WARREN BUFFETT: Thank you. (Applause)

Good morning. Before we start, there are two very special guests that I'd like to introduce, have stand up.

The first, even though he was on tour, he took a quick detour to Omaha to be here today. And will my friend [singer-songwriter] Paul Anka please stand up. Paul? (Applause)

With all the talk that had been around about my succession, I thought it was probably a good idea to try and hook up with someone famous that might give me a shot at a second career here. (Laughter)

So we're available for weddings and funerals and bar mitzvahs. (Laughter)

We actually had one offer the other day. I thought it was kind of insulting. They offered $1,000. And, I mean, for me and Paul, that really seemed a little ridiculous.

I told the people that and they said, "OK. We'll make it $10,000 if just Paul comes." (Laughter)

WARREN BUFFETT: Now we have one other very special guest.

This affair does not just happen by itself.

And there's a young woman who had a baby, a young boy named Brady, in September. And she has marshaled together 400-plus of the people from our various companies and put on the show you're witnessing today.

And I just want to say a special thanks to the woman we all love, and especially me, Carrie Sova. Carrie? (Applause)

Please stand up. There she is. (Applause)

WARREN BUFFETT: OK. Now we get down to the minor players and we'll introduce the board of directors. (Laughs)

We're going to have the — we'll have the board meeting — the shareholders meeting, I should say — after the Q&A, which will end at 3:30. And then we'll recess for 15 minutes. And at 3:45, reinstitute the — or begin — the shareholders meeting.

But for those of you who won't be around at 3:45, I'd like you to have a chance to meet the directors now.

So, I will introduce them one at a time and ask them to stand. Hard as it may be, withhold your applause until they're all finished standing, and then you can go crazy.

So, doing it alphabetically, and if you'll stand as I give your name.

Howard Buffett, Steve Burke, Sue Decker, Bill Gates, Sandy Gottesman, Charlotte Guyman, Don Keough, my partner Charlie Munger, Tom Murphy, Ron Olson, Walter Scott, and Meryl Witmer.

And that is the board of directors at Berkshire. (Applause)

WARREN BUFFETT: We have just a couple of slides and then we'll move right into the questioning, which will go on until roughly at noon.

We'll take a break at noon and come back about 1:00, and then we'll continue till 3:30, at which point we'll adjourn and then have the annual meeting at 3:45.

But, there are just a couple slides. We released our earnings yesterday.

And I've always emphasized — we try to release our earnings always after the market's closed, and, preferably, after the market's closed on a Friday, so that people will have a full weekend to digest the information, because there's a lot of information about Berkshire every quarter. And it's contained, primarily, in a 10-Q that we make available for you to read over the full weekend.

So we always urge you not to just look at the summary figures, but take a look at the 10-Q. It's great reading. And absorb all that by Monday morning.

But here we have the summary for the first quarter.

And as you can see, our operating earnings were down a bit. And that was more than accounted for in insurance underwriting. And you should understand that insurance underwriting from quarter to quarter really doesn't mean that much.

For one thing, it can be quite affected by changes in foreign exchange, which really don't have anything to do with our insurance business. But — or at least in the reality of interim results.

Our insurance business now has a float of $77 billion. And that $77 billion is ours to invest. And whether it costs us anything or not is determined by whether we have an underwriting profit.

So even though our underwriting profit in the first quarter was quite satisfactory, but nevertheless down from the first quarter of last year, the insurance business is marvelous for us.

And if we even break even, that $77 billion, which is subtracted from net worth, I mean, it's a liability on the balance sheet, but if it's cost free, it really does us about as much good as net worth itself does. So it's a very remarkable business.

And frankly, if we average an underwriting profit over the years, I'll be very happy and you should be very happy with what our insurance business does for us.

But it was down in the first quarter. And, like I said, that more than accounted for the decline in earnings.

We always advise you to pay little — pay no attention, really — to quarterly or even annual realized gains or losses in securities because we make no attempt to time the sales of securities to produce earnings in any given quarter.

We just try to manage the money as well as we can. And we let the chips fall where they may, in terms of whether those actions produce gains or losses in the short term.

We hope that they produce a lot of gains over the longer term, and they have.

But they should be ignored in attempting to interpret our shorter-term earnings.

WARREN BUFFETT: With that, I would like to give you a little preview of a vote that has taken place and which we will talk more about when we get the shareholders meeting.

But it's so remarkable, that I wanted to put it up for all of you to look at now.

As you know, we had a shareholder resolution. Yeah, it's up there.

We had a shareholder resolution, rather elegantly stated, that suggested that we pay a dividend. And with the sort of subliminal suggestion that we weren't paying it because I was so rich that I could live in this grand style to which I've become accustomed, without a dividend, but that the shareholders were out there essentially bereft of the necessities of life because we were holding all the money here in Omaha. (Laughter)

So this gentleman put this on the ballot. And if we'll go to the next slide, you'll see some remarkable figures.

Bear in mind that, you know, you people get these proxies at your home or at your office. And you can mark anything you want.

We hire no proxy solicitation firms. So we are making no calls. We make no attempt to influence how anybody votes. We just count them as they come in.

And as you'll see at the top, among the Class A shares, the vote was roughly 90-plus-to-one, against the dividend. But you might suspect that I stuffed the ballot box, which I did. (Laughter)

And so I took my vote out. And you'll see down below, the vote was a little less than 40-to-one among the untainted shareholders of A against receiving a dividend.

And then you may say to yourself, "Well, you know, those are Warren and his rich friends, all the plutocrats. And easy for them to say."

So let's go onto the next slide. And you will see there that among the B shareholders — and we believe we may have as many as a million B shareholders. We don't know the exact number. We don't even know an approximate number very well. But it's not a bad guess that we have a million or so shareholders.

And remarkably, by a vote of 45-to-one — these are people — we're not making any phone calls to get their vote or anything — by 45-to-one, our shareholders said, "Don't pay us a dividend."

I'm not sure that there's any company in the world that would get quite that vote.

And now you go to one more slide and that'll be the end.

But this is the rather disturbing part of that vote. If you go to the next page, you'll see again, among the B shareholders, that — I've got that same vote up there — and if you look down below, you will notice that almost the same number of people voted against, or withheld their vote for me, as voted for having a dividend.

So from that you can only deduce that if the shareholders are ever forced with the choice — or I should say, if the directors are ever forced with the choice — of paying a dividend or getting rid of me, it's a close vote. (Laughter)

So you can see why I'm rather reluctant to bring up the dividend question with the directors.

The vote, actually, up until two days earlier, before these final figures, the vote was actually just virtually a dead heat.

The number of people that wanted to have a dividend and the number of people that wanted me to get out of the place were running neck in neck. So it — again, it's a rather unusual voting arrangement.

WARREN BUFFETT: Well, with that we're going to do the questioning, as we always do.

We have journalists on this side. We have financial analysts on this side. And we've got a wonderful group of shareholders in the audience.

So we're going to alternate among these groups. And we will keep doing that until noon. And then we'll pick up where we left off at 1 o'clock, then continue doing it.

And we will start off with Carol Loomis of Fortune Magazine.

CAROL LOOMIS: Good morning. I'll make my two or three sentence introductory remarks.

First, Becky and Andrew and I get hundreds, if not thousands, of questions, and we can only ask a few. So, if we didn't get to your question, please excuse us.

Secondly, Warren and Charlie got no hint of what we were going to ask.

Though they read the news like we do, and that may explain that they would sometimes get a thought about what they were going to get asked. And that will explain my first question.

CAROL LOOMIS: The question is from Will Elridge (PH) of New York City.

And he says, "Mr. Buffett, this is a question about Berkshire's holdings in Coca-Cola.

"This spring, Coke asked shareholders to approve a magnanimous stock option program for its executives.

"Asked about it by the press after the vote, you said the program was excessive. Yet, you did not tell the world prior to the Coke shareholders meeting that you believed the program to be excessive, a disclosure that, had it been made earlier, might've made shareholders vote against it.

"And in fact, you did not vote Berkshire's shares against the plan. You only abstained in the voting.

"I guess you had your reasons. I must say, I don't expect to agree with them. And I cannot see how they can stand up under examination.

"But I still would like to know why you engaged in this very strange, un-Buffett-like behavior.

"So why did you abstain rather than voting no against a corporate action that deserved to be shouted down?"

WARREN BUFFETT: Yeah. Well, some people, incidentally, think that strange and un-Buffett-like are really not quite right. Strange is frequently Buffett-like. (Laughter)

The proposal was made by a shareholder who'd owned shares for a long time and was opposed to the option program.

His calculations — and I probably should explain this in a minute — but his calculations of the dilution were wildly off. And we did not care to get into a discussion of that or anything else.

But we did talk — or I did talk — to Muhtar Kent. And I informed him that we were going to abstain.

I told him that we admired, enormously, the Coca-Cola Company. We admire the management.

And we thought the compensation plan, although it was very similar to a great many plans, was excessive.

And Muhtar and I had a very good discussion right here in Omaha, as a matter of fact, as well as a couple of telephone discussions. And then immediately after the vote, I announced that we had abstained, and gave the reasons that we thought the plan was excessive.

And I think that in terms of having an effect on the Coca-Cola compensation practices, as well as maybe having an effect on some other compensation practices, that that is the most effective — was the most effective — way of behaving for Berkshire.

We made a very clear statement about the excessiveness of the plan. And at the same time, we, in no way, went to war with Coca-Cola. We have no desire to go to war with Coca-Cola.

And we did not endorse some calculations that were wildly inaccurate, and joined forces with someone that I had really no contact with him. I received several letters in the mail after they'd first been given to the press.

So, I think you have to be — I don't think going to war is a very good idea in most situations. And I think if you're going to join forces in going to war with somebody, you'd better be very sure about what that alliance might mean.

So, I think the best result for the Coca-Cola Company was achieved by our abstention. And we will see what happens in terms of compensation between now and the next meeting with Coke.

Charlie?

CHARLIE MUNGER: I think you handled the whole situation very well. (Laughter)

WARREN BUFFETT: And Charlie remains vice chairman. (Laughter)

Charlie, incidentally, was the — Charlie was the only one with whom I talked over the vote before — or the abstention — before I did it.

I called Charlie. And told him about the plan. And we agreed on the course of action.

I should point out one thing. And in fairness to David Winters who may — who led the war — he took figures from the Coca-Cola proxy statement. So it's hard to fault him for that.

But for those of you who would really — would like to know how to think about calculating dilution, Coca-Cola has regularly repurchased the shares that are issued through options.

And the share count has, thereby, come down just a small bit at Coca-Cola. Not anywhere near as much as if they hadn't issued as many shares, though, in repurchased shares.

But Coca-Cola has a plan that involves 500 million shares. And they say in the annual report that they expect to issue these over approximately four years. And then they have a further calculation between performance shares and option shares, but I'll leave that out. Make this a little simpler.

And that's a lot of shares.

Let's assume for the moment that Coca-Cola's selling around $40 a share now, which it is. And that when — and that all the options are issued at $40. And that the — when they're exercised, we'll say the stock is $60.

Now, at that point, there has been a $10 billion transfer of value. Twenty dollars a share times 500 million shares, a $10 billion transfer of value.

Now, the company, when that is done, gets a tax deduction — and at the — for 10 billion — and at the present tax rates, that would result in 3 1/2 billion less tax.

So if you take 20 billion of proceeds from exercise of the options, and you add 3 1/2 billion of tax savings, the Coca-Cola Company receives 23 1/2 billion.

And if they should buy in the stock at $60 a share, which it would be selling for then, they would be able to buy 391,666,666 shares.

So, in effect, the Coca-Cola Company, net, would be out a little over eight — 108 million shares. And that's on a base of four-billion-four.

So the dilution — assuming all the proceeds from the option exercise and the tax refund were used to buy shares — the dilution would be 108 million shares on 4.4 billion, or about 2 1/2 percent.

And I don't like dilution and I don't like 2 1/2 percent dilution. But it's a far cry from the numbers that were getting tossed around.

It's a long explanation, but I've never seen the math written about. I mean, I've seen people throwing out claims and all of that.

And you can change my supposition from 55 — 60 to 55 — or 65. It doesn't change things very much.

WARREN BUFFETT: Jon Brandt

JONATHAN BRANDT: Hi, Warren. Thanks again for having me back.

My first question is as follows: Berkshire has a track record of buying successful companies and leaving them alone.

3G has a more hands-on strategy with its acquisition. Its zero-base budgeting would seem to offer the potential to improve margins at any non-insurance business.

Is there a way for Berkshire to use 3G's methods to boost profits without violating promises made to selling shareholders or breaking faith with Berkshire's decentralized culture?

Would it be consistent with Berkshire's culture to hire a 3G alumnus to run a Berkshire subsidiary after an existing manager retired? Or alternatively, how hard would it be for a non-3G alumnus to learn and implement their management process? Thank you.

WARREN BUFFETT: Yeah. I don't think the two blend very well.

But I do think that we — I think 3G does a magnificent job of running businesses. And I've watched them in the past from afar and I've watched them more recently up close.

And there's no question that it's a different style than Berkshire. And I don't think it would pay to try and blend the two.

But I certainly think that we will see more opportunities to partner with 3G. And we're very likely to jump at those opportunities, because I think they're as able as anybody I've seen in the management of businesses.

And to get a chance to join with them — and in addition to that, they're marvelous partners. They're more than fair in everything they do with us.

So we will, as I've put in the past, I think we're very likely to partner with them, perhaps in things that are very large.

But I do not think a blending of the two would work very well. We've got a system, works very well for us.

And managers, when they join Berkshire, are joining into a large business that's unlike virtually any large business that's around. They really can't find a home exactly like Berkshire.

And that's a huge corporate asset. It's one that's grown over time. It'll continue to grow. And we want to maintain that with a very clear message that it goes well beyond my lifetime.

But we welcome the chance to join with 3G.

Charlie?

CHARLIE MUNGER: I don't think we've ever had a policy that loved overstaffing. (Laughter)

WARREN BUFFETT: Well, I would only slightly disagree with that.

We certainly never had a policy that allows for overstaffing at the home office.

We only feel happy when people are sitting in other people's laps. I mean, you have to understand this.

But the — but we have not enforced, or attempted to enforce, nor would wish to enforce, a strong discipline on every subsidiary as to whether they have a few too many people or not.

A great many don't. In fact, I mean, most of them are — overwhelmingly — they're managed on a lean basis.

But that's not true of everyone we've been involved in over the years. And it probably won't be true of everyone in the future.

We encourage — I mean, we encourage, just by example. But we do not encourage it by edicts, particularly.

Charlie?

CHARLIE MUNGER: I think a lot of great businesses spill a little just because they don't want to be fanatic.

And that's all right. I don't think you have to have the last nickel out of the staffing cost.

WARREN BUFFETT: OK. We'll go to the shareholder in station 1, up on my far right.

AUDIENCE MEMBER: Yes, hello. My name is Doug Merrill (PH). I'm from Denver, Colorado, the home of Peyton Manning.

WARREN BUFFETT: Omaha, Omaha. (Laughter)

AUDIENCE MEMBER: Awesome.

The president's approval rating is at 40 percent. Steve Wynn said, "Obama is the biggest wet blanket to the economy." Other countries are lowering taxes and reducing debt.

You have Obama's ear. The train's going in the wrong direction. Can you conduct Obama to change the train's direction? (Applause)

WARREN BUFFETT: Doug, I think I'll let you communicate with him directly. (Laughter)

I don't agree with a number of things you've said there. American business is doing extraordinarily well. (Applause)

The — many of the American people are not. And, you know, and I think Obamacare is more about doing something for them than many other people would.

But we're going to have a difference of opinion on politics. And I'm not going to convince you, and you're not going to convince me.

But I will say that anybody that thinks American business is doing — is not doing well — should just look at corporate profits.

Anybody that thinks our corporate taxes are too high should look at a chart of corporate taxes as a percentage of GDP since World War II, and it's come down from 4 percent of GDP to 2 percent of GDP, while many other forms of taxes have, obviously, increased.

And American business earnings on net tangible assets, which is the way to measure profitability overall, you know, it's basically the envy of the world. I mean, we have extraordinary returns on tangible assets — net tangible assets — in this country.

And our tax rates now for corporations are far lower than when Charlie and I were operating. And American business actually was doing pretty good then.

But for much of our life, taxes were at — corporate taxes — were at either 52 percent or 48 percent.

But I don't want to try and convince you because I don't want you to try and convince me. So we'll call a truce on that and I'll let Charlie comment. (Laughter)

CHARLIE MUNGER: I'm going to avoid this one. (Laughter)

WARREN BUFFETT: And people complain about me abstaining. (Laughter)

WARREN BUFFETT: OK, Becky Quick.

BECKY QUICK: This question is from Manolo Salseda (PH).

And I'll preface it by saying he says that he is "a true admirer of Buffett and what he stands for, so please don't confuse my bluntness and straightforwardness with a lack of admiration or empathy with this amazing person and his master creation." With that disclaimer —

WARREN BUFFETT: "But." (Laughter)

BECKY QUICK: But. His question is, "You've stated several times in the past that if management, you, wasn't capable of delivering a better return than the index, than management wasn't doing the job.

"Then you said that the yardstick should be any five-year period. You've just missed your five-year period comparison.

"How come you didn't tackle the issue in your annual shareholder letter? Are you changing the yardstick, and what's next?"

WARREN BUFFETT: No, we're not changing the yardstick.

But I would point out that we said, actually, in the 2012 report — and it's in the upper half of the first page — we pointed out how we do worse in very strong years and better in poor years.

And I said then, "If the market continues to advance in 2013, our streak of five-year wins will end."

I didn't say it might end, or could end, or anything. It was obvious that if you have five strong years in a row, we will not beat the S&P. And that will be true in the future, for sure.

And of course, last year was — I think there were two years in the last 40 or so that the market was up more than it was last year. So, despite the things mentioned about President Obama, the stock market seems to have done quite well.

We will underperform in very strong up years. We'll probably, more or less, match in moderate up years. We'll do better than average in even years or down years.

And I have said, and I'll continue to say, and it's been true that over any cycle, we will — I think we will overperform. But there's no guarantee on that.

But it was clearly said — like I say, on the first page of the 2012 report — that if the market went up, we would have a five-year streak of underperformance. And that's exactly what happened.

Charlie?

CHARLIE MUNGER: Well, we should remember that Warren's standard talks about net worth of Berkshire increasing, after full corporate taxes, at roughly 35 percent. And the indexes aren't paying any taxes.

And so, Warren has set a ridiculously tough standard and has so far met it over a long period of time.

In the last couple of years, the net worth of Berkshire, after full corporation income taxes, went up, what, 60?

WARREN BUFFETT: Something like that, yeah —

CHARLIE MUNGER: $60 billion —

WARREN BUFFETT: Yeah. Pre-tax, probably 90 billion in —

CHARLIE MUNGER: Yeah. And so, if this is failure, I want more of it. (Laughter and applause)

WARREN BUFFETT: OK. Jay Gelb.

JAY GELB: Warren, this question is on Berkshire's intrinsic value.

In the annual letter, you appear to strongly signal that Berkshire's shares are undervalued, especially relative to intrinsic value.

Aside from share buybacks, what actions can Berkshire take to narrow the discount between the current share price and intrinsic value? For example, would you ever consider an IPO of Berkshire's individual operating units?

WARREN BUFFETT: The answer to the last part is no.

But the — I think we try to explain —my guess is I've never seen an annual report that uses the term, "intrinsic value," or even talks about the intrinsic value of its units or business, as much as Berkshire does.

So, Charlie and I really devote considerable effort to explaining which of our businesses — where there's really a significant discrepancy between what carrying value is, or book value — call it carrying value — and the true value, or the intrinsic value, of the business.

And I got very specific in the case of GEICO in the past year, for example.

And I said that GEICO, which is carried at about 1 billion over tangible assets, may be worth as much as 20 billion over tangible assets. And I wouldn't be surprised if five years or ten years from now that that figure itself will be a lot larger.

So we've talked about it. We said we are willing to buy — not only willing, but eager to buy — stock at 120 percent of book value.

Well, with book value being close to 230 billion now, that obviously means we think that at $45 billion, roughly, over that figure, we are getting a bargain, in relation to intrinsic value.

But we're never going to try and put out an exact number because we don't know an exact number.

And it's — A, it changes from day to day. And — although not a lot day to day, but certainly changes, you know, over the quarters and over the years.

And the second reason is, if you ask Charlie and me to write down a figure as we sit here as to the intrinsic value of Berkshire, we'd probably be within 5 percent of each other.

But we might very — we probably would not be within 1 percent of each other.

And so we will continue to try to give shareholders information about the important units.

It isn't — the small ones are not unimportant to us, but they are — they do not have a big impact on the overall intrinsic value.

We've got a few businesses. I mean, we have some businesses that may be carried at a few hundred million that might be worth a billion or maybe 2 billion, even.

But that isn't where the big, undisclosed by the balance sheet, values are.

You know, they're in the railroad, they're in the insurance business, they're in our utility business.

And we — they add up to some pretty big numbers. We try to tell you exactly the numbers and, really, and use the words that we use when we're thinking about those businesses ourselves, in terms of estimating their value. But we don't want to go further than that.

The 120 percent, obviously, is a loud shoutout as to a figure that we think is very significantly below intrinsic value, or we wouldn't use it to repurchase shares.

We only believe in repurchasing shares when we can do so at a significant discount from intrinsic value.

Some companies talk about — Coca-Cola does — they talk about buying in shares to cover options. That actually isn't the best reason to buy in shares.

I mean, the stock could be overpriced, and even though you issued on options, you shouldn't be buying it in.

But that's become sort of a mantra throughout corporate America, that if you buy shares to cover the option exercises that you've negated the dilution to shareholders.

But again, if you buy shares — if you buy a dollar bill for 90 cents, you're doing your shareholders a favor. And if you buy it for $1.10, you are doing them no favor at all.

Charlie?

CHARLIE MUNGER: Well, I don't believe we've ever wanted to get the stock way over intrinsic value so that we can issue it to other people and get an advantage for ourselves and a disadvantage for them.

And, I think the people that want the stock up very close to intrinsic value, or higher, really want egg in their beer. It's okay if it's a little below.

And we're not in the game of ballooning our stock up as high as we can get it so we can issue it more at a profit to ourselves.

I think over the long term, our system will work pretty well. And I think the stock will eventually go above intrinsic value, whether we like it or not.

WARREN BUFFETT: Yeah. But we have — we really watched a lot over the years of certain managers attempting to get their stock to sell for way more than it was worth, so they could use it to trade for other companies. I mean, that was all the rage in the late '60s.

One of the reasons that I wound up my partnership was that that activity was going on so much and it affected all other values.

And it was really a game. And it was a game that some people played sort of halfway honestly, and other people really cheated like crazy, because if you're trying to get your stock to be overpriced, you're very likely to cheat on your earnings and cheat on projections. Cheat on everything.

And it works, incidentally. It doesn't work indefinitely, but it works.

Some companies, whose names you know, were, to some extent, built on that principle.

That's a game that we not only don't want to play, we really found it very distasteful, because we saw a lot of these people in action.

And it comes in waves. And we just — we don't want to come close to playing it.

Unless I'm careful, Charlie will name names, so we'd better move on to shareholders. (Laughter)

WARREN BUFFETT: Well, let's go to station number 2.

AUDIENCE MEMBER: Hi, Mr. Buffett—

WARREN BUFFETT: Hi.

AUDIENCE MEMBER: — and Mr. Munger.

My name is Masato Luso (PH) and I'm from Los Angeles, California.

Berkshire is known to buy into whole companies for many, many years. But earlier in your careers, that was not known.

And typically, acquisitions of other companies is very disruptive. Employees fear losing their jobs as a redundancy. And managers really have to think twice and be diligent about it.

So my question is, what do you do to gain the trust of founders or owners of the companies you have bought out in the past?

WARREN BUFFETT: Well, we've kept our word to them.

And now we have to be very careful about what we promise, because we can't promise, for example, never to have a layoff in a business we buy, because who knows what the world holds.

But we can promise that we won't sell their business, for example, if it turns out to be disappointing, as long as it doesn't run into the prospect of continuing losses or having significant labor problems.

But we keep — we are keeping — certain businesses that you would not get a passing grade at business school on if you wrote down our reasons for keeping them.

But the reason is, we made a promise.

And we put that — we not only make the promise, we put it in the back of the annual report now — we've done it for 30 years or so — where we list the economic principles.

And we put it there because we believe it. But we put it there, also, so that the managers who sell us their— the owners who sell us their business — know they can count on it.

And if we behave differently, you know, the word would get around. And it should get around.

So, we can make promises. We can't make promises we'll never change employment. We can't even make a promise that we'll keep a business forever.

But we can promise what we do promise, which is that if it turns out to be somewhat disappointing on earnings, but does not promise, sort of, unending losses, or if we have labor problems, we can keep that promise.

And we have kept that promise. We've only had to get rid of a few businesses, including our original textile business.

We promise the managers, you know, that they are going to continue to run their businesses.

And believe me, if we didn't do it, the word would get around on that very quickly. But we've been doing it now for 49 years.

And we've put ourselves in a class that is hard for other people to compete with, if that's important to the seller of a business.

A private equity firm is going to be totally unimpressed by what's in the back of our annual report. They don't care. And that's — there's nothing wrong with that. That's their business.

But for somebody that's built up their company over 20 or 30 or 40 years — and maybe their father or grandfather built it up even before that — some of those people care about where their businesses go.

They're very rich, they've accomplished all kinds of things in life. And they don't want to build up something which somebody else tears apart very quickly believe they handing it over to a few MBAs who want to show their stuff.

So, we do have a unique — close to a unique — asset at Berkshire. And as long as we behave properly, we will maintain that asset. And really, no one else will have much luck in competing with us.

But it doesn't solve all problems, but — and it — and frankly, it's the way we want to operate anyway.

So it's — we're comfortable with it. The sellers that do come to us that care about their businesses are comfortable with it. And I think it'll continue to work well.

Charlie?

CHARLIE MUNGER: Well, obviously, we behave the way we do because we like doing it. And number two, it's worked pretty well and we're unlikely to stop.

WARREN BUFFETT: OK. (Applause)

You can tell that he doesn't get paid by the word. (Laughter)

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: Warren. This is a tough corporate governance question. I probably received about a dozen of them this week, some polite and some less polite. This —

WARREN BUFFETT: Use one of the polite ones.

ANDREW ROSS SORKIN: This is probably one of the more polite ones.

"Your son Howard serves on the board of Coke and voted to support its CEO pay package proposal, which you have said was excessive and you were against.

"You have said Howard will become non-executive chairman of Berkshire after you step down, as its, quote, 'protector of culture,' to uphold the morals that you and we all hold so dear.

Given his role in the Coke vote, how can we count on Howard to defend the culture of Berkshire and ensure that the future management of Berkshire does not benefit at the expense of its shareholders?"

WARREN BUFFETT: Yeah. Well, I think, as I mentioned in at least one interview, I voted for not — I'm not referring to Coke here necessarily — but as a director of various companies, I not only voted for comp plans that were far from what I would've come up myself, but I voted for acquisitions that I didn't think make much sense.

I voted against a few. And they attracted a lot of attention. But they were big ones, where I really think — where I thought — it really made a difference.

But the nature — and this is something worth exploring, generally, because the nature of boards is such that they're part business organizations and part social organizations. And people behave in some ways with their business brain and they behave to some extent with their social brain.

And I would say — and I said this — that in 55 years of being on corporate boards, and 19 companies aside from Berkshire, I don't think I've ever seen a comp committee report come in and get a dissenting vote.

And the social reason for that is that the board organizes itself in a way whereby certain activities are delegated to a smaller portion of the board, one being a compensation committee.

And that committee presumably meets for a few hours the day before the meeting, or maybe the morning of the meeting. And then they go into a board meeting. And the comp committee reports on its activities. And you've delegated that activity, as a board member, to that group.

It's almost unheard of to question that. I'm not saying that maybe it shouldn't be questioned, but I'm just saying that that is the way it works.

Now bear in mind that the so-called independent directors on such a board are probably receiving maybe $200,000 a year, maybe $300,000 a year. Believe me, they are not independent.

They're independent as measured by some standards, perhaps, at the SEC, but they — you know, how would you feel about having a job that required you to go to work four or six times a year, pleasant company, you know, certain amount of prestige attached with it, and on top of it, you get paid maybe $300,000 a year and you kind of hope to get another job like that? That is not independence.

So, you get a group coming in like that from the comp committee. And in those 19 boards, I was put on the comp committee exactly once. Charlie might be able to tell you exactly what the result was that time. They do not look for Dobermans. (Laughter)

They look for cocker spaniels. And then they make sure that the tails are wagging. (Laughter)

But that is — don't condemn it too much because you and I are doing similar things in other parts of our lives.

You know, the social dynamics are important in board actions. My son Howard — in fact, my other two children as well, if they were involved — you know, they would have a dedication, and do have a dedication, to the culture of Berkshire, which is clearly defined. It's one of the reasons I want it clearly defined. And it's reinforced by the behavior and it's reinforced by results.

And, incidentally, their job would not be to set the compensation. I mean, the non-executive board chairman is not there to select the compensation of the CEO or others. He's not there to select the CEO.

He is there to facilitate a change if the board of directors decides a change is needed. And that can be important. Very, very, very unlikely to be important in the case of Berkshire.

But it's a nice, little, extra safety valve. And Howie's the perfect guy to carry that out.

And like I say, I voted for comp plans at various places, including way back, you know, at Coke that were far from what I would've designed myself. And the ones I designed myself would have worked.

But that is the way boards work.

I was made chairman of one comp committee, and Charlie can tell you a little about that.

CHARLIE MUNGER: Yeah. (Laughter)

Warren was totally voted down at Salomon Inc. In fact, people acted like, what in the hell is he doing? How could he be disapproving compensation on Wall Street?

And I think the general idea that a person should just shout disapproval all day long of everything he disapproves of is very suspect. In the world in which we inhabit, people accomplish more if they pick their spots for public disapproval.

And knowing both Howie and Warren Buffett, I don't think you have to worry that they're going to go crazy or be soft and foolish just because they don't shout all the time about everything they disapprove of. If we all did that, we wouldn't be able to hear each other.

WARREN BUFFETT: Yeah. (Applause)

If you — if you're in any social organization and you keep belching at the dinner table, you'll be eating in the kitchen before very long. (Laughter)

And people won't pay any attention to you.

I mean, you really have to — you not only have to pick your spots, you have to pick how you do it.

I mean, you — that could even be — I mean, sure, Charlie gives the marital advice around here, as you noticed, in the movie, but it's not even a bad thought to keep in mind in marriage, I mean, in terms of — of attempting to change the behavior of others, which is — you'll have a very limited ability to do, in any event. It's not helped by shouting a lot.

CHARLIE MUNGER: I offend more people than you do. And I'm quite satisfied with your level of disapproval. (Laughter)

WARREN BUFFETT: OK. Gregg Warren of Morningstar. Gregg, welcome.

GREGG WARREN: Thank you. Warren and Charlie, on behalf of Morningstar, I want to thank you for having us on the panel this year.

I may not be an accredited bear, but hopefully, I ask probing questions that add value for shareholders.

My first question relates to the measurement of management performance.

For Morningstar, the ultimate measure of success is not just whether or not a firm can earn more than its cost of capital, but whether or not it can do so for an extended period of time.

Berkshire has historically done a good job of generating outsized returns. But as you've noted in the past, the sheer size of the firm's operations, which continue to grow, will ultimately limit the returns that Berkshire could generate.

With that in mind, what do you believe Berkshire's cost of capital is? How much do you think that this hurdle rate is increased as you've acquired more capital intensive, debt-heavy firms?

And how much confidence do you have that future capital allocators at Berkshire will be able to generate returns in excess of the firm's cost of capital, acknowledging, of course, the fact that Berkshire's days of outsized returns are most likely behind it?

WARREN BUFFETT: Yeah. Well, there's no question that size is an anchor to performance. And we intend to prove that up to the point where it starts really biting.

But it — we cannot earn the returns on capital with well over 200 — well, with a market cap of 300-plus billion. It just isn't doable.

Archimedes, he said he could move the world if he had a long enough lever, didn't he, or something like that, Charlie?

CHARLIE MUNGER: Yes, he did.

WARREN BUFFETT: Well, I wish I had his lever because we don't have that lever at Berkshire.

So we — well, we'll answer two questions there.

In terms of cost of capital, Charlie and I always figure that our cost of capital is the — is what could be produced by our second best idea. And then our best idea has to exceed that.

We think — I have listened to so many nonsensical cost of capital discussions, that —

CHARLIE MUNGER: I've never heard an intelligent one.

WARREN BUFFETT: Yeah. Yeah. (Laughter)

It's really true. I mean, and there's — that's another thing. I've been on boards and the CFO comes in and explains why we're doing this and it always gets down to, you know, it exceeds our cost of capital.

And he doesn't know what the hell his cost of capital is, and I don't know. And — but I don't embarrass him, you know?

So I just sit there and listen to this stuff and apply my own thing, and then still end up voting for it, probably, if I don't like it, although there have been a few exceptions to that.

The real test, you know, over time, is whether the capital we retain produces more than a dollar of market value as we go along.

And if we keep putting billions in and those billions, in effect, are worth, in terms of present value terms, in terms of what they add to the value of the business, more than what we're putting in, you know, we'll keep doing it.

We bought a company day before yesterday, I guess it was. And we are spending close to $3 billion U.S. It's a Canadian company.

And we think we will be better off financially because we did that and we thought it was the best thing that we could do with the $3 billion on that day. And those are the yardsticks that we have.

And what I do know is that I've never seen a CEO who wanted to do a deal where the CFO didn't come in and say it exceeded the cost of capital.

It's just — it's a game, as far as we're concerned.

And we think we can evaluate businesses. And we know the capital we have available. And we have things that we can sell to buy. Not businesses, but marketable securities that we can sell to buy businesses if we like.

And we are constantly measuring that opportunity cost that Charlie talked about in the movie. It's an important subject. And one that I think has had more nonsense written about it than about anything.

But I'll turn it over to Charlie to go over —

CHARLIE MUNGER: Well, a phrase like "cost of capital," which means different things to different people, and often means silly things to people who teach in business schools, we just don't use it.

Warren's definition of behaving in a corporation, so that every dollar retained tends to create more than a dollar of market value for the shareholders, is probably the best way of describing cost of capital. That is not what they mean in business schools.

The answer's perfectly simple. We're right and they're wrong. (Laughter)

WARREN BUFFETT: I look good compared to him, don't I? (Laughter)

WARREN BUFFETT: OK. Station 3.

AUDIENCE MEMBER: Good morning. My name is Jonathan Fye (PH) and I'm from Denton, Texas, just up the road from the new Nebraska Furniture Mart that's going to be located in The Colony.

My question relates to your original acquisition of that business from the Blumkin family in 1983.

Based on the data you provided in this year's annual report, it appears you were able to purchase this business for roughly 85 percent of book value, or roughly two times earnings.

Can you comment on the factors or the environment in Omaha that enabled you to purchase this wonderful business for such a wonderful price?

WARREN BUFFETT: Well, I wish we had bought it that cheap, Jonathan, but no — we paid at the time, as I remember, probably 11 or 12 times after-tax earnings. It was not a discount from book value.

I'm not sure where those numbers come. Well, we bought 80 percent of the company. It was bought on the basis, as I remember, of 100 —of $60 million of purchase price.

So we —actually there was a second transaction involved in it. But 60 million was 100 percent value. We ended up with 80 percent.

The 60 million would've been more than book at the time. Not way more, but more than book.

And it would've been a multiple of 11 or 12 times earnings, as I remember. The sales were about 100 million. Pre-tax margins were in the 7 percent range.

So, it was about 7 million pre-tax. And, you know, 4 ½, probably, after-tax. That's ballpark.

So, it was not a bargain purchase. It was a great business. It was a wonderful opportunity to join as fine a family as I've ever met.

But it was — and incidentally, there was another company, I believe, from Germany, that was trying to buy it at the time.

And believe it or not, Erskine Bowles, of Simpson-Bowles, was representing them, my friend Erskine — I didn't know this at the time.

And then I went out on my birthday, August 30th, 1983. And had that contract, which is in the annual report.

And I gave it to Mrs. B. And — and she didn't read, but Louie, her son, told her what was in it.

And I never asked her for an audit. I just asked her if she owed any money. And I asked her if she owned the building. And she said yes. And we made the deal. But it was not a bargain purchase.

Now, if you want to talk about bargain purchases, we should talk about going out to the Nebraska Furniture Mart. (Laughter)

So far, in the three — we —in the days of this annual meeting, our sales, which were a record 40 million for the week last year, are up about — I think they're up about 7 percent now. And last year, of course, it was a record.

And on Tuesday, which was the first day, we did 7.8 million.

And Berkshire owns the largest home furnishing store in Sacramento, California. We own the largest one in Boise, Idaho. We own the largest one in Salt Lake City. We own the largest one in Las Vegas. Largest one in Reno.

Our sales at the Furniture Mart on Tuesday were larger than the monthly sales of any one of those stores I've just named, being the largest ones in places like Sacramento. So it is a remarkable organization. (Applause)

And the good news is there's still time for you to avail yourself of those prices. (Laughter)

I would like to put in a plug for the Dallas store, where — I was down there a week ago. And it's a plot of land like you wouldn't believe. It's a store like you wouldn't believe. It is 1,800,000 square feet under one roof. Over 40 acres.

It will do more volume, I predict, than any other home furnishing store in the world. And I wouldn't be surprised if I could add to that by a factor of at least two.

It's a remarkable store. And I toured around it. And we're, you know, we're putting in streets. We're — site preparation, utilities, racking, all these things. This wonderful woman, Michelle, who showed me around.

And the Blumkins later told me that she had started — worked for Nebraska Furniture Mart as a cashier, and she is in charge of this, you know, many hundreds of millions of dollar project. It's really — it's the good thing about America.

And at the end of the tour, she'd had this number two person working — walking around with us, who — she was explaining some things to us, too. And I learned at the end of the tour that number two was Michelle's husband. (Laughter)

Interesting pillow talk, you know? "How many cubic yards did you move today, honey," you know? (Laughter)

WARREN BUFFETT: OK. Carol.

CAROL LOOMIS: This question comes from Jason Rothman (PH) of Oklahoma City, who was the first shareholder to ask a question that subsequently was framed by a number of other shareholders as well.

In my mailbox, this was the most popular question asked.

"Mr. Buffett, you state in your annual letter to shareholders that in your will you have given instructions to the trustee who will be acting for your wife's benefit to put 10 percent of the cash given her in short-term government bonds and 90 percent in a very low-cost S&P 500 index fund.

"My question is why are you advising the trustee to put 90 percent of the cash into an S&P 500 index fund instead of into Berkshire shares?"

WARREN BUFFETT: Well —

CAROL LOOMIS: "This might imply that you expect the index fund to outperform Berkshire in the future when the company is run by a new CEO and chairman. Please clarify."

WARREN BUFFETT: Yeah, I'll be glad to clarify. That letter didn't come from Vanguard, by any chance, did — (Laughter)

When I die, incidentally, then all the Berkshire shares I have at that point will go to five different foundations. Every single share. I mean, there are no shares that have not been designated, mentally, to charity. A good many of them have been designated specifically to — in numbers and all that.

But — and they will be distributed over the ten years after my estate is closed. So figure over 12 years.

And I tell my — I tell the trustees that will be holding these shares, you know, "Don't sell any Berkshire shares until they have to be sold."

So my views, on Berkshire at least through 12 years after my death are as bullish as anybody could possibly come up with.

And incidentally, without those kind of instructions, anybody would say, "You know, you're crazy to keep many, many billions of dollars all in one stock." I can't think of anything better to do it over those 12 years.

In terms of my wife's situation, you know, that is not a question of maximizing capital. It's just a question of total, 100 percent peace of mind on something that cannot get a bad result.

And, like I said, there's way more money for her than she'll ever use. As a matter of fact, those of you who know her, you know, may feel that I've added about three zeros too many.

But it is not designed for her to get even larger amounts of capital. And there'll be capital, loads of capital left over on that part of it.

On the part that I care about maximizing, I have instructed the three trustees to not sell a single share until it has to be sold. So, that's good for 12 years after I die, as to my best advice as to what I want them to hold.

Charlie?

CHARLIE MUNGER: Well, Warren is a little peculiar in the way he distributes money in the family. And I think he's entitled to do what he damn pleases. (Applause)

Speaking —

WARREN BUFFETT: Do I — do I hear my — children applauding? Do I hear my children applauding? (Laughs)

CHARLIE MUNGER: And I've never had this feeling I had to starve the family down to a few trifles.

And Warren really — and Susie, when she was alive, was the same way.

He really is a meritocrat. He's really quite extreme in wanting to let most of his money go back to the civilization in which it was earned.

I like being associated with it. (Applause)

WARREN BUFFETT: Jonathan?

JONATHAN BRANDT: The BNSF has done very well since Berkshire acquired it in 2010.

But its western competition of Union Pacific has actually grown its earnings more. And at the moment, the UP seems to be operating more smoothly for its customers.

Could you shed some light on the service challenges Burlington has experienced recently and perhaps discuss any differences between the two railroads in end markets, geography, and strategy that may have led to the divergent result?

Would it be fair to say that, in trying to aggressively sign up new business volume last year, that the railroad did not allow for a sufficient margin of safety in terms of what its capacity could handle, should there be a harsher than normal winter or other adverse circumstances?

WARREN BUFFETT: Yeah. It — we've handled more volume, actually, than in the past. I mean, in 2006, we had a peak of 219,000 carloads. That was in the late fall.

But no question that we've had a lot of service problems, particularly on our northern route.

We have been spending more money than Union Pacific, and they spend a lot, in terms of attempting to anticipate the kind of problems that can occur when you get a big increase in volume, on that one route particularly, from the boom in the — particularly the Bakken shale oil.

We've got a lot of unit trains that are running over those lines that weren't running five years ago.

I think I've got Matt Rose here — right — I think somewhere in the front. And he might address some of the problems of cold weather. I mean, want to get — there were a lot of days where it was 15 below or worse.

And in terms of sending people out to work on problems, under those circumstances, it can be really — it can be life threatening.

But Matt, do you have — oh, there he is. OK. Could you shine a light down on him, please, too? So he's right here in the front. In the front.

MATT ROSE: Warren. So last year, the industry grew at about 820,000 units. BNSF handled 53 percent of all those units.

And it's not what we wanted to take or what we didn't want to take. Quite frankly, it's the geographic nature of our franchise. And the oil came a lot faster than we were expecting and we've been spending money at a rapid clip to try and build into it.

The second issue was, you know, I had previously, prior to this past year, been in the CEO role for 13 years, and I have never seen a weather — a winter weather — like that.

We had 83 inches of snow in Chicago. We had multiple days, over 30 days, where it didn't get to zero in the Minnesota area.

So, you know, we know this is an outdoor sport. We get it, on the weather. But quite frankly, when we get to about 0 to 10 degrees below, things just don't work.

The weather's getting better. Last week, we handled 206,000 units. No other railroad has ever handled 205,000 units.

So the railroad's coming back. And we're making the significant investments to be able to handle all the business that's out there.

WARREN BUFFETT: Thanks, Matt. (Applause)

We will spend $5 billion on the railroad this year. No railroad's ever spent that kind of money, or even very close to it.

But I got a call — or I got a letter — from a fellow in North Dakota. And they were having a problem getting fertilizer. And I called and talked to him. And they sent it down to Matt.

But we've now put on — I think we're going to have 52 unit trains of fertilizer. And they will get there in time for the planting. And that's important. I mean, we take it seriously.

But cold in winter or floods in the summer, I mean, we're now really functioning a lot better and our earnings will be, in my view, are very likely to be a lot better.

But the thing that could disrupt that is, if for some reason, you had incredible floods. You're dealing with 22,000 miles of track. And if you get weak links, one of which, always, for all four big railroads, is Chicago, because that's where things get interchanged and that's where a lot of bottlenecks have been this year, and that's where weather was tough as well.

But you're right, Jon, in the comparative financials in recent months. And believe me, Matt's paying a lot of attention to them and Carl's paying a lot of attention to them, and I even pay a little attention to them.

So I have a feeling that they will be getting better over the remainder of the year.

WARREN BUFFETT: OK, station 4.

AUDIENCE MEMBER: Rosal Kerkhove (PH). I'm from Omaha, Nebraska. My question relates to our company's use of natural gas to generate electricity.

This past winter, natural gas in storage has declined substantially.

In the future, how do our companies assure that they have an adequate supply of natural gas to generate electricity?

And if the price of natural gas increases in multiples, how do our companies assure that they can sell the electricity at a satisfactory return on investment? Thank you.

WARREN BUFFETT: Yeah. We have — I'm going to ask Greg Abel to be more specific on this.

But we are the largest alternative generator of — using alternative sources — I think, in the country. And I think by the end of 2015, we will be capable of producing 40 percent of our needs in Iowa through wind, which will be unlike any other company you can find in the country. (Applause)

But I think I'll have Greg answer the specifics of any natural gas-dependent generating units we have.

I'm not worried about that thing, but I — about what you raised —but Greg would know a lot more about the mix on natural gas and the opportunity to shift to coal. And exactly the profile of the generating capacity.

Greg? Now, let's get a light down on him, if you can. He —

GREG ABEL: I think it's — okay, there it is.

WARREN BUFFETT: Yeah, there we go —

GREG ABEL: Yup. Sorry. So like Matt touched on, obviously, we had a very cold winter in the Midwest.

So our systems, for the first time, were challenged in a significant way. But very proud of how the resources were managed.

So if you look at the question around natural gas, and specifically the gas availability, there was substantial gas available to be utilized both to heat homes and produce the energy, because ultimately, we're worried about both, the — keeping the furnaces on and, equally, keeping the lights on.

So when you looked at the balance of supply, there was gas there.

But clearly, we have to continue to look at the unique situation as we continue to move towards using more gas in the United States.

Warren touched on an important point. This past year, as he highlighted — he highlighted 2015 — but if you look at just what we produced on the renewable side in Iowa, that was 39 percent renewable, i.e. wind. And that'll only get larger.

So as we continue to manage these multiple resources, there's clearly a way to meet the needs of our customers. And we're meeting it in an extremely cost-effective fashion.

I'd also highlight that when you think through the cost recovery side of it, we've got very unique mechanisms within our utilities.

When the underlying cost of gas goes up, where we have to purchase more than we had anticipated, we've got clear pass-throughs back to our customers. And we've negotiated those across each of our states.

So we're well positioned to service our customers long term, and equally protect the fundamental financials of the underlying businesses.

WARREN BUFFETT: The —

GREG ABEL: Thank you.

WARREN BUFFETT: The company that Greg runs has many subsidiaries. And our gas pipeline subsidiaries move about 8 percent of the gas in the United States.

And I think you said you were from Omaha. And the gas that comes into this area comes through a pipeline that we own. And we just renamed the company to Berkshire Hathaway Energy, from MidAmerican Energy. We changed it to Berkshire Hathaway Energy.

But, it's a point of some pride to us that that company, Northern Natural Gas, which originally came from Omaha, when we bought that from Enron a decade or so ago — actually, Dynegy had it in between — but its origin then was Enron.

You know, they'd skimped on maintenance, done all kinds of things. And it was ranked number 42 out of the 42 ranked pipelines in the United States at that time. And last year it was ranked number one.

So it went from last to first under Greg's management. And I tip my hat to him. (Applause)

And number two was our other pipeline — current pipeline. So we're running one, two at the moment.

WARREN BUFFETT: Becky?

BECKY QUICK: This question comes from Fred Ireman (PH) in Richmond, Virginia, and it's addressed to you, Warren.

He says that, "During the past several years, much has been written and many have speculated about your successor. I shall not even go down that path, as it would cause you to repeat yourself.

"However, has there been any discussion at your board meetings about a replacement for your partner, longtime friend, and co-chairman, Charlie Munger?

"Has it been determined Berkshire will continue to be led by a similar dynamic duo? Two magnificent investor minds, each providing a unique point of view, have been a major reason the business has performed magnificently over the decades and has delighted the shareholders."

WARREN BUFFETT: Well, Charlie is my — he's my canary in the coal mine. (Laughter)

Charlie turned 90. And I find it very encouraging how well he's handling middle age. (Laughter)

So I hope to be able to do the same thing myself.

No — you raised a point, which is — I hadn't thought about, but I'm a little sensitive now that you raised it.

They always talk about replacing me, but they never talking about replacing Charlie.

I do think — I think it's very likely, incidentally, that whoever replaces me as CEO probably has, over the years certainly, developed — they'll never be able to develop another Charlie — but they'll develop somebody that they work with very closely. It's a great way to operate.

Berkshire is better off because the two of us have worked together than if either one of us had been working individually, there's no question about that. (Applause)

And —but I do think, you know, we saw it with Roberto Goizueta and Don Keough at Coke, we saw it with Tom Murphy and Dan Burke at Cap Cities. I mean, these were magnificent companies.

And I think that in both cases that I just named, I think that they accomplished far more because they had two incredible people running them who admired and worked well with the other. And they were complimentary, in terms of the talents they brought.

In many ways, it's a great way to operate. You can't will it to somebody.

But I would be very surprised if, a few years after my successor takes over, or maybe sooner, that there isn't some relationship, a partnership, that enhances the CEO's not only — not only achievements — but the fun they have.

And — but so far, nobody's brought up, in the meeting, any successor to Charlie.

And frankly, I have a lot of trouble thinking of anybody that could be a successor to Charlie. (Laughs)

Charlie, you want to comment? I've got to give you a chance. (Laughter)

CHARLIE MUNGER: I don't think the world has much to worry about. Most 90-year-old men are gone soon enough. (Laughter)

WARREN BUFFETT: Well, the canary has spoken. OK. (Laughter)

WARREN BUFFETT: Jay?

JAY GELB: I have a question on succession planning, as well.

Matt Rose recently shifted his role from CEO of the Burlington Northern unit, to executive chairman of Burlington. Does this change affect who will be the next CEO of Berkshire? And what is the succession plan for Ajit Jain at Berkshire's reinsurance unit?

WARREN BUFFETT: The only succession for Ajit would be reincarnation. (Laughter)

We will not get another Ajit. But fortunately, we won't have to for a very, very long time.

The situation with Matt, which was at Matt's suggestion, was designed to fit specifically the succession situation at BNSF and the wishes of certain people. It doesn't have any implications for Berkshire.

I have letters from every one of our managers telling me what I should — I keep — these are private, I don't share these with the board, even — telling me what I should do if something happens to them tonight.

So I have their ideas. In some cases, they talk about more than one person. In some cases, they tell me the strengths and weaknesses of the people.

But the — I would not try to make any judgments about the succession plans at the parent company from what is done in terms of succession planning at any of the subsidiaries.

Charlie?

CHARLIE MUNGER: Well, I always say, I'm not the least bit worried about it. If I — I wish my main problem in life was the fear about succession problems at Berkshire. I think we're in very good shape.

WARREN BUFFETT: OK. Station 5.

AUDIENCE MEMBER: I am Bill Melby from Northfield, Minnesota.

At the 2009 annual meeting, Mr. Buffett, you said that if you were required to invest your total net worth in one company, that that company would be Wells Fargo.

So in 2014, I ask the same company — or the same question. If you were required to invest your total net worth in one company, what would that be?

WARREN BUFFETT: When the question was asked in 2009, did you exclude Berkshire? Because I think I would've answered Berkshire. (Laughs)

But I wouldn't quarrel with Wells Fargo as a marketable security outside of Berkshire at that time.

Well, I guess he's checking his notes on — the — well —

AUDIENCE MEMBER: The question is other than Berkshire —

WARREN BUFFETT: Oh, other than Berkshire.

AUDIENCE MEMBER: —what would you invest in today?

WARREN BUFFETT: Yeah. Well, it's a great question, but it's not going to get an answer. (Laughter)

Charlie, do you want to answer?

CHARLIE MUNGER: No, no, I think you've given exactly the right answer. (Laughter)

WARREN BUFFETT: Yeah. Well, I'm sorry to disappoint you, but we've disappointed others when they've asked that question.

WARREN BUFFETT: OK, Andrew?

ANDREW ROSS SORKIN: Thank you, Warren. This question comes from Dave Hitchy (PH) from Auburn.

It's a long question. He says, "As a shareholder for about a dozen corporations in addition to Berkshire, I always see a number of proxy statements each year. In all, except Berkshire, the summary compensation table has the compensation listed for at least five or more of the highest paid executives. Berkshire lists three, Warren, Charlie and Mark.

"I assume that since Berkshire is a holding company structure, that's the way it is. I think it would be instructive to include at least two of the highest paid executives from the wholly-owned subsidiaries in the summary table, Ajit, Tony, or Greg, or Matt, to give the shareholders, your partners, a sense of how Berkshire compensates its strongest and highest-paid leaders, as other companies do.

"This would be particularly valuable since two-thirds of the current listees, Warren and Charlie, only receive nominal salaries of $100,000 per year, a figure that is vastly below the value they bring to the company.

"Would you, in the spirit of transparency, be willing to add at least two of the highest-paid subsidiary officers in the table in future years? And how much do you think the next CEO of Berkshire should be paid?"

WARREN BUFFETT: Well, the answer to the last is he certainly will be entitled to pay — get paid a lot. But their decision as to how much they accept is another question.

But I'm going to write about that very end question next year in the annual report because it has a lot of interesting ramifications.

We, obviously, are following the SEC rules, which I can't recite, in terms of the officers required to be in the proxy statement as to their pay.

But, you know, Andrew, in my sporting mood, I would say that Comcast probably has some people in the employ that make a lot more money — not at CNBC, we're not —but — that would exceed the salaries of the people that they list in the proxy statement, as well.

And there's a real question as to whether it's in the interests of the shareholders of the company to start listing, you know, how much the person who's the anchor of the nightly news or whomever it might be, gets paid because it might have a very negative effect, in terms of negotiating salaries with other people within the organization.

I would say that the — I would say the shareholders of Comcast would be hurt, actually, if you published the five highest salaries paid at the subsidiaries or at Comcast itself.

And certainly, if you carried it to every subsidiary there was. I mean, if you were to publish the five highest salaries at CNBC, I don't think the salaries overall would go down the following year.

So, I think that is a — I think that's a good reason for not — for us not publishing the salaries of, you know, say, our top ten managers of the company.

At Salomon — we mentioned that a little earlier — everybody — virtually everybody — was dissatisfied with what they were getting paid. And they were getting paid enormous amounts of money.

But they were disappointed, not because of the absolute amount. They were disappointed because they looked at somebody else in the place and it drove them crazy.

And as a matter of fact, the first big crisis we had in compensation was when the management made a — what was regarded as a secret deal, with the arb group, as I remember — whereby, John Meriwether and his crew got paid a lot of money, which I would argue they earned. I mean, I think they deserved it.

But as soon as that happened, it made compensation, which had always been a terrible problem, an even greater problem because of the jealousy that broke out among the people that weren't in John Meriwether's group.

I think it's been — I think it's very seldom that publishing compensation accomplishes much for the shareholders.

In fact, you can argue that much of what's going on in corporate America — well, I would put it this way: corporate CEOs, as a group, would be being paid a lot less money if proxy statements hadn't revealed how much other people were getting paid.

It is only human to look at a whole bunch of proxy statements and say, "Well, I'm worth more than that guy," and negotiate that way. And a comp committee is going to respond to that.

So, American shareholders are paying a significant price for the fact that they get to look at that proxy statement every year and see how much those top five officers are earning.

Charlie? (Scattered applause)

CHARLIE MUNGER: In the spirit of transparency, you're asking for something that wouldn't be good for the shareholders. And it's not going to happen unless the SEC makes it happen.

We're way better off without adding to the culture of envy in America.

WARREN BUFFETT: Yeah, there's no one that looks at —there's no CEO that looks at other proxy statements and comes away thinking, "I should get paid less." I mean, that — you know? (Laughter)

We haven't seen — have we ever seen them?

CHARLIE MUNGER: No.

WARREN BUFFETT: No.

CHARLIE MUNGER: No, I —

WARREN BUFFETT: Well, we're not old enough.

CHARLIE MUNGER: I would say that envy is doing the country a lot of harm. And our practices are envy dampeners.

WARREN BUFFETT: OK. Greg. (Applause)

GREGG WARREN: Thank you. As you know, Berkshire's cash balances are an issue for some investors. Especially with excess cash being in the 25 to $30 billion range the last couple of years, and Berkshire having a more difficult time than it's had historically reinvesting capital as quickly as it comes in.

Although Berkshire did provide $3.5 billion of the $3.6 billion of cash that was used to acquire NV Energy last year, with MidAmerican funding the remainder with debt, was there something that kept Berkshire from providing all of the capital for the acquisition, perhaps via inter-company debt?

And on a separate note, can you provide with us some insight into the decision to allow MidAmerican to retain all of its earnings, while Burlington Northern, which spent $3 billion on capital expenditures last year and is on pace to spend $5 billion this year, continues to pay a distribution to Berkshire, all while it takes on additional debt to help fund capital spending?

WARREN BUFFETT: Yeah. MidAmerican, now renamed Berkshire Hathaway Energy — we'll call it BH Energy — will have multiple opportunities, I hope, and we've seen two of them in the last 12 months, to buy other businesses.

And, as you noted, we spent a substantial amount of money on NV Energy and two days ago we agreed to buy transmission lines in Alberta.

So, we will — we hope we will — and so far we've been able to — come up with really large businesses to buy at BH Energy.

That will not — at BNSF, we will spend a lot of money to have the best railroad possible. But we're not going to be buying other businesses.

So, we distribute substantial money out of BNSF and we will continue to do so because it'll earn substantial money. And it can easily handle the debt that it has and will incur.

Whereas, at Berkshire Hathaway Energy, we have pretty much the appropriate level of debt at both the subsidiary and the parent company level. So as we buy things, we need not only the retained earnings that we have, but occasionally we need some money from the shareholders.

And there are three shareholders of BH Energy. Berkshire owns 90 percent and then Greg and Walter Scott have the balance.

And so, if we make a large acquisition and we need a little more equity, we will have a pro rata subscription, which the other two shareholders are welcome to participate in. But if they don't — if they decided not to, it wouldn't hurt them. They'd still have an improvement in the value of their shares.

So those two companies are quite different that way.

I hope that more possible deals for Berkshire Hathaway Energy come along. And I think they will.

So we may invest many, many, many billions there. We will invest billions at the railroad, but it'll all be to improve the railroad. It won't be to buy additional businesses.

So far this year, if you think about it, counting yesterday — now, two of these deals started last year — but we've spent 5 billion on acquisitions, roughly.

And, of course, in the first quarter, we spent another 2.8 billion on property, plant, and equipment.

But we are finding — we are finding things to do that tend to sop up the cash.

We always will have $20 billion around Berkshire. We will never be dependent on the kindness of strangers. It didn't work that well for Blanche DuBois, either.

But in any event, the — we don't count on bank lines. You know, we don't count on — we don't count on anything.

There will be some time in the next 100 years, and it may be tomorrow and it may be 100 years from now, and nobody knows, you know, where we cannot depend on anybody else to keep our own strength and to maintain our operations.

And we spent too long building Berkshire to have that one moment destroy us.

I mean, we lent money, as you probably know, to Harley-Davidson at 15 percent. And we lent it at a time when short-term rates were probably a half a percent.

Well, Harley-Davidson is a fine company — but it, like Goldman Sachs and General Electric and a bunch of other companies —we lent money to Tiffany's — they — you know, they needed — when you need cash, you know, it's the thing — it's the only thing — you need. And it's because other people aren't coming up with it.

I've always said that, you know, cash is — available cash or credit — is a lot like oxygen: that you don't notice it — the lack of it — 99.9 percent of the time.

But if it's absent, it's the only thing you notice. And we don't want to be in that position.

So we will keep 20 billion. We will never go to sleep at night worrying about any event that's taken place that could hurt our ability to keep playing our game.

And above 20 billion, we'll try to find ways to invest it intelligently. And so far, we've generally done it. I mean, right — you know, we always had something above that.

But, you know, we've spent a fair amount of money so far this year. We'll probably spend more later in the year.

So, so far, I feel we could get the cash out at reasonable returns. We never feel a compulsion to use it though, just because it's there.

Charlie?

CHARLIE MUNGER: I think we're very lucky to have these businesses that can employ a lot of new capital at very respectable rates.

And if — earlier in the history of Berkshire, we didn't have such automatic opportunities. And now that we're so affluent, we really are way better off having these opportunities.

It's a blessing. I mean, who would want to get rid of MidAmerican and the Burlington Northern Railroad? Nobody in his right mind.

I mean, we love the opportunity to invest more capital intelligently in a world where short-term interest rates are half a percent, or lower.

WARREN BUFFETT: And we love the opportunity to go in with 3G at Heinz and —

CHARLIE MUNGER: Yes.

WARREN BUFFETT: —employ significant capital. We'll get the chances to use capital.

Eventually, you know, compound interest will catch up with us. And it's certainly dampened things.

But it hasn't delivered its final blow yet.

WARREN BUFFETT: Station 6.

AUDIENCE MEMBER: Hi Warren, Charlie. John Norwood from West Des Moines, Iowa. Thank you so much for the annual meetings. And please don't move it to Dallas or some other place. I've got my system worked out here.

WARREN BUFFETT: We won't.

AUDIENCE MEMBER: Thank you. Hey, two quick questions.

One is allocation of capital and how you wrestle with the operating companies and how much cash comes up to the operating companies — or comes up to the mother ship — versus the operating companies.

And you and Charlie, do you ever fight or argue? And any lessons over the years for how you manage your partnership of two? Thank you.

WARREN BUFFETT: Yeah. Charlie and I have never had an argument. We met in 19 — when I was 29. He was 35. We're a little older now.

And in those years, 55 years, we've disagreed on a lot of things. And it's just never led, and never will, lead to an argument.

We argue with other people. (Laughs)

But it just — it hasn't occurred.

I called Charlie on the Coca-Cola vote, you know, and then said what the proxy statement said and everything. Said, "What do you think?" And we thought alike, you know?

Sometimes we don't think alike. And we never go away in the least bit mad if we don't, or —

CHARLIE MUNGER: Most of the time, we think alike. That's one of the problems. If one of us misses it, the other is likely to, too. (Laughter)

WARREN BUFFETT: Yeah. I would say that — well, there's no question. If you look at the really bad mistakes we've made, I've made them.

I'm probably a little more inclined toward action than Charlie. Would you say that's fair, Charlie? Or —

CHARLIE MUNGER: Well, you once called me the abominable 'no' man. (Laughter)

WARREN BUFFETT: Now we've missed — what's the — what was the first part of the question? (Laughter)

AUDIENCE MEMBER: Capital allocation. How do you decide how much cash comes up from the operating companies —

WARREN BUFFETT: Yeah, that's —

AUDIENCE MEMBER: — to the mother ship?

WARREN BUFFETT: Yeah, that's pretty simple, in that we don't really care too much where that 20 billion minimum is.

We wouldn't — but we don't count the money in a regulated — well, in the energy business or the railroad.

So we really count the money that we could make a phone call and get.

With interest rates at these levels, we sit around sometimes with — every one of our companies, I would say, probably has more cash in it than if some other large conglomerate was running the place.

They would probably have sweep accounts and all of that. And we may get around to that at some point, but it just doesn't make that much difference, because if we had it at the parent company, we'd have it out at five basis points. And if it's at the — if it's down at the subsidiary, it's probably getting five basis points.

So we're not — it's not something we think about on a day to day or week to week or month to month basis.

I know where the cash is. And I know when we're going to need cash and I know what I'm thinking about doing, or may possibly do in the next few months, that maybe something's a 50/50 probability of happening.

And anything I am committing to do, I know where the cash is coming from.

But it doesn't mean that we try to get it all in the parent company, day by day or week by week like many companies do. We could change that procedure someday. Maybe a sweep account would make sense at some point. Probably would.

But we're not big disciplinarians of our subsidiaries day by day. We don't want them to feel that way.

And there's one company I'm thinking of, where I've never been there. Probably only talked to the fellow who runs it three or four times in ten years. You know, and there's a lot of cash around. And every now and then, he sends me some.

And if I really need it, I mean, I know where it is. And he'll give it to me. But there's — it doesn't really make much difference, you know, whether it's sitting there, whether it's sitting at Berkshire.

I don't want to encourage to our managers of our other subsidiaries who are listening to this a new way of behaving. But, I sort of adapt to the companies, except when we really need the money, and then I grab it. (Laughter)

Charlie?

CHARLIE MUNGER: That's just fine.

WARREN BUFFETT: Carol?

CAROL LOOMIS: This question comes from an astute fellow named Richard Sercer of Tucson, who spotted an opening and is going for it.

And it actually reminds me of a question that you, Warren, or Charlie, could've thought up yourself.

"In an interview on April 23rd, 2014 about the Q&A session, Warren said, quote, 'I hope we will get questions that probe at our weak points.' My question is, what is our weak points and what can be done to address them?" (Laughter)

WARREN BUFFETT: Well, that would spoil all the fun for the journalists. (Laughs)

They're the ones that are supposed to look for the weak points.

We have a lot of weak — we point them out. You know, I've just pointed out one.

Probably, I would say if you'd — if we'd — executed a sweep account for all our subsidiaries some years ago, you know, we would have a few more dollars than we have now.

You know, it — who knows what they're doing with some of those balances in terms of — we wouldn't — it wouldn't be because we do riskier things. But we — you know — we are very disciplined in some ways. And by ordinary business standards, we're sloppy in other ways.

And, oh, well, a clear weak point of mine would be I'm slow to make personnel changes. I mean, I like the managers we have.

And Charlie and I had a wonderful friend who couldn't have been a greater guy. And, you know, we were slow to make a change there. We loved the guy. And it wasn't killing us in our business.

And how long would you say we went beyond where somebody else would've acted in that case, Charlie?

CHARLIE MUNGER: Well, I don't know exactly.

But that, turning to the sweep account system, reminds me of a friend I had when I was in the Air Corps and he was a very skinny man. And he decided to give blood. And they put the needle into his arm and the blood stopped flowing.

And the nurse just started stripping his arm as though it were the udder of a cow. And he got the impression that he was going to — they were going to get that blood whether it took all he had. And he fainted.

It was a very unpleasant occurrence. And I don't think a sweep account is all that pleasant to sit there and just — every little dollar comes in, somebody sweeps it away.

WARREN BUFFETT: Charlie, our —

CHARLIE MUNGER: I like the tone of our business.

WARREN BUFFETT: Our managers are listening here. I mean, don't give them that illustration to use when I ask for money. (Laughter)

CHARLIE MUNGER: But, you know, I've seen people subject to — Teledyne and Litton, those people, swept every dime every day, basically.

And it was a little more economic, but it created a tone in the company that — which I think is less desirable than ours.

WARREN BUFFETT: We've waited too long on managers, though, sometimes, Charlie.

CHARLIE MUNGER: Well, sure. You and I participated in taking one man directly from an executive chair into a Alzheimer's home. There was no — (Laughter)

WARREN BUFFETT: You're hitting a sensitive subject here, Charlie. (Laughter)

CHARLIE MUNGER: We'd arranged that he could do no harm, and we loved him well enough so that we just made it easy for him.

I've never regretted it, have you?

WARREN BUFFETT: No. Not —

CHARLIE MUNGER: No.

WARREN BUFFETT: Not at all. Not at all. It —

CHARLIE MUNGER: On the other hand, I want to be pretty careful.

WARREN BUFFETT: It — we will be slow. And we — there will be times when what you might call our lack of supervision over subsidiaries, you know, we'll miss something.

Now, we think that giving our managers the degree of freedom that they enjoy will also accomplish a lot.

So someone will come along someday and say, "If you'd had many more checks and oversight and all of that sort of thing," you know, something — well, something will happen at Berkshire and they'll say, "That wouldn't have happened if you'd followed the procedure that some other company followed." And they'll be right.

But what they won't be able to measure is how much on the positive side we have achieved with dozens and dozens of people because we gave them that same sort of leeway.

I mean, we operate differently in terms of the level of control and supervision. You know, we don't have a general counsel's office at Berkshire. We don't have a human relations department at Berkshire.

And that would be almost unthinkable to other companies. And we're not saying that's a 100 percent benefit in all ways. We think — but we think on balance, it's a benefit.

But when the down side of such a procedure shows up, people will say, "Well, you should of done it differently and you should've been spending lots of money over the years and restricting the activities more of your subsidiary managers," and so on.

And our reaction will be that they are wrong. But we will look bad in that individual case.

Wouldn't you say that's true, Charlie?

CHARLIE MUNGER: Yeah. The — by the standards of the rest of the world, we over trust. And so far, our results have been way better because we carefully selected people because they were going to be over trusted. And it's worked very well for us.

And, I think a lot of places work better when they create a culture of deserved trust. And that's been our system. And some people regard that as a weakness.

And this modern accounting treatment, when everybody's measured on internal controls, I think it's going to do more harm than good. (Applause)

WARREN BUFFETT: Jonathan?

JONATHAN BRANDT: See's Candy is obviously small in the context of Berkshire's currently expansive operations, but has long been one of your favorite businesses.

And no wonder, given that its pre-tax profits grew consistently from less than $5 million in 1972 when Berkshire acquired it, to $74 million in 1999.

However, since 1999, profit growth appears to have stalled.

Can you explain why See's was able to grow its profits through the '70s, '80s and '90s, but not, so far, in this millennium?

Did something change about the business, for instance, the growth and demand for boxed chocolates or its market position?

Could you or Brad Kinstler discuss whether the relatively recent geographic expansion could help reignite See's growth? Thank you.

WARREN BUFFETT: Yeah, the boxed chocolate business is, basically, not growing.

I mean, if you go back 100 years, the — each city of any size was characterized by lots of candy shops. Chicago was a big leader. New York was a big leader.

Believe it or not, the predecessor company to Pepsi Cola was the — a company with the most — it was a company called Loft's — that had the most candy shops in New York City.

It was a candy shop company, originally, that a fellow that — what was his name?

CHARLIE MUNGER: [Charles] Guth.

WARREN BUFFETT: Yeah. What was it?

CHARLIE MUNGER: Guth.

WARREN BUFFETT: Yeah. He acquired Pepsi for a few thousand bucks, stuck it in Loft's.

And the corporate — the corporate name, if you go all the way back on Pepsi, is Loft's.

So there were loads of candy shops around everyplace. And including in Omaha.

Boxed chocolates have lost position dramatically. Primarily, I would guess, to salted snacks of one sort or another. Various things.

See's has done remarkably well, far better than any chocolate company in the country.

Russell Stover did very well for a while. Very well, with a different business model. But, you know, they ran into their problems as well.

So, we can't do much about increasing the size of the market. And we've tried a lot of ways. And we've tried moving out of our strong geography, multiple times.

I mean, Charlie and I looked at what we were earning in California in the '70s and said to ourselves, "If we could do this in 50 states instead of one, you know, we'll get very rich."

So we tried it and we didn't get very rich. It doesn't travel that well.

CHARLIE MUNGER: Well, sometimes it does and sometimes it doesn't. And you figure out whether it's going to work by trying it.

WARREN BUFFETT: Yeah. And we've tried it many times.

But so far — it's interesting. Two-thirds — people in the East prefer dark chocolate, two-thirds to one-third. In the West, they prefer milk chocolate, two-thirds to one-third.

They like miniatures in the East. They won't eat miniatures in the West. There's a lot of different things.

But in the end, there isn't a lot of boxed chocolates volume.

And we've done very, very, very well in See's. And it not only has provided us with earnings that we've used to buy other businesses, so we've added lots of earnings power through See's, beyond the earning power we've added at See's.

But it opened my eyes to the power of brands and probably you could say that we made a lot of money in Coca-Cola partly because we bought See's, or at least in my case, bought See's, because I'd understood brands to some degree, but there's nothing like owning one, and sort of seeing the possibilities with it as well as the limitations, to educate yourself about things you might do in the future.

And in 1972, we bought See's. And in 1988 we bought Coca-Cola.

And I wouldn't be at all surprised, if we had not owned See's, whether we would've owned Coca-Cola later on.

Charlie?

CHARLIE MUNGER: Yeah. There's no question about the fact that its main contribution to Berkshire was ignorance removal. And it's not the only big contributor to ignorance removal.

If it weren't for the fact we were so good at removing our ignorance, step by step, Berkshire would be practically nothing today.

What we knew originally wasn't enough. We were pretty damn stupid when we bought See's. We were just barely smart enough to buy it.

And if there's any secret to Berkshire, it's the fact that we're pretty good at ignorance removal. And the nice thing about that is we have a lot of ignorance left to remove. (Laughter)

WARREN BUFFETT: Well, that's what happens when I call on him. (Laughter)

WARREN BUFFETT: Station 7.

AUDIENCE MEMBER: My name is Ben Ottenhoff and I'm from Washington, D.C.

I was wondering if you could talk — I've read recently that the Bank of America investment, you changed it so they can now treat it as tier one capital.

WARREN BUFFETT: Right.

AUDIENCE MEMBER: Can you explain a little bit why you did that and what benefit, if any, there is to Berkshire's shareholders?

And also, does it give you any pause that they can't calculate their tier one capital requirements properly?

WARREN BUFFETT: The — it came about some — really, a good many months ago, that Brian Moynihan called me and asked me whether we would be willing to change our preferred stock, five billion of it, from a cumulative preferred, to a noncumulative preferred.

Now, a non-cumulative preferred has certain defects, obviously, compared to a cumulative preferred. As, for example, the shareholder — the preferred shareholders — of Freddie Mac and Fannie Mae are finding out.

Noncumulative preferreds — Ben Graham wrote about them in the 1934 edition of "Security Analysis" — they're a terribly weak form of security.

But, partly because they are that weak form of security, they count different in capital with banks.

So Brian asked me to do that and then he said, "If you will do that" — and this requires approval by their shareholders and everything — but he said, "If you'll do that, we would be willing to make your preferred noncallable for five years."

Now, in a world of five-basis money — five-basis-point money — you know, practically nothing — no returns — I was very willing to make that trade-off.

It was — they felt it was good for them and I felt it was good for Berkshire.

So, I get five years at Berkshire of non-call of a 6 percent preferred, which I can always use as payment for the warrants we have.

So, I don't have a problem of being locked into it forever, into a noncumulative committed preferred, and the BofA gets the benefit of using it in their calculation of capital.

That was all done before this recent — I mean, a long time ago — before the recent, you know, week ago or so when they had the miscalculation involving some structured notes of Merrill Lynch.

That error they made does not bother me. I mean, it — you know, we work on our figures, you know, we've got that 20,000 page-plus tax return. We have 10-Ks, 10-Qs, going in and out. You do the best you can.

But I — that error did not affect their GAAP reported numbers or anything of the sort. And they wished they hadn't made it. And they'll pay a penalty, in the sense of their capital plan, because they did make it.

But it doesn't change my feeling about the Bank of America or its management one iota.

And I do think that this — they were going to pay the dividend anyway. You know, I mean, the probabilities that going to non-cumulative hurts us are very, very low. And the probability that making it noncallable for five years is a real plus to us.

So, it was an exchange I was happy to make. And I think that it was good for us and good for them.

Charlie?

CHARLIE MUNGER: Well, I agree with you.

WARREN BUFFETT: OK. (Laughter)

WARREN BUFFETT: Becky?

BECKY QUICK: This question comes from Frank Robinson in Madison.

And he asks, "Ten years ago, NetJets was mentioned at the annual meeting each year as an exciting growth opportunity for Berkshire. Five years ago, there were some problems which seem to have been addressed since they're no longer mentioned.

"What are the current prospects for NetJets? Is it a substantial contributor to growth and revenue and earnings?"

WARREN BUFFETT: Yeah, it's not a big grow — it's a very — it's a perfectly decent business.

The number — it peaked in new unit volume more or less coincident with what happened in the stock market in 2007 and '08.

I mean, there were a fair number of people whose income was dependent on stock market behavior, particularly hedge fund managers. But other — a lot of others.

And they gave us quite a boom in sales. And not only did their demand fall off, but when their contracts ran out — and they tended to run out in, like, 2011 and '12 — a lot of them did not renew.

Until the last — won't be totally accurate on this — but until the last six or eight months, net ownership in the U.S. was declining just slightly. And that's turned around now. Net ownership is growing month by month.

But it is not a huge growth business at all. I mean — it's a very large-size business. I mean, we are, you know, probably 60-some percent of the industry and there's nobody remotely close as a second. I mean, we are the premier product.

But I don't see the market being double or triple the present size.

We are going to China very soon. But that's a very, very long-range play. We are in Europe and that is not — that still is declining a little bit in unit volume.

Now, the flight hours have picked up a fair amount. So the owners are using the planes more in the last six months to a year, and that fell off a lot in the 2007- 8 period.

So I would not characterize NetJets as a big growth opportunity. But I would — but I'm glad we own it. And I think it's very — it's a very satisfactory business.

But it is not one I would expect to see a whole lot of growth out of.

Charlie?

CHARLIE MUNGER: Well, I demonstrated my optimism by buying 25 more hours. (Laughter)

WARREN BUFFETT: He was a tough sell, too, I got to tell you that. (Laughter)

I can think of a few more comments, but I won't make them.

WARREN BUFFETT: Jay.

JAY GELB: This question is on acquisitions.

How large of an acquisition is Berkshire comfortable targeting currently?

And to what extent are Berkshire's major equity investments in Wells Fargo, Coke, American Express, and IBM realistically a potential source of funds for deals?

WARREN BUFFETT: Well, they could be a source of funds. But it's very unlikely they will be.

But — the — our goal is to buy really good businesses, and big businesses, and businesses where we like the management, and businesses that we think we can grow over time.

I mean, Berkshire is about building earning power. When we buy, as we did a day or two ago, agreed to buy that transmission line in Alberta, I mean, I'm looking at trying to add earning power to Berkshire.

And we try to do that every day or every week or every month. And we don't get opportunities that often.

But if the opportunities were large enough and we needed to raise some money, you know, we can dip into a huge reservoir of securities and still have, you know, huge investments thereafter.

It hasn't come to that. You know, when we've got 40-some billion of capital — or cash — and I'm willing to take it down to 20, it — you know, we've got a fair cushion there.

But if I needed to, we would do something, if it was attractive enough, and big enough, that it required us to.

So, that could happen. Could happen this year, could happen ten years from now. You never know.

Charlie, have you got any thoughts on that?

CHARLIE MUNGER: Well, no, I think the — our acquisitions have been irregular in the past. They'll be irregular in the future.

I do think we'll get more, sort of, automatic, intelligent redeployment of capital from our railroad and our utility subsidiary than we have in the past. And I think that's good, good for the shareholders.

WARREN BUFFETT: I think people may think that what we get turned on is by finding some stock we'd like to buy. That's fine.

But what really — there's no comparison — what really turns us on is finding a business that we want to buy, and that fits well for Berkshire, and that'll be earning money for Berkshire 10 and 20 and 50 years from now.

That's what we're — that's what we've been trying to build for 49 years.

And marketable securities have played a big part in that, because the profits that we've made from them have helped do that, and it's a great place to deploy capital on an — you know, it's easy to do there.

But if you — what we're really thinking about, at least Charlie and I — we've got Todd and Ted thinking about marketable securities — what we're really thinking about is buying businesses. And that's what it'll continue to be.

We're in no hurry to sell any of those stocks you mentioned. (Laughs)

They — there probably would be other stocks — if we were going to go out to raise five or 10 billion from stocks, they would not be the names you mentioned.

WARREN BUFFETT: OK. Station 8.

AUDIENCE MEMBER: Hello Warren, Charlie. My name is Stefano Grasso (PH) and I come from Genova, Italy, all the way from there. It's a pleasure to be here today with you.

I have a question about increasing leverage for Berkshire in this day. This question is really to trigger a discussion and to hear your thoughts on that.

And also, this question was triggered by the fact that following the acquisition of BNSF, few years ago, which was partially financed by Berkshire stock, shortly after, there was plenty of cash around.

There could be different advantages for Berkshire to wisely increase leverage these days. Some generally true for all the companies. Some Berkshire specific.

And the Berkshire specific, most important one for me as a shareholder, is that the investment decision made to invest the funds would be made by the present team, you and the other managers.

Question is then, why not go out and ask for several billions in bonds with a long maturity, and maybe even with some earlier endorsement or callable options embedded at Berkshire discretion, and good — and make a good use of it? Thank you.

WARREN BUFFETT: Well, what you say makes great sense.

And it's the kind of thing Charlie and I used — I think if you'd asked Charlie and me 40 years ago, that if we were looking at the present set of interest rates and we had some wonderful businesses that were making a lot of money, whether we would have gone out and borrowed a whole lot of money for the long term. We would've said yes, right, Charlie?

CHARLIE MUNGER: Wouldn't have been a hard decision.

WARREN BUFFETT: But, we've got several reasons. We — A, we do have a good way of generating funds other than through equity: through float. And we've done that to the tune of 77 billion.

And we don't like the idea of operating a very conservatively-leveraged company, and then changing courses so that the people who bought bonds that were rated double-A, sort of find themselves with much lower rated bonds of the sort.

We don't have any problem leveraging up the utility or the railroad. They deserve to have even a lot more debt than they do, but we keep it sort of in line with what the rating agencies think should be conventional ratios.

But they're — if you look — if you analytically look at them — both of them could withstand a fair amount more debt.

At the parent level, we — you know, looking back on the BNSF deal, we borrowed some money that time and we used some equity.

I think using equity helped us make the deal. But it was, you know, it was not a smart thing to do, basically.

I should — and I could've always gone to the market and repurchased a bunch of stocks subsequently, and that's probably what I should've done on that.

So I understand your point. I completely — you know, another 30 or 40 billion of debt at Berkshire would be nothing and it would cost very little.

We don't actually have great places to put it now, as evidenced by the fact that we've got 25 billion or so of excess cash.

We'd be — we are reluctant to leverage it up a lot at the parent now, since we have these other sources of money that are really pretty attractive.

We are selling what we call structured settlements, for example, that have a very long duration. And they actually have an interest cost to us of less than if we were to sell bonds.

So we are doing certain things that are along the lines you urge, but not nearly as aggressively as you urge.

And you probably are right. And you're certainly right if we saw a $50 billion deal and we passed on it for some reason because we were unwilling to take on some debt.

If we see a really good $50 billion deal, we'll figure out a way to do it.

Charlie?

CHARLIE MUNGER: I think we'd welcome it. We're — even though what you suggest is intelligent, we're probably not going to do it in advance.

WARREN BUFFETT: You caught the last two words there.

WARREN BUFFETT: Andrew.

ANDREW ROSS SORKIN: Question comes from Rory Holscher in Galena, Illinois. This question is about Berkshire's investments in climate change.

"On one hand, Berkshire's utilities have large commitments to wind and solar power. Berkshire also has an investment in BYD, an innovative transportation company that may be comparable in some ways to Tesla.

"On the other hand, Burlington Northern hauls a lot of coal. You point out in the 2013 annual report that its profits could shrink if coal burning was curtailed.

And then there's the reinsurance business.

How do these and other Berkshire investments align with your understanding of the risks and opportunities posed by climate change? How should we think about this as investors?"

WARREN BUFFETT: Well, I think that you've stated the facts on a whole bunch of businesses. And, I mean, if you own a railroad that's carrying a lot of coal, it'll carry a lot of coal for a long period. A very long period. But it'll probably carry less at some point. I don't think —I think that's very likely, too.

But, I get all these questions from people who tell me they want me to fill out lots of forms and everything about how it'll affect our insurance business. It doesn't — it just doesn't operate in that — in that time period.

I mean, we are not making — when Ajit and I talk about what we'll charge for catastrophe insurance, you know, whether it's hurricanes in Florida, or whether it's earthquakes in New Zealand, or whatever it may be, the year-to-year change in probabilities on that are, at least in our view, extremely low.

I mean, it doesn't come close to being anything that affects your prices in any material way in any given year.

And, you know, we will continue to develop alternative sources of energy. We'll continue to use coal in our coal generation plants until the utility commissions under which we operate tell us that we should do something different. We have no choice about that.

We, incidentally, have no — I mean, we're happy to carry the coal, but beyond that, we are a common carrier. I mean, we might love to turn away chlorine or ammonia or something like that because of the dangers in carrying it. And we can't get compensated adequately for that.

But we are a common carrier. So, we — by law, we're required to carry the freight that is offered to us.

So I — I don't think in making an investment decision on Berkshire Hathaway, or most companies, virtually all of the companies I can think of, that climate change should be a factor in the decision- making process. Charlie?

CHARLIE MUNGER: Yeah, I think a lot of the people who think they know how climate change is going to change weather patterns and hurricanes are overclaiming. (Applause)

We're sort of agnostic. It isn't that there isn't some global warming, because there plainly is.

But the people who think they know exactly what's going to happen and how many people are going to die from tropical diseases and so forth are mostly talking through their hats.

I think there's a class of people who like the idea they've got a calamity to worry about. And —

WARREN BUFFETT: Well, but — and when you say it, I mean, just in terms of being an economic variable in making a decision, this —

CHARLIE MUNGER: No. We're not saying, "How can we structure our whole investment program to take into account what we think we know about climate change?"

But I think we're very well located long term, no matter what happens.

I think that transmission lines and more or — we're going to have to produce a lot more electricity directly from the sun or indirectly through things like wind. And, we're beautifully positioned.

It's just like GEICO made a lot of money when the internet came along, that they didn't really plan on, I think we'll make a lot of money as more and more electricity is produced more directly from the sun.

So I think we're in a very good shape. But I don't think we deserve any great credit for it. We just stumbled into it.

WARREN BUFFETT: Gregg?

GREGG WARREN: Since Berkshire started to transfer some of the responsibility for the company's investment portfolio over to Todd Combs and Ted Weschler, the two men have gone from managing around $3 billion each in early 2012, to managing more than $7 billion each earlier this year.

That said, this still represents less than 10 percent of the equity portion of your investment portfolio, with big legacy positions in Wells Fargo, Coca-Cola, American Express, IBM and Proctor & Gamble, overshadowing the rest of the holdings.

Can you give us an update on how much money each of your lieutenants is now running and how much you see that growing into over the next five years?

And given that both men have seemingly been involved in things beyond their roles as portfolio managers the last couple of years, how much do you expect their roles to expand over time?

And on a completely separate note, at what point can we expect to see Todd and Ted join you and Charlie up there on stage to talk about their efforts managing Berkshire's investment portfolio?

WARREN BUFFETT: I got through college answering fewer questions than that. (Laughter)

They are managing about —it's a little over 7 billion now. We will change that periodically and it will always be upward. But we don't change it month by month.

I mean, their portfolios may change in value month by month. But they will be handling more money in the future than they are now.

I think, to some extent, they, as well as I — you know, I've had the unpleasant experience of handling more and more money as the years go by — they are seeing that it does get a little more difficult as the sums get larger.

But it's still far better to keep moving money over to them and away from me as time passes. And that'll continue to be the case.

They're both terrific additions to Berkshire, beyond their investment skills in that they know — they each know — a whole lot about business. They know a whole lot about management.

And there are a lot of things that come across the desk at Berkshire that I get an idea on, but I just don't feel like carrying out myself, because they might involve a lot of time, particularly if they get involved in negotiating small points and that sort of thing.

So Ted and Todd have both, as I mentioned in the report, been very helpful in doing things beyond their investment management duties that have added a significant value to Berkshire. And I think it's a cinch that that will continue.

They want to do it. They enjoy doing it. They don't ask for extra compensation, at all, because they do it.

They're 100 percent attuned to Berkshire. They know how I think. And if I tell them, you know, "Here's a deal that I think makes sense if you can get it done," they'll know why it makes sense, and they'll know how to get it done, and they'll spend the time to do it.

So it's been a big, big plus for Berkshire to bring them onboard. And they'll be more important factors as the years go by. OK.

Charlie? I'm sorry, I'm —

CHARLIE MUNGER: Nothing to add.

WARREN BUFFETT: OK.

CHARLIE MUNGER: How's that?

WARREN BUFFETT: Station 9.

AUDIENCE MEMBER: Good morning, Warren and Charlie. My name is Jason. I'm from Toronto and my question relates to the general financial markets.

We've been in an environment of virtually zero interest rates now for many years. In recent times, prolonged periods of low rates have led to asset bubbles, such as the housing bubble and, potentially, now a bond bubble.

If you were running the Fed, what would be your policy with respect to interest rates? Do you see a need for a hike? And what would be your time horizon for such a change? Thank you.

WARREN BUFFETT: Well, since it's — you're right about the — who would've guessed five years ago that you'd have had rates this low for this long?

You're — I would say that I'm surprised at, really, how well things are going.

I don't think I would be doing much differently. And I particularly say that because it's worked so well so far. So I would like to say that I would've done exactly the same thing and take credit for it.

I've been surprised at how well this worked. But as I said last year, this is really an interesting movie because we haven't seen it before. And what makes it interesting is also we don't know how it ends. But, I think Ben Bernanke was a hero, both at the time of the crash — or the panic — and subsequently.

I think he's a very smart man. I think he handled things very well.

What was interesting to me was when the minutes of the Fed from the period in 2007 and 2008 came out, it was interesting to me how a number of the members of the Fed were not getting it, as to what was happening.

That was really fascinating. It wasn't — there were a lot of them that didn't really understand, it seems that way, or some of them that didn't understand just how serious things were.

And so I give particular credit to Bernanke, considering the fact that he was really not getting a cons — certainly not a unanimous view from those surrounding him, that the kind of actions he knew were necessary, were really necessary.

And yet, he went ahead with them. And in my opinion, did a masterful job. And from everything I've seen of Janet Yellen, I feel the same way about her.

We will see how this movie plays out. You know, I do not know the answer as to what happens if you keep rates close to zero for a very, very long time. And keep absorbing more and more of the debt issuance of the country because so far, we've tapered, but we're still buying.

I'd be interested to hear Charlie's thoughts on it.

CHARLIE MUNGER: Well, nobody, for instance, in Japan would ever have anticipated that interest rates would go way down and stay down for 20 years.

And nobody would've expected common stocks to decline by huge amounts and stay down for 20 years.

So strange things have happened. And they're very confusing to the economics profession.

In fact, if you're not confused, you really probably don't understand it very well.

And at Berkshire, what I noticed is there aren't many long-term bonds being bought.

WARREN BUFFETT: Yeah. We — well, you know, in 2008, I wrote an article saying, you know, that — everybody was saying cash is king. Well, cash may have been king if you used it, but cash was the dumbest damn thing you could possibly own, you know, if you weren't going to use it.

And people cling to cash at — usually at the wrong times.

But it is — a zero interest rate policy has had a huge effect, both in rejuvenating the economy and — and in terms of asset prices.

It has not, in my view, produced a bubble. That doesn't mean it can't produce one. But this is not — this is not a bubble situation, at all, that we're living in. But it's an unusual situation that we're living in.

Any further thoughts, Charlie?

CHARLIE MUNGER: No, I'm as confused as you are.

WARREN BUFFETT: Oh good. Good. (Laughter)

That's why we get along so well.

WARREN BUFFETT: Carol?

CAROL LOOMIS: This question concerns another uncertainty. It's from Chris Gotcho (PH) of Gotcho Capital Management in New York City.

"You've been looking for a credentialed bear to ask questions at this meeting. I'm not it. In fact, selling short on Berkshire would be quite silly.

"However, in the long term, Berkshire has a business model of owning over 70 non- financial, unrelated businesses — bricks and chocolate, for example — which is a model that has almost universally not worked well in the past 100 years of American business.

"The model has worked well for you two, Mr. Buffett and Mr. Munger, who are uniquely talented.

"But the question is, the probabilities do not seem likely to be favorable that their successors will be able to have it continue to work nearly as well."

So that is my question.

WARREN BUFFETT: OK. Actually, the — it's interesting.

The model has worked well for America. I mean, if you look at all these disparate businesses in America, they've done extraordinarily well over time.

So if you want to look at the Dow Jones average as one entity — now, it was a changing group of companies over a 100-year period — but, you know, any business unit that goes from 67 — or 66 — to 11,497 while paying you out a fair amount of money every year, actually is a model that's worked pretty well. But it hasn't been, of course, under one management.

But owning a group of good businesses is not a terrible business plan. A good many of the conglomerates were put together to perform financial magic of one sort or another.

They were based upon — you know, if you go back to the Litton Industries and the Gulf and Westerns and just — you could name them by the hundreds. They were really put together — Ling-Temp — LTV, and — on the idea of serial issuance of stock, where you issued stock that was selling at 20 times earnings to buy businesses that were at ten times earnings.

And it was the idea that somehow you could fool people into continuously riding along on this chain letter scheme, without the primary thought being given to what you were actually building in the management.

I think our business plan makes nothing but great sense, to own a great group, a group of great businesses, diversified, outstanding managers, conservatively capitalized.

And with one enormous advantage, which people don't really understand. I mean, capitalism is about, in an important way, it's about the allocation of capital. And we have a system at Berkshire where we can allocate capital without tax consequences.

So we can move businesses from See's Candy, to generate surplus capital, to other areas. It doesn't hurt See's in the process, and we can move it, as the textbooks say, to places where capital can be usefully employed, like wind farms or whatever it may be.

So we are — you know — there's nobody else really better situated to do that than Berkshire Hathaway, and it makes perfectly good sense.

But it has to be applied with business-like principles, rather than with stock promotion principles. And I would say a great many of the conglomerates have been — have had, as their underlying premise, stock promotion.

You know, you saw what happened with Tyco or — the serial acquirers were usually interested in issuing a lot of stock.

I think if you had to look at one of the primary indicators of what sort of species you're viewing, you would see whether somebody's issuing — if they're issuing stock continuously, one way or another, they've probably got a chain letter game going on. And that does come to a bad end.

I think our method of acquiring for cash, and acquiring good businesses, and building many, many sources of growing earning power, I think, is a terrific model.

Charlie?

CHARLIE MUNGER: Well, I think there're a couple of differences between us and the people who are generally thought to have failed at a conglomerate model.

One is we have an alternative when there's nothing to buy in the way of companies. We've got more securities to buy in the insurance company portfolios. And that's an option which most of the other conglomerates didn't have.

Number two, they were hell bent to buy something or other quite regularly. And we don't feel any compulsion to buy. We're willing to just sit until something makes sense.

We're quite different. We're a lot more like the Mellon brothers than we are like Gulf and Western. And the Mellon brothers did very, very well for what, 50, 60, 70 years.

And they were willing to own minority interest, they were willing to grow companies, they were a lot like us.

And so I don't think we're a standard conglomerate. And I think we're likely to continue to do very well, sort of like if the Mellon brothers had just kept young forever.

WARREN BUFFETT: Now you're talking.

CHARLIE MUNGER: Yeah. (Laughter)

WARREN BUFFETT: Jonathan.

JONATHAN BRANDT: Forest River is one of Berkshire's better performing acquisitions. Since Berkshire purchased it in 2005, its sales have grown considerably faster than those of its principle competitor, Thor. And I believe it has taken the number one spot at retail for recreational vehicles.

Can you explain what Forest River is doing differently from Thor? And tell us whether Forest River is accepting lower operating margins than Thor's 7 percent to gain the share.

Does Forest River have any sustainable, structural advantages over Thor that will help it maintain its number one position?

Also, with three companies now accounting for about 80 percent of the share in the RV market, are there greater barriers to entry than in the past, or can a feisty upstart like Forest River, in its day, still come out of nowhere and gain a lot of share?

WARREN BUFFETT: Yeah. We bought a company called Forest River, run by a fellow named Pete Liegl, I'd say about ten years ago or so.

And it's interesting. Pete, who is not an MBA type at all, he's a terrific guy, he built up a — (Laughter)

That was not a statement, that was an observation. (Laughter)

Pete built up a very successful, but much smaller, RV business. And he sold it to a private equity firm in the mid-1990s. And they promptly started telling him how to run it. And he, very shortly thereafter, told them to go to hell.

And, not very long after that, it went broke, which is not an unusual — I would've predicted that.

So Pete then bought it out of bankruptcy, and rebuilt it, and then came to see me about ten years ago.

And in one afternoon — we went to dinner that night. He brought his wife and his daughter. And we bought the business.

And he made me a couple of promises then. He's very limited in his promises. I told him what I'd do. And we've lived happily ever after.

I've never been to Forest River. It's based in Elkhart, Indiana. I hope it's there. I mean, maybe they're just making up these figures — you know?

I could see that. Some guy saying, "What figures shall we send Warren this month, you know, ha, ha, ha." (Laughter)

Pete does a terrific job of running the company. We made a deal at the time he came, on incentive comp and base comp. He's never suggested a change, I've never suggested a change.

He's built the company to where it'll do over — I think it'll do over $4 billion of business this year.

I've probably had three or four phone calls with him in the whole time.

It's his company. And he does a sensational job.

I don't know about the Thor-Forest River situation in terms of how tough it is to go in to compete with him. I think it'd be tough to compete with Pete under any circumstances.

His IT department, for a $4 billion business, consists of six people. He just knows what's going on in the place.

And the important thing is that it's his company. I couldn't run an RV company, and we don't have anybody at headquarters that could run one.

It's a tough business. And you do work on narrow margins, to get to your point on that, Jonny. The —it's a business that runs with maybe 11 or 12 percent gross margins, and probably 5 to 6 percent of SG&A. So, you know, your margins are in that 6-or-so percent range.

We have a very good — both from his standpoint and from our standpoint — we worked out an incentive comp. Like I say, we worked it out that afternoon in Omaha when he came by.

And it's worked for him. It's worked for us. You know, it couldn't be a better arrangement. I wish we had 20 like it.

And probably, most of our shareholders don't even know we own Forest River. But that is a company that will do 4 billion of business this year, and I'll bet will do more business over time. It's the leader in its industry. The industry's not going to go away.

And, you know, maybe we can even sell a little insurance on RVs. So that's the story on Forest River.

WARREN BUFFETT: Station 10.

AUDIENCE MEMBER: Hi, Warren, Charlie. My name is Vishal Patel (PH). I'm visiting from Toronto, Canada, and my question is about the oil sands.

Can you please share with the audience your view on the oil sands industry and their impact on Berkshire Hathaway?

WARREN BUFFETT: Well, in terms of —are you thinking of the oil sands or are you thinking of shale production?

AUDIENCE MEMBER: I'm thinking oil sands, Alberta.

WARREN BUFFETT: Alberta, yeah.

AUDIENCE MEMBER: Keystone XL.

WARREN BUFFETT: It's not a huge impact. We have a crane business at Marmon that does a lot of business in oil development, generally. But, certainly, is active in the oil sands.

We will soon have a transmission operation that will cover 85 percent of Alberta. Alberta's a big place. It'll have 8,000 miles, or something like that, of transmission lines, for example.

But the oil sands business is — I mean, you know, oil sands are huge. And we own some Exxon Mobil, when they've got an operation in the oil sands, obviously.

One thing you might find kind of interesting, you know, we are moving 700,000 barrels a day of crude oil on our railroad. We've got — probably got — maybe, nine unit trains — now [BNSF Executive Chairman] Matt [Rose] can correct me on that — you know, that carry 100 cars or so.

And each one has 650 barrels, or so, of oil so that — oil, you may find interesting, not only is there a significant advantage in terms of the flexibility of where you take it, so that spreads are different in different places, and you can move it to refineries that you might otherwise have trouble moving it to. Rail's flexible that way.

But rail, actually, you know — mentally, you think of oil gushing through pipelines. But rail is probably, I would say, close to twice as fast in moving oil as is — as are pipelines.

But we recently bought a company from Phillips 66. We got it in an exchange for our Phillips stock. We bought a specialty chemicals company.

And its main product is a chemical additive that causes oil to move through pipelines about 10 percent faster than it would otherwise. So it may take a day off of a trip.

So we're actually in the pipeline business in a small way — the crude pipeline business — in a small way, through that.

I don't think — I think the oil sands are an important asset for mankind, obviously. There's a huge amount of oil there. They're an important asset for mankind, you know, in — over the centuries to come.

But I don't think there's — I don't think it will dramatically change anything at Berkshire.

Matt might have a different view on that. I'll ask Charlie to talk. And then if Matt would like to say anything, I'd be glad to hear from him, too.

CHARLIE MUNGER: Well, but, a lot of the oil sand production uses natural gas to produce the heavy oil.

So it's a very peculiar thing. It's economic only if oil stays at a very high price, and it's delightfully economic only if natural gas is too cheap.

So it's a very peculiar business. And it is good for mankind. But whether it's a great investment or not, I haven't the faintest idea.

WARREN BUFFETT: Matt, would you — do you have anything to add on the crude situation there?

WARREN BUFFETT: OK. We're at noon.

I promised a group — some people — six years ago I made a bet for charity on how a index — Standard and Poor's 500 index fund — would compare in performance to a group of hedge funds. And a firm in New York took me up on the bet.

And I promised that every year I would give the up-to-date results on how we're doing. And it's getting to be more fun to give these results every year. (Laughter)

We're now six years into the bet. And it's interesting, because the people who selected these funds are very decent people and smart people. And, obviously, the fund of funds gets paid based on the per — they get paid a fee, naturally.

But they also get paid an additional performance fee based on how the hedge funds they select do. So they have every economic incentive to come up with a wonderful group of hedge funds.

And underneath these fund — five funds of funds that are involved in the bet — there are probably, at least, 200 hedge funds that the fund of fund managers have carefully picked in order to enhance their own income. They got the ultimate motivation going for them.

So we are now five years — six years — into the bet. And the first year, the fund of fund groups, in a down market, did considerably better than the S&P.

But as you can see in the five years subsequently, the S&P has been running away, to some degree.

Interestingly enough, we bought — we each put in 350, or something, thousand dollars, and we bought zero-coupon bonds so there would be a million dollars in ten years.

We bought ten-year Treasurys, zero coupon. And we bought a million dollars principal. We each put up 350.

Well, the way interest rates changed after a few years to practically zero rates, it meant the bonds, even though they had no coupons attached to them, practically went to par.

So, a year or two ago, we sold the bonds at about 95 or 6, we got almost the full million dollars. We put that all in Berkshire stock. I guaranteed them that they would have a million dollars at the end of ten years, no matter what happened.

And so the prize looks like it's going to be quite a bit more than a million dollars when the ten years comes around, so. So, so far, everyone's happy.