WARREN BUFFETT: I had a hot dog with a lot of ketchup for lunch. I hope you did the same.

WARREN BUFFETT: And we'll go to Doug.

DOUG KASS: Thank you, Warren.

Mae West once said, "The score never interested me, only the game."

Are you at the point now where the game interests you more than the score? But before you answer the question, let me explain to you why I asked it.

In the past, your research has been all-encompassing, whether measured in time devoted to selecting investments and acquisitions, or the intensity of analysis, your interest in the old days of knowing the slightest minutia about a company.

You once said, in characterizing Ben Rosner, quote, "Intensity is the price of excellence," closed quotes.

Your research style has seemed to morph over time from a sleuth-like analysis — American Express comes into mind when you hired Jonathan's dad, Henry Brandt. You and he conducted weeks of analysis and sight visits and channel checks.

Not so much in the later investments. As an example, you famously thought of making the Bank of America investment in your bathtub.

There is an investment message of this transformation from being intense to less intense.

Would you please explain the degree it has to do with the market, Berkshire's size, or some other factors?

WARREN BUFFETT: Yeah. I think, actually, you have to love something to do well at it. There may be exceptions on that, but it is an enormous, enormous advantage if you absolutely love what you're doing, every minute of it.

And the nature of it is that that intensity adds to your productivity.

And I have every bit of the intensity — not manifested exactly the same way — but it's there every minute. I mean, I love thinking about Berkshire. I love thinking about its investments. I love thinking about its businesses. I love thinking about its managers. It's part of me.

And it is true, you can't separate the game from the scorecard. I mean, you — so your score card is part of playing the game and loving the game.

The proceeds are — you know, to me — are unimportant, but the proceeds are part of the score card, so they come with a score card.

But it's much more important — I mean, I would — no question about it, I wouldn't be — feel — the same way about Berkshire at this point if I didn't own a share of it, if I didn't get paid. I mean, it's what I like doing in life, and that's why I do it.

So, I don't think you'll — I don't think it's actually a correct observation — and Charlie can comment on this — to say that because we're doing things in a somewhat different way, that any of the intensity or the passion has been lost.

There's nothing more fun for me than finding something new to add to Berkshire, and that was true 40 years ago. It's true now. And it'll be true 10 years from now, I hope.

Charlie, how would you answer that?

CHARLIE MUNGER: Well, I think when you bought American Express for the first time, you didn't know that much about it, so, naturally, you were digging in rather deeply.

The second time you bought it, I remember you got on the golf course with Olson —

WARREN BUFFETT: Frank Olson, yep.

CHARLIE MUNGER: — and you just saw how he couldn't get rid of American Express if he wanted to, and then you bought it the second time.

The research is still — the first one was hard, and the second was easy.

WARREN BUFFETT: It's all cumulative.

CHARLIE MUNGER: Yeah, it's cumulative, eventually.

WARREN BUFFETT: Yeah. And, you know, what I learned sitting with Lorimer Davidson on a Saturday at GEICO in January of 1951 is still — is useful to me, and I don't have to learn it a second time. I can build on it.

But that's one of the great things about investing. I mean, the universe, there's enough in it so that you can finds lots of opportunities, but there — it's not like it's changing dramatically all the time.

There's some things that may change, and we just don't play in that part of the game if we don't understand them.

But what Charlie says is true. I didn't know a thing about American Express when the Salad Oil Scandal hit in November of 1963. But I thought I saw an opportunity, so I learned a lot about it.

I went around to restaurants and talked to people about travel and entertainment cards, as they were called then. I learned about traveler's checks. I talked to banks. And I was absorbing some knowledge.

And then, as Charlie said, when we were up at Prouts Neck playing golf with Frank Olson, and he was running the Hertz Corp., and he was telling me that there was no way in the world that he could get rid of American Express, or even get them to cut their fees. That was my kind of business.

And I knew enough to proceed to buy a fair amount of stock, and now we own whatever it is, probably 13 percent of the company or thereabouts. And they keep buying in their stock. We can't buy anymore stock ourselves.

I got asked that question in March of 2009 by Joe Kernen, "Why aren't you buying the stock of American Express?" Well, it was a bank holding company, and we couldn't add a share.

But they are doing it for us, and I love it.

At Coca-Cola, at Wells Fargo, to a lesser degree, at IBM, at most of our companies, our interest in the company goes up every year because the companies are repurchasing shares and they probably earn more money so we got a double play going for us.

But the passion is not gone, I promise you.

WARREN BUFFETT: Station 1.

AUDIENCE MEMBER: Hi, Warren and Charlie. My name is Vincent Wong (PH) from Seattle.

When people analyze a stock, a lot of them look at quantitative metrics, such as P/E ratio, return on equity, debts-to-asset ratio, et cetera.

So, Mr. Buffett, when you analyze a stock for purchase, what's your top five quantitative metrics that you looked at, and what's your preferred number for each metric? Thank you.

WARREN BUFFETT: Well, we're looking at quantitative and quality — we aren't looking at the aspects of the stock, we're looking at the aspects of a business.

It's very important to have that mindset, that we are buying businesses, whether we're buying 100 shares of something or whether we're buying the entire company. We always think of them as businesses.

So when Charlie and I leaf through Value Line or look at annual reports that come across our desk or read the paper, whatever it may be, that, for one thing, we have a — we do have this cumulative knowledge of a good many industries and a good many companies, not all by a long shot.

And different numbers are of different importance — or various numbers are of different importance — depending on the kind of business.

I mean, if you were a basketball coach, you know, you would — if you were walking down the street and some guy comes up that's 5'4" and says, you know, "You ought to sign me up because you ought to see me handle the ball," you would probably have a certain prejudice against it. But there might be some — one player out there it made sense on.

But on balance, we would say, "Well, good luck, son, but, you know, we're looking for 7-footers." And then if we find 7-footers, we have to worry about whether we can get them halfway coordinated and keep them in school, a few things like that.

But we see certain things that shout out to us, look further or think further.

And over the years, we've accumulated this background of knowledge on various kinds of businesses, and we also have come up with the conclusion that we can't make an intelligent analysis out of — about all kinds of businesses.

And then, usually, some little fact slips into view that causes us to rethink something. It was mentioned how I got the idea about buying the Bank of America — or making an offer to Bank of America on a preferred stock — when I was in the bathtub, which is true.

But the bathtub really was not the key factor. (Laughter)

The truth is, I read a book more than 50 years ago called "Biography of a Bank." It was a great book, about A.P. Giannini and the history of the bank.

And I have followed the Bank of America, and I've followed other banks, you know, for 50 years.

Charlie and I have bought banks. We used to trudge around Chicago trying to buy more banks in the late '60s.

And so, we have certain things we think about, in terms of a bank, that are different than we think about when we're buying ISCAR. And so there is not one-size-fits-all.

We have certain things we think about when we're buying an insurance company, certain things we think about when we're buying a company dependent upon — that depended upon — brands. Some brands travel very well, Coca-Cola being a terrific example, and some brands don't travel.

And, you know, we just keep learning about things like that, and then every now and then we find some opportunity.

The Bank of America — whenever it was — in 2011 — was subject to a lot of rumors, terrible — I mean, lots — big short interest, morale was terrible, and everything else. It just struck me that an investment by Berkshire might be helpful to the bank and might make sense for us.

And I'd never met Brian Moynihan at that point — maybe I'd met him at some function, some party of something, but I had no memory of it — and I didn't have his phone number but I gave him a call. And things like that happen.

And it's not because I calculate some price — precise — P/E ratio or price-book value ratio or whatever it might be.

It is because I have some idea of what the company might look like in five or ten years, and I have a reasonable amount of confidence in that judgment, and there's a disparity in price and value, and it's big.

Charlie, would you like to elaborate?

CHARLIE MUNGER: We don't know how to buy stocks just by looking at financial figures and making judgments based on the ratios.

We may be influenced a little by some of that data, but we need to know more about how the company actually functions. And anything a computer could be functioned to do, in terms of screening — I know I never do it. Do you use a computer to screen anything?

WARREN BUFFETT: No. I don't know how to. (Laughter)

CHARLIE MUNGER: No. Bill's still trying to explain it to me.

WARREN BUFFETT: I — we — you can — it's a little hard to be precise on, because we don't really use screens — (inaudible) were screening everything. But it's not like we sit there and say, you know, we want to look at things that are below the price of book value, or low P/Es, or something of the sort.

We are looking at businesses exactly like we'd look at them if somebody came in and offered us the entire business, and then we try to think, what is this place going to look like in five or ten years, and how sure are we of it.

And most — a lot of companies, you know, we just don't know the answer to it. We do not know which auto company is going to, you know, be knocking the ball out of the park ten years from now or which one is going to be hanging on by its fingernails.

You know, we watched the auto business for 50 years, a very interesting business, but we don't know how to — we don't know how to foresee the future well enough on something like that.

CHARLIE MUNGER: We think that the Burlington Northern will have a computer — a competitive —advantage 15 years from now, with a high degree of confidence. We would never have that degree of confidence about Apple, no matter what their financial statement showed.

WARREN BUFFETT: No.

CHARLIE MUNGER: It's just — it's too hard.

WARREN BUFFETT: Yeah. We don't know about an oil company ten years from now, you know, in terms of what the product will be selling for or anything.

I would say we're — you know, we're virtually 100 percent confident about a Burlington Northern, or a GEICO, or some other companies that I won't name.

CHARLIE MUNGER: People with very high IQs who are good at math naturally look for a system where they can just look at the math and know what security to buy. It's not that easy.

You really have to understand the company and its competitive position, and the reasons why its competitive position is what it is, and that is often not disclosed by the math.

WARREN BUFFETT: Yeah. It's not what I learned from Ben Graham, although the fundamentals of looking at stocks as businesses, and the attitude toward the market and all that, is absolutely still part of the catechism.

But I wouldn't — I don't know exactly how I would manage money if I was just trying to do it by the numbers that —

CHARLIE MUNGER: You'd do it poorly. (Laughter)

WARREN BUFFETT: Yeah. That takes care of that. (Laughs)

WARREN BUFFETT: OK. Carol?

CAROL LOOMIS: This question is from Benjamin Knoll of Greater Twin Cities United Way.

"Every time Bill Gross writes a new essay on the, quote, 'new normal,' unquote, I get more depressed about the prospects for my retirement.

"Do you share his view that market returns in the next few decades will be much lower than in the past few? And should we expect Berkshire's future market returns to be greatly constrained, not only by its size, but also by much lower equity returns overall?

WARREN BUFFETT: Yeah, Charlie and I don't pay any attention to macro forecasts.

We have worked together now for 54 years, and I can't think of a time when we made a decision on a stock, or on a company, where a macro discussion — where we've talked about macro.

We don't know what things are going to look like, in any precise way. And, incidentally, naturally, we think if we don't know it, nobody else knows. That's the conceit that we have. (Laughs)

And — so we — you know, why talk — why spend time talking about something you really don't know anything about? I mean it — people do it all the time, but it not very productive. So we talk about the businesses.

I like Bill Gross. Sounds like Lloyd Bentsen, you know, back in the — he's a friend of mine.

But I don't — it doesn't make any difference to me what he thinks about the future, doesn't make any difference to me, you know, what any economist thinks about it.

I have a general feeling that America will continue to work well. And I don't — you know — there's — throughout my adult lifetime, and before that, there's always been all kinds of opinions that, you know, about what's going to happen this year or the next year or anything like that. And nobody knows.

What you do know, with a very high degree of certainty, in my view, is that BNSF will be carrying more carloads 10 years from now, 20 years from now; that there will be no substitute for the service that they provide; that there will be two important railroads in the west and two important railroads in the east; and that they will have an asset that has incredible replacement value, nobody could turn out something like it, and that they'll get paid fairly for what they do. It's not very complicated.

And to ignore what you know because of predictions about what you don't know, or what nobody else knows, in our view, it's just plain silly.

So we don't have anything against somebody talking about a new normal or an old normal or an in-between normal, but it doesn't mean anything to us.

My own guess is that people will do very well owning good businesses, if they don't pay too much for them, you know, whether they hold them for 10 years or 20 years or 30 years.

And if they try and time their purchases in some way by listening to forecasts about what's going to happen in business and try and buy and sell them, they're going to do very well for their broker and not so well for themselves.

Charlie?

CHARLIE MUNGER: Yeah. But, of course, Warren, we have a lot of money. We have to do something with it. So we're going to do our thing no matter what the external climate is.

If you're a busy surgeon and trying to decide whether to work two more years before you retire, then you may be more interested, and rationally so, in the new normal.

And I would personally advise the guy to work an extra couple of years. (Laughter)

In other words, I kind of agree with Bill Gross.

WARREN BUFFETT: What do you think the normal is?

CHARLIE MUNGER: Well, less than we've enjoyed in our lifetimes, the new normal.

WARREN BUFFETT: What have we enjoyed in the last 10 years? I mean, you know —

CHARLIE MUNGER: It hasn't been so bad.

WARREN BUFFETT: No. And it hasn't been —

CHARLIE MUNGER: It's not nearly as good as it was in the first 30.

WARREN BUFFETT: Yeah. And do you think it would be worse than the average of the last 10 years?

CHARLIE MUNGER: I think that's quite a conceivable outcome.

WARREN BUFFETT: So take your pick. OK. (Laughter)

WARREN BUFFETT: Jonathan?

JONATHAN BRANDT: Warren, I'm sorry. My last question about solar was directed at Charlie, but my next question is about underwear, so I think you can probably field this one.

WARREN BUFFETT: Boxers or briefs? (Laughs)

JONATHAN BRANDT: I'm not talking.

Over time, Fruit of the Loom and others have lost nearly all of the T-shirt-focused wholesale screen print market to Gildan, a relatively new player with very low cost structure.

Gildan is now going after the underwear-focused retail market and is having some success with certain large customers. Branding is obviously more important in the retail market, but is there any reason to think Fruit of the Loom won't lose significant amounts of share here over time, just as they did in the wholesale screen print market?

What can they do to protect what remains of their franchise?

WARREN BUFFETT: Yeah. You keep — you keep your costs down and you constantly work at brand building, and you try very hard to make sure that your main customers, in turn, have their customers happy with the product, and are happy with the price points that you can deliver it at.

And you're correct that Gildan, in terms of certain aspects, the non-branded aspects, basically, of some parts of the business, has hurt Fruit in the last — well, last 10 years, certainly.

But we turn out first-quality, low-priced underwear with a strong brand recognition. And I think it will be very tough to either build a brand against it or to beat our costs significantly.

Now Gildan pays very little in the way of income taxes, you know, because they route stuff through the Cayman Islands, and that's a modest factor.

But I think you'll find five years from now, or 10 years from now, that our market share in men's and boys', particularly underwear, will hold up.

But you're right. They're a competitive threat. Hanes is a competitive threat. And it's not a business that you can coast on. It's not Coca-Cola, but it's not an unbranded product, either.

And I think Fruit will do reasonably well, but it will not get anything like, you know, the kind of profit margins that you can get in certain branded products.

Charlie?

CHARLIE MUNGER: Yeah. And then, too, as many products as we have, we may average out pretty well, in terms of market shares, but we're not going to win every skirmish or every battle.

WARREN BUFFETT: OK. Station 2.

AUDIENCE MEMBER: Yeah. Hi, Warren. Hi, Charlie. I'm Fritz Hauser (PH) from Offenburg, Germany.

I'd like to know what 10 books influenced you the most and that weren't written by Graham and Fisher, and I'd also like to tell you that I think it would be great if you would publish the portfolio statements of the Buffett Partnership years.

I think there are a lot of small investors that would get a kick out of knowing, you know, what you invested and how you went ahead and analyzed the companies. Thank you.

WARREN BUFFETT: Yeah. Well, Charlie ran something called Wheeler,Munger and his portfolio was even more interesting, so we'll start with you, Charlie. (Laughs)

He ran a more concentrated portfolio than I did in those days.

CHARLIE MUNGER: Yeah. I don't think people would be greatly helped. You wouldn't recognize the names, most of them, clearly, by the partnership.

You'd recognize American Express. Rattle off some of the names.

WARREN BUFFETT: Yeah. Well, we can start with Mosaic Tile and —

CHARLIE MUNGER: The map company.

WARREN BUFFETT: — Meadow River Coal & Land. There's hundreds of them. Flagg-Utica, Philadelphia Reading Coal & Iron, you name it.

I've literally owned — I bet I've owned 4- or 500 names at one time or another, but most of the money's been made in about 10 of them.

CHARLIE MUNGER: And I couldn't name 10 books either that have — that I regard as that much better than the next 10. My mind is a blend of so many books I can't even sort it out anymore. (Laughter)

WARREN BUFFETT: Yeah. "The Intelligent Investor" changed my life, in terms of — I literally had read every book in the Omaha Public Library by the time I was 11 on the subject of investing, and there were a lot of books.

And there were a lot — there were technical books, Edwards & Magee, I mean, that was a classic in those days, and a whole bunch of them, Garfield Drew. But — and I love — I enjoyed reading them a lot. Some of them I read more than once.

But I never developed a philosophy about it. I enjoyed it. I charted stocks. I did all that sort of thing.

Graham's book gave me a philosophy, a bedrock philosophy, on investing that made sense. I mean, he taught me how to think about a stock, he taught me how to think about the stock market, and he taught me that the market was there not to instruct me but to serve me.

And he used that famous "Mr. Market" example. He taught me to think about stocks as pieces of businesses, rather than ticker symbols or things that, you know, you could chart, or something of the sort.

And so it was that philosophy — and in some way, further influenced by Phil Fisher's book — and Phil Fisher was just telling me the same thing that Charlie was telling me, which was that it's very important to get into a business with fundamentally good economics, and one that you could ride with for decades, rather than one where you had to go from flower to flower every day.

And those — that philosophy has carried me along. Now, I've learned different ways of applying it over the years, but it's the way I think about businesses now.

I have not found any aspect of that bedrock philosophy that has flaws in it. You have to learn how to apply it in different ways.

So those are the books that influenced me.

And, of course, in other arenas, Charlie's probably read more biography than anybody that I know of. And I like to read a lot of it.

We're just about through reading the Joe Kennedy biography. You've read that, haven't you, now, Charlie?

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: You know, I'm not sure you want to emulate everything he did, but it's still interesting reading. (Laughs)

We read for the enjoyment of it. I mean, it's been enormously beneficial to us, but the reason we read is that it's fun. And, you know, it's still fun.

And on top of it, we have gotten very substantial benefits from it. My life would have been different if Ben Graham hadn't gone to the trouble of writing a book, which he had no financial need to do at all. You know, I would have a very different life.

WARREN BUFFETT: OK. Becky.

BECKY QUICK: This question comes from Bill Miller of Legg Mason.

He writes, "The U.S. airline industry has been plagued with terrible economics for over 100 years. With the pending merger of USAir and American, the industry will have consolidated to the point where the top four carriers will control almost 90 percent of the traffic.

"As a result, the industry has been consistently profitable this past several years, with many of the airlines now earning double-digit returns on invested capital and generating substantial free cash flow.

Do you think the industry's much improved economics are likely to persist? And would there be any economic benefits if Berkshire were to own a domestic airline and pair it with NetJets?"

WARREN BUFFETT: Yeah. Well, the answer to the second is no.

But the question about the industry is really interesting, because it is true that it has consolidated very significantly.

And in some businesses, you can have only two competitors and they're still terrible businesses, they beat each other's brains out. And sometimes they end up competing to do very stupid things. You can argue that that's what happened with Freddie Mac and Fannie Mae. I mean, enormous companies that had a huge advantage over everybody else, but they still, in their battle to both report higher earnings every quarter and to beat the other guy out, you know, drove prices for insuring loans down to the improper levels, and did a lot of other stupid things, too.

So you see — you do see certain industries where once they get down to very — a very few companies, do extremely well. And you see other industries where, even when they get to be two of them, they don't do that that well.

I mean, you can take Coke and Pepsi in the United States.

I mean, they're the only two colas that people can name, and 50 percent or so of the soft drinks are colas. But if you go into a supermarket on the weekend, you will see them pricing their product at ridiculously low prices and competing very vigorously.

So it's very industry specific. The airline industry, you know, has this situation where they have very, very, very low incremental costs per seat, you know, with enormous fixed costs, and the temptation to sell that last seat at a very low price is very high and it's very — and sometimes it can be very difficult to distinguish between the last seat and other seats.

So it's a labor-intensive, capital-intensive, largely commodity-type business, and it's been — as Bill Miller points out in that question, it's been, you know, a death trap for investors ever since Orville [Wright] took off.

I mean, as I've said, if there had been a capitalist at Kitty Hawk he should have shot down Orville and done us all a favor. (Laughter)

But the — but having neglected to do that, investors have poured money into airline companies, and aircraft manufacturing companies, now for 100 years-plus, with terrible results.

And if it ever gets down to where there's one airline and there's no regulation, it will be a wonderful business. And then the question is whether, having gotten down, now, through a lot of bankruptcies, to a relatively few that are doing a high percentage of the seat miles, whether it's a good business yet. I don't know the answer, but I'm skeptical.

Charlie?

CHARLIE MUNGER: Well, the last time we were presented with a similar opportunity was when the railroads did exactly what Bill Miller suggests. The railroads got down and consolidated and got better control of their labor costs and it turned into a wonderful business. And what did we do? We missed it. We stumbled in very late to the party, right?

WARREN BUFFETT: Right.

CHARLIE MUNGER: So we've proven ourselves to be slow learners in this field, and it's conceivable, isn't it, that Bill Miller is right in what he suggests?

WARREN BUFFETT: Which way do you bet?

CHARLIE MUNGER: It goes into my too hard pile. (Scattered laughter)

WARREN BUFFETT: Mine, too.

CHARLIE MUNGER: But he could be right.

WARREN BUFFETT: Yeah, sure he could. And it will be fun to watch.

But we like things we have stronger feelings about.

We do not think that things will change dramatically in — well, with See's Candy, you know, it's — we've got — even there, you know, the real profitability is limited to the West Coast, but we do not see some competitor coming along and taking away business.

CHARLIE MUNGER: You really couldn't create another railroad and —

WARREN BUFFETT: I hope not.

CHARLIE MUNGER: — and you — and you can create another airline.

WARREN BUFFETT: Very easily, and you have people that like to do it.

CHARLIE MUNGER: That's what we don't like about it.

WARREN BUFFETT: And people love doing it. It's exciting to people.

And you can sell the idea. I've had, probably, a dozen proposals over the last 25 or 30 years from people that want to get into the airline business one way or the — and a number of them have. It's sexy, for some reason.

I mean, it — you know, if you go to the office of some Mr. Big CEO and say, "I want to talk to you about this new airplane," you get in the door. You know, I mean, if you want to talk to him about hauling coal or something, it's a little different.

So it is a business that attracts people. And you can go out and raise money for a new airline, and the record is — it's really been something. I don't know how many bankruptcies there have been in the airline field, but it's an enormous number.

And, of course, some have done it more than once. We bought USAir. I bought that. I was at Gorat's with [CEO] Ed Colodny, and he explained to me how wonderful the airline was — he's a good guy, incidentally — and I wrote a check.

And by the time the check was cashed, they were having troubles. I mean, it did not take long.

CHARLIE MUNGER: No.

WARREN BUFFETT: And then they went bankrupt twice. We were very lucky on — we actually made quite a bit of money on it, as it turned out, because there was a little blip at one point. But I think it went bankrupt twice after we bought it.

And Charlie and I were on the board, and we would look at these projections, you know, and they were just ridiculous. I mean, they never came true, did they, Charlie?

CHARLIE MUNGER: No, no, no. It was —

WARREN BUFFETT: We were very popular because we actually pointed that out a few times. (Laughter)

WARREN BUFFETT: OK. Cliff.

CLIFF GALLANT: I want to ask you about share repurchases. How hard a floor should shareholders think about the 1.2 times book value buyback multiple?

Are there circumstances under which you would not be buying back at 1.2?

WARREN BUFFETT: Yeah. Well, generally speaking, book value has got nothing to do with the price at which you should purchase your shares; intrinsic business value does. And the correlation between intrinsic business value and book value throughout the investment universe is — you know, there's virtually no correlation.

So book value is unimportant to most companies. It actually has — it has a reasonable tracking utility at Berkshire.

Our intrinsic business value is very considerably above book value, and we have signaled that — we'll say it right here, we've said it before — but in addition, we've signaled that by saying that we would repurchase our shares as long as we had a substantial cash balance, met all the needs of our operating companies, at 120 percent of book value, and if we got the opportunity to buy it there, we would probably buy a whole lot of it.

The calculus is very much what I put in the report. You know, you take care of your business with money first, and if you can buy additional businesses at something where you add to the per-share value of the business, you do that.

If you can repurchase your shares at a significant discount from intrinsic value, it like buying dollar bills at 90 cents or 80 cents or whatever it may be, and it's a very sure way of improving per-share value.

It's been very difficult for us to do it because every time we announce it, people say, "Well, if it's — if he thinks it's worth more than 120 percent of book," you know —

CHARLIE MUNGER: Yeah. Those cheapskates are willing to pay that.

WARREN BUFFETT: Yeah, right. Well, if at least one cheapskate is willing to pay that, the —

And, you know, they're right. And we don't really — we've got mixed emotions on it.

We don't really like the idea of running a company where it makes most of its money by buying its partners out at a discount, but if partners want to sell out at a discount, we also like the idea of buying and making, you know, sure money that way.

We haven't done much of it. Most of the time our stock has sold in a reasonable range in relation to intrinsic business value. We would think that probably a fairly significant percentage of the time in recent years it sold at at least some discount. There were a few years when we thought it sold for more than intrinsic business value.

But if it, in our opinion, the directors' opinion, the stock is selling at a significant discount and we've got the money around and we've got the stock offered to us in a reasonable quantity, we will buy it, and then — and there could be circumstances — it's unlikely — but there could be circumstances where we'd buy a whole lot at a price that would be attractive for the stockholders who stayed in.

Charlie?

CHARLIE MUNGER: Nothing to add.

WARREN BUFFETT: Station 3.

AUDIENCE MEMBER: Hi there. Sean Cawley. I'm a real estate agent in Los Angeles, California.

Question for Charlie. It's kind of a real estate question, and it's also a company culture question. Have you ever considered moving to Omaha to be closer to corporate headquarters?

CHARLIE MUNGER: (Laughs) Oh, I think the answer to that is no. (Laughter)

WARREN BUFFETT: I'm sure the answer to that is no.

Our partnership works extremely well. And even though we're somewhat technophobic, we have gotten to the point where we can handle using the phone — (laughter) — don't push us beyond that.

CHARLIE MUNGER: No, we've never learned anything beyond the phone.

WARREN BUFFETT: But we — I mean, as a practical matter, we each know exactly how the other guy thinks, so that we don't really even need the phone, exactly. (Laughter)

We used to do a lot of phoning back when it cost a lot of money to phone. Now it doesn't cost anything to phone, and we don't talk to each other, hardly. (Laughter)

Charlie — but Charlie has a lot of fond thoughts about Omaha, incidentally, as do I.

CHARLIE MUNGER: Yes. Although, I — as I said earlier on this weekend, they're rebuilding it so rapidly now that I felt like Rip Van Winkle. They've torn down so many of the buildings I remember. It's amazing how much Omaha has changed the last five years.

WARREN BUFFETT: Well, you have to remember that a third of the lifetime of the country has passed during our lifetime, so you have to expect a little change occasionally, Charlie. (Laughter)

WARREN BUFFETT: OK. Andrew.

ANDREW ROSS SORKIN: OK, Warren. We got a couple of questions related, this year, to climate change and its impact on the company.

So let me ask this question from Clem Dinsmore, who asks: "If asked, what would the underwriting experts at your casualty insurance and reinsurance companies advise you and your fellow board members are the emerging risks to Berkshire's many enterprises from the changes in extreme weather associated with climate change?"

And I would add that Jed McDonald asked a separate question, but related, saying, "What are your thoughts on the price on carbon debate?"

WARREN BUFFETT: Yeah. Well, as you've noticed if you've been here the last few years, the climate really is getting a lot warmer. (Laughter)

Obviously — well, Charlie knows far more about science than I do, which is not saying a whole lot, but the — my general feeling is that there is a — certainly a reasonable chance — that people that are worried about warming and the effect of CO2, et cetera, are right.

But I don't know enough so that I can say that, you know, that I can speak as any kind of an expert on it.

I don't know the answer on it, but I certainly am willing to assume that — there are a lot of very smart people who think that, and I think that it's a reasonable assumption.

I don't think that it makes any real difference in assessing insurance rates from year to year.

We have a general tendency to be pessimistic in our assumptions about the likelihood of natural catastrophes, but we would have that general bias, which I think is useful, regardless, if there were no carbon emissions of any kind going on.

We would still assume that whatever the past history had been of natural disasters, we would assume that they were going to be somewhat worse.

And the global warming, in terms of resetting prices of insurance from year to year, is not a real factor.

Our general pessimistic bias is something of a factor.

The second part about pricing of carbon emissions, do you want to repeat that again?

ANDREW ROSS SORKIN: The full question — and I abbreviated it — was, “What are your thoughts on the carbon — the price of carbon — debate?

"Do you think it's a feasible way, for example, to incentivize efficiency improvements and capture the externalities of carbon's damaging effects, or is it a lofty, idealized concept too tricky to figure out in practice?”

WARREN BUFFETT: I would say that the question calls for having Charlie give the answer. (Laughter)

CHARLIE MUNGER: Well, you've got to realize that I'm a Caltech-trained meteorologist, but that was before they'd invented most of modern meteorology. (Laughter)

I think that I think that carbon trading is pretty impractical, a whole bunch of nations with different ideas, and so on.

And I think if you're going to change habits, the correct answer is carbon taxes.

I think Europe, because they're socialists and wanted to tax the thing the people needed the most, they put these big high taxes on motor fuel. So they did it by accident, and not because it was a good idea, vis-a-vis global warming and a lot of other issues, but because they really needed the money.

But I think they stumbled into the right policy. I think the United States should have way higher taxes on motor fuel, and that's efficient. (Applause)

Some group of shareholders, though. They like clapping for high taxes. (Laughter)

WARREN BUFFETT: They weren't all clapping. (Laughter and applause)

WARREN BUFFETT: OK. Doug.

DOUG KASS: Warren, my next question is both a question and an unusual challenge.

I'm asking this next question because in the past, you've been open to inviting your audience to apply for jobs.

In 2002, you suggested that shareholders who thought they were eligible to send in their qualifications if they were interested in seeking a seat on your board of directors.

And, again, in your 2006 letter, when you advertised for a successor to Lou Simpson at GEICO, you said at the time "Send me your resume."

In the past, you have discussed your views on short selling. You have cited that stocks tend to rise over time, and you've talked about the asymmetry between reward and risk.

By contrast, the last 15 years has demonstrated that short selling can be a value additive tool to total return when done by professionals. In fact, I believe Todd Combs had success as a short seller when you hired him.

CHARLIE MUNGER: He had so much success he stopped doing it. (Laughter and applause)

DOUG KASS: Yes, Charlie, but he got the job from that success. My question is —

WARREN BUFFETT: No, no, he didn't. (Laughs)

Can't slide that one in there, Doug. (Laughter)

DOUG KASS: My question is: would you ever consider committing capital to a short-selling strategy? Would you or Berkshire consider being my Homer Dodge, who invested in your partnership after the original seven investors?

Would you or Berkshire Hathaway be willing to give my firm at least $100 million in a managed account?

If Seabreeze failed to outperform the increase, during the two-year period, of the book value increase in Berkshire, all the earned fees earned would be contributed half to the Sherwood Foundation, and half to two charities of my choice, including the Jewish Federation of Palm Beach County?

And even if Seabreeze outperformed Berkshire's change in book value, 25 percent of the earned fees would be contributed to the charities.

And I want to add something else. You talked about being technophobic.

Technology may be very hard for Berkshire to invest in, but it is also disruptive to many industries whose business models are scathed by it, and this produces very fertile ground for short-selling opportunities.

WARREN BUFFETT: Well, we got to —

CHARLIE MUNGER: Let me add to that.

WARREN BUFFETT: OK — 1:55 without an ad, but — (laughs)

CHARLIE MUNGER: The answer to your question is no. (Laughter and applause)

WARREN BUFFETT: Charlie and I are no strangers to short selling. I mean, we both —

CHARLIE MUNGER: Failed at it.

WARREN BUFFETT: Yeah. (Laughter)

So we'll — just think about how lucky you are. You don't have the competition from all kinds of people that listen to us or — ourselves.

No, we — I may even propose a little wager at some point, but we'll let that ride for the time being.

I've known — well, if you go back far enough, you know, we did a reasonable amount of short selling, and I've certainly identified lots of companies that I thought were far overpriced, and I've identified a fair number of companies that I not only thought, but was virtually certain, were frauds. And so, Charlie — we've been seeing them ever since we got in the business.

But making a lot of money short selling, still, is not a game that appeals to us over a long period of time. It's one of those things that —

CHARLIE MUNGER: We don't like trading agony for money. (Applause)

WARREN BUFFETT: But we wish you well. (Laughter)

WARREN BUFFETT: Station 4.

AUDIENCE MEMBER: Ben Sauer (PH) from Shreveport, Louisiana.

Could you be more specific about what factors you considered when determining what a fair price was for an acquisition such as Heinz?

And also, what sources do you use to make judgments about major changes that will affect an industry?

WARREN BUFFETT: Well, we usually — we usually feel we're paying too much. Isn't that right, Charlie? (Laughs)

But we find the business so compelling, the management, our associates, so compelling, that we gag and we get there on the price.

But we — there is no mathematical — perfect mathematical — formula.

Looking back, when we've bought wonderful businesses that turned out to continue to be wonderful, we could've paid significantly more money, and they still would have been great business decisions. But you never know 100 percent for sure.

And so it isn't as precise as you might think. Generally speaking, if you get a chance to buy a wonderful business — and by that, I would mean one that has economic characteristics that lead you to believe, with a high degree of certainty, that they will be earning unusual returns on capital over time — unusually high — and, better yet, if they get the chance to employ more capital at — again, at high rates of return — that's the best of all businesses. And you probably should stretch a little.

Charlie and I have had several conversations where we were looking at a building — a business — which we liked, and were sort of gagging at the price, and Charlie or I will say, you know, "Let's do it," even though it kind of kills us to pay that last 5 percent.

We did that with See's Candy. Charlie was the one that said, "For God's sakes, Warren, write the check." I was the one that was suffering.

But it's happened quite a few times, hasn't it, Charlie?

CHARLIE MUNGER: It almost always happens. (Laughter)

Modern prices are not cheap.

WARREN BUFFETT: No, no. And great businesses, you know, you're not going to find lots of them, and you're not going to get the opportunity to buy them and — although you do in the market.

The stock market will offer you opportunities for profit, percentage-wise, that you'll never see, in terms of negotiated purchase of business.

In negotiated purchase of a business, you're almost always dealing with someone that has the option of either selling or not selling, and can sort of pick the time when they decide to sell, and all of that sort of thing.

In stock markets, it's an auction market. Crazy things can happen.

You can have, you know, some technological blip that will cause a flash crash or something. And the world really hasn't changed at all, but all kinds of selling mechanisms are tripped off, and that sort of thing.

So you will see opportunities in the stock market that you'll never really get in the business market.

But what we really like, we really like buying businesses to hold and keep. We like buying cheap marketable securities, too. But particularly when you've got lots of cash coming in and you're going to continue to have lots of cash coming in, you really want to deploy it in great businesses that you can own forever.

Charlie, anything?

CHARLIE MUNGER: No. It — we're sort of in a different mode now, and that has a great lesson, in that if we'd kept our earlier modes, if we'd never learned, we wouldn't have done very well.

The game of life is a game of everlasting learning. At least it is if you want to win.

WARREN BUFFETT: We want to win.

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: Carol.

CAROL LOOMIS: This question is from Logan Reed (PH) of Pawling, New York, and has both a question and a postscript, and I'm going to do the postscript first. It's friendly.

"I'm an 86-year-old World War II vet, which puts me about halfway between you and Mr. Munger. I would respectfully and urgently request that you quit eating so many hamburgers. (Laughter)

"Those things plug up your arteries, and I want to keep you around for a while, in spite of the fact" — the unfriendliness comes in here — "that you voted for President Obama." (Laughter)

Now, here is the question.

WARREN BUFFETT: This guy is trying to kill me, and he's doing it — (Laughter)

CAROL LOOMIS: "Over the years, you've frequently alluded to your legendary reputation for thriftiness, and you've extolled the virtues of the managers of Berkshire companies who have invariably been extremely cost conscious.

"If these are hallmarks of the philosophy which has enabled you to achieve your astounding success, how can you possibly support an administration which has plunged our country into $16 trillion worth of debt, and has not indicated the slightest concern — (applause) — over the efficiency — inefficiency — over the inefficiency of big government?"

WARREN BUFFETT: Yeah. Well, the 16 trillion, we'll have to give Bush a certain amount of credit for that, too. (Applause)

They certainly didn't — certainly wasn't — the Obama administration that, at least, allowed policy that created the greatest financial crisis and required an appropriate stimulus on the part of the government. (Applause)

But, in the end, I find it totally unproductive — and that fellow at 86 probably is — should have found it out by now — to discuss politics with people. I mean, you're to have roughly half agree with you and half disagree.

So if you — if you look at this — the trouble is, Charlie and I, even though he's a Republican, I'm a Democrat, we really don't disagree as much as you might think based on that.

Otherwise, I could say you could just take your pick here and vote for one of us and ignore the other one, and we would offer a little something for everyone.

The amount of deficit spending in the last four years, the amount of stimulus provided — fiscal stimulus provided — I think, has been quite appropriate in relation to the threat to the economy that was posed by the greatest panic in my lifetime.

I mean, you literally had a situation where Berkshire Hathaway was getting a phone call because General Electric needed money, and we were the last stop.

That is quite a situation. It's quite a situation when Freddie and Fannie go into conservatorship and WaMu and Wachovia fail, and where money market funds have 5 percent drained out of them in three days, and with a panic underway.

So I — we needed fiscal stimulus in this country.

Now, the real question is: how do you get off of that? And that is a problem, but it's a lesser problem than we would've had if we'd decided to follow some austerity program, in my view, at least, starting in 2008.

How do you feel about that, Charlie?

CHARLIE MUNGER: I agree with you completely. (Applause)

And, by the way, so did George W. Bush.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: That was bipartisan. We were in so much trouble, that on both sides of the aisle, we finally got together and supported these extreme interventions.

WARREN BUFFETT: George Bush issued, probably, the ten greatest words of economic thought in history. Most people don't give him credit for that.

They think of Adam Smith and comparative advantage and Keynes and animal spirits and all those guys.

But George Bush went out there in September of 2008 and said, "If money doesn't loosen up, this sucker could go down." (Laughter)

I mean, that is a man that knew how to get to the point. (Laughter)

And I give him great credit for it, enormous credit.

And plenty of members of his party did not agree with what he was doing, but we owe him a lot, in that respect.

And, you know, we — our leaders, generally speaking, in both parties, once they were in the terrible trouble, I think they behaved, or came up with policies that, in general, were very useful in avoiding something far worse than what we experienced.

And they weren't easy to do. I mean, it took some guts.

So, I am disturbed by a national debt that grows in respect to GDP. In fact, I wrote an article in The New York Times, an op-ed piece, in — I think maybe 2009 or 2010 — talking about this very problem.

But, you know, we came out of World War II with a debt higher — a gross or net debt — higher in relation to GDP than we have now, and people were predicting terrible things at that time because of that situation, and the country has done sensationally.

The real danger is that it just continues to grow, and it gets easier to print money than exercise some discipline.

But we've encountered far worse problems than we face now. I mean, this is not our country's toughest hour, by a huge margin.

And I think we will do fine, but with a lot of bickering, and kind of nonsense that will bother you when you read about it day to day. But when you look at it from a viewpoint of history 10 or 20 years from now, you will not be that disturbed.

Charlie?

CHARLIE MUNGER: Well, I agree with you about George W. Bush, and I like these nonpartisan episodes when we get together and do things right.

And I also think that our current problems are quite confusing. In fact, if you aren't confused, I don't think you understand it very well. (Laughter)

WARREN BUFFETT: That sort of immunizes you from everything. (Laughs)

How bothered are you by the level of debt in relation to GDP?

CHARLIE MUNGER: Well, I don't think there's any one fixed ratio that is written in the stars.

As a matter of fact, most of the debt, as I conceive it, is not even counted in what you call "debt." The off-the-books debt of the United States is bigger than the on-the-books debt, all the present value of future promises that are unfunded.

WARREN BUFFETT: That can be changed, however.

CHARLIE MUNGER: Yes. But, if they can be changed, but are we really going to take Social Security away from somebody who's worked a lifetime?

WARREN BUFFETT: Well, we shouldn't.

CHARLIE MUNGER: I don't think it's very likely.

WARREN BUFFETT: No, no. But Social Security is not a killer, actually, in terms — if you have a GDP that rises a couple percent in real terms —

CHARLIE MUNGER: Of course — that's the great problem. All of our problems are trivial, if GDP will just rise at 2 percent per annum, per capita.

All these problems that the Republicans are screaming about fade into insignificance if we can do that.

But you've got to have policies that enable you to do it, and I'm not sure we always do that very well. (Applause)

WARREN BUFFETT: OK. Stay tuned.

WARREN BUFFETT: Jonathan.

JONATHAN BRANDT: I have a question about the competitive landscape in the paint business.

I personally always use Benjamin Moore, but some say that Benjamin Moore is disadvantaged because it doesn't control its own distribution, as does Sherwin-Williams, and they note that it has lost market share to Behr, which is sold in the home centers at lower prices.

You recently replaced management there. What changes in strategy and/or pricing, if any, are being undertaken at that unit, and what is the outlook for that franchise?

WARREN BUFFETT: Yeah. Benjamin Moore, it's a relatively small percentage of the total paint industry, but it — at the high end, it is the best regarded paint, and we have not lost position in that respect.

But the — when we purchased Benjamin Moore, I made a promise. I even made a video. It had a dealer system, and people that invested their savings and passed on from generation to generation dealerships from Benjamin Moore, and counted on the company adhering to a dealer system, even though you could always get a huge jump in volume, particularly in the first year, if you went with the big boxes.

So we were always approached by the big boxes, and they said, you know, "Let us take Benjamin Moore into our stores," whether it be Home Depot or whomever. And we would've gotten a big jump in volume when that happened and they would've loved us — to have us — as a brand with that kind of identity in their stores, but it would've represented a total change in the distribution arrangement.

I don't think it would've worked out as well over time, and I know it would have been essentially — particularly after my pledge, which the other — which the management pledged too, they would've been double-crossing a network of dealers that trusted us, and trusted us when we bought it to continue with the policy.

A dealer policy will work with a first-class brand like Benjamin Moore. It will never get the kind of market share as will take a Behr, which is distributed through Home Depot.

We were actually offered Behr at one time. Charlie, do you remember that one?

CHARLIE MUNGER: Yes, I do.

WARREN BUFFETT: Yeah, yeah. But the company was actually investigating, and went on its way to implementing, some moves that would've, in effect, gutted, or we felt would drastically hurt the dealers and violate the pledge that I'd made to them back when we bought it.

So we did have a change there. And we will — we will not follow the Sherwin-Williams path, which is a very — I mean, it's a very effective business strategy. I'm not knocking that at all, but that is not our strategy. Our strategy will be a dealer strategy, focused on the high end of the market.

CHARLIE MUNGER: Besides, it's worked very well.

WARREN BUFFETT: Oh, yeah, it's worked well, and it'll continue to work well.

It doesn't mean that Sherwin-Williams won't do extremely well. I think they will. It doesn't mean that Behr won't do well. I think they will.

But we are in a different segment and it's up to us to protect and really foster the dealer distribution network, and I think we can have something, and do have something, very special with those dealers and with the position that Benjamin Moore has.

But it will not lead to far higher market shares or anything. I think it will lead — and it has — to very decent profitability. Benjamin Moore is a good business, and I think it will continue to be a good business.

Charlie?

CHARLIE MUNGER: Well, I agree totally. I always wish we could buy five more like it tomorrow.

WARREN BUFFETT: Yeah, exactly.

WARREN BUFFETT: OK. Station 5.

AUDIENCE MEMBER: Derek Foster, Ottawa, Canada.

First of all, thank you, Warren, for sharing all your information. You've changed my life. I took finance in university, couldn't understand Greek formulas, but now I can invest reasonably well.

My question to you is, in the past you've said for an investor, you should simply — for 99 percent of investors — you should simply stick money in an index fund and let it go and don't worry about it. Those 1 percent of investors, choose your best five stocks and put a substantial amount of money in it.

I'm just wondering, how about a strategy of, perhaps, buying 20 of the best stocks in America, you know, Procter & Gamble, Coca-Cola, Johnson & Johnson, whatever, the companies that have been around for centuries — or a century or decades or whatever — and just leaving it at that.

Do you think that that would outperform an index fund over the long term? And I want Charlie's opinion as well.

WARREN BUFFETT: Well, I don't know whether you're saying the 20 largest companies or the 20 best. You might get different thoughts from different people on what they are.

But I think you would — probably the 20 you would pick would virtually match the results of an index fund. Who knows exactly which ones would be the best?

But the real distinction — and Graham made this in his book, basically — is between the person who is going to spend an appreciable amount of time becoming something of an expert on businesses, because that's what stocks are, or the person who is going to be busy with another profession, wants to own equities, and actually will actually do very well in equities. But the real problem they have is that they may tend to get excited about stocks at the wrong time.

You know, they, really, the idea of buying an index fund over time is not to buy stocks at the right time or the right stocks. It's to avoid buying them at the wrong time, the wrong stocks.

So equities will do well over time, and you just have to avoid getting — you know, getting excited when other people are excited, or getting excited about certain industries when other people are, trying to behave like a professional when you aren't spending the time and bringing what's needed to the game to be a professional.

And if you're an amateur investor, there's nothing wrong with being an amateur investor, and you just simply — you've got a very logical, profitable course of action available to you, and that is simply to buy into American business in a broadly diversified way and put your money in over time.

So I would say your group of 20 will probably match an index fund, and you'll probably do well in that, and you will do well in an index fund.

Charlie?

CHARLIE MUNGER: Well, I have nothing to add. I do think it's — that knowing the edge of your own competency is very important. If you think you know a lot more than you do, well, you're really asking for a lot of trouble.

WARREN BUFFETT: Yeah. And that's true outside of investments, too.

CHARLIE MUNGER: Yes. Works particularly well in matrimony. (Laughter)

WARREN BUFFETT: Do you want to give any other advice on that subject?

CHARLIE MUNGER: No.

WARREN BUFFETT: He gave it in the movie. I saw people taking notes.

WARREN BUFFETT: OK. Becky?

BECKY QUICK: This question comes from James Brodbelt Harris of Columbus, Ohio.

He says that your enormously generous multibillion charitable gifts of Berkshire Hathaway stock over the past decade have, and will continue to be, sources of salable assets for the charities linked to the Buffett, Gates, and Munger families.

Could annual sales of billions of dollars’ worth of donated stock by these charitable foundations be a reason why shares have traded under 120 percent of book value, and will announced share repurchase plans fully address this selling by the charitable funds in the coming decade?

WARREN BUFFETT: Yeah. I give away 4 3/4 percent of my stock, we'll say, every year, and let's say that's $2 billion worth of stock, roughly. That's 1 percent — a little less than 1 percent — of the market value of Berkshire.

Many companies in the New York Stock Exchange trade over 100 percent a year. A 1 percent sale annually of the outstanding capitalization is absolutely peanuts, and you can even argue, in some cases, that it can aid, in terms of market price, because the availability of stocks sometimes determines whether people get interested in buying.

But a supply of 1 percent annually is not going to change the level at which a stock trades. I mean, it just it's insignificant compared to the volume.

Berkshire — I think Berkshire's volume, A and B combined, is — probably averages, what, 4 or $500 million a day, so 2 billion spent over a year is not going to affect things.

And you can argue that, you know, everybody else has a right to sell their stock or give it to a charity. I don't think I should be totally tied up, in terms of being able to give the stock away.

Charlie?

CHARLIE MUNGER: Well, there's nothing so insignificant as an extra $2 billion to an old man. (Laughter)

WARREN BUFFETT: I've never given away a penny that in any way changed my life. Have you, Charlie?

CHARLIE MUNGER: No, of course not.

WARREN BUFFETT: We never even thought of it. (Laughs)

CHARLIE MUNGER: It would be unthinkable.

WARREN BUFFETT: It's — it has a lot more utility in the hands of other people than it does in my safe deposit box.

WARREN BUFFETT: OK. Cliff? (Applause)

CLIFF GALLANT: Looking over your first quarter results in the 10-Q, I was wondering — and this might apply more to the noninsurance businesses — what are you seeing in terms of reading the tea leaves for the U.S. economy right now?

Are you starting to see lift? And I'm curious if you have any — if you feel any — need to start to expand Berkshire internationally outside of the U.S.?

WARREN BUFFETT: Well, we're willing to go, you know, anyplace where we think we understand what things are — in a reasonable way— what things are going to look like in five or 10 years, and where we get our money's worth, and good management, and all of the things that we emphasize.

But — so we don't — we've never foreclosed anything, but we're going to find most of our opportunities in the United States. It's just the nature of things that this is a huge, huge market for businesses, and we're better known here.

But, you know, most of our deals will take place here, but we find things outside the United States, particularly in terms of bolt-on acquisitions.

In terms of current business, ever since the fall of 2009, coming on four years, we've seen a gradual improvement. And sometimes people have gotten encouraged to think it was speeding up quite a bit, and then they get feeling that — they start talking about a double-dip, which I've never believed in and hasn't happened.

What we see overall is just a slow progress in the American economy. You saw those figures on carloadings for the first 17 weeks. And, you know, we were up 3-and-a-fraction percent, but the other railroads were up 4/10 of a percent, so the industry as a whole might be up 1 percent or thereabouts, a little over 1 percent.

This economy is not — for the last four years — it's not come roaring back in any way, shape, or form.

It's never faltered, and I wouldn't be surprised if it keeps going this way.

Now, finally, the overhang in housing ended — it ended about a year ago — but — so we're starting to get — we're seeing some recovery in home prices, which has a big psychological effect, and we're seeing some improvement in construction.

But we don't want to start overbuilding again. We really want to have housing starts that more or less equal household formation. And I think we're seeing that.

So if you ask me where we're going to be when we meet here next year, you know, I think we will have moved forward.

But I don't think it will be in any surge of any sort, but I don't think we'll stall, either.

Charlie?

CHARLIE MUNGER: Well, it's not a field where —

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: — I've been good.

WARREN BUFFETT: We do know what's going on now, though. I mean —

CHARLIE MUNGER: Yeah, we know what's going on now.

WARREN BUFFETT: And I guess that ends it? (Laughs)

CHARLIE MUNGER: Can't make a lot of money knowing what's going on now. (Laughter)

WARREN BUFFETT: And you can't make a lot of money thinking you know what's going to go on tomorrow if you don't, either.

We will — we'll just keep — we keep playing the game. I mean —

CHARLIE MUNGER: Yeah, we keep playing the game.

WARREN BUFFETT: And if we hear about something tomorrow that we can spend 15 or $20 billion on and we feel we like the business, United States or otherwise, we'll move in an instant, and if we don't, we won't do anything.

And we just never know when opportunity is going to come along, but it does come along from time to time. And sometimes in financial markets, it comes in a huge way. I mean, that will happen from time to time.

We may not see very many more, but most of the people in this room will see four or five times in their — during their lifetimes — they will see incredible opportunities offered in — probably in equity markets — but maybe in bond markets as well.

People — things will happen, and then, you know, you have to be able to act, and then you have — and that means both in terms of having the ability and also having the mental fortitude to jump in when most people are jumping out. OK. Station 6. Charlie, you want to —

CHARLIE MUNGER: No.

WARREN BUFFETT: OK. Station 6.

AUDIENCE MEMBER: Hi. Brandon from Los Angeles.

I'm in my 20s and I'm starting a partnership. What advice do you have about getting people to put in money before I have a track record as a solo investor? (Laughter)

WARREN BUFFETT: Well, you haven't sold me. (Laughter)

No, I think people should be quite cautious about investing money with other people, even when they have a track record, incidentally. There are a lot of track records that don't mean much.

But overall, I would advise any young person that wants to manage money, and wants to attract money later on, to start developing an audited track record as early as they can.

I mean, it was far from the sole reason, far from the sole reason, that we hired Todd and Ted, but we certainly looked at their record, and we looked at a record that we both believed and could understand, because we see a lot of records that we don't really think mean much.

I mean, if you get — you know, if you have a coin flipping contest, as I wrote, you know, some years ago, and you get 310 million orangutans out there and they all flip coins and they flip them 10 times, you know, you will — instead of having 300 million left, you'll have 300,000, roughly, left that'll flip ten times in a row successfully.

And those orangutans will probably go around trying to attract a lot of money to back them in future coin flipping contests.

So it's our job when we hire somebody to manage money to figure out whether they've been lucky coin flippers or whether they really know what they're —

CHARLIE MUNGER: When you had his problem, didn't you scrape together about $100,000 from a loving family?

WARREN BUFFETT: Yeah. Well, I hope they kept loving me after they gave me the money. That was —

Well, it was very slow, and it should have been very slow. As Charlie has pointed out, some people thought I was running a Ponzi scheme, probably, there.

And other people may not have thought it, but it was to their advantage to sort of scare people because they were selling investments in Omaha.

But you — to attract money, you should deserve money, and you should develop a record over time that — and then you should be able to explain to people why that record is a product of sound thinking rather than simply being in tune with a trend or simply just being lucky.

Charlie? You're starting today and you're 25 years old. How do you attract money?

CHARLIE MUNGER: I think most people start with friends and family, or people whose trust they've already earned in some other way. So it's hard to do when you're young, and that's why people start so small.

WARREN BUFFETT: And a relatively few will be successful.

CHARLIE MUNGER: That's right, too.

WARREN BUFFETT: Some of them — a great many will be successful and make — I mean, you know, we have the hedge fund record here. And during that time, the hedge fund managers have probably made a very considerable amount of money.

As I pointed out, Todd and Ted, working under a 2 and 20 arrangement, if they put the money in a hole in the ground, would make $120 million each this year.

So it's not exactly an arrangement that you don't want to think about a little bit before you engage in it.

CHARLIE MUNGER: The arithmetic attracts many of the wrong sort of people.

WARREN BUFFETT: Naturally, we thought we were exceptions.

CHARLIE MUNGER: Yes.

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: OK. At Berkshire, there is a unique dynamic that exists between your recognition of Ajit's special skills and Ajit's special skills.

You comment often about how unique Ajit's skills are. So just tell us, is Ajit your successor? (Buffett laughs)

And if not, what happens to Ajit's businesses without Ajit?

WARREN BUFFETT: Well, they won't be without Ajit for a long time. And he — what — he's remarkable in many ways, but one of the ways he's particularly remarkable is that when people start copying something he's doing and turning what was maybe quite profitable into something that becomes something every Tom, Dick, and Harry is doing, he figures out new ways to do business.

And I notice you started with the 'A's when you started on a possible successor with Ajit, and you won't have any more luck when you get to the 'B's. (Laughs)

Charlie?

CHARLIE MUNGER: Well, I think the basic answer is that if Ajit ever is not with us —

WARREN BUFFETT: We won't look as good.

CHARLIE MUNGER: Yeah, we won't look as good, right.

WARREN BUFFETT: And that's true of a number of other managers, too. We have an extraordinary group of people, in most cases, who do not need the money that they earn working for us. They may make substantial money. And they are doing a job for you shareholders and for me and Charlie that you can almost say we don't deserve.

But they are having — I think they're having — a good time running their businesses. The one thing we do is try and create an atmosphere where they can enjoy running the businesses rather than spend all their time running back and forth to headquarters and doing show-and-tell operations and that sort of thing.

And it's taken a long time, though, too. I mean, we operated Berkshire for 20 years without Ajit. If he'd come in the office in 1965 instead of 1985, we'd probably own the world. (Laughter)

Kind of fun to think about, isn't it?

Charlie?

WARREN BUFFETT: Doug?

DOUG KASS: Howard, like you, I have two sons that I love. Like you, I have a son in the audience today. This question is not meant to be disrespectful —

WARREN BUFFETT: Sounds like it's going to be, but go ahead. (Laughter)

DOUG KASS: — but it's a question I have to ask.

WARREN BUFFETT: OK.

DOUG KASS: Someday your son, Howard, will become Berkshire's nonexecutive chairman. Berkshire is a very complex business, growing more complex as the years pass. Howard has never run a diversified business, nor is he an expert on enterprise risk management.

Best as we know, he hasn't made material stock investments, nor has he ever been engaged in taking over a large company.

Away from the accident of birth, how is Howard the most qualified person to take on this role?

WARREN BUFFETT: Well, he's not taking on the role that you described. He is taking on the role of being nonexecutive chairman in case a mistake is made in terms of who is picked as a CEO.

I don't — I think the probabilities of a mistake being made are less than 1 in 100, but they're not 0 in 100. And I've seen that mistake made in other businesses.

So it is not his job to run the business, to allocate capital, do anything else. If a mistake is made in picking a CEO, having a nonexecutive chairman who cares enormously about preserving the culture and taking care of the shareholders of Berkshire, not running the business at all, it will be far easier to then make another change.

And that — he is there as a protector of the culture, and he has got an enormous sense of responsibility about that, and he has no illusions about — at all — about running the business.

He would have no interest in running the business. He won't get paid for running the business. He won't have to think about running the business.

He'll only have to think about whether the board and himself — but as a member of the board — but whether the board may need to change the CEO.

And I have seen many times, really many times, over 60-plus years or — well, probably 55 years as a director — times when a mediocre CEO, likable, you know, not dishonest, but not the person who should run it, needs to be changed.

And it's very, very hard to do when that person is in the chairman's position. It's not as — it's a bit easier now that you have this procedure where the board meets at least once a year without the chairman present.

That's a very big improvement, in my view, in corporate America. Because it — a board is a social institution, and it is not easy for people to come in, we'll say, to Chicago or New York or Los Angeles once every three months, have a few committee meetings, and maybe have some doubts about whether they've really got the right person running it.

They may have a very nice person running it, but they could do better. But who's going to make a change?

And that's the position that the nonexecutive chairman, in this case, Howard, will be in. And I know of nobody that will feel that responsibility more in terms of doing that job as it should be done than my son, Howard, you know.

CHARLIE MUNGER: Yeah. I think the Mungers are much safer — (applause) with Howard there.

You've got to remember, the board owns a lot of stock, you know. We're thinking about the shareholders. We're not trying to gum it up for the shareholders.

WARREN BUFFETT: Yeah. After my death, whatever it may be in terms of value then, but it would be $50 billion worth of stock, will, over a period of time, go to help people around the world and it makes an enormous difference, you know, whether the company behind that stock is doing well or not.

And both Charlie and I have seen — we've seen some — more than one example — of where a CEO who might be a six on a scale of 10, and is perfectly likable and has, perhaps, helped select some of the directors that sit there, and continues to run the business year after year when somebody else could do it a whole lot better.

And it can be hard to make that — very hard — to make that change if that person controls the agenda and, you know, keeps everybody busy when they come into town for a little while.

CHARLIE MUNGER: You can have a CEO that's nine out of 10 on everything but with deep flaws, too.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: It helps to have some objective person with a real incentive sitting in the position Howard will be in.

WARREN BUFFETT: The example I've used in the past, I mean, that — you know, that blessed are the meek for they shall inherit the earth, but after they inherit the earth, will they stay meek?

Well, that could be the problem, you know, if somebody got named CEO of Berkshire. It could be a position where people might want to throw their weight around in various ways.

You may have noticed that in the annual report, in terms of our newspapers, I said, you know, I am not going to be telling them who to endorse for president. Ten of them endorsed Romney and two endorsed Obama. I voted for Obama, but I'm not going to change that.

But when I write that sort of thing, I'm trying to box in my successor, to some degree, too, and we do not want somebody using Berkshire Hathaway as a power base in the future. We want them to be thinking about the shareholders. It's that simple.

CHARLIE MUNGER: Sometimes somebody becomes CEO who has the characteristic of a once-famous California CEO, and they used to say about him he's the only man who could strut sitting down. (Laughter)

WARREN BUFFETT: OK. Station 7.

AUDIENCE MEMBER: Hi. I'm Brad Johnston from Minneapolis, Minnesota.

And my question is within the context of a very low interest rate environment that may be sustained for some time and the challenge that insurance companies are facing in that environment with respect to managing their capital, as well as managing their risk and uncertainty when they have future liabilities and potentially the need for liquidity.

And maybe you could transcend that down to the individual, as well, who is dealing with a low interest rate environment, trying to manage uncertainty and yet still get some cash return from investments.

I appreciate your concept of selling, you know, some of your shares periodically and being better off to do that rather than take dividends, but many people are dealing with the challenges of cash flow.

WARREN BUFFETT: Yeah.

AUDIENCE MEMBER: And then — and just one final tag-on. If you could at the end, could you explain what Federal Reserve Chairman Ben Bernanke believes he has as a tool in his toolbox called the "term credit facility"?

WARREN BUFFETT: No. The answer is I can't. Can you, Charlie?

CHARLIE MUNGER: No.

WARREN BUFFETT: The problem faced by people who have stayed in cash, or cash equivalents, or short-term Treasurys, or whatever, I mean, it is brutal.

The loss — if they live off their income, you know — the loss of purchasing power, it's just staggering when you get into these low interest rates. They are huge victims of a low-interest policy and a dramatically low-interest policy, you know.

Basically, you know, I've written — I wrote back in 2008 to own equities. I mean, it was — equities were cheap.

And you were almost certain to get killed, you know, in terms of — for at least a while — we had a promise that the Fed was going to hold rates very low, so it was a great time to own equities.

And I feel sorry for people that have clung to fixed-dollar investments, particularly short-term ones, during a period like this, and I don't know what I would do if I were in that position.

Imagine having, you know, some sum that seemed like a very large amount of money in the past but, you know, a quarter of a percent on a million dollars is $2,500 a year, and that is not what people anticipated when they were saving over the years.

So I — well, anybody I've advised, I've always felt that owning businesses certainly made sense — more sense — than fixed dollars, under most circumstances.

Not every time in my life, but probably 90 percent of the time in my life, it's made more sense than owning fixed-dollar investments. And it's certainly made dramatic sense a few years ago when equities were marked down to where they were, you know, terrific buys, and where you could see the prospect that fixed-dollar investments were going to pay very little for a considerable period of time.

And I didn't anticipate that we would see the kind of rates for the extended period that we have already, and I don't know how long it will go on.

But it's a real dilemma for people. I get letters — I get a lot of letters — from people that say, you know, "I've got $300,000," and they say, "What should I do?"

So it's — the fallout from low interest rates has hit millions of people in a very harsh way. And you don't read much about it and they don't have much of a voice, but it's been a good argument for owning productive assets rather than dollars during a period like this.

Charlie?

CHARLIE MUNGER: Well, they had to hurt somebody, and the savers were convenient.

WARREN BUFFETT: What would you do about it?

CHARLIE MUNGER: I would've done about what they did.

WARREN BUFFETT: Yeah, so would I.

CHARLIE MUNGER: I would've felt bad about it, but I would have — that's what I would have done.

WARREN BUFFETT: OK. Station 8. We're now going to the shareholder base. We've gone through the panels, and we've got about 45 minutes left and so we're going to give the shareholders a chance to ask — answer — to ask all the questions — maybe answer them — ask all the questions from this point.

Station 8.

AUDIENCE MEMBER: Hi. Chris Hu (PH) from Tokyo, Japan.

Can you talk a little bit more about the IBM investment? Where do you see the moat for that business? And just in the spirit of full disclosure, I work for Microsoft.

WARREN BUFFETT: Yeah. Was your — what was your — the moat about which business?

AUDIENCE MEMBER: IBM.

WARREN BUFFETT: Oh, IBM. Well, I would say that I do not understand the moat around an IBM as well as I understand the mode around a Coca-Cola. I think I have some understanding of it, but I feel I would have more conviction about the moat around a Coca-Cola, or a Wrigley or a Heinz, for that matter, than an IBM.

But I feel good enough about IBM that we've put a considerable amount of money in it. And there's nothing that precludes both Microsoft, which you mentioned, and IBM being successful. In fact, I hope they both are.

We — I've got enough conviction about IBM's position that we took a very large position.

I like their financial policies. I think the odds are good that their position is maintained in a strong way over time, but I don't feel the same degree of conviction about that as I do about the BNSF railroad. I mean, you know, it's very hard for me to think of anything that could go wrong with BNSF. I could think of some things that could go wrong with IBM.

They, incidentally, have a very large pension obligation. Now, they have a large pension fund, too, but you're talking 75 or $80 billion of assets and liabilities that, you know, is a big — it is a big annuity company on the side.

And you can have — balls can take funny bounces in the annuity field. I would rather they didn't have that, but that is a fact that I take into consideration when I buy. They show the assets and liabilities of being roughly equal, but the liabilities are a lot more certain than the assets over time.

Charlie?

CHARLIE MUNGER: Yeah. Well, at least the IBM pension plan has the resources of IBM. Suppose you're a big life insurance company now. All over the world, the life insurance companies have started to suffer the tortures of hell.

In Japan, they agreed to pay 3 percent interest, and, of course, there was no way to earn 3 percent interest once the Japanese policies had been in place a long time.

A whole lot of once revered, secure places look unsecure now.

And around Berkshire, you'll notice the life operations are — where we have our own policies as distinguished from reinsurance — are pretty small, right?

WARREN BUFFETT: Yeah. We do not like giving options in this world, and people tend to — well, particularly they've got a sales force pushing them on, as you have in the life insurance industry. They have tended to give people options that have, in certain cases, cost them huge amounts of money.

It's — you know, you always want to accept an option; you never want to give an option. But the life business is in just the reverse side of that.

Actually, the mortgage business — I mean, you know, Charlie and I were in the savings and loan business. The idea of giving somebody a 30-year mortgage where they can — if it's a good deal for you — they can call it off tomorrow, and if it's a good deal for them, they keep it for 30 years.

Those are terrible instruments. They're good for you if you're buying a house, and I recommend that you — I recommend everybody in this room get a 30-year mortgage immediately on a house for all they can.

If it's a bad deal and rates go to 1 percent, you can refund it. If rates go to 6 or 7 percent, maybe you can buy it back for 70 cents on the dollar or something of the sort.

So the life companies have engaged in that big time — big, big time — in the last few decades, and a lot of them are paying the price, and some of them haven't even realized exactly quite what the problems are.

They're kind of like the fellow in the switchblade fight, you know, where the other guy takes a big swipe at him with a switchblade and the fellow says, "You didn't touch me," and the other guy says, "Well, just wait until you try and shake your head." Well, that's a little bit like where some of the life companies are right now.

Charlie? Anything further, Charlie?

CHARLIE MUNGER: No, that's gloomy enough.

WARREN BUFFETT: OK. Station 9. (Laughter)

AUDIENCE MEMBER: Hi. My name is Masato Muso. I'm from Los Angeles, California, and an MBA student at Boston University.

You have mentioned that you are 85 percent Benjamin Graham and 15 percent Phil Fisher, and you have also said that if you only had $1 million today, you could generate 50 percent returns.

Since I'm a young investor, this is my question for the both of you: how was your investment strategy different when you were still accumulating money as opposed to managing billions?

Did you focus on specific industries, small cap, large cap, et cetera? Thank you.

WARREN BUFFETT: Well, managing a million dollars is an entirely different game than running Berkshire Hathaway, or running some 20 or $50 billion fund of money.

And if Charlie and I were running a million dollars now or 100,000 or — we would be looking in some — we'd be looking at some — probably some very small things. We would be looking for small discrepancies in certain situations.

And the opportunities are out there, and periodically, they're extraordinary.

But that's something we really don't think about anymore because our problem is handling 12 or 14 billion, or whatever it might be, coming in every year, and that means we have to be looking for very big deals and forget about what we used to do when we were very young.

Charlie?

CHARLIE MUNGER: Yeah. I'm glad I'm through with that particular problem. (Laughter)

WARREN BUFFETT: He worked pretty hard at it when —

CHARLIE MUNGER: Yes.

WARREN BUFFETT: We both did.

CHARLIE MUNGER: Did we ever.

WARREN BUFFETT: Yeah, yeah. We looked under a lot of rocks, and —

CHARLIE MUNGER: I used to make big returns on my float on my own income taxes. Between the time I got the money and I paid it to the government, I frequently made enough money to pay the tax. It was working for small amounts of money and doing it on most things.

WARREN BUFFETT: He didn't tell me how to do it, though. (Laughs)

WARREN BUFFETT: OK. Station 10.

AUDIENCE MEMBER: Hi, Warren and Charlie. This is Andy Ling (PH) from Shanghai, China.

Thank you very much for what you have said and what you have done. People around the globe have benefited a lot from your philosophies, so you have fans — even a lot of fans — even in China.

My question is: how did you see investments in emerging markets where Berkshire is spend its investments in places like China? If yes, what kind of industries and companies you are interested in? Thank you.

WARREN BUFFETT: Yeah. We don't really start out looking to either emerging markets or specific countries or anything of the sort.

We may find things, you know, as we go around, but it isn't like Charlie and I talk in the morning and we say, you know, it's a particularly good idea to invest in Brazil or India or China or whatever it may be. We've never had a conversation like that, have we, Charlie?

CHARLIE MUNGER: No.

WARREN BUFFETT: It just won't happen.

We don't think that's where our strength is. We know that our strength is not there. And we think, probably, most people's strength isn't there either. I mean, it sounds good, but I don't really think it's the best way to look at investments.

If you told me that we can only invest —

We're perfectly willing to do it. We owned a lot of PetroChina at one time. We own some BYD now. We've owned securities outside the United States and will continue to.

But if you told us that we could only invest in the United States the rest of our lives, we would not regard that as a huge hardship, would we, Charlie?

CHARLIE MUNGER: Yeah. It's a great way to sell investment advice, to have a whole lot of different categories, lots of commissions, lots of advice, lots of action.

And a lot of things we just — we don't feel we've got enough of an edge so that we want to play.

WARREN BUFFETT: Yeah. When we hear somebody talking concepts, of any sort, including country-by-country concepts or whatever it might be, we tend to think that they're probably going to do better at selling than at investing.

It's just such an easy way — I mean, it's what people expect to hear when — you know, when somebody comes calling that, you know, today we think you ought to be looking at this or that around the world.

The thing to do is just find a good business at an attractive price and buy it.

CHARLIE MUNGER: Our experts really like Bolivia. And you say, "Well, last year you liked Sri Lanka." It's just — we're not comfortable with that.

WARREN BUFFETT: Yeah. And we usually think it's a lot of baloney, but —

CHARLIE MUNGER: That's why we're not comfortable.

WARREN BUFFETT: Yeah. (Laughter)

WARREN BUFFETT: OK. Station 11.

AUDIENCE MEMBER: Hello, Mr. Buffett, and Mr. Munger. My name is Brandt Hooker from Los Angeles.

I want to thank you both, first of all, for all the years of advice and your financial philanthropy, as well as your education and/or knowledge philanthropy you've given to so many investors around the world.

And my question is: the U.S. government was seemingly complicit in enticing the American public to buy a home, and, therefore, a mortgage, at any cost. Do you think our legislators are doing the same thing now, and are we creating a bubble?

WARREN BUFFETT: No. I don't think we're remotely near a bubble, in terms of housing, now.

And I certainly think that your statement is accurate but not complete, in terms of what went on before.

I mean, the whole country, almost, every — really kind of went crazy in terms of housing. And the government was a very big part of it because they're a very big part of the financing of it. And it's certainly true that plenty of legislators were encouraging Freddie and Fannie to be doing things that they shouldn't have been doing, not just in retrospect. I mean, if you looked at it at the time, you could come to that conclusion.

But there were an awful lot of people doing the same thing. I mean, it was coming from all sources. And it had that aspect to it, which bubbles do, where year after year for three or four or five years, whatever it might be, that the skeptics looked like idiots and that the people who jumped on the bandwagon were the ones that were refinancing their houses at ever higher prices and people who were speculating on other houses.

So it just looked all so wonderful. And people are really susceptible to that sort of bandwagon effect where they see their neighbors making easy money, everybody's making easy money but them, and they finally succumb.

It's just — it's the nature of things. And it doesn't mean the people at Freddie or Fannie were necessarily evil — a few of them were — or that legislators, necessarily, were evil, although, again, a few of them probably were. But overwhelmingly, I think most people just get caught up in a grand illusion.

And, you know, it's happened many times in history, it'll happen again, and you can use that very much to your profit.

We're not in that kind of a period now on housing. You've got very, very low interest rates, which support, in many cases, the purchase of houses, because it brings down the payments, obviously.

But I personally, about a year ago, I mean, I recommended to people that they buy houses, and I certainly recommend to people that they finance them now.

And most places I would recommend if you find a — if you're going to live in the community for some time and you find a house that fits your needs, I think it's probably a very good time to buy it, in part because the financing is so unbelievably attractive.

Charlie?

CHARLIE MUNGER: Well, the main problem was that as things got crazier and crazier, the government could've intervened by pulling away the punch bowl before everybody was totally drunk, and instead, the government increased the proof.

And this was not a good idea. But you — it's hard to get governments in a democracy to be pulling away the punch bowl from voters who want to get drunk.

WARREN BUFFETT: Well, it's almost impossible.

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: Yeah. I mean, it isn't —

CHARLIE MUNGER: So you're complaining a little bit about what's sort of inevitable in life. Not too good an idea.

WARREN BUFFETT: Yeah. You'll see it again, not necessarily in housing, but you will see it.

And humans will continue to make the same mistakes that they have made in the past.

I mean, they get fearful when other people are fearful. I mean, that's — you saw it in those money market funds when 175 billion, you know, flowed out in three days. I mean, everybody gets — when people get scared, you know, they — it's very, very pervasive.

I've often thought that, you know, if I owned a bank in a two-bank town, you know, I'd — if I were inclined to — I might hire a whole bunch of Hollywood extras to form a line in front of the other guy's bank. (Laughter)

The hell of it is that they — you know, as soon as they got through forming a line there, they'd start forming a line at my bank because they — people really get — they get fearful en masse.

Confidence comes back sort of one at a time, but when they get greedy, they get greedy en masse, too.

I mean, it just — it's just the way the humans are constructed. That's where Charlie and I have an edge. We don't have an edge, particularly, in many other ways.

But we are able, I think, perhaps better than most, to not really get caught up with what other people are doing. And, you know, I don't know whether we learned that over time or what.

But when we see falling prices, you know, we think it's an opportunity to buy, and it doesn't bother us.

Now, we don't own things on margin or, you know, we don't get ourselves in a position where somebody else can pull the rug out from under us. That's enormously important in life. You never want to, you know, get out on a limb.

And, of course, leverage gets very tempting when things are going up. And leverage was what was introduced into housing in a huge, huge way. I mean, people just felt that you were an idiot if you didn't keep borrowing more on your house, and using that to buy more houses, or using it to live on, or whatever, and then finally the roof fell in.

Charlie?

WARREN BUFFETT: OK. Station 1.

AUDIENCE MEMBER: Hi, Warren. Hi, Charlie. My name is George Islets (PH) from Cologne.

Do you see investment opportunities in the eurozone? For example, extending your stake in Munich Re?

Do you trust in the policy of the ECB to bring the things together? Thank you.

WARREN BUFFETT: Yeah. Well, we're perfectly willing to look at business opportunity in the eurozone, and we bought a couple of bolt-on acquisitions, one for a couple hundred million in the farm equipment area. And we'll be happy if we find a business in any one of the 17 countries tied to the euro.

There might be a few of them we may be a little less inclined than others. (Laughs)

But — you know, it may create opportunities for us to buy businesses. We'd be happy to. Europe is not going to go away. But the European monetary union was — you know, had a major flaw, and they're grappling with a way to correct that flaw.

And with 17 political bodies and a lot of diverse cultures, it's really tough for them to do so.

They'll do it in time, in my view. But essentially they synchronized a currency without synchronizing much else.

And nature finds the fatal flaw always, and so does economics, and they found it fairly quickly, in terms of the euro. And the structure that was put in place will not work, and they'll have to find something that does work.

And they will, eventually, but they may go through a fair amount of pain in the process.

Charlie?

CHARLIE MUNGER: Yeah. Structured as Europe was structured, letting in Greece into the European Union was a lot like using rat poison as whipping cream. (Laughter)

It just — it was an exceptionally stupid idea. (Laughter)

It's not a responsible capitalistic country, a place where people don't pay taxes and so on and so — it just — and —

WARREN BUFFETT: I've tried for years to get him to use 'Country A' and 'Country B,' but he — (Laughter)

CHARLIE MUNGER: — and committed fairly extreme fraud in the course of getting into the union. They lied about their debt.

And so Europe made terrible mistakes. They have politicians, too. (Laughter and applause)

WARREN BUFFETT: You think it'll be behind them in ten years?

CHARLIE MUNGER: I think Europe will muddle through.

WARREN BUFFETT: Sure.

CHARLIE MUNGER: Think what Europe has already muddled through.

WARREN BUFFETT: But we would be delighted, even with that dire forecast, not overly — we would be delighted, tomorrow, to buy a big business in Europe that we liked, and we'd pay cash for it.

CHARLIE MUNGER: I hope you'll call me if it's in Greece. (Laughter)

WARREN BUFFETT: I make these small suggestions, but you can see it doesn't help much. (Laughs)

WARREN BUFFETT: OK. Station 2.

AUDIENCE MEMBER: Hi. I'm David Yarus (PH) from Miami Beach, Florida.

On behalf of the internet, welcome to Twitter.

And my question is: how has social media impacted your business and any Berkshire companies, and what impact do you see it having on the world in the short and long term?

WARREN BUFFETT: Probably half the people or more in this audience could answer that question better than I can.

It has — certainly in a place like GEICO, you know, we are — it makes a difference, and over time will make a huge difference in marketing, just as the internet made a change.

I mean, GEICO was founded in 1936 and it had a great business idea of going direct, but it did it entirely by mail, initially, and it worked very well.

And then it progressed to — as the world changed, it, you know, went to TV advertising and phone numbers and that sort of thing, and then it went to the internet, and now it goes on to social media.

So, you know, we have to listen to our customers in all our businesses. Some of them it's much more dramatic than others.

And I've been amazed, you know, at how fast the world has changed. I thought the internet, for example, in terms of GEICO, would affect younger people very quickly, in terms of their buying habits.

But the truth that it spread across the entire age range very, very quickly, a huge change. And you have to respond to that. And I am not the best person, by miles, to do that, but we have people that are very good at it at our businesses, and they're thinking about it plenty, and they'll continue to think about it.

But it would be a terrible mistake to put me in charge of social media at Berkshire Hathaway. (Laughter)

And Charlie would not be a particularly good choice, either. (Laughter)

Charlie, do you want to defend yourself, or —

CHARLIE MUNGER: Well, I don't understand it very well. For very good reason, I avoid it like the plague.

And I hate the idea of the teenagers in my own family immortalizing for all time the three dumbest things they said when they were 13. (Laughter)

WARREN BUFFETT: We would have been in big trouble, Charlie. (Laughs)

CHARLIE MUNGER: We would have been in big trouble, both of us, if that were the system.

And so I think there's a time when your ignorance and folly ought to be hidden. (Laughter and applause)

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: I also think that when you multitask like crazy, like the young people do, none of the tasks is likely to be done well. (Applause)

WARREN BUFFETT: Is there anyone we've forgotten to offend? (Laughter)

WARREN BUFFETT: OK. Station 3.

AUDIENCE MEMBER: Hello. My name is Stuart Kaye (PH) and I work in Stamford, Connecticut.

Earlier in the meeting, you said when reading over financial statements, you identified companies you were virtually certain were frauds.

What was it in those financial statements that you saw that made you be so certain they were frauds?

WARREN BUFFETT: Well, it varies just enormously over the years, but there are — we can't identify 100 percent of the frauds, or 90 percent, or 80 percent, but there are certain ones that jump out to you, just — people give themselves away a lot, too.

I mean, in poker they talk about tells. And Charlie and I have bought a lot of businesses, and it's very important when we buy those businesses that we assess the individuals that we're buying from with some degree of accuracy.

Because, you know, they hand us the stock certificate and we hand them a lot of money, and then we count on them to run the business with as much enthusiasm after they have the money as they did before.

And so we are assessing people. And we don't think we can assess everyone accurately. We just have to be right about the ones where we make an affirmative decision.

And those decisions have not always been perfect, but they've been pretty good. And I would say they've probably gotten a little bit better, even, as the years have passed.

Similarly, in looking at financial statements — for example, in the insurance field, we've seen some frauds, and they're — you can see things being done with loss reserves occasionally. We saw it back in — I won't name any names. Unlike Charlie, I don't — we'll call them Company As and Bs instead of naming names.

But you would see companies that, when they were offering stock to the public, you know, the year or two before that, the reserves would be down very suspiciously, and — you know, then — or even when they were selling them to other insurance companies, if they were buying in stock they might be building the reserves.

But there's a million different ways. And I don't claim I know all the ways, obviously, but I have seen enough situations over the years, and I've seen how promoters act. And you can spot certain people who you know are, one way or another, playing games with the numbers. They give themselves away.

But I can't give you a checklist of 40 items or something of the sort that you look for in the balance sheet or the income account or the footnotes.

Charlie, can you help?

CHARLIE MUNGER: Sometimes it's pretty obvious. I once was introduced by Warren, of all people, by accident, to a man who wanted to sell us a fire insurance company. One of the first things he said, with a thick accent, from Eastern Europe, I think —

WARREN BUFFETT: Don't name countries. (Laughter)

CHARLIE MUNGER: And I don't remember the country.

WARREN BUFFETT: Good. (Laughter)

CHARLIE MUNGER: But what he told me was — he says, "It's like taking candy from babies," he said.

"We only write fire insurance on concrete structures that are underwater." And I figured out instantly that it was probably fraudulent.

WARREN BUFFETT: The guy's a crook.

CHARLIE MUNGER: I'm a very acute man.

WARREN BUFFETT: Yeah, the guy's a crook.

Well, you actually — you had some experience — you know, he was a lawyer in the movie industry. (Laughs)

CHARLIE MUNGER: Oh, my God.

WARREN BUFFETT: Yeah. The — when you get into accounting for — well, movies are a good thing, in terms of how fast you write off properties, and anything where you've got construction in progress or progress payment-type things — there's so many ways you can cheat in accounting.

And financial institutions are particularly, probably, prone to it. And there's been plenty of it in insurance.

CHARLIE MUNGER: A lot of it, they're not being deliberately fraudulent, because they're deluded. In other words, they believe what they're saying.

WARREN BUFFETT: Yeah. People like to hire them as salesmen. (Laughter)

If you've got doubts, forget it. There's probably some reason you —

It's interesting. The accounting — they worked harder and harder and harder at coming up with disclosures in accounting. And I'm not sure I find present financial statements more useful or, in some cases, as useful as I found them 30 or 40 years ago. (Scattered applause)

Charlie?

CHARLIE MUNGER: Well, I think the financial statements of big banks are way harder to understand now than they used to be. They just do so many different things, and they've got so many footnotes, and there's so much gobbledygook, that it doesn't — they're not my grandfather's banks.

WARREN BUFFETT: Well, we couldn't understand them when we owned them.

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: I mean, we bought a company that — Gen Re — where they had 23,000 derivative contracts. And Charlie and I could've spent 24 hours a day, and had the help of 10 or 20 math Ph.Ds. and we still wouldn't have known what was going on.

It cost us about $400 million to find out, but — and that was in a benign market. But nobody can.

CHARLIE MUNGER: And the accountants had certified the balance sheet.

WARREN BUFFETT: Sure.

CHARLIE MUNGER: It's a new kind of asset I invented a name for. I said, "Good until reached for." (Laughter)

WARREN BUFFETT: Yeah. Well, and you would — you would actually — the same auditing firm would be auditing two different companies that are on the opposite side of a derivative transaction and attesting to different values to the same contract.

And Charlie found one mistake at Salomon on a derivative contract. What was it, 20 million?

CHARLIE MUNGER: No. It was a big contract, and both sides reported a large profit, blessed by their accountants, on the same contract —

WARREN BUFFETT: Kind of like us and Swiss Re.

CHARLIE MUNGER: — just for breaking it.

Once people get in a competitive frenzy, things just go out of control.

WARREN BUFFETT: I became the interim chairman of — interim CEO — of Salomon in 1991, and, fortunately, I testified to both the House and Senate committee before I found this out.

And, generally speaking, incidentally, Salomon wanted to have conservative accounting. I think that would be a fair statement. And in many cases did.

But they did come in to me one day and they said, "Warren, you probably should know that we have this item" — and I think it was around 180 million or something like that — with a capital base of 4 billion, maybe — but 180 million.

And they said, this is a plug number, and we've been plugging it ever since Phibro merged with Salomon in 19 — I guess, '81.

For ten years, this number moved around every day. And as I remember, Phibro or some — one of them was on a trade date system, and that was on a settlement date system.

And in ten years, with Arthur Andersen as their accountant, paying a lot of money in auditing fees, they just never figured out how the hell to get the thing to balance, so they just stuck a number in every day.

And they literally plugged it for ten years, and I couldn't figure out how to unplug it myself. I mean, it was — you almost had to start over. Didn't they do that one time out there?

CHARLIE MUNGER: We did that, Warren.

WARREN BUFFETT: Right. (Laughs)

CHARLIE MUNGER: We had a discrepancy when we changed accounting systems in our savings and loan, and none of the accountants could fix it. So we just let it run out.

WARREN BUFFETT: Yeah, we let the account —

CHARLIE MUNGER: We just let the account run out, and then —

WARREN BUFFETT: Figured we'd start over again.

CHARLIE MUNGER: We started over, right.

WARREN BUFFETT: Accounting is not quite the science that people might want you to —

CHARLIE MUNGER: In accounting, you can do things like they do in Italy when they have trouble with the mail. You know, it piles up and irritates the postal employees. They just throw away a few carloads — (laughter) — everything flows smoothly thereafter.

WARREN BUFFETT: You're naming names again, folks. (Laughs)

That happened in some unnamed international country. (Laughter)

CHARLIE MUNGER: Yeah, Italy. (Laughter)

WARREN BUFFETT: OK. Section 4.

AUDIENCE MEMBER: Good afternoon. My name is Jerry Lucas (PH) from Newark, Delaware.

You answered the question earlier about emerging markets. I just have a similar question.

If you found the business that attracted you in sub-Saharan Africa, outside of South Africa, are the conditions right today to make that investment?

WARREN BUFFETT: Well, I might not know enough to do it myself, but I think — and I wouldn't rule — if it was attractive enough and I thought I understood the nature of the business, I would probably get some advice from some other people. And I might not end up doing it, but I wouldn't totally preclude it.

CHARLIE MUNGER: I saw that done. The University of Michigan hired an investment manager in London who specialized in sub-Saharan Africa. And I thought, "My God, how are they doing this?"

What they did is the little banks would trade in the pink sheets in Africa, and the first thing people would want was not to have the money under their pillow, and they just bought all the little banks in Africa, and they made a lot of money.

So it is possible, if you know what you're doing, to go into very unlikely places. I would say we're not very good at it.

WARREN BUFFETT: No, that isn't our specialty, but it can be done. And if we were poor enough, we might even be thinking about doing it, right, Charlie?

CHARLIE MUNGER: I don't think so.

WARREN BUFFETT: OK. (Laughter)

Next year we'll prepare for this. (Laughter)

WARREN BUFFETT: OK. Station 5.

AUDIENCE MEMBER: Hello. I'm Marvin Blum from Fort Worth, Texas, the home to four of your companies.

WARREN BUFFETT: Absolutely. We love Fort Worth.

AUDIENCE MEMBER: Thank you. We love you, too, and your presence in our community.

I'm an estate planning lawyer, and it's interesting as we wrap up today to ponder that the Baby Boomer generation is about to pass along the greatest transfer of wealth in history.

I can design plans that eliminate estate tax and pass down great amounts of wealth to the next generation, but many of my clients come to me and say they want a plan like Warren Buffett's, leaving their kids enough so they can do anything, but not so much that they can do nothing.

Now they ask me, and I'm asking you, how much is that, and how do you keep from ruining your kids?

WARREN BUFFETT: Yeah. Well.

(Applause)

I think more kids are ruined by the behavior of their parents than by the amount of the inheritance. (Applause)

Your children are learning about the world through you, and more through your actions than through your words, you know, from the moment they're born. You're their natural teacher, and, you know, it's a very important and serious job.

And I don't think — I don't actually think — that the amount of money that a rich person leaves to their children is the determining factor, at all, in terms of how those children turn out. But I think that the atmosphere, and what they see about them, and how their parents behave, is enormously important.

I would say this: I've loosened up a little bit as I go along.

Every time I rewrite my will, my kids are happy because they know I'm not reducing the amount, anyway. (Laughter)

And I do something else that — I find that — which I think is an obvious thing, but it's amazing to me how many don't do it.

I think that your children are going to read the will someday — that's assuming you're a wealthy person — your children are going the read the will someday.

It's crazy to have them read it after you're dead, for the first time. I mean, you're not in a position to answer questions then unless the Ouija board really works or something of the sort.

So if they're going to have questions about how to carry out your wishes, or why you did this or that, you know, why leave them endlessly wondering after you die?

So in my own case, I always have my children — I rewrite a will every five or six years or something like that — and I have them read it.

They're the executors under it. They should understand how to carry out their obligations that are embodied in the will, and they should — also, if they feel there's anything unfair about it, they should express themselves before I sign that will, and we should talk it over, and we should figure out whether they're right or I'm right, or someplace in between.

So I do think it's very important in wealthy families, once the kids are of a certain age. I mean, I don't advise doing this with your 14-year-old or something, but when they get — you know, certainly by the time they're in the mid-30s or thereabouts — I think they should be participants in the will.

And I do think that if you get to be very wealthy that the idea of trying to pass on, create a dynasty of sorts, it just sort of runs against the grain, as far as I'm concerned.

And the money has far more utility — you know, the last hundreds of millions or billions have far more utility to society than they would have to make — create a situation — where your kids don't have to do anything in life except call a trust officer once a year and tell them how much money they want.

Charlie?

CHARLIE MUNGER: I don't think I want to go into this one.

WARREN BUFFETT: OK.

CHARLIE MUNGER: And I'm absolutely sure you don't want to discuss your will with your children if you're going to treat them unequally.

WARREN BUFFETT: No.

CHARLIE MUNGER: That is poison.

WARREN BUFFETT: But there — one of the problems you have — I mean, and what you want to discuss just for that very situation is there may be circumstances where one child will have much more of an interest in one type of asset than others, or something of the sort.

And you want to make sure that your definition of equality, in terms of handling different kinds of assets, meshes, or at least is understood, by the children so that they don't think the fact that you may gave one a farm and another a house or something of the sort resulted in inequality when you thought it was equality.

Charlie, you got anything?

CHARLIE MUNGER: No. I'm —

WARREN BUFFETT: He's staying away from this one.

WARREN BUFFETT: OK. Station 6.

AUDIENCE MEMBER: No question.

WARREN BUFFETT: No questions. I like station six. (Laughter)

WARREN BUFFETT: Station 7.

AUDIENCE MEMBER: Mr. Buffett, Mr. Munger, thanks for everything that you do for us, including advice that you give us, and also for — as an individual investor — for the things that you've done for me.

I have a question. You've long been against stock splits, but as you think about the Berkshire A share and one day can — if you don't split it — it can get to a million dollars, is the board thinking about how to deal with that, in terms of getting new stock owners, the ownership structure, and so on?

WARREN BUFFETT: Well, I — we actually — I think we've got a pretty good arrangement now.

It evolved, originally, through some people that were going to try and make a lot of money off of our shareholders by creating their own split shares, so we created the B shares.

And then when the BNSF acquisition came along, we wanted to be sure that people that wanted to have a stock-free exchange, or that wanted to get shares, would not prohibit it simply because they had a small amount of BNSF, and, therefore, our B shares were too expensive.

So I think now with one stock, you know, in the $100 range, people can split the — people that own the A stock can split their stock anytime they wish.

And we've always pledged that there won't ever be this situation, but if there was some corporate transaction or anything like that, we will — the A and B will get treated identically.

And so I really see no reason to change the present situation.

Charlie?

CHARLIE MUNGER: I would not hold your breath until we change. (Laughter)

WARREN BUFFETT: That may apply to almost anything in our lives.