Warren Buffett and Charlie Munger say investors need to act quickly to take advantage of market dislocations, which are often very brief. They also express their preference for a business that "drowns in cash," and Buffett offers life advice to a 12-year-old.
NEWS ANCHOR (CNBC's Becky Quick, on tape): Folks, this just in. It appears that Warren Buffett has struck a deal to trade jobs with daytime soap opera diva Susan Lucci.
Buffett has reportedly negotiated a permanent spot on the cast of All My Children. Apparently, Ms. Lucci is en route to Omaha as the new CEO of Berkshire. (Applause.)
CHARLIE MUNGER: Where could he be? (Laughter and applause as actress Susan Lucci comes on stage)
SUSAN LUCCI: Do you mean Warren, Charlie? He's been detained at the TV studio. (Laughter)
CHARLIE MUNGER: Really?
SUSAN LUCCI: Hi, Charlie. I'm Susan Lucci. Oh, haven't you heard about the deal between Warren and me? He's going to be a big star in All My Children, and I'm going to be taking over Berkshire Hathaway.
CHARLIE MUNGER: Well, you've certainly got some important qualities that Warren lacks. (Laughter)
SUSAN LUCCI: Well, thank you, Charlie. And you can relax now, you dear man. You just make yourself at home because I'll take it from here, thank you.
I've been wanting to talk to our shareholders for quite some time now. There's some changes I really think we need to make around here.
The first thing we need to look at is our dividend policy. (Laughter)
I have never heard of anything so cheap and so unfair to our wonderful shareholders. We need to change it. (Applause)
CHARLIE MUNGER: Sounds good to me. (Laughter)
SUSAN LUCCI: And, second, we need to look at giving guidance on earnings. And we need to do that every single week. (Laughter)
CHARLIE MUNGER: Sounds good to me. (Laughter)
SUSAN LUCCI: And, third, we need to pay our directors more than $900 a year. (Cheers and applause)
WARREN BUFFETT: Just one minute. (Applause.)
SUSAN LUCCI: Hi, Warren. Warren, I thought you were at the All My Children studio.
WARREN BUFFETT: What's that talk about dividends that I hear?
SUSAN LUCCI: Oh, nothing important, Warren. You just concentrate on your role on the show.
WARREN BUFFETT: Susan, my show is Berkshire Hathaway. And my role is to run it. (Takes paper out of jacket pocket and rips it up)
SUSAN LUCCI: Warren, you can't do that.
WARREN BUFFETT: I just did it. All My Children can't do without you, and I can't do without Berkshire. (Applause.)
SUSAN LUCCI: Oh, Warren. So you mean the deal is off?
WARREN BUFFETT: The deal is off. I really want to thank you. You've brought me to my senses. You can go back to All My Children. I'll stay here at Berkshire.
But I am so grateful to you Susan, that I want you to go out to Berkshire — not to Berkshire — to Borsheims and I want you to pick out anything you would like, and charge it to Charlie. (Laughter)
SUSAN LUCCI: Oh, Warren, you are darling. Thank you. (Applause.)
SUSAN LUCCI (to MUNGER): And you're a darling, too.
WARREN BUFFETT: Now, wait a second.
SUSAN LUCCI: Thank you. (Applause)
WARREN BUFFETT: OK. Charlie, let's get this show on the road. (Laughter)
The — she spent more time with him than she did with me, but — (Laughter)
The — we're going to follow the usual procedure.
The business meeting will start at 3:15. But between now and then, with a break for lunch, we're going to answer your questions. We don't screen them ahead of time, as you know — based on who gets lined up at the microphone first.
And we'll go around from sections to sections and then go to the overflow rooms. My understanding is that our best estimate is that we have about 31,000 people here today. (Applause.)
WARREN BUFFETT: Somewhere I have a map here. Marc, do we have that?
Pardon me? Can't hear a thing up here. But in any event — on the yellow pad. OK. We'll just mark them off as we go along.
The — I would like, before we start — I heard Ron Olson laughing there. I think he made it. I'm glad to hear it.
Let me introduce our directors. I really wasn't sure whether to go through with this part of the show after they showed that rousing applause for things like dividends and raising their — but we have up here — we have Charlie Munger on my left. He's the one that can hear; I can see. We work together for that reason. (Applause.)
WARREN BUFFETT: And if the rest of you will just stand as I give your name. And if you'll hold your applause to the end — or even longer if you would like — (laughter) — I will introduce them.
It's Howard Buffett, Susan Decker, Bill Gates, David Gottesman, Charlotte Guyman, Don Keough, Tom Murphy, Ron Olson, and Walter Scott. The best directors in America. (Applause.)
WARREN BUFFETT: Charlie and I will take a break at noon because we will probably, by that time, have finished all of the things we have up here to eat, and we'll need to have lunch.
I'd appreciate it if you would limit your questions to one question, and that means not embodying a three-parter or a four-parter or something like that.
And there's no need to make a long introductory statement because we'll get more questions answered that way, and we want to cover as many people as we can.
WARREN BUFFETT: So with that, we'll go right over to post number 1 and start in with the first question.
AUDIENCE MEMBER: Very good morning to Mr. Buffett and Mr. Munger. My name is Rajesh Furor (PH) from Bombay, India.
I have been learning a lot from letters of yours. It's been a great insight into investment philosophy that I haven't learned from anywhere else. Great job.
That's on the mind side. But on the heart side, what touches me the most is what you have achieved all these years is through a hundred percent honesty, and I salute to that. Thanks.
WARREN BUFFETT: Thank you.
AUDIENCE MEMBER: Now, my question is on what key steps would you recommend to correct the mind set of typical investor like me, which is what you noted as lemmings-like, the crowd mindset?
WARREN BUFFETT: What would we recommend — we got the question being repeated here — about the mindset of an investor? Is that —?
CHARLIE MUNGER: He wants you to advise him as to how he can become less like a lemming. (Laughter)
WARREN BUFFETT: Well, since you repeated the question, I'm going to let you give the first answer to that, Charlie. (Laughter)
Until he eats about a thousand calories, it — (Laughter)
CHARLIE MUNGER: He wants to invest less like a lemming.
WARREN BUFFETT: Oh, I understand that. I was giving you the first shot at it. Well, I will tell you what changed my own life on investing.
I started investing when I was 11. I first started reading about it — I believe in reading everything in sight. And I first started reading about it when I was probably six or seven years old.
But for about eight years I wandered around with technical analysis and doing all kinds of things, and then I read a book called "The Intelligent Investor." And I did that when I was 19 down at the University of Nebraska.
And I would say that if you absorb the lessons of "The Intelligent Investor", mainly in — I wrote a forward and I recommended particularly Chapters 8 and 20 — that you will not behave like a lemming and you may do very well compared to the lemmings.
We have here in the Bookworm, copies of "The Intelligent Investor", and I think it's as great a book now as I did when I read it early, I guess, in 1950.
You will never — you can't get a bad result if you follow the lessons of — Ben Graham taught in that book.
I should mention that there's a book out there also that I did not know it would be completed by this time.
My cousin, Bill Buffett, has written a book about our grandfather's grocery store called "Foods You Will Enjoy." And Bill will be out there. He's signing books.
I just got my first copy a couple days ago. Read it, and I enjoyed it a lot.
Charlie worked at the same grocery store — how many years ago? Probably a good 70 years ago in Charlie's case. Neither one of us was very good. (Laughter)
But my grandfather — you don't want to pay much attention to his advice on stocks. He wrote a lot of letters, and he was very negative on the stock market and big on hard work at the grocery store.
So we quit listening to him. (Laughter)
Instead, read The Intelligent Investor. That's the book that gave me the philosophy that has taken me now for a lot of years.
And there's three big lessons in there which relate to your attitude towards stocks generally, which is that you think of them as parts of a business; and your attitude toward the market, which is that you use it to serve you and not to instruct you; and then the idea of a margin of safety, of always leaving some extra room and things.
But the people in this room, I think, have learned that important first lesson. I mean, I think most people that own Berkshire do not see themselves as owning something with a little ticker symbol or something that may have a favorable or unfavorable earnings surprise or something of the sort, but they'd rather think of themselves as owning a group of those businesses that are out there in the other room.
And that's the way to look at stocks. You'll never be a lemming if you do that.
WARREN BUFFETT: Let's go to Number two.
AUDIENCE MEMBER: Good morning, Warren. Good morning, Charlie. My name is George Iscis (PH) from Cologne, Germany.
My question: how is the operational integration of the Cologne Re progressing? Thank you very much.
WARREN BUFFETT: Cologne Re, for those of you who are not familiar with it, is a 95 percent-owned subsidiary of General Re, of which Berkshire Hathaway owns 100 percent.
And Cologne Re, I believe, is the oldest reinsurance company in the world. It's done a magnificent job for us as part of, first Gen Re, and then Berkshire Hathaway.
And we have a process in place that will, before too long, result in us owning a hundred percent of Cologne.
One difference, then — there won't be any difference in operation. It runs magnificently the way it's being run. But at that point — up until this point, they have run their own investment portfolio. That portfolio and the equity portfolio of GEICO are the only two that I don't run.
But when we own a hundred percent of Cologne, then I will take the responsibility for Cologne's investment portfolio. Otherwise it would be hard to improve on the operation of the management of Cologne.
So there will be — you will not see any other changes except we will consolidate in 100 percent of the earnings of Cologne rather than 95 percent.
WARREN BUFFETT: Area 3.
AUDIENCE MEMBER: Good morning, Mr. Buffett, Mr. Munger. My name is Sam Reiner (PH) from Fort Lee, New Jersey, and my question concerns your comment this week about the recession, and the stock market going up so significantly in April.
Can you expand on where the market is going from here? (Laughter)
WARREN BUFFETT: Hah. Well, I can expand, but I couldn't answer. (Laughter)
Charlie and I haven't the faintest idea where the stock market is going to go next week, next month, or next year. We never talk about it. You know, it never comes up.
Our directors will tell you that they've never been to a directors meeting where the subject of the direction of the stock market is — we are not in that business. We don't know how to be in that business.
Obviously, if we could guess successfully a high percentage of the time where the stock market was going to go, we would do nothing but play the S&P futures market. There wouldn't be any reason to look at businesses and stocks. So it's just not our game.
We don't think — what we see when we look at the stock market is we see thousands and thousands and thousands of companies priced every day, and we ignore 99.9 percent of what we see, although we run our eyes over them.
And then every now and then we see something that looks like it's attractively priced to us, as a business. Forget about the word "stock."
So when we buy a stock, we would be happy with that stock if they told us the market was going to close for a couple years. We look to the business.
It's exactly the same way as if you were going to buy a farm a few miles here outside of Omaha. You would not get a price on it every day, and you wouldn't ask, you know, whether the yield was a little above expectation this year or down a little bit.
You'd look at what the farm was going to produce over time. You'd look at expected yields. You'd look at expected prices, the taxes, the cost of fertilizer, and you would evaluate the intelligence of your purchase based on what the farm produced relative to your purchase price.
Quotes would have nothing to do with it. That's exactly the way we look at stocks. We look at them as businesses. We make judgments about what the future of those businesses will be. And if we're right about — in those judgments, the stocks will take care of themselves.
CHARLIE MUNGER: Nothing to add. (Laughter)
WARREN BUFFETT: He's been practicing for weeks. (Laughter)
WARREN BUFFETT: Let's go to area 4.
AUDIENCE MEMBER: Good morning, Mr. Buffett and Mr. Munger. My name is Chander Chavla (PH), and I am from Seattle, Washington.
Berkshire Hathaway has some of the best managers in the world, and I am very bad at hiring good managers. The — some of the decisions that I've made, which were without any phone calls from Jamie Lee Curtis, I look back and I see — you know, what was I thinking.
What can you advise on, how in one hour you can assess the capability of a person to be a good manager?
WARREN BUFFETT: Well, you have to understand that we cheat. (Laughs)
We buy businesses with good managers. So if you give me a hundred MBAs — and I have these classes come out all the time to Omaha. I've had about 30 schools this year, and usually there's 75 or a hundred men and women in the classes.
I no more could take those hundred and spend a few hours and rank them from number one to a hundred in terms of their future achievements as managers, you know, than I could pick them — you know, it would be impossible for me.
But what we do is we buy businesses with great managers in place. We've seen those people perform for, in many cases, decades. We've seen their record, and they come with the business.
Now, our job is not so much to select great managers, because we do have this proven record that they come with. Our job is to retain them.
And many of the managers — a majority of the managers that work at Berkshire — are independently wealthy. We hand them checks, sometimes, in the billions, often in the hundreds of millions. So they do not have a monetary reason to work, in many cases.
So our job — we are dependent on them, incidentally. I mean, we have 19 or so people at headquarters, and we have 250,000 working for Berkshire around the world, and we can't run their businesses.
And our job is to make sure that they have the same enthusiasm, excitement, passion, for their job after the stock certificate changes hands, than they had before.
Now, that requires some judgment on our part as to whether these people love the business or love the money. They all like money, but many of them — well, our managers in particular — they love their businesses. I mean, they've worked at them — they're a work of art to them, and they've been in the family sometimes as many as four generations.
So we have to see the passion in their eyes, and if we see that, then we have to behave in a way that that passion remains.
Can't be done by contract. We don't have contracts. It won't — that doesn't work.
But we can try to create an environment — and Berkshire, frankly, is the ideal environment — it's even an ideal environment because of events like this.
Our managers feel appreciated. And they are appreciated. They're not just appreciated by me and Charlie; they're appreciated by you. And we want to give you a chance to applaud them. (Applause.)
WARREN BUFFETT: So I can't be of enormous help. And if you're looking at a group of MBAs, you know, it's not easy. I mean, they know — they sort of learn by that point in life how to fool you, in terms of what answers you want to hear and all of that sort of thing.
I would look for the person with passion for the job. I mean, the person that is always doing more than their share. You look for people that are goods communicators and all of that sort of thing.
But I like my way better. It's a lot easier just to take somebody that's been batting .400 in baseball and say, "I think I'll stick them in the lineup."
And the nice thing about our game is that, you know, in baseball, unless you're Nolan Ryan or somebody, you have to hang up things at 40 or thereabouts, but in our game, they go on and on and on.
I mean, I use as an example — we had a famous Mrs. B from the Furniture Mart, and she worked for us until she was 103, and then she left and she died the next year. And that is a lesson to our managers that — (Laughter)
CHARLIE MUNGER: Well, that was very useful advice. It reminds me very much of the late Howard Ahmanson.
And a young and starving business student once asked him for advice as to how to get ahead, and Howard said, "Well, I always keep a few million dollars laying around in case a good opportunity suddenly turns up." (Laughter)
WARREN BUFFETT: Well, let's go to number 5. (Laughter)
AUDIENCE MEMBER: Good morning. I'm Joe Hutchin (PH), a shareholder from Culver, Indiana.
Could you please comment on how you use stock options when trying to enter or exit a position in a public company?
WARREN BUFFETT: Yeah. We've — I think there's one time we sold a put on Coca-Cola with the idea that, if it got exercised, we were very happy to own more Coca-Cola. It didn't get exercised. We would have been better off if we had just bought the stock.
Usually, if you want to buy or sell a stock, you should buy or sell the stock.
And using an option technique to buy a call on a stock instead of buying the stock outright with the idea that you get it a little cheaper that way means that about four times out of five you'll be right and the fifth time the stock will have moved earlier and you'll have missed, you know, the transaction you wanted to have.
And so we virtually have never used options as a way to enter a position or exit a position, and I would doubt very much if we do.
We've used — we've sold these equity — long-term equity put options that were described in the press release yesterday and were described in the annual report, but that's a different sort of thing.
If we want to buy something, we'll just start buying it. And if we want to get out of it, we'll start selling it. And we won't get involved in any fancy techniques.
CHARLIE MUNGER: Well, if I remember right, you wrote a letter when the public authorities were deciding whether we should have option exchanges for stocks. And Warren was all alone at that time, and he wrote a letter saying that he didn't think it would do any good at all for the country to throw out the margin rules in this fashion.
I've always thought that Warren was totally right. We — it's — the idea of turning financial markets into gambling parlors so the croupiers can make more money has never been very attractive to us.
WARREN BUFFETT: Yeah. (Applause.)
WARREN BUFFETT: Yeah. It's very interesting to me when I talk to these MBA students. One of them from the University of Chicago, the very first question I got a few years ago, he says, "What are we being taught that's wrong?"
I love questions like that. I have to plant them in the future.
The amount of time spent at business schools — maybe it's a little less now — but teaching things like option pricing and that sort of thing, it's totally nonsense.
I mean, you need two courses in a business school: one is how to value a business, and — from the standpoint of investments — how to value a business and how to think about stock market fluctuations.
But the idea that you would spend all of this time with formulas — but the problem, of course, is that the instructors know the formulas, and you don't when they come, and so they've got something to fill the time explaining to you.
And, you know, it is no fun if you — I mean, if you were teaching Biblical studies, you know, and you could read three or four of the most important religious tomes forward and backward in five different languages, you would hate to tell somebody that it comes down to the Ten Commandments. I mean, any damn fool can do that.
So there's a great desire of the priesthood in finance to want to teach the things that they know and you don't know and that they spent a long time learning and that maybe requires a fair amount of mathematics.
And it really has nothing to do with investment success. Investment success depends on buying into the right businesses at the right price. And you have to know how to value businesses, and you have to have an attitude that divorces you from being influenced by the market.
You want the market there, not to influence you, you want it there to serve you. And that requires a mindset, which goes back to an earlier question, and it's a mindset that's described quite well in Chapter 8 of "The Intelligent Investor."
WARREN BUFFETT: Let's go to number 6.
AUDIENCE MEMBER: Hi. I'm Irene from Bonn, Germany. Both of you are very generous person. What is your joy of giving, and what are the potential pits when donating money — pitfalls when donating money? I'm sorry.
WARREN BUFFETT: The joys and giving and the pitfalls of donating money, huh. The — I know personally I've never given up anything in my life that made a difference in my life.
I mean, there are people that will go to church this Sunday and they will drop money in a collection plate, and it will make the difference about where they take their family, or whether they take their family, in terms of where they eat, whether they go to a movie, whether they get an extra present at Christmas, whatever it may be.
I mean, they are giving some money that makes a difference in their lives. I've never given a penny that way, and I never will.
I mean, I get to do everything I want to do in life. But because I've lived a long time — which gives you an enormous advantage in terms of accumulating money — and most of the things I want in life don't come from the expenditure of money.
So it accumulates, and basically I'm giving away excess. I'm not giving away anything from necessity.
So I really — you know, I think what I'm doing is useful with the money, but I don't think it's on a par at all with the actions of somebody that's giving money that really makes a difference in how they or their children live.
Those are really charitable people. I think my sister Doris is here. She has given away money that made a difference in her life. She gives away time, too. She gives away eight or ten hours a day, in terms of actually looking into the real needs of people, and giving them things beyond the money — giving them help and advice and somebody to talk to.
And, you know, that's real giving. And I admire her for it. I'm not emulating her. I mean, she is in the retail business of giving; I like wholesale much better.
In terms of the pitfalls, you know, you can make mistakes in any area. But if you — you should give to things that you personally have an interest in and believe in, and that can be anything. I don't — I'm not going to prioritize what should be done with gifts.
Something you're involved in. Something you want to give your time to as well as money. But beyond that, I'll let Charlie carry on.
CHARLIE MUNGER: Yeah. Regarding pitfalls, I would predict that, if you have an extreme political ideology, whether of the left or the right, you're very likely to make a lot of dumb charitable gifts. (Laughter and applause)
WARREN BUFFETT: If you hang around Charlie like I do, you get the sunny side of life. I mean — (laughter)
We ought to have that playing, "The Sunny Side of the Street."
WARREN BUFFETT: Let's go to number 7.
AUDIENCE MEMBER: Good morning. My name is Okosh Vajay (PH), and I'm from India. I worship Mr. Buffett for his philanthropy, and I do hope to serve the Gates Foundation someday.
My question to Mr. Buffett is, what's your level of involvement when one of your companies is faced with an ethical dilemma? For example, Fruit of the Loom's competitors have sweatshops in Central America. So what do you do to ensure that you don't fall into the same trap?
WARREN BUFFETT: Yeah. Well, we let our managers run their businesses. And we've got some terrific managers, not only in terms of ability, but I would say that what we have seen of the ethical standards of our managers has been extraordinary over the years.
That doesn't mean there isn't — there aren't slip ups here or there. But taken as a group, over decades, I think that I'm very happy, in effect, turning over the keys, not only to the financial performance of the business, but in terms of how they behave.
And I would say that I think you're quite wrong in terms of — Fruit of the Loom's operations are conducted in absolutely terrific standards. John Holland is here. I'd be glad to have you meet with him later.
But we — we're proud of our businesses and how they operate.
We do not give them elaborate guidelines. I write them a letter every two years, roughly, and I ask them to send me a letter telling who they think should be the successor if anything happened to them that night. I keep those letters around. Fortunately, they don't come into play very often.
But I also tell them we've got all the money we need. It's nice to have more money, but we're not going to lack for money at Berkshire Hathaway.
We don't have a shred of reputation more than we need, and we never want to trade away reputation for money.
So we give them that same message that was given in the movie, in terms of the Salomon situation, which is that not only do they behave in a way that conforms with the laws, but that they behave in a way where, if a story were written by an unfriendly but intelligent reporter, the next morning, in their local paper, they would have no problem with their neighbors, their family reading it.
And we run that in the movie every year, just because we like the managers to keep getting that message all of the time. There is no pressure from Berkshire's corporate office to report X dollars per — of earnings in any quarter. They don't give me budgets, so they don't — there's no feeling that they have to come through with given numbers or I'll be embarrassed in public in terms of publishing earnings or anything of the sort.
We have no incentives to cause people to do anything that would go against their conscience or play games or cut corners or anything of the sort.
And, overall, I think it's worked pretty well. It isn't perfect. You can't have 250,000 people in the city without having something going on at some point. And we do have 250,000 people working. But I'm not unhappy with our batting average.
CHARLIE MUNGER: Yeah. And, of course, Fruit of the Loom does have foreign plants, and we have no rule against that at all. We've got quite a few foreign plants now.
We don't favor foreign plants. We just do whatever makes sense under the circumstances.
WARREN BUFFETT: Yeah, we had a shoe business I've written about in Maine, and we had wonderful, wonderful workers there. They were more productive than workers around the world.
But the United States was producing, 20 years ago, roughly a billion pairs of shoes a year, and we were a nation of Imelda Marcoses. I mean, it was wild.
And Brockton, Massachusetts, and you name the towns, revolved around the shoe business, as did a town called Dexter, Maine.
And we bought that business. And we tried to compete. We had a good brand name. We had great workmanship. And we found out that it just plain wouldn't work against — competing against — shoes produced in China.
So now of the — it's over a billion pairs of shoes a year used in this country. Basically they all come from outside the borders. And you're going to see that.
And factories in China, factories in Central America — they do not have exactly the norms that we have in this country. And, you know, that's going to be the situation.
We are — we will not — we are not going to tell the world how to run their business in any great way.
We — obviously we have some standards that have to be met, but we are not — they are not exactly the situation you are going to find in the United States.
WARREN BUFFETT: Number 8.
AUDIENCE MEMBER: Good morning. My name is Mike McGowan (PH). I'm from Pasadena, California. I'm a shareholder in both Berkshire and Wesco. I run a website called FinancialFoghorn.com, and I write about precious metals and things.
And I've asked you questions in the past about silver, and I didn't really get them answered. So I thought I'd ask about a different commodity this time.
I read about the Chinese raising the price of tungsten, and I think about your comment last year in buying ISCAR.
Will commodity price increases in things like tungsten affect the profitability of ISCAR? And would that be the reason you're locating a plant in China to build machine tools? Thanks.
WARREN BUFFETT: Yeah. The reason the plant was built in China was to serve the Chinese market, which is large and growing. And we opened in Dalian late last fall.
It's nicer to be closer to the raw material, but it really had nothing to do with changes in the price of tungsten.
Generally speaking, if you're creating a higher value-added product, as ISCAR is doing, from a raw material, there may be three months, six months, of adjustment to changes in raw material prices. And obviously, with some commodities, if it gets high enough you get into substitutes.
But there isn't going to be any substitute for tungsten in the cutting tools, and there won't be — you know, we tried some substitutes for crude oil in terms of gasoline or — not so — heating oil but then the substitutes like natural gas go up in price, too.
So I think largely, in our businesses, raw materials get passed through.
Now, we're having a tough time, for example, in the carpet business in passing through the cost increases that we experience in oil-based raw materials. But we would be having trouble — we probably would be having trouble in the carpet business regardless now because of the slowdown in residential housing. It does make it tougher.
But over a period of time, our businesses are going to reflect raw material costs. You know, the candy here I have, this fudge, which I can hardly wait to get into, you know, it's going to reflect sugar and cocoa and things like that over time.
And if you're running an airline, it's going to reflect the cost of fuel. So you can have little squeezes here and there, but it's not a big deal, and it certainly isn't the reason that we went to China to locate the ISCAR facility.
That facility — incidentally ISCAR — we have a number of people here from ISCAR, and families in some cases.
That is — I had very high expectations for that when we bought it. It's exceeded it in every way. It's exceeded in terms of financial performance. It's exceeded in terms of the human relations we've developed with the people.
I mean, it was — I told you it was a terrific acquisition a few years ago. It's been a dream acquisition, and I know Charlie wants to add to that. (Applause)
CHARLIE MUNGER: Yeah. I would say that the short answer is that, while we don't like inflation because it's bad for our country and our civilization, that we will probably make more money over time because there is inflation.
WARREN BUFFETT: Go to number 9.
AUDIENCE MEMBER: Good morning. My name is Marc Rabinov from Melbourne, Australia.
My question is, Berkshire has bought a lot of shares over the last 12 months in listed companies. Do you expect the return on these investments to be between 7 and 10 percent per annum over many years, which is, I would say, well below what Berkshire has achieved in the past?
WARREN BUFFETT: The answer to that is yes. (Laughs)
The — we would be very happy if we could buy common stocks where our expectation over a long period, pretax, from a combination of dividends and capital gains — we'd be very happy if we thought it was going to be 10 percent, and we would probably settle for a little less than that.
And there's no question — absolutely no question — that returns from owning Berkshire will be less in the future than they have been in the past.
There's no question that we will not do as well with the common stocks at Berkshire that we own in the future as we have over the last, really, 40 years or thereabouts.
We operate now in a universe of marketable stocks that — where we're talking about companies with market caps of at least 10 billion but really, in most cases, to have a meaningful impact on Berkshire, we're talking much bigger than that, maybe 50 billion and up.
Well, that universe is not as profitable a universe to operate in as if you have the entire universe of thousands and thousands of companies.
So we — if we — just take an example. If we find a company with a market cap of 10 billion and we can buy 5 percent of it — and usually that's what we can buy without disturbing things — we can have a $500 million investment.
Let's say it doubles over a period of time. That's 500 million. You pay a 35 percent tax. You have 325 million. That's less than two-tenths of 1 percent in terms of Berkshire performance.
So our universe has shrunk enormously, and we will not do as well in that universe — remotely as well — as we would if we were the operating in a much wider universe and could do all kinds of things.
We've found little things to do from time to time where we've made some money. I may refer to them a little later, a couple things. And they're nice, but they don't move the needle very much at Berkshire.
So anyone that expects us to come close to replicating the past should sell their stock. I mean, because it isn't — it isn't going to happen.
And, you know, I think we're going to get decent results over time, but we're not going to get indecent results. And in this field we prefer indecent, but we're not going to get them.
CHARLIE MUNGER: I think you can take Warren's promises to the bank.
We are very happy making money at a rate in the future that is way less than the rate at which we made money in the past. And I suggest that you adopt the same attitude. (Laughter)
WARREN BUFFETT: Well, I wouldn't condemn them to that. I think if you're working with small amounts of money — I've talked —
CHARLIE MUNGER: Oh, yeah.
WARREN BUFFETT: Yeah. Then you may have something very much better to do with your money than to buy Berkshire.
I mean, if you're working with small amounts of money, and you want to put in significant amounts of time, and examine thousands of securities, you will find things that are more intelligent to buy than Berkshire.
You know, we still think Berkshire is an attractive investment over a long period of time. We think that it stacks up reasonably well with other very large companies.
We don't think it's the most attractive investment in the world, in terms of what you can find if you're willing to go through those thousands of possibilities, which is what Charlie and I used to do many years ago. It's not feasible for us to do it now and wouldn't have any impact on Berkshire.
What we really like at Berkshire is buying good-sized to very large first-class businesses with first-class management and just sitting there. Because the nice thing about that is you don't have go from flower to flower. You can just sit there and watch them produce more and more every year and give you capital and you can buy more businesses.
That's a nice formula. It's a formula that will work, I think, for us. It won't produce returns like the past.
WARREN BUFFETT: Number 10.
AUDIENCE MEMBER: (Inaudible). My name is Chu Chu (Inaudible), and I come here from the Klamath River, and I come here with a heavy heart.
And I know this is a pretty light-hearted event, but I came here last year with a heavy heart, too. And I fasted for ten days driving over here to speak with you.
And, you know, we really were disrespected last year, because one of your subsidiaries, PacifiCorp, has dams on the Klamath River that are creating toxic algae blooms, along with multiple other things. I won't go into it too far.
But I just come here today with a principle agreement between you and I, that you will sit down at the table and help us figure this out, help us make PacifiCorp accountable.
And being that I'm an indigenous American, and you're a guest in my home as a European American, that you would do that in front of all your shareholders today in good faith, that you care, you know, as a philanthropist and you care about, you know, helping, you know, third-world countries, you know, fight poverty, disease, when you're helping create it right here in the United States.
WARREN BUFFETT: You may not — you may not — last year we read the order under which we acquired PacifiCorp.
And, actually, as you may know, I'm prohibited from actually making decisions in that — in the area of PacifiCorp. That was part of the public utility commission ruling when we bought it.
But we have Dave Sokol here who can speak to that. I think the first dam was built in 1907, and we bought PacifiCorp a couple of years ago.
But David — if Dave could go to a microphone, I think that — I think he could address the issues that you brought up. I don't think we meant in any way to be disrespectful last year.
Those of you who were here last year, we may have a difference of opinion on this, and incidentally there are strong differences of opinion, as I understand it, in your area about what should be done.
And — well, I think I should have Dave make the explanation on it. Dave? Somebody want to put a spotlight on the —
DAVE SOKOL: Thanks, Warren. As you stated first, it would be inappropriate for Mr. Buffett to respond in any detail on this issue, because it's part of the acquisition in 2006 of PacifiCorp.
He specifically agreed in writing not to interfere with any decisions of our regulated assets within PacifiCorp. So having said that, these four dams that we operate on the Klamath River were built over the last 100 years.
There are a whole series of issues in the Federal Energy Regulatory Commission relicensing process as to what should occur.
These decisions, through that regulatory process, have been ongoing for eight years, and they won't culminate for probably another six.
Having said that, there are 28 various parties from federal, state, and local agencies, Native Americans, fishery folks, local landowners, that are party to a discussion as to what should or should not happen with these assets — and I left out the irrigators.
Of those 28 parties, other than PacifiCorp, there are at least four different directions in which people think this process should go.
From our perspective, we will be pleased to find a resolution when the 28 parties agree as to how that resolution should go forward, how it would be funded, et cetera.
Fundamentally, it's up to the Federal Energy Regulatory Commission, state and federal regulators, in addition to them, and then our specific regulators in each of the six states that PacifiCorp operates in.
So if public policy moves in a direction of dam removal, fish ladders, or maintaining the existing status quo, that would be the process in which we would go forward.
We are working constructively with each of the various parties. We've met numerous times with each of the four tribes. And it's a complicated situation and one that hopefully, over time, a cooperative resolution can be met. (Applause.)
WARREN BUFFETT: Area 11, please.
AUDIENCE MEMBER: Good morning. I'm (inaudible) from Walnut Creek, California. Well, we learned something from the comic movie, but could you please expand on how do you maintain your good mental and physical health? (Laughter)
WARREN BUFFETT: Well, you start with a balanced diet. (Laughter)
Some Wrigley's, some Mars, some See's, some Coke.
Basically it — if Charlie and I can't have a decent mental attitude, who can? I mean, we get to do what we love doing every day. We do it with people that are not only cheerful about it and like us, but they do their jobs extraordinarily — they like their jobs too.
We're forced to do virtually nothing we don't want to. I have a trainer that comes three times a week. She — I think she's probably here. And she may think I'm a little begrudging in that particular activity, but that's only 45 minutes, three times a week.
The rest of the time I am doing almost — well, I'm doing whatever I love, you know, day by day by day by day. And I do it, you know, in air-conditioned offices and, you know, with all kinds of help and it — I mean, how could you be sour about life, you know, being blessed in so many ways?
And then the amazing thing is that Charlie is 84; I'm 77. And we've slowed down, I'm sure, in a lot of ways, but we pretend we haven't, and it doesn't seem to bother us. (Laughs) We get along fine.
Great partners, great managers, you know, great families. I — there's just no reason to look at any minuses in life and to focus on that. It would be crazy.
So we really do count our blessings because they've been many and they continue to come forth, and we'll enjoy it as long as we can. There's not much more to it than that.
CHARLIE MUNGER: Well, I wish we were poster boys for the benefits of running marathons and maintaining a very slim bodily state and so forth.
But as nearly as I can tell, neither of us pays much attention to any health habits or dietary rules — (laughter) — and it seems to have worked pretty well so far. I don't think we can recommend it to everybody, but I, for one, don't plan to change. (Laughter and applause)
WARREN BUFFETT: Really, from the moment we get up to when we go to bed at night, we get to do all kinds of things.
We get to — associating with wonderful people is about as good as it gets. And, you know, we live — we're biased, obviously — but we think we live in the best country in the world and have all kinds of good things. I mean, just imagine — (Applause.)
WARREN BUFFETT: We could have stayed in my grandfather's grocery store, and it would have been hell. (Laughter)
CHARLIE MUNGER: By the way, this relates to the subject of corporate compensation.
You're in a job which you would pay to have, if that were the only way to get it, and you're supposed to be an exemplar from other people — for other people. There's a lot to be said for not paying yourself very well. (Applause.)
WARREN BUFFETT: He points that out to me regularly. (Laughs)
Well, if you think about it, you know, the idea that CEO compensation represents a market system and that you have to pay some guy a $10 million retention bonus or something to stay around in the job that, you know, he's been fighting to keep and stacking the board and everything so they keep him around.
I mean, it's — I don't know of a CEO in America — I'm sure there are a few — but I don't know of any that wouldn't gladly do the job at half the price or a quarter of the price.
And I've seen some that have left jobs paying them eight figures and nobody's offered them anything, you know, a year later or two years later. I wonder where that wonderful market system is that is supposed to have all these bidders for their services. It's really sort of ridiculous, I think. (Applause.)
WARREN BUFFETT: Let's go onto 12.
AUDIENCE MEMBER: Hi. I'm Richard Rentrop from Bonn, Germany.
At the moment I attend high school and would like your wisdom on how to approach the question of what to do with the rest of my life. So — (Laughter)
WARREN BUFFETT: We prefer things a little more difficult than that if you're got a — (Laughter)
AUDIENCE MEMBER: So, Mr. Buffett and Mr. Munger, if you were about to start all over again, what profession would you choose and why?
WARREN BUFFETT: Well, I would choose what I do because, A, I have fun at it. I'm reasonably good at it. You know, I meet a lot of interesting people through it. No heavy lifting. You know, it — it's — it fits me.
It doesn't — but that — that's not advice for you. I mean, you have to find out what really — what's your passion in life?
You know, it's a terrible mistake to kind of sleepwalk through your life, because unless Shirley MacLaine is right, you know, it's the only one you're going to have.
And the — so I've — I was very lucky in that I found my passion early. I mean, I — that's not easy. You know, that takes some luck.
It just so happened my dad was in a business at a very small office and he had a bunch of books down there. And when I would go down there on Saturday or after school, I would start reading those books, and it turned me on.
And this was before Playboy actually existed. (Laughter)
And so, you know, that was just plain lucky, you know. If he'd been a minister, I'm not so sure I would have been quite so enthused about visiting the office. (Laughter)
But that's the way to go. And I can't prescribe that for you. But I can tell you that if you're going through the motions in life, you're doing something — now, obviously, if you need the job you have and you can't make a change and your kids have to eat and all of that, you deal with realities like that.
But when you're in a position to make choices, you know, I always tell the kids that come visit me, I tell them, "Go to work for an organization you admire or an individual you admire."
That means many of them become self-employed, but they — (Laughter)
The idea — you know, you can't get a bad result. I went to work for Ben Graham when I was 24. I only worked for him for less than two years, but I jumped out of bed every day in the morning.
I was excited about what I was going to do. I was learning things. I was with a man I admired. I never asked my salary when I took that job. I moved to New York City and found out what my salary was when I got the check.
So just be sure you — and be sure and get the right spouse. That's enormously important.
You know, as Charlie says, the problem, you know, is that we talk about that fellow that spent 20 years looking for the perfect woman, and then he found her, and unfortunately she was looking for the perfect man. So you may have a problem in that respect. (Laughter)
But it's enormously important who you marry. I mean, it's a huge, huge, huge decision.
And, you know, if you're lucky in a couple things like that, you're going to have a happy life.
And you're going to behave better as you go along. I mean, it's a lot easier to behave well when things are going your way and you are enjoying your work and you like the — you're thinking about things every day that are the kind of things that you like to think about.
And Charlie has a lot better advice than I have about it. Go to it.
CHARLIE MUNGER: Well, of course, you'll do better if you develop a passion for something in which you have a considerable aptitude. I think if Warren had gone into the ballet — (laughter) - nobody would have ever heard of him.
WARREN BUFFETT: Oh, I think they'd have heard of me, just in a different way, Charlie. (Laughter)
Well, the chances are, if you find something that turns you on, you probably do have some talent for it. I mean, it — I never — I don't think I could have gotten turned on by ballet. (Laughs)
WARREN BUFFETT: Let's go — we're going to go now to 13, which is in an adjacent ballroom.
We have multiple overflow rooms, which is how we're handling the 31,000. The grand ballroom is the only one we've got a microphone in. So let's go to number 13. Somebody there?
AUDIENCE MEMBER: I'm Nancy Ancowitz. I'm from New York City, and I teach at New York University.
Mr. Buffett, I'd love to get your advice on something that's a little off the investing path but that taps into your business experience and wisdom.
I'm writing a book to help people of a more introverted nature get the recognition they deserve.
What advice would you give to the quieter half of the population to help them raise their visibility in their careers?
WARREN BUFFETT: Well, that's a very good question. And I sort of faced that at one time.
I was absolutely, throughout high school and college, terrified of public speaking.
And I would have — I avoided any classes, signing up for them, that would require it. I would get physically ill if I even thought about having to do it, let alone doing it.
And I took a Dale — well, I've — first of all, I signed up — I went down to a Dale Carnegie course when I was at Columbia, and signed up for it, gave him a check for a hundred dollars, went back to my room and stopped payment on the check. (Laughter)
This is a real man of courage you're looking at up here. (Laughter)
And then I came out to Omaha, and I saw a similar ad. It was at the Rome Hotel, for you old-timers in Omaha, on 16th Street.
And I went down there, and this time I took a hundred dollars in cash and gave it to Wally Keenan, who some of you may know. He died some years ago. First time I'd met him.
And I took that course, and when I finished that course, I went right out to the University of Omaha and volunteered to start teaching, knowing that I had to get up in front of people.
I think the ability to communicate, both in writing and orally, is of enormous importance, under taught.
Most graduate business schools, they wouldn't find an instructor to do it because it would sort of be beneath them to do something so supposedly simple.
But if you can communicate well, you have an enormous advantage. And to you, who are talking to the group of introverted people — and, believe me, I was in certain ways quite introverted — it — you know, it's important to get out there and do it while you're young.
If you wait until you're 50 it's probably too late. But if you do it while you're young, just force yourself into situations where you have to develop those abilities.
And I think the best way to do that is to get in with a whole bunch of other people who are having equal problems, because then you find you're not alone, and you don't feel quite as silly.
And, of course, that's what they did at the Dale Carnegie course. I mean, we would get up in front of 30 other people who could hardly give their own name, and after a while we'd find that we could actually pronounce our own name in front of a group.
But we would stand on tables and do all kinds of silly things, just to get outside of ourselves.
You may have thought — by this point you may think it went too far in my particular case, but that's another problem. (Laughs)
But you're doing something very worthwhile if you're helping introverted people get outside of themselves. And working with them in groups, where they see other people have the same problem and they don't feel quite as silly themselves, I think is — I think you're doing a lot for some human beings when you help them do that.
CHARLIE MUNGER: Yeah. It's a real pleasure to have an educator come who is working to do something simple and important instead of something foolish and unimportant. (Applause)
WARREN BUFFETT: I hope he's not going to name names. (Laughter)
WARREN BUFFETT: OK. Let's go back to number 1.
AUDIENCE MEMBER: Hi, Mr. Buffett. My name is Regina Chichizola, and I'm the Klamath Riverkeeper.
I came here today with many of the other people from the Klamath that came here, and I thank you for having us, and I thank the shareholders for being a lot nicer to us this year than they were last year.
So my question is, I'm sure you're familiar with the severe pollution issues in the Klamath River, such as the toxic algae problem that is 4,000 times allowable recreation levels, and that the fish are also now toxic due to the Klamath dams.
I was wondering if you were familiar with the finances behind the Klamath dams? Many economic studies have shown that removing the Klamath dams would be up to hundreds of millions of dollars cheaper than relicensing them.
So my question is, what would you do if PacifiCorp decided to keep these dams, even though it would mean that your shareholders would lose money in the long run and that PacifiCorp's ratepayers would also be losing money?
WARREN BUFFETT: Well, I think the question about the ratepayers will be addressed by the public utility commissions.
I mean, it is their job to represent the citizens of Oregon, and weigh a number of different considerations — for example, clean energy. Do you want to replace hydro energy with a — what you're talking about — with coal, which emits carbons into the atmosphere? There are enormous tradeoffs.
Anytime the government gets involved in eminent domain — we have that with wind farms, for example, in Iowa — there's some people that are unhappy with us using the land for wind farms. But, on the other hand, you get clean energy that way.
There are tradeoffs involved in government policy. You get into that with the question of eminent domain, all of that sort of thing.
But I think I'm going to let Dave talk to the more technical questions you get into.
But I would say, overall, you have people with widely different interests. Obviously, a big interest is the cost of electricity.
And to some extent, every public utility commission that makes a decision on gas versus coal versus wind versus solar is making a decision based partly on the economics to their ratepayers, partly on their feelings about what is the best for society, and those commissions are appointed state by state to make those decisions.
Now, in addition, in this case we have the FERC as it's called, the Federal Energy Regulation Commission, that will also have to rule on it.
They will listen to everybody. They'll listen to you. They'll listen to the 28 others that Dave mentioned. In the end we will do exactly what they say.
I mean, as a public utility, if they tell us to put up — not put up coal, we will not put up coal. If they tell us to put up wind, assuming that there is a place where there is wind, we will put up wind. We follow the dictates of the regulatory bodies that tell us what to do.
And in the end they give us a fair return on the assets employed, and we will get that return whatever the assets may be. If they tell us to put in coal assets, we'll get a return out of that.
So from our standpoint, from the standpoint of profitability, it's neutral.
From the standpoint of society, weighing all these different things, that's a decision society will make.
But, Dave, let's — do you want to talk to the algae question?
DAVE SOKOL: Sure. First, it's important, the Karuk tribe did do a study and found bioaccumulation of microcystins, or blue-green algae, in the perch and the fresh water mussels in the Klamath River.
What's important to understand about that — and by the way, we disseminated that report immediately to state and federal health agencies because they should know about it.
Microcystin is not unique to the Klamath River. There are 27 other lakes in the state of Oregon that have blue-green algae, 70 different countries, every province in Canada, and 27 of the U.S. states have lakes that have blue-green algae.
It is created from lakes that have a high abundance of nutrients and naturally-forming algae. And at the head of the Klamath River is a lake known as Upper Klamath Lake, which is actually a Bureau of Reclamation reservoir — it's a shallow, large reservoir, that is known as being hypereutrophic, which means a great abundance of algaes and various nutrients.
Those nutrients then flow down the river and do pass through or, in cases, get backed up by the four reservoirs down below the Bureau of Reclamation-linked dam.
The important issue is those things are, in fact, taken into account by the Federal Energy Regulatory Commission. They issued their environmental impact statement last November, which endorsed various fish passage methods on the dams but do not call for removal of the dams.
But, again, those are decisions that all the state, federal, agencies, and the various involved parties will either have to come to agreement with or let them run their course through the FERC process.
WARREN BUFFETT: Thank you. Number 2.
AUDIENCE MEMBER: Hi. My name is Henry Pattener (PH). I'm hailing from Singapore, most recently.
In one of your older letters, you — your older partnership letters in 1964 — you introduced a fourth investment method called "Generals — Relatively Undervalued."
In your description you say, "We have recently begun to implement a technique which gives promise of very substantially reducing the risk from an overall change in valuation standards.
"We buy something at 12 times earnings when comparables or poor-quality companies sell at 20 times earnings, but then a major revaluation takes place so that the latter only sell at ten times."
Is this technique pair trading and, if so, how did you think about and calculate the ratio of longs to shorts?
WARREN BUFFETT: Yeah. I didn't remember we started as early as '64, but certainly in the '60s we did some of what, in a very general way, would be called pair trading now, which is a technique that's used by a number of hedge funds, and perhaps others, that go long one security and short another, and often they try to keep them in the same industry or something.
They say that British Petroleum is relatively attractive compared to Chevron or vice versa, so they long one and short the other.
And actually that technique was employed first by Ben Graham in the mid-1920s when he had a hedge fund, oftentimes — I read articles all the time that credit A.W. Jones with originating the hedge fund concept in the late '40s, but Ben Graham had one in the mid-1920s — and he actually engaged in pairs trading.
And he found out it worked modestly — very modestly — well because he was right about four times out of five but the time he was wrong tended to kill him on the other four.
We did — we shorted out the general market for about five years in the partnership, to a degree. We borrowed stocks directly from some major universities. I think we were probably quite early in that.
We went to Columbia and Harvard and Chicago and different places and actually arranged for direct borrowing. They weren't — it wasn't as easy to facilitate in those days as it is now.
And so we would take their portfolios and we would just say, "Give us any of the stocks you want, and then we'll return them to you after a while and we'll pay you a little fee."
And then we went long things that we thought were attractive. We did not go short things that we thought were unattractive; we just shorted out the market generally.
It was always kind of interesting to me, when I would visit the treasurer of Columbia or something like and I'd say, "We'd like to borrow your stocks to short," and, you know, he thought his stocks were pretty good at that point.
And he'd say, "Which ones do you want?" And I said, "Just give me any of them — (laughs) — I'm happy to short your whole damn portfolio." (Laughter)
I needed the Dale Carnegie course to get me through that kind of thing, you know.
We didn't have any specific ratios in mind. We were always limited by the number of institutions that would give us the stocks to short.
So it was not a big deal, but we probably made some extra money on it in the '60s. It's not something that would fit our — what we do these days at all.
And, generally speaking, I think if you've got some very good ideas on businesses that are undervalued, it's really unnecessary to do any shorting out of the market.
There's a — for those of you who are in the field — I mean, there's a — kind of a popular proposal — money managers always have some popular proposal that's being sold to the potential investors — and now there's something called 130-30, where you're long 130 percent long, short 30 percent.
That stuff is all basically a bunch of stuff just to try and sell you the idea of the day. It doesn't really have any great statistical merit.
But the fish bite, as Charlie says. Charlie can elaborate on that.
CHARLIE MUNGER: Yeah. We made our money by being long some wonderful businesses. We didn't make it by a long-short strategy.
WARREN BUFFETT: Number 3.
AUDIENCE MEMBER: Dear Mr. Buffett, dear Mr. Munger. My name is Oliver Krautscheid from Frankfurt in Germany.
The subprime crisis has led to inconsistent pricing in capital markets. Credits are trading at large discounts, and at the same time, the equities do not reflect this.
My question is, when will this be over, and how do you take advantage of market dislocations?
WARREN BUFFETT: Well, when there are market dislocations, there are always ways to take advantage of it, but we'll leave for you the joy of searching for those.
But there have been some really important dislocations. And I brought along, just for your amusement, a few figures on something that we've done recently. But it doesn't have any big significance for Berkshire. I mean, Berkshire will make some extra money out of this.
It doesn't take any time to think about. But it does illustrate just how dramatic the changes were. And the ones I brought along relate to the tax-exempt money market funds.
There were 330 billion of these. That's a lot of money — 330 billion. And they relied on repricing of — really, in almost all cases — first-grade municipal bonds.
Every seven days they have these auctions, and it was all set up very elaborately so that people could have their money, more or less, in their minds, instantly available and something that was tax exempt, and they were marketed extensively.
And I brought along — for example, here's one that related to the — they were backed by various municipal issues. This one happens to be one by the LA County Museum of Art. Just pulled that out.
And on January 24, it was marketed at 3.15 percent; January 31, 4.0; February 7, 3.5; February 14, 8 percent.
Now, how can a tax-exempt bond of short-term nature be selling at a 3 1/2 percent rate one week, and one week later on Valentine's Day be at 8 percent, and one week after that be at 10 percent?
It's now back to 4.2 percent. Now, those are huge dislocations in markets. That's crazy.
It would be one thing to be some little obscure item, but this happened with billions and billions and billions of dollars of securities.
It even happened — we get these bid sheets every day, and this happens to be a bid sheet, I think, from Citigroup. And they were repricing these every seven days.
And what you would find on these — you'll see there's lots of issues involved — the same issue would appear on several different pages, because it would represent some different auction, although handled by the same broker at the same time.
On one page you would find an issue — we would bid all these — we happened to bid these at 11.3 percent.
On one page, we bought them at 11.3 percent. On another page, the same issue, we bid the 11.3 percent and somebody else bid 6 percent.
So you have the same issue with the same broker at the same time being sold at 11.3 percent and 6 percent. Those are marks of extreme dislocation, and you find those occasionally.
You found that after the Long-Term Capital Management crisis is 1998. You found the equivalent of it in the stock market in 1974, and so on.
And those are great times to make unusual amounts of money. And if you — there's certain things we can't figure out.
I see — in the Wall Street Journal — I see advertisements these days of auctions taking place in some esoteric mortgage securities. If you had enough time, you could probably figure out some of those that were very mispriced. We don't fool around with that. We just don't have the time.
We were able to do four — we have about 4 billion in this right now. When we get all through, we'll have made some extra money for a couple of months.
It won't be significant, in relation to Berkshire's size, but it's something that's very easy to do.
You may be able to find — by working very, very hard on some smaller issues — you might be able to find in this mess in mortgages — and it's gone beyond subprime. It's gone into Alt-As and it's gone into Option ARMs and that sort of thing.
There very well could be some great opportunities out there that Charlie and I will no longer spot because we just can't be looking at that many things.
CHARLIE MUNGER: Yeah. What is interesting is that — how brief these opportunities to take advantage of dislocations frequently are.
Some idiot hedge fund bought unlimited municipal bonds at, you know, incredible margins. I think they bought 20 times more municipal bonds than they could afford with their own money, borrowing all the rest.
And when those things were dumped on margin calls, municipal bonds suddenly got mispriced in America. But the dislocation was very brief. So you —
WARREN BUFFETT: But very extreme.
CHARLIE MUNGER: But very extreme.
WARREN BUFFETT: Yeah.
CHARLIE MUNGER: So if you can't think fast and act resolutely, it does you no good.
So you're like a man standing by a stream trying to spear a fish and the fish just comes by once a week or once a month or once every ten years. And you've got to be there to throw that spear fast before the fish swims on. It's a pretty demanding business if you do it right.
WARREN BUFFETT: But there have been times. I mean, in the junk bond market, there was a three- or four-month period in 2002 where some really incredible things happened and they happened on a large scale. So —
CHARLIE MUNGER: Yeah. It happens about twice a century.
WARREN BUFFETT: Yeah. (Laughter)
Which means he and I have only had four or five times when we could do it. (Laughter)
WARREN BUFFETT: Let's go to number 4.
AUDIENCE MEMBER: Hello, Mr. Buffett and Mr. Munger. My name is Svinneyvaz Canadival (PH). I'm from Fort Lauderdale, Florida.
I read all your letters and annual reports multiple times, and every time I get a different insight. So thanks for doing it.
My question is about converting the successful small businesses into large enterprise. I have a good and successful small business from the last few years, and I'm unable to grow it to the next level. It seems like there are some components are missing, so I wanted to take your advice on it.
WARREN BUFFETT: Well, Berkshire was a small business at one time. I mean, it just takes time. I mean, it's the nature of compound interest. You know, you can't build it in one day or one week.
So Charlie and I — you know, we've never tried to do in some master stroke — convert Berkshire into something four times as large. People have done that sometimes in business.
But we've sort of felt that if we kept doing what we understood, and did it consistently, and had fun while we were doing it, that it would be something quite large at some point.
But there's nothing magic — it would be nice to attract a whole bunch of money into some great idea and have it — you know, multiply it manyfold in a few weeks or something of the sort. But that has really not been our approach.
We have just — we have done — in a general way, we've done the same thing. Now, we do little variations of it, but we kept doing the same thing for years and we'll keep doing it.
You know, we will have more businesses a few years from now than we have now. And we'll have all the ones we have presently. Most of them will do better. Some won't. And we will have added something.
And that's an automatic formula for getting ahead, but it's not an automatic formula for galloping ahead.
But we don't really feel — we're not unhappy because we're not galloping. We're not happy if we're not moving at all.
But, you know, we've got 76 or so, in most cases, pretty darn wonderful businesses. And, like I say, we'll have more as we go along. So it's a very simple formula.
Gypsy Rose Lee said once — she said, "I have everything I had five years ago. It's all that it's 2-inches lower," you know.
Well, what we want to have five years from now is a whole bunch of businesses we had before that are 2-inches higher, plus some more businesses. And that's the formula.
CHARLIE MUNGER: Yeah. You've got to remember that it's the nature of things that most small businesses will never be big businesses.
It's also in the nature of things that most small — most big businesses — eventually fall into mediocrity or worse. So it's a tough game out there.
In addition, the players of the game all have to die, and that is — those are just the rule of the game, and you have to get used to it.
We've only created from scratch one small business that became a huge business that I can think of, and that's the reinsurance department.
And there, Warren and Ajit and others have created a great and valuable business out of air. But can you think of anything other that's large that we've done in all these decades?
WARREN BUFFETT: No. No.
CHARLIE MUNGER: We've only done it once, so we're a one-trick pony.
WARREN BUFFETT: Yeah. We were lucky on that one, too. (Laughter)
Yeah, and incidentally, without Ajit we wouldn't have done it at all.
CHARLIE MUNGER: Right, right.
WARREN BUFFETT: It isn't that we did it. Ajit did it. We just sat there cheering.
CHARLIE MUNGER: Somebody asked us once what was the best investment we ever made, and I answered the fee we paid to the executive recruiter to find Ajit Jain. (Applause.)
WARREN BUFFETT: In that connection, I'd like to give you a little report.
We went into the municipal bond insurance business a few months ago, and naturally, we did it through Ajit. And he got our companies up, licensed, and running.
And in the first quarter of 2008 — I don't have the figures for all the other people — but our premium volume came to over $400 million.
And I think — now, that was overwhelmingly written in the secondary market, but I think our premium volume was not only larger than any other municipal bond insurer in the United States, I wouldn't be surprised if it's as large as all of the rest of them combined.
And this was from a standing start that Ajit accomplished this. And I have here a list of, what, 300 and — this is the end of the quarter — 278, I believe it is, transactions.
Now, that's all done out of an office with 29 or 30 people who are doing a lot of other things, too. I mean, it's a remarkable, remarkable place.
One of the interesting things about this is that almost all of this business — although not all the premium volume — all of — almost all of this business was — came from people who came to us with municipal bonds asking us to insure them, and in every case, except two or three, they already had insurance from the other bond insurance, most of whom are rated triple-A.
So they were paying us a fee which was higher to write insurance which would only be paid, not only if the municipality didn't pay, but the original bond insurer didn't pay.
So we were writing business at an average rate of two and a fraction percent for the quarter, and the original insurer had charged, perhaps, an average of 1 percent. And they had to pay and they — in fact, the only way we're going to pay is if they went broke.
So it tells you something about the meaning of triple-A in the reinsurance — in the bond insurance — field in the first quarter of 2008.
Ajit has done a remarkable job in this arena. And Berkshire wrote a couple of primary policies for the Detroit Sewer District and the Detroit Water District that — each about 370 or 380 million — and people have found our insured bonds trading in the secondary market at a more attractive yield to the issuer. In other words, at lower yields than from any other bond insurer.
So this whole company has been built, just in a matter of a couple of months, by Ajit in his small office in Connecticut. It's pretty remarkable, and I congratulate him for it. (Applause.)
WARREN BUFFETT: Let's go to area 5, please.
AUDIENCE MEMBER: Hello. My name is Stuart Kaye, and I'm from New York City.
I wanted to know, if you could not talk with management, could not read an annual report, and did not know the stock price of a company, but were only allowed to look at the financial statements of a company, what metric would you look at to help you determine whether you should buy the company?
WARREN BUFFETT: Well, what we're doing in investment, and what everybody is doing in investment, is they're laying out money now to get more money back later on.
Now, let's leave the market aspect of the asset out. I mean, when you buy a farm, you really aren't thinking about what the market on it's going to be tomorrow or next week or next month.
You're thinking about how many — what the — how many bushels of beans per acre can you get or corn per acre and what the price is likely to be. You're looking to the asset itself.
In the case you lay out, the first question you'd have to make is do I understand enough about this business so that the financial statements will tell me the information that's useful to me in making a judgment about what the future financial statements are going to look like.
And in many cases, the answer would be no. Probably in a great majority of the cases it would be no.
But I've actually bought stocks the way you're describing many times, and they were in businesses that I thought I understood where, if I knew enough about the financial past, it would tell me enough about the financial future that I could buy.
Now, I couldn't say the stock was worth X or 105 percent of X or 95 percent of X, but if I could buy it at 40 percent of X, I would feel that I had this margin of safety that Graham would talk about, and I could make a decision.
Most times I wouldn't be able to make it. I wouldn't know — if you hand me a bunch of financial statements and you don't tell me what the business is, there's no way I could make a judgment as to what's going to happen. It could have been a hula hoop business; it could have been a pet rock business. You know, on the other hand it could have been Microsoft early on.
So unless I know the nature of the business, the financial statements aren't going to tell me much, you know. If I know the nature of the business and I see the financial statements, you know, if I see the financial statements on Wrigley, I know something about the business. Now I have to know something about the product before I can make that judgment.
But we've bought lots and lots of securities. The majority of the securities Charlie and I bought, we've never met the management and never talked to them, but we have primarily worked off financial statements, our general understanding of business, and some specific understanding of the industry in the business we're buying.
CHARLIE MUNGER: Yeah. I think there's one metric that catches a lot of people. We tend to prefer the business which drowns in cash. It just makes so much money that the main — one of the main — principles of owning it is you have all this cash coming in.
There are other businesses, like the construction equipment business of my old friend John Anderson. And he used to say about his business "You work hard all year, and at the end of the year there's your profit sitting in the yard."
There was never any cash. Just more used construction equipment.
We tend to hate businesses like that.
WARREN BUFFETT: Yeah. It's a lot easier to understand a business that's mailing you a check every month. But that's what an apartment house — you know, if you own — you can probably value an apartment property pretty well if you know anything about, you know, the city in which it's in.
And if you have the financial statements, you could make a reasonable guess as to what the future earnings are likely to be. But that's because it is a business that gives you cash. Now, you can — there can be surprises in that arena as well.
But I've bought a lot of things off financial statements. There are a lot of things that I wouldn't buy, you know, if I knew the — actually, there are a lot of businesses I wouldn't buy if I thought the management was the most wonderful in the world because, if they were in the wrong business, it really doesn't make much difference.
WARREN BUFFETT: Number six?
AUDIENCE MEMBER: Good morning. My name is Mike Palmateer (PH), fisheries supervisor for Karuk Fisheries.
Mr. Buffett, you grew up and still live in the banks of the Missouri River. I, too, live on a river called the Klamath. My family has lived there since time immemorial.
In 2002, 68,000 fish died at the mouth of the Klamath River due to disease and bad water quality. These fish are also my relations.
If another company polluted your river and killed all the fish and made the river unswimable and unfishable, how would you approach this problem? Thank you.
WARREN BUFFETT: Well, I think society would — as a whole — should approach that problem by looking at the net benefits from whatever is taking place in that situation and what the costs of electricity would be and what the farmer's situation would be if he went to a different form of water distribution.
I mean, there are a lot of competing ideas and desires in a large society, and it's up to government, basically, to sort out those.
We're sorting it out — right now, we're building coal plants in the country. We're building gas plants. We're doing various things.
People are coming to different conclusions about what kind of tradeoffs they want to make, and generally these are being made at the state level, although you could have a national energy policy that would override individual states' decisions.
We're responsive to national policy on that. We're responsive to local policy. The Oregon Public Utility Commission, I'm sure, is aware of exactly what you've discussed and they have to consider that, but they have to consider a lot of other things in determining what is the best way to generate the electricity required for the citizens of Oregon.
And, Dave, would you want to add anything to that?
DAVE SOKOL: Warren, just one comment. And not in any way to be disrespectful of the fishermen, but it — we are not polluting the river.
We're not doing — adding — anything to the water that isn't coming out of Upper Klamath River, and we do recognize the different views as to whether the irrigation is a good thing or a bad thing, whether renewable power such as hydro is better than returning the river to its prior 1907 date.
But the one thing that — just to be clear — is that PacifiCorp is not adding anything. The water is flowing through penstocks, creating electricity, and coming out the rear end, and it did so under a 50-year FERC license.
Again, we understand the varying concerns, and hopefully, over the next six years a societal answer that balances all those concerns will be reached.
WARREN BUFFETT: Thank you. (Applause.)
CHARLIE MUNGER: I'd like to — I'd like to point out how refreshing it is to have people addressing a pollution problem which has nothing to do with burning carbon. (Applause.)
WARREN BUFFETT: Number 7.
AUDIENCE MEMBER: Hey. I'm Jack Range (PH). I'm from Philadelphia. I'm in seventh grade, and I'm 12-years-old.
I just wanted to ask, what kind of things should I be reading, like, in my grade? 'Cause I know there are a lot of things that they don't teach you in school that you should know, but what things should I be looking into? (Applause.)
WARREN BUFFETT: Well, I would get in the habit, if you don't have it already — but you sound like you very well may — of reading a daily newspaper, which is not the most popular thing in the world among younger people these days.
But you want to learn as much as you can about the world around you. And Bill Gates, I think, quit at the letter P in the World Book. Doesn't seem to have hurt him too much to quit there.
But you can have a set of World Books. You can read the newspapers. You should just sop it up. And you'll find out what's the most interesting to you.
I mean, you know, there's a certain point where the sports pages were most interesting to me, then the finance pages. I happen to be a political junkie. But you just can't learn enough in life.
And I think the fact — what you'll find is the more you learn, the more you want to learn. I mean, it is fun, and — but you sound to me like a young person that's going to do a lot of that on their own.
Do you have any suggestions, Charlie? You'd probably suggest reading Ben Franklin.
CHARLIE MUNGER: My suggestion would be that the young person that just spoke has already figured out how to succeed in life. You've got it made. (Applause)
WARREN BUFFETT: Number 8.
AUDIENCE MEMBER: Greetings to all of you from the Midwest of Europe, from Bonn, Germany, on the Rhine River. I'm Norman Rentrop. I'm a shareholder in Berkshire, Wesco, and Cologne Re.
I want to thank you and Eitan Wertheimer to take the initiative and the time to come to four cities in Europe, and potentially throughout the world, to tell owners of family businesses what great alternative Berkshire Hathaway is to selling their businesses to buyout funds.
Now, my question regarding the chocolate industry. I'm challenged since I cannot buy See's Candy in my hometown, Bonn, Germany. You gave that great example of the great business, the good business, and the gruesome business.
See's Candy, you cited, having sent, like, $1.3 billion in cash profits to Omaha. There's another company called Lindt and Sprungli.
Now, while See's Candy achieves more than 20 percent profit on sales, you describe that their growth has been "OK." Lindt and Sprungli does only 14 percent on sales, but they did go almost global.
WARREN BUFFETT: Yeah. Could you get to the question, please, on this? (Laughs)
AUDIENCE MEMBER: Yeah. The question is in — whether you want to have a company with high profitability but OK growth versus a company going global but lower profits? What are your considerations?
WARREN BUFFETT: It really makes no difference to us. We evaluate all kinds of businesses.
And what we do want is we want a business with a durable competitive advantage, which both of the companies you named do.
And we want something we understand. And we want a management that we like and trust. And then we want a price that makes sense.
And we try to look at — we probably looked at every confectionary business, you know, for 20 years that was publicly owned where we got the figures. And sometimes we find something where we can take action, and most of the time we don't.
When they're private businesses, we don't determine — a really good private business — I always tell the manager, the best thing to do if you've got a wonderful private business is just keep it. It's going to be worth more next year and the year after.
So there's no reason to sell a wonderful business except for kind of extraneous factors. It may be family situations. It may be taxes. It may be that there isn't another potential heir or whatever it may be.
But there's no need — if you've got a business worth a billion dollars, you don't need the billion dollars — you've got a business that's worth a billion dollars — any more than if you've got a farm that's worth a million dollars. You've already got the million dollars. You just happen to have it in the farm. And if you like farming, you keep it.
So we never urge people to sell good businesses. We urge them to keep them.
But there comes times when they do want to sell for one reason or another — maybe once every 20 or 50 years — and we do think if they have a business that they're enormously proud of — it's a really fine business — that they can keep more of the attributes that they love in that business by selling it to Berkshire than they can, by far, selling it to anyone else.
So we are the logical buyer. As you mention, I'm going to Europe — Eitan, who's been wonderful about setting this up — and we're going to make presentations, not to try to get anybody to sell us their business now, because most people shouldn't sell us their business now.
But we do want them to think of us when the time comes when an event occurs that does cause them to think about selling. And we want to be on their radar screen.
And we're more on the radar screen in the United States than we are in Europe, and we're going to try to correct that.
But if you take a firm like you name, a Lindt, you know, there's a price at which we would buy stock in Lindt. There's a price at which we'd buy the whole business. But it's unlikely to be selling there.
You know, the — if you think about hundreds and hundreds of wonderful companies — I get all these managers that — just got a CEO yesterday who called me — and they want to tell me about their business, and they imply their businesses — or they think — their business is the most attractive investment in the world.
It isn't the most attractive investment in the world. There are thousands of possible investments. And, you know, the idea that all these managers are saying "Our stock is the most wonderful in the world" is crazy.
But it's our job to look at hundreds of things and, in terms of marketable securities, buy what we think are the most attractive ones, among the ones we understand and like as a businesses.
And then occasionally we get the chance to buy an entire business. We never do that at a bargain price. It just doesn't happen. People don't do that. The stock market gives you bargain prices; individual owners won't. But when we get a chance to do that at a fair price, we like doing it.
We love building Berkshire with a bunch of businesses with favorable long-term economic characteristics.
But the chance that any one of them — you know, we aren't going to look for a given confectionary company and say, "Regardless of price, we're going to do this," because we don't do anything when the phrase "regardless of price" enters into the sentence.
CHARLIE MUNGER: Yeah. I watched a man build up a business in southern California, which was a wonderful business. And the time came to sell it — and he devoted his whole life to creating it — he sold it to a known crook who was obviously going to ruin the business just because he could get a slightly higher price.
I think that's an insane way to live a life if you own a prosperous business. I think the better course is to sell to somebody you know is going to be a good steward of what you've created. (Applause.)
WARREN BUFFETT: Let's go to number 9, please.
AUDIENCE MEMBER: Hi. My name is Johann Freudenberg (Ph) from Germany.
How would you, as a European investor that invests in U.S. equities, hedge the U.S. dollar risk? Thank you.
WARREN BUFFETT: How would I what?
CHARLIE MUNGER: How do you hedge the U.S. dollar?
WARREN BUFFETT: Oh. Well, whether you're thinking about starting in Germany and hedging the dollar risk of investing here or vice versa, we are happy to invest in businesses that earn their money in euros in Germany, or whether it's there, or France, or Italy, or earn their money in sterling in the UK, because we do not have a feeling — at least I don't have a feeling — that those currencies are likely to depreciate in a big way against the U.S. dollar.
That would be how we would get hurt. We could offset that by borrowing the money in those countries and borrowing in their currency to make the purchases.
But, overall, I think that the U.S. is going to continue to follow some policies that have made the dollar weaker in recent years.
So if I had to bet my life one way or another over 10 years, I would probably bet that the dollar would weaken against other major currencies, and, therefore, I feel no need — if we buy companies whose earnings primarily arise elsewhere in major countries — I feel no need to try and hedge those purchases.
I mean, if I landed from Mars today with a billion of Mars dollars or whatever they call them on Mars, and I was thinking about where to put my money, you know, I went to the local — wherever my UFO landed — and went to the bank and said, "I've got this billion of Mars currency," and they said, "Well, what would you like to exchange here?" I don't think I'd put all the billion in U.S. dollars.
So it doesn't bother me to buy businesses around the world, unhedged in terms of their currency, and have a fair amount of our earnings coming from earnings that originate in other currencies and which I will convert at current rates to dollars at some time in the future.
If you take Coca-Cola — we own 200 million shares of Coca-Cola. And if their earnings are roughly $3 a share, that means our share of the earnings of Coca-Cola are $600 million a year.
And of those earnings of 600 million, you know, maybe close to 500 million will be from around the world — all different kinds of currencies.
Basically I like that. I think that that will be a net plus to us over time, and it certainly has been a net plus to us in recent years.
So we are not in the business of hedging currencies, basically. We do not have a lot of hedges set up.
CHARLIE MUNGER: Nothing to add.
WARREN BUFFETT: Number 10.
AUDIENCE MEMBER: Hey. How you doing? I'm Eric Schleien from Larchmont, New York.
This is actually a follow-up question from a question that I asked last year at the meeting. I'd asked you guys, you know, what you would do with small sums of money since — you know, I run a small portfolio, under a million dollars.
And I asked you if you'd be doing things, you know, like the net-nets that Benjamin Graham used to talk about and, you know, liquidation arbitrage. You know, a lot of things you used to do at the Buffett Partnership.
And you acknowledged that you wouldn't be just a buy-and-hold investor, that you — as you are today — but we would be doing a lot of those transactions.
And, Mr. Buffett, you also talked about how a lot of the investments you would do with under a million dollars would have nothing to do with stocks and would be with other types of securities, and you really don't elaborate — neither of you really elaborated any more than that.
So I guess I was wondering if you could elaborate a little bit more on how your investment strategy, you know, back then, you know, in reference to non-stock investments, would be different than your buy- and-hold strategy today?
So what kind of stuff would you be doing? Maybe you could give me a past example that you did in the '50s and the '60s. That would be great. Thank you. Appreciate it.
WARREN BUFFETT: Well, if I work with small sums of money — and I'd be happy doing that — it would just open up thousands of possibilities to me.
And you might very well — certainly we found very mispriced bonds, where we could come nowhere near buying a position of enough size in Berkshire to make a difference, but where it would have made a difference if you were working with a million dollars.
But it would be bonds. It would be stocks of both in the United States and elsewhere. We found them in Korea a few years ago that were ridiculously cheap.
You know, you basically had to make very significant returns, but you couldn't put big money on it.
So it could be in stocks. It could be in bonds. It wouldn't be in currencies with small amounts.
But, you know, I had a friend who used to buy tax liens — you know, Tom Knapp, he's got some relatives here. An enterprising person can find a lot of different ways to make money.
You'll find most of them will be in small stocks. If you're working with small money, they'll be in small stocks or in some specialized bond situations. Wouldn't you say that, Charlie?
CHARLIE MUNGER: Sure. (Laughter)
WARREN BUFFETT: Number 11, please.
AUDIENCE MEMBER: Hi. I'm Dr. Silber from the Infertility Center of St. Louis. And we feel that by making many, many babies, we're doing the best we can to help salvage the solvency of Social Security. (Laughs)
WARREN BUFFETT: We won't pursue the logic of that too far. (Laughter)
AUDIENCE MEMBER: We need someone to pay into the system, and with the demographic implosion that we're facing and the current anti-immigration feeling, that this is the real cause of the Social Security dilemma that we're facing. And it's true in most of the developed world.
But my question is, everybody is looking very closely at what you and Charlie are going to say at this meeting because there's just a huge amount of confusion since the credit crisis, and I guess you've been through many, many years and decades of confusion.
But everybody really wants to know what you think, because we have three candidates, one of whom I like, which I won't mention, but all three of whom seem to be pandering to voters and not really demonstrating a profound understanding of economics.
And we're going to decrease interest rates to help the credit crisis, and we're going to inject $180 billion as free gifts into the economy, and yet our dollar is down 50 percent, and we certainly don't want a recession and all the misery that would bring.
But aren't we going to eventually have a gigantic inflation here in the U.S.?
And so — in China, which is our major partner in this, the stock market has gone down and people are losing money because they're worried about the U.S.
So I'm wondering if you could just shed some words of wisdom on, if you were the presidential candidate — which I would like to see happen — what would be your position or your policy?
WARREN BUFFETT: Well, I think it was Bill Buckley that ran for mayor of New York, you know, 40 years ago or something like that, and they asked him what the first thing he would do if he were elected. He said, "I'd ask for a recount." (Laughter)
It's not an easy game. I think we have — just personally— I think we have three pretty good candidates this time — quite good candidates.
But I think that your comments about the pandering and all that, I'm afraid that's just part of — if you have a very long political process, and you have people only generally willing to listen to ideas in fairly short form, and you're trying to make the other candidates look bad one way or another — I think that the truth is you do get a lot of pandering in the policies that are proposed.
I think you have candidates that are pretty smart about economics. I happen to think two of the three are maybe a little smarter about economics than the third, but the third may be just as smart, too. They may just be forced into a different position.
You know, a political process is something that doesn't lend itself to Douglas-Lincoln debates on the fine points of policy, and it's a tough game.
And I don't — the one thing I think is I think they will behave better in office than on the stump. I think that's true of all three of them, and I think — but I think that's just built into the system.
We — you know, we have a country that works awfully well. You know, whether Warren Harding is in office or Franklin Pierce, or whatever it may be over the years.
And it gets back to that saying I've said many times that you want to buy stock in a business that's so good that an idiot can run it because sooner or later one will. (Laughter)
And we live in a country, frankly, that is so good that your children and grandchildren will live a lot better than you live, even though an idiot or two runs it from time to time in between.
But we've got a lot better than idiots running. Believe me. I think we've got three very good candidates, and I wish — whichever one of them wins, I wish them well.
You know, it's the toughest job in the world, the most important job in the world, and I think the motivations of the people running it are a lot better sometimes than their proclamations as they go along in the political process.
I think it's very hard to run in Iowa without being for ethanol. You know, it may be — you may win some badge for courage or something in the end, but you won't win the presidency.
CHARLIE MUNGER: Well, I'd like to address the recent turmoil and its relation to politics.
After Enron totally shocked the nation with the gross amount of folly and misbehavior, our politicians passed Sarbanes-Oxley, and it has now turned out that they were shooting at an elephant with a pea shooter.
And low and behold, we have a convulsion that makes Enron look like a tea party.
And I confidently predict that we will have changes in regulation and that they won't work perfectly. (Laughter)
Human nature always has these incentives to rationalize and misbehave, and the learned professions very often fail in their basic responsibility to be learned. And we're going to have this turmoil as far ahead as you can see.
WARREN BUFFETT: But look at it this way: I have a job here I love. You know, I'd gladly pay to have this job.
Now, I have enough stock so that I'm reasonably assured of keeping the job, but let's just assume for the moment that there are three other candidates out there, and none of us had any stock, and we were all up here making a pitch to you.
My answers might have been a little different today, you know, in terms of what Berkshire's prospects would be under me and all that sort of thing going forward. It's a corrupting process.
Now, you know, it works pretty well, but the process itself has to be corrupting.
Just take the boom in commodity prices we've had. We've had a boom in the price of oil, but we've had a boom in the price of corn and soybeans.
Now, I've heard no political candidate say you've had this huge increase in the price of corn and soybeans. That means all these poor people throughout the country, they'll be paying more for food, so we ought to put an excess profits tax on farmers. That is not something you're going to hear.
On the other hand, when it happens in oil and it happens to be Exxon, you know, people will propose occasionally we ought to put a terrible tax on Exxon because the price of oil has gone up.
There's a lot of situational ethics, or situational policymaking, that depends on how many voters there are in any given category and what state you happen to be in and all that. But I don't think I'd behave any better.
If my ambition were to be President of the United States, you know, I would — I'm sure it would affect my — what I talked about and my behavior. You know, we're all human beings.
So I don't condemn the people for the fact that when they, you know, are working 18 hours a day and the other guy is shooting at them and they start exaggerating things a little, I just don't think you should expect more of human beings than — and I think that they will tend — I think any one of the three candidates — will tend to behave quite well in the White House.
They'll succumb to all the things that presidents do in terms of having to — certain groups that helped them get there and all that sort of thing. But I think, on balance, they will end up doing what they think is best for the country, and I think they're all smart people.
WARREN BUFFETT: Number 12?
AUDIENCE MEMBER: My name is John Ebert (PH). I'm from Bremerton, Washington. I'm very pleased to see that both you and Charlie look so healthy, and I'm also glad to know that your goal is to work to at least 102 before you retire.
I think your secret must be the Cherry Coke and the See's Candy by evidence of what you're doing on the screen there.
My question, obviously, deals with succession. At last year's meeting, you spoke about your plan for your chief financial officer. Could you please update us on where you stand on succession?
WARREN BUFFETT: Yeah. And we've said, on the CEO front, we have three that any one of which could step in and do a better job than I do in many respects.
And the board is unanimous, I believe, in terms of knowing which one it would be if it were tomorrow morning, but that might be different two or three years from now.
I think in any event, when the time comes, they'll want to pick somebody reasonably young, because I think, on balance, it's good idea to have a long run at this job, and I think it aids in acquisition and being able to make promises to people about how their businesses will be treated and so on.
In terms of the investment officer, the board has four names. We've discussed the four. Any one or all of the four would be good at doing my job, probably better in some ways, and — but they all have good jobs now. They're happy where they are now.
They would — I think any one of the four would be here tomorrow if I died tonight and they were offered the job by the board. They're all reasonably young. They're all very well to do or rich, and compensation would not be a major factor with them.
I think any of the four would take the job at less money than they're making now, but there's no reason for them to come now.
I would still end up making the decisions, and they would probably chafe at the idea of not being able to make the decisions.
I actually worked for Ben Graham for a few years. And I loved the man enormously. I learned an amount from him. I named my older son, middle name, is after him.
But in the end, I wanted to make decisions, and I — if Ben Graham made them differently — you know, I actually prefer to make my own decisions. And anybody that manages money well is going to feel that way.
So it's just better in this case. It can happen tomorrow. It could happen five years from now. But whenever I'm not around to make the decisions, the board will decide whether to have one, two, three, or four of these people.
They'll decide — you know, they may decide to have four and divide it up four ways. They may decide to have only one. They will probably be heavily influenced by how the incoming CEO feels about exactly how he wants to work with a group or with one.
And they'll come. So there will not — there will be no — there will be no gap after my death in terms of having somebody managing the money, and they'll probably be a lot more energetic than I am now.
And they'll — they could very easily have a much better record. Some of them have a much better recent record than I do.
CHARLIE MUNGER: Well, you know, we still have a rising young man here named Warren Buffett. And having — (Applause)
WARREN BUFFETT: That's the advantage of working with a guy 84. You always look young. (Laughter)
CHARLIE MUNGER: And I think we want to encourage this rising young man to reach his full potential. (Laughter and applause)
WARREN BUFFETT: One thing I should point out, with our average age being 80, people talk about aging managements. We haven't found a management that isn't aging. If we ever find them, we want to start eating what they eat.
And what I can point out about your management, since our average age is 80, we're only aging at the age of 1 1/4 percent a year, and that is the lowest rate of aging that I know of in corporate America.
I mean, some of these companies have 50-year-olds, and they're aging at 2 percent a year, and just think how much riskier that is. (Laughter)
WARREN BUFFETT: Let's go to 13.
AUDIENCE MEMBER: I'm Isaac Dimitrovski (PH) from New York City. Mr. Buffett, it's great to be here.
I've read that there were several times in your investing career when you were confident enough in one idea to put a lot of your money into it — say, 25 percent or more.
I believe a couple of those cases were American Express and the Washington Post in the '70s. And I've heard you discuss your thinking on those.
But could you talk about any of the other times you've been confident enough to make such a big investment and what your thinking was in those cases?
WARREN BUFFETT: Charlie and I have been confident enough — if we were only running our own net worth — I'm certain a very significant number of times, if you go over 50 years, there have been a lot of times when you would have put at least 75 percent of your net worth into an idea. Wouldn't there, Charlie?
CHARLIE MUNGER: Well, but 75 percent of your worth outside Berkshire has never been a very significant amount.
WARREN BUFFETT: No. Well, I'm going back — let's just assume it was. (Laughter)
Let's just assume you didn't have Berkshire in the picture. There have been times — I mean, we've seen all kinds of ideas we would have put 75 percent of our net worth in.
CHARLIE MUNGER: Warren, there have been times in my life when I've had more than a hundred percent of my net worth invested in things.
WARREN BUFFETT: That's because you had a friendly banker; I didn't. (Laughter)
That — there have been times — well, initially, I had 70 — several times I had 75 percent of my net worth in one situation.
There are situations you will see over a long period of time. I mean, you will see things that it would be a mistake — if you're working with smaller sums — it would be a mistake not to have half your net worth in.
I mean, there — you really do, sometimes in securities, see things that are lead-pipe cinches. And you're not going to see them often and they're not going to be talking about them on television or anything of the sort, but there will be some extraordinary things happen in a lifetime where you can put 75 percent of your net worth or something like that in a given situation.
The problem has been the guys that have put 500 percent of their net worth in. You know, I mean, if you look at — just take LTCM. Very smart guys. Very decent guys. Some friends of mine. High grade. Knew their business.
But they put, you know, maybe 25 times their net worth into things that were a cinch, if they hadn't have gone in that heavily. I mean, they were in things that had to converge, but they didn't get to play out the hand.
But if they'd have had a hundred percent of their net worth in them, it would have worked out fine. If they would have had 200 percent of their net worth in it, it would have worked out fine. But they instead went to, you know, maybe 2500 percent or something like that.
So there are stocks — I mean, actually, there's quite a few people in this room that have close to a hundred percent of their net worth in Berkshire, and some of them have had it for 40 or more years.
Berkshire was not in a cinch category. It was in the strong probability category, I think.
But I saw things in 2002 in the junk bond field. I saw things in the equity markets.
If you could have bought Cap Cities with Tom Murphy running it in the early — in 1974, it was selling at a third or a fourth what the properties were worth and you had the best manager in the world running the place and you had a business that was pretty damn good even if the manager wasn't.
You could have put a hundred percent of your net worth in there and not worry. You could put a hundred percent of your net worth in Coca-Cola, earlier than when we bought it, but certainly around the time we bought it, and that would not have been a dangerous position.
It would be far more dangerous to do a whole bunch of other things that brokers were recommending to people.
Charlie, do you want to —?
CHARLIE MUNGER: Yeah. If you — students of America go to these elite business schools and law schools and they learn corporate finance the way it's now taught and investment management the way it's now taught.
And some of these people write articles in the newspaper and other places and they say, "Well, the whole secret of investment is diversification." That's the mantra.
They've got it exactly back-ass-ward. The whole secret of investment is to find places where it's safe and wise to non-diversify. It's just that simple.
Diversification is for the know-nothing investor; it's not for the professional.
WARREN BUFFETT: And there's nothing wrong with the know-nothing investor practicing it. It's exactly what they should practice. It's exactly what a good professional investor should not practice. But that's — you know, there's no contradiction in that.
It — a know-nothing investor will get decent results as long as they know they're a know-nothing investor, diversify as to time they purchase their equities, and as to the equities they purchase. That's crazy for somebody that really knows what they're doing.
And you will find opportunities that, if you put 20 percent of your net worth in it, you'll have wasted the opportunity of a lifetime, you know, in terms of not really loading up.
And we've had the chance to do that, way, way in our past, when we were working with small sums of money. We'll never get a chance to do that working with the kinds of money that Berkshire does.
We try to load up on things. And there will be markets when we get a chance to from time to time, but very seldom do we get to buy as much of any good idea as we would like to.
WARREN BUFFETT: Go to number 1.
AUDIENCE MEMBER: Good morning, Mr. Chairman and Charlie. I'm Father Val Peter.
For 25 years I was lucky to be head of Boys Town. Expanded across the whole country. Warren was very kind to me, very helpful, over long periods of time.
What I represent today is Parents Television Council, where 1.2 million folks across the country, and our concern is to help keep toxicity off television programs — excessive violence, et cetera.
And I was very surprised, being on a parents television council board, when I read a report — I hope it's not true, but it might be — that says that of the best and most troublesome advertisers, Berkshire Hathaway, is near the bottom at 444 out of 452. I hope that's not true.
But my point is this: when I was head of Boys Town and somebody said something like that, I'd say, "Go find out. Correct it." My question is would you be kind enough to say, "Go find out," if it's necessary, "Correct it." Thank you.
WARREN BUFFETT: Yeah. I would say this: I don't know where the rankings come from. I mean, I see the — certainly by far our biggest advertiser would be GEICO.
We spend over $700 million a year on advertising. I see their ads all over the place, and, you know, I don't regard them as offensive or inducing antisocial behavior or anything like that.
But I would be glad for you to contact Tony Nicely because I can't think of any other company at Berkshire that does, remotely, the amount of advertising. And Tony is an easy fellow — he's here now, actually, but you could write him at GEICO or you could find him at the GEICO booth, probably, later in the day and just talk to him about that. I'd be glad to have you do that, Father Peter.
WARREN BUFFETT: Number 2.
AUDIENCE MEMBER: Good morning Mr. Buffett, Mr. Munger. My name is Deb Caviello, (PH) and I'm from Windsor, New Jersey.
I'm 45-years-old and have achieved financial independence in that I'm able to manage the money of my spouse and myself full time. And that goes to marrying well, part of that. I was —
WARREN BUFFETT: That can be a big part of it. (Laughter)
AUDIENCE MEMBER: Marrying well in the sense that I received the encouragement and the confidence to pursue that.
WARREN BUFFETT: That's terrific.
AUDIENCE MEMBER: I was going to ask you a question more along the lines of diversification, but I think I will put it this way. I'll skew it a little differently.
Each of us has a traditional IRA, a Roth IRA, and together we have a brokerage account. Should the assets in those accounts be separated or better managed as a whole pile?
In other words, have overlapping securities in each account or different types of securities relegated to a specific account?
WARREN BUFFETT: Yeah. Well, I would say your marriage sounds like it's going to last, so I think you should think of yourself and your husband as a unit.
And I would — you should — in my view, you should look at your overall financial condition and not worry about where the location of the assets will be.
So if you have a net worth of X and you have 20 percent of it in a 401(k) and 30 percent outright and so on like that, just look at the whole picture and decide what mix of assets, what type of assets you want, and don't treat them as being in separate pots.
I mean, at Berkshire, you know, we own stocks in a whole bunch of different — our insurance companies own stocks in separate portfolios and we even have a portfolio in Cologne as mentioned earlier.
I don't even think about what entity anything is in. You know, it's all working for Berkshire, and I think you should — the way to think about your situation is to think about it all working for your family.
Now, if you're — you strike me as having a very solid marriage, and I think your husband would be crazy if he split with you. But the — if you're just starting out, you may want to keep your money separate for a while until you see how it plays out, because a significant percentage do end up in divorce.
Listen, I don't get into marriage counseling very often. (Laughter)
But I can feel the ground sort of disappearing between my feet here. But I will turn it over, therefore, to our marital expert, Charlie Munger. (Laughter)
CHARLIE MUNGER: Yeah. Occasionally, you'll find an investment that is going to produce a huge amount of taxable income. It's a junk bond paying a high yield that's taxable or something.
So some items are more suitable for those retirement accounts that get tax-deferral benefits. But apart from that, it's all one pot. Sure.
WARREN BUFFETT: Number 3.
AUDIENCE MEMBER: Hi, Warren. I'm Doug Hicks (PH) from Akron, Ohio. And you hear on the news lately a lot of people say that oil will run out during this century.
Considering the U.S. policy is to do nothing until the very last second, how do you think the end of oil will play out?
For example, do you think that this would, unfortunately, result in World War III? Or do you think alternative energy will be available, the day that oil runs out, to take its place?
And maybe, do you think these oil companies' value will go to zero when oil runs out?
WARREN BUFFETT: Yeah. Oil won't run out. It doesn't work that way.
What oil will do at some point — who knows when — people predict a lot of different things — oil at some point, daily productive capacity throughout the world will first level off and then start declining very gradually.
The nature of oil extraction is such that wells don't — with rare exceptions — they don't go to a given point producing a hundred barrels a day and then all of a sudden quit or anything like that. So you run into this depletion aspect and get into decline curves and that sort of thing.
So we won't — we're producing in the world, 86 or 87 million barrels a day of oil, which is more than we've ever produced before.
We are closer — by at least my calculations — we are very much closer to producing almost as much as our productive ability is in the world, with fields in their current stage of development, than we've ever been.
I mean, our surplus capacity, I think, is less than, well, any time I can remember. And it's quite a bit less than most periods.
So we don't have the ability to crank up, in any short period of time, the 86 or 7 to a hundred million barrels a day.
But whatever that peak will be, and whether we hit it five years from now or 50 years from now, and then it will just gradually taper down, and the world will adjust to it, and hopefully we'll be thinking about it, you know, well before it happens, and various adjustments will be made in the world that will cause the demand to somewhat taper down as the available supply.
But we will be producing oil far beyond this century. It's just — the question is whether we're producing 50 million barrels a day, or 75 million, or 25 million barrels a day. I don't know the answer to that.
There's a lot of oil in place in the world. We've messed up the recovery of a lot of the oil. I mean, we never recovered the, you know, the total potential of fields. And some fields we've mis-engineered in ways so that we will recover a very small percentage. Now, maybe there will be better engineering, tertiary recovery, and that sort of thing in the future.
It's nothing like an on and off switch, though, in terms of the world producing oil or adjusting to reduced capacity or anything like that.
You may still have enormous political considerations to — access to the available oil — because it's going to be so darn important to our society for so long.
There's nothing we can do, in any short period of time, that will wean the world off of oil. You know, that is a fact of life.
CHARLIE MUNGER: Well, if we get another 200 years of economic growth pretty well disbursed over the world, while the population of the world also goes up, all of the oil, coal, natural gas, and uranium reserves of the world are like nothing.
So eventually, of course, you have to use the sun. There is no other alternative. And I think we can confidently predict that there will be some pain in this process of adjusting to a different world.
Personally, I think it's extremely stupid to use up the hydrocarbon reserves of the world as fast as we are.
I don't think we've got any good substitutes for those things as chemical feed stocks, and I think it's perfectly crazy to use up something so precious for which you have no alternative that's sure to be available.
And if you look at it backwards, what should we have done? Hell, we should have bought all the oil in the '30s in the Middle East and take it over here by tankers and put it in our own ground.
I mean, it's obvious to see what should have been done in the past.
Even though that's obvious, are we doing the equivalent of that now? And the answer is, basically, no.
So I think the governmental policy tends to be way behind in terms of rationality. And I think we'll just have to soldier through. But eventually the — if we're going to have a prosperous civilization — we have no other alternative than the sun.
WARREN BUFFETT: What's your over-under figure for 25 years from now, world production oil per day?
CHARLIE MUNGER: Down.
WARREN BUFFETT: Yeah. (Laughter)
That's not an insignificant prediction. I mean, it — believe me. If oil production is down 25 years from now, it will be a different world.
I mean, you — China's going to sell over 10 million cars this year. I mean, the demand is going to keep — even at these prices — it's hard for me to imagine demand falling off a lot. So if production falls off, you'll have some interesting consequences.
WARREN BUFFETT: Number 4.
AUDIENCE MEMBER: Mr. Buffett and Mr. Munger, my name is Guy Pope, and I'm from Portland, Oregon.
I enjoyed the cartoon this morning, and I'd like to expand on that.
I, too, like the idea of both of you serving as a single term as the President of the United States. During — hypothetically, let's say, Mr. Buffett, you served the first term; Mr. Munger, you served a second term.
WARREN BUFFETT: I think the other way around is better, but go ahead. (Laughter)
AUDIENCE MEMBER: Each of you please name three difficult policy decisions you would implement during your term to better the country.
WARREN BUFFETT: Well, Charlie is going to serve the first term, so I'm going to let him name his three.
CHARLIE MUNGER: I think that one takes us so far afield that I think it's asking too much. Three perfect solutions to the major problem of mankind from each of us in a few minutes?
We've just barely managed to stagger through life as well as we have, and I don't think we're quite up to it. (Laughter)
WARREN BUFFETT: We'd probably have a massive federal program for retirement homes, actually. (Laughter)
I would probably do something about the tax system that would change things so that the superrich paid a little more and the middle class paid a little less, but — (Applause.)
WARREN BUFFETT: That might be why you'd prefer to have Charlie serve first.
WARREN BUFFETT: Number 5.
AUDIENCE MEMBER: Hi. I'm Ryan Johnson (PH) from Arizona, and I wanted to ask what you think about the food shortages in the world and what trends you see in the next decade or two?
WARREN BUFFETT: Well, again, I'm no expert on that. Charlie?
CHARLIE MUNGER: Well, I said last year that I thought that the policy of turning American corn into motor fuel was one of the dumbest ideas, in terms of the future of the world — (applause) — that I'd ever seen.
I came out here with the head of an academic institution, and he called the idea stunningly stupid.
Now, I'm here in Nebraska where I like Nebraskans to prosper. But this idea was so monstrously dumb that I think it's probably on its way out.
WARREN BUFFETT: We've now — oh, no. We've got time for a couple more. Let's go to number 6.
AUDIENCE MEMBER: Hi. My name is Timothy Ferriss. I am a guest lecturer at Princeton University twice a year. And I'd like to touch on an earlier question about investing with small sums of money.
I'd like to ask both of you, if you were 30-years-old again and had your first million in the bank, how would you invest it, assuming you're not a full-time investor, you have another full-time job, you can cover your expenses with other savings for about 18 months, no dependents, and it would be really helpful for my students, for myself and others here, if you could be as specific as possible about asset classes, percentages, whatever you're willing to offer. (Crowd noises)
WARREN BUFFETT: Well, I'll be very simple: I — under the conditions you name, I'd probably have it all in a very low-cost index fund, and it would probably be — you know might be Vanguard — somebody I knew was reliable, somebody where the cost was low.
And because you postulated that you're not going to become a professional investor, I would recognize the fact that I'm an amateur investor, and I would feel that a — unless bought during a strong bull market, which this hasn't been — I would feel that that was going to outperform, to a degree, bonds, under current conditions over a long period of time, and then I'd forget it and go back to work.
CHARLIE MUNGER: Yeah. It's in the nature of things that you aren't going to have a whole lot of screamingly successful professional investors.
You've got a great horde of professionals taking croupiers profits out of the system, most of them by pretending to be professional investors, and that is in the nature of things, too.
But if you don't have any rational prospects of being a very skilled professional investor, of course you should compromise on some simple thing like an index fund.
WARREN BUFFETT: Yeah. And that — you will not get that advice from anybody because nobody gets paid to give you that advice.
So you will have all kinds of people telling you how much better they can do for you than that, and how if you just give them a wrap fee, or give them commissions, or whatever it may be, that they will do better, but they won't do better.
On average, you know, if a thousand other people like you do the same thing, that group of a thousand will do worse if they listen to the people that make pitches at them.
And in the end, why should you expect — I mean, you've got a very perfectly decent return over a 30- or 40-year period by doing what I suggest.
And why should you expect more than that when you don't bring anything to the party? The salesman will tell you that you'll get it, but you won't.
CHARLIE MUNGER: I would give you another word of warning: do not judge stockbrokers generally by the ones you meet at this meeting. We attract some of the most honorable, intelligent stockbrokers in the world. They are not representative of the class.
WARREN BUFFETT: (Laughs) The politician in him just came out
WARREN BUFFETT: OK. We'll do one more, and then we'll break for lunch. Number 7.
AUDIENCE MEMBER: Good morning. My name is Tim Fam (PH). I'm from Austin, Texas.
For my children, I would like to hear from both of you as far as the temptation to keeping up with the Joneses.
And can you give them advice that they can live by with respect to frugality, debt, and work ethic?
WARREN BUFFETT: Yeah. Just tell them to keep up with the Buffetts. (Laughter)
Well, Charlie and I have always been big fans of living within your income, and if you do that, you'll have a whole lot more income later on.
And, you know, it — I think they will, to a considerable extent, not a perfect extent, they will follow the example of their parents.
I mean, if their parents are coveting, you know, every possession of their neighbor, you know, or trying to figure out ways to increase their cost of living without necessarily their standard of living, the kids are likely to pick up on it.
But now you can get the reverse effect. If you get too tough with them, they go crazy later on. (Laughs)
But the — it's — people make that election.
Incidentally, there are people — there are plenty of people that I don't advise to save.
I mean, the real — if you're struggling along and making a reasonable income and you have a job with a 401(k) being put aside for you, and you have Social Security, who's to say whether it's better to defer a dollar of expenditure on your family on a trip to Disneyland or something that they'll get enormous enjoyment out of so that when you're 75 you can have a, you know, 30-foot boat instead of a 20-foot boat?
I mean, there are choices and there are advantages to spending money in various forms for your family when it's young, and giving them various forms of enjoyment or education or whatever it may be.
So I don't — I don't advocate — I may practice — but I don't advocate extreme frugality.
The — and I don't say that it's always better to be saving 10 percent of your income instead of 5 percent of your income.
I think it's crazy to be spending 105 percent of your income, and I think that leads to all kinds of problems, and I get letters from people every day that have experienced those problems.
But, you know, in the end you want to have an internal score card. I mean, you are not a better person or a worse person because you live a different kind of life than your neighbor. Live a life that, you know, is true to yourself.
CHARLIE MUNGER: Yeah. It's obviously the best method to train your children to provide the proper example.
(A person in the audience is shouting)
WARREN BUFFETT: I think we're hearing a child that didn't get that advice. (Laughter)
CHARLIE MUNGER: But of course, even if you do provide the proper example, it's likely not to work —
WARREN BUFFETT: It's noon.
CHARLIE MUNGER: — some of the time anyway.
WARREN BUFFETT: It's noon now. We'll take about a 30 to 40-minute break. We'll come back. Some of those who are in the other room — we always have some openings here after lunch so you might be able to move into the main room.
We'll reconvene, we'll say, at 12:45. We'll go to 3 o'clock.