a signal to China and to the Sudan that there are costs to continuing this destruction, and it will lead other corporations to follow your ethical actions.

Genocide is never a good investment. I can think of no greater tribute to my grandparents than introducing this resolution. As Elie Wiesel said in his Nobel Peace Prize speech, "We must take sides. Neutrality helps the oppressor, never the victim. Silence encourages the tormenter, never the tormented. Sometimes, sometimes we must interfere."

My husband will now present the proxy resolution. He will be followed by Jason Miller, who will speak about the relationship between CNPC and PetroChina. Abdul Makjid (PH), who is from Sudan, will speak about the genocide taking place. And Bob Edgar, Secretary General of the National Council of Churches, will conclude our discussion of this resolution. Thank you.

GERALD PORTER: Thank you. Mr. Buffett. Since you've read the resolution, I will not repeat the resolution. I will speak about the resolution, though.

On November 3rd, 1997, President Bill Clinton issued Executive Order 13067, which imposed a trade embargo prohibiting most American businesses from operating in the Sudan.

This executive order was expanded on April 27th, 2006, by President George W. Bush. While it is true that American companies cannot do business in the Sudan, Americans can invest in Asian and European companies that do business in the Sudan.

Such investments do not violate the letter of this law, but they certainly do violate the spirit of the law and are counter to the stated policy of the United States.

We believe there is general agreement that the Chinese National Petroleum Company, CNPC, plays a major role in funding the genocide, in providing weapons to the Sudanese, in cooperating with the Sudanese military, in forcibly displacing local populations, and in myriad other ways, facilitating the killing of hundreds of thousands of Darfuris.

CNPC is the largest foreign investor in Sudan's oil industry, and fully 70 percent of the revenues Khartoum generates from CNPC's operations go to its military, which, in turn, conducts the genocide in Darfur.

We are here today because Berkshire Hathaway is the major non-Chinese investor in CNPC's subsidiary, PetroChina.

You, Mr. Buffett, have stated that you believe that we are wrong, both in our analysis of PetroChina's connection to the genocide and the belief that divesting the company's PetroChina holdings would in any way have a beneficial effect on Sudanese behavior.

We disagree. You are correct in stating that PetroChina does not do business in the Sudan. However, as you agree, its parent company, CNPC, is a major investor in the Sudan, and funds from that relationship help provide the instrumentalities of genocide.

Managements claim that the relationship between PetroChina and CNPC is similar to that between Fannie Mae and the U.S. government. That argument is fallacious.

The Harvard University Advisory Committee on Social Responsibility examined the management of the two companies. The results of that review were striking.

There was almost total management overlap between the two companies. Andrew Leonard, writing for Salon.com commented, "To declare that a subsidiary has no ability to control the policies of the parent when the two entities are run by exactly the same people is an exercise in specious obfuscation."

In short, PetroChina is an artifact created for the sole purpose of allowing some shareholders to distance themselves from the action of its parents, CNPC.

In China, the companies share the same brand name and the same logo. If you look at a coin, the images on the two sides are different, but the coin is a unity. You cannot spend one side of a dime or own one side of a quarter.

It's the same with PetroChina and with CNPC. They look different, but they are simply two faces of the same corporation.

Two U.S. presidents have stated clearly that it's against the national interests of the United States for U.S. companies to do business in Sudan.

It is the position of the U.S. government that a targeted economic boycott of the Sudan will help end the genocide in Darfur.

For a U.S. company to invest in a subsidiary of a foreign company, such as PetroChina, that engages in business in the Sudan is a circumvention of Executive Order 13067 and weakens the U.S. sanctions.

Economic sanctions against the Sudan have worked in the past. For example, Talisman Oil's sale of its assets in the Sudan helped bring about the end of the civil war in the Sudan.

Sudan's main protector in the United Nations is the government of China. China will be hosting the 2008 Olympics and is very sensitive about negative publicity that could be aimed at that event.

In response to the recent criticism of the Chinese support of Sudan by Mia Farrow and Steven Spielberg, a senior Chinese official traveled to Sudan to push the Sudanese government to accept a United Nations peacekeeping force.

You and the company are viewed as exemplars of ethical behavior. If Berkshire were to take the lead and divest, others would follow. If Mia Farrow can cause change to occur, then so, too, can Warren Buffett.

No one divestment in South Africa brought about the end of apartheid. But if we all act together, we have tremendous power to bring pressure on the Sudanese government to stop the killing of innocent people.

During the last two decades, beginning with the tearing down of the Berlin Wall in October 1989, we have seen events that no person could ever have anticipated: The breakup of the Soviet Union, the democratization of Eastern Europe, and an unbelievable transition in South Africa.

What we have learned is that all things are possible. There are important issues in our society that desperately need our attention. Remember the words of Hillel: "If I am not for myself, who will be for me? If I am for myself alone, what am I? If not now, when?"

Thank you. And I'm pleased to introduce Jason Miller. (Applause.)

JASON MILLER: I'm Jason Miller, the National Policy Director for the Sudan Divestment Task Force and also an owner of three shares of Berkshire Class B stock.

I'd like to echo the Porters' comments that CNPC is by far and away the most irresponsible and abusive oil operator in Sudan.

They've participated with the government in forced displacements and other human rights violations, and 70 percent of the revenue that they provide to Sudan gets funneled into the military that prosecutes the genocide at Darfur. But what does that have to do with PetroChina?

Currently, the chairman of PetroChina's board is the immediate past president of CNPC. The president of CNPC is the president of PetroChina and vice chair of the PetroChina board. The CFO of CNPC is the CFO of PetroChina. The chairman of the PetroChina supervisory board is the chief of discipline and inspection at CNPC.

Eight of the nine PetroChina directors have a current or immediate past connection to CNPC. Four of the five PetroChina supervisors have a current or immediate past connection to CNPC. All PetroChina senior executives are currently or formerly connected to CNPC.

We've also documented a slew of other management irregularities. Furthermore, asset transfers between the two are fluid and often cross-subsidized. After PetroChina's IPO, it took on $15 billion in debt from CNPC, which freed up cash flows for CNPC to spend on Sudan.

Ten percent of IPO revenue from PetroChina went to CNPC's operations in Sudan. Fifty percent of CNPC's profits come from PetroChina dividends.

PetroChina, in 2005, provided $3.15 billion in cash for CNPC's finance arm to provide to other CNPC subsidiaries like those in Sudan. And 64 percent of CNPC's assets are represented by PetroChina stock.

If this isn't management overlap and two manifestations of the same entity, I would challenge people to find one that is more overlapping.

As a result, and because of the huge magnitude of the atrocities in Darfur, even a whiff of this type of overlap between PetroChina and CNPC, and the lack of strong corporate governing structures there, would suggest that engagement with PetroChina by Berkshire Hathaway is a minimum requirement in order to investigate these connections and their potential contributions to the Darfur genocide.

I'd very quickly also like to mention the important question that Berkshire Hathaway was asked, which is what's next? If we engage PetroChina, ask them about these questions, what happens?

The answer by unanimous consent with all foreign policy experts we interact with and those international organizations working in Sudan is that China would change its behavior in Sudan.

Sudan is too important to China as an energy policy for China for it to abdicate those assets. And, as a result, we've already seen changes in China's behavior.

And taking leadership from the queues of Berkshire Hathaway would be one more in the line of Mia Farrows and Steven Spielbergs that could help catalyze the important sea change that's necessary to bring an end to the genocide. (Applause)

JASON MILLER: I'd now like to introduce a Darfurian who's from Des Moines and would like to speak —

WARREN BUFFETT: I would — I would —

Is he a shareholder or not? I want to be sure all the shareholders have a —

GERALD PORTER: He has the proxy of Etta and James Friend, who are the shareholders of three shares —

WARREN BUFFETT: I just want to make sure. Are there other shareholders at 7 that want to talk too or not? I want to make sure that all the time isn't taken.

AUDIENCE MEMBER: We will not take all the time.

WARREN BUFFETT: OK. That's fine. I just want to make sure that the shareholders aren't shut up.

AUDIENCE MEMBER: Good afternoon, and thank you for inviting me to speak about Darfur. My name is Abdamide Jusef (PH), and I am speaking today as a proxy of Etta, Freta, and James Friend, who are the holder of four shares of Class B stocks.

I am from western Darfur, and my parents still live in Darfur. I fled from Sudan to Egypt in September 2002 after being expelled from Sudan University in Khartoum for speaking out in (inaudible) of Darfur.

We are detained for a few week and we suffered from abuse physically and psychologically every day until they released and told us we are not allowed to go to any university and we had to stay away from any activity for that student association. I get refugee status in the United States, and I move to Des Moines, Iowa, on March 2005.

The Janjaweed attack my family — my family's home — in Darfur in January 8, 2007. Four Arab men from the Janjaweed attack our home in the early morning.

At that time, there was a guest in my family home. The Janjaweed left him without attention; so he run away to get help from our neighbors. The Janjaweed started by taking all the money and jewelry from my family.

When the Janjaweed found out that someone had run to get help, they left my family, but they promised them they were going to come back.

Even that my family escaped injury, my neighbor (inaudible) and his entire family of five were murdered by the Janjaweed. The Janjaweed also took their horses, and these activities were ongoing in my town for a while.

And everybody in my community or someone was murdered, have someone was murdered and raided by the Janjaweed. My mom told me everybody wake up every day, and the first thing they do is check their neighbor and their relative to see if they are alive or not, and so do I.

The Janjaweed are stealing my town. Now they work as gangs who kill and rape. Every family is affected, and nobody can stop them.

Even though I live in safety and peace there — here in United States, I still worry about my family back home in Darfur.

Please try to do anything to help my family and all people in Darfur. I need your help. If you do the simple thing like tell your friend about the genocide in Darfur or join an organization, or talk or send letters to your member of Congress, or don't invest in any companies that's helped genocide in Darfur.

Please, Mr. Buffett and Berkshire Hathaway shareholders, get involved to bring the hope and peace to the children and women and all of us in Darfur. Whatever you do to stop the genocide in Darfur is saving life of human being.

Thank you for listening, and now I would like to introduce Bob Edgar, the General Secretary of the National Council of the Church. Thank you.

BOB EDGAR: As we close, I'm Bob Edgar, General Secretary of the National Council of Churches and a former member of the United States Congress. I'm here in support of the resolution and a proxy for Doris Gluck, who holds ten shares in the company Class B stock.

In February of 1968, I had the privilege of meeting Dr. Martin Luther King five weeks before he was assassinated. Later, as a member of Congress, I served on the Select Committee on Assassinations, looking into both the death of Dr. King and John F. Kennedy. I come here today in honor of the kind of dream that Dr. King had.

He said this: "Our lives begin and end the day we have become silent about the things that matter. We will not be silent."

I am here today representing millions of faithful Americans — Christians, Jews, Muslims, and others — who have stood up and said no to this genocide. Just 11 or 12 or 13 years ago, 800,000 people were killed in Rwanda in 90 days, and we were silent. We will be silent no more.

Mr. Buffett, this morning you said a great thing, and I quote, "I find it reprehensible when a government preys on the weaknesses of its citizens rather than protecting them." I wholeheartedly agree. You were talking about gambling. We urge you to think the same way about genocide.

On the document in opposition to this resolution, you said this: "Proponents of the Chinese government's divesting should ask the most important question in economics, 'And then what?'"

We are prepared to answer that question, "And then what? And then what?" Then the world will finally focus on the issue of genocide in Darfur.

Then the international investors all over the world in many companies would follow the ethical actions of Berkshire Hathaway's moral leadership, moral leadership, and call for all governments of the world to stop the genocide.

"And then what?" Children would be saved, women would not be raped, fathers would not be killed, and we would find our way in this human family to care for one another.

Jesus said, "We should love our neighbors as ourselves." I think he meant, "We should probably try every means available to stop those neighbors from being killed." This is just one way we can follow those words of Jesus.

And, finally, the former pope, John Paul, said, "I dream of a world where none will be so poor they have nothing to give and none will be so rich they have nothing to receive." I urge support of this resolution. (Applause.)

WARREN BUFFETT: Are there other shareholders that would like to talk before we respond?

AUDIENCE MEMBER: Mr. Buffett, my name is Aaron Frank. Thank you for hearing us on this matter. I'm from Atlanta, Georgia. And along with being a — along with being a Berkshire shareholder, I also independently own shares of PetroChina.

And this issue is something I've struggled with for years, in terms of whether to divest or not. What I've done personally is given the dividends that I receive from PetroChina to organizations that help in Darfur, but this is mostly symbolic.

What is clear to me is if I had the opportunity to engage the management of PetroChina in a meaningful way as I do with you here today, that I would be compelled to do so ethically.

As owners of Berkshire Hathaway, we have a unique opportunity to engage the management of PetroChina in a way that will be heard not only by the management of PetroChina but by CNPC, China, and the international community due to your standing.

That's a unique opportunity, and this is an incredibly — this is an incredibly important matter. I think we have an ethical obligation to do so. Thank you for listening.

WARREN BUFFETT: OK. Thank you. (Applause.)

WARREN BUFFETT: Is there anyone —

AUDIENCE MEMBER: Yes.

WARREN BUFFETT: Yeah.

AUDIENCE MEMBER: My name is Bill Rosenfeld from Lexington, Massachusetts. In your web posting you claim that a subsidiary can't control the actions of its parent, so actions against PetroChina will have no impact on CNPC.

Suppose that millions of Americans boycotted GEICO Insurance or other Berkshire companies because of a policy at Berkshire Hathaway. Wouldn't that make you reconsider that policy even though your subsidiaries are voiceless in Berkshire Hathaway management?

How does targeting PetroChina to influence CNPC differ from this situation? (Applause.)

WARREN BUFFETT: Well, I actually would say it's quite different. If a shareholder of Wesco — you might — Marc, you might put up the chart that shows the flow of ownership both with China and with —

MARK HAMBURG: It's up.

WARREN BUFFETT: OK. Wesco does not control Berkshire Hathaway. We can have all the — we can have lots of overlap in management and everything.

Berkshire Hathaway controls Wesco. If a shareholder of Wesco were to complain to the management of Wesco, which is analogous to PetroChina, about the fact that, let's say, that Berkshire bought ISCAR or any other activity or anything I was doing personally, they would have no ability to control me.

If somebody controlled — complained to Berkshire about something that was going on at Wesco, we could certainly introduce action. So the — it flows downward.

The overlap means nothing. I mean, obviously the Chinese government controls PetroChina. They own 88 percent of the stock. We control MiTek. We own 90 percent of the stock. We control Wesco. We own 80 percent of the stock. We can tell MiTek what to do. We can tell Wesco what to do. But MiTek and Wesco cannot tell Berkshire what to do.

I think there's a fundamental misunderstanding on that. The Chinese government controls 20 — 32 of the largest 33 publicly-owned companies in China. And the Chinese government, in effect, is in charge of all of those companies.

The Chinese government does business with the Sudan. PetroChina does not. PetroChina in no way tells the Chinese government what to do. And we've seen evidence of that in a lot of ways.

So it seems to me it's backwards. If it was PetroChina following a policy that the Chinese government disagreed with, believe me, there would be a change in a hurry.

We have no disagreement at all about what's going on in Darfur. There's two questions.

One is PetroChina influence the Chinese government. And, secondly, if we don't agree with what the Chinese government is doing, should we sell our stock in PetroChina?

The people here who are come, who own stock in Berkshire Hathaway, have obviously made the choice, even though they disagree with what our policy is, to continue as shareholders.

And I agree with them — with that — a hundred percent. And we, in turn, elect to continue to hold our shares in PetroChina because we have no disagreement with what PetroChina is doing.

If there's a disagreement, it may be with what the Chinese government is doing. Now, in terms of what the Chinese government is doing, you know, we've heard talk about divesture by China.

If the Chinese left the Sudan tomorrow, 400,000 barrels of oil would be being produced, a good bit with the money that China has invested in the Sudan.

You can't take the assets. You can't the refinery. You can't take pipelines. You can't take the oil out of it.

They can sell their interest. They can sell it to other people who are doing business in the Sudan. They can sell it to the Sudanese government.

But, believe me, they would probably sell it very cheap. The Sudanese government would get a bargain, or the Sudanese government might very well renegotiate terms in their favor, if they allowed a third party to buy.

Believe me, you know, they would be in a position if they — assuming they could affect the transfer — and I think there's a lack of understanding of what really would happen if China said tomorrow, "We're going to get — we're going to take our interest away from our activities in Sudan."

They would have to sell them or they'd have to give them up one way or the other. And, like I say, I think the Sudanese government would probably end up better off financially if they had a half-decent adviser in the question than they are presently.

I might mention one other thing which is kind of interesting in this. We buy about — currently about $250 billion worth more of goods from China than we sell to them, and we give them little pieces of paper in exchange.

And we say to them, "We want your goods, and you should work hard and send us your goods, and we'll send you these little piece of paper called American dollars."

Two years ago, China wanted to use some of those American dollar — we'd use their goods — to want to buy a company called Unocal. Unocal was a (inaudible) U.S. company.

The majority of their production of oil and gas came from outside the United States — a substantial majority — came from places like Thailand, Indonesia.

And the Chinese wanted to buy that company, and by a vote of 395 to 18, the U.S. House of Representatives sent their message to President Bush that it would be against the national interest to let this company be sold, which, as I say, produced very little oil and gas in the United States. Got most of it from the rest of the world.

So, in effect, we snubbed the Chinese in a big way on something important to them: energy.

And I might mention that we import perhaps four times as much energy from all the countries around the world as the Chinese do, even though they have four times the population.

So we have, in a sense, told the Chinese a couple of years ago "Don't even think about buying the small U.S. company with a lot of production — fair amount of production — abroad to satisfy your energy needs."

And I think it's understandable to some extent that the Chinese are looking for energy around the world just as we have for the last century. They are buying significant amounts of oil from Sudan. They put money in there, and the — they are going to buy four or — they are going to buy that 400,000 — they're not taking the whole 400,000 barrels a day from the Sudan, but they're taking significant amounts.

They're going to buy that oil in the world market. That oil is going to get produced. Revenue is going to flow to the Sudan. The question is how much the Sudanese keep themselves and how much gets disbursed to the Chinese because of the investment they've made.

So I see no effect whatsoever in Berkshire Hathaway trying to tell the Chinese government how to conduct their business.

I agree a hundred percent with the fact that what is happening in the Sudan should not be happening, and I — there are other parts of the world where say some — that same situation may exist, although not to the same degree.

But I don't think you can — I don't think it's proper for us to divest our shares in PetroChina. They would be sold to somebody else. I think the proponents of the motion probably would like the idea that the price of the stock would go down.

But we don't sell stocks, you know, basically to try and drive them down in price. We might sell PetroChina if it went up enough, but we would not be selling it to try and drive down the price, because all that would be doing is giving a bargain to somebody else who is buying the stock of PetroChina.

It doesn't change the funds available to them at all.

One of the speakers mentioned the amount of money that goes from PetroChina up to its parent. Well, money from Wesco comes up to Berkshire from our subsidiaries. You know, that's the nature of having a major ownership in a subsidiary is that you get money from MiTek, you get money from Nebraska Furniture Mart, which we own 80 percent of.

But that really has nothing to do — in my view, at least — it has nothing to do with the fact that it is China that has a policy in respect to being partners in Sudan, and it is not PetroChina at all. Selling our stock would not change one thing.

If we would have any communications, as a practical matter, the communications should be with Chinese government — and actually people here have had a chance because we have a lot of media here — they've had a chance to express their views to the Chinese government.

Believe me, unless the opinions get expressed to the Chinese government, expressing them to PetroChina means nothing.

I mean, PetroChina is controlled by the Chinese government, and they are not — if you were an official of PetroChina, you are not going to tell the Chinese government what to do. They are going to tell you what to do.

Charlie?

CHARLIE MUNGER: Well, the issue also is China is a rapidly rising nuclear power, and who should decide how the federal government — or how the Americans — should react to China?

There's a lot to be said for letting the policy flow through the U.S. government instead of sort of a vigilante effort of various citizens.

Now, I would also point out that there's a lot wrong all over the Earth, and there's a lot of cruelty and there always has been, and there will always be a lot of oil produced in a lot of lands with a lot of cruelty.

And nobody is in favor of cruelty, but there's a limit to how much you can fix. And so I'm very skeptical of the idea that Berkshire should become an instrument of telling — of setting United States policies vis-a-vis China. (Applause)

WARREN BUFFETT: Yeah. Charlie and I have our own views, for example, on reproductive freedom, but we don't have a Berkshire Hathaway policy on reproductive freedom nor do we finance from Berkshire Hathaway funds — the funds of our shareholders — we do not finance any activities that relate to our personal beliefs, although we may, obviously, fund them by ourselves or speak out on them by themselves, but we do not have a Berkshire Hathaway funding just because we believe that women should have the right to choose or questions of that sort.

CHARLIE MUNGER: I think reasonable minds can disagree on these subjects.

At Berkshire, there's all kinds of businesses we won't buy and control individually, but we're willing to own stock in the same businesses.

Is that the correct moral line to draw? I don't know. We do our best, and we make the decisions, and we make the calls.

WARREN BUFFETT: I would say — I wonder really whether when the Unocal question was being determined here, were the Chinese to whom we'd given lots of little tickets in exchange for taking their goods, and they came along with a perfectly decent offer to the shareholders of Unocal, 18 1/2 billion dollars.

They wanted to buy a little more oil and gas production around the world. And the U.S. Congress overwhelmingly said this is a terrible thing and we want the United States to oppose it and we want it sold to Chevron for less money.

And I really don't recall a lot of people speaking up on behalf of the Chinese right to buy oil companies over here, just like we've bought oil companies around the world for many decades.

So to the extent that they may feel themselves somewhat alienated from the rest of the world in this respect, I think we've actually contributed our share.

Charlie?

CHARLIE MUNGER: Another thing in the complexity of life, the woman who lost her family to the Holocaust, we clobbered the people that committed that genocide by joining genocidal Joe Stalin. These issues are complicated.

WARREN BUFFETT: OK. If there are any shareholders that want to vote in person in this — on this — matter or to change their proxies, we have monitors. If you just raise your hand.

And if there are none of those, Miss Amick, are you ready to 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 15,740 votes for the motion and 830,598 votes against the motion.

As the number of votes against the motion exceeds a majority of the number of votes related to all Class A and Class B shares outstanding, the motion has failed.

Certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting.

WARREN BUFFETT: Thank you, Ms. Amick. The proposal fails.

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

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

WALTER SCOTT: I move this meeting be adjourned.

WARREN BUFFETT: Is there a second?

VOICE: Second.

WARREN BUFFETT: All those in favor say "aye."

VOICES: Aye.