WARREN BUFFETT: Thank you. Thank you. Thank you.

I'm Warren; this is Charlie. He can hear. I can see. We work together. (Laughter)

In just a couple of minutes we'll move onto the questions and answers and follow the same procedures as in previous years.

WARREN BUFFETT: But first, there’s just a couple of special introductions I'd like to make. And I'd like to start it off with John Landis. Do we have a spotlight that we can pick out John?

John is the man that directed, conceived, et cetera, of the Floyd Mayweather fight.

And John, as you know, directed "Coming to America,"" Animal House," and the one I particularly like is "Trading Places."

If you haven't seen "Trading Places," by all means get it. It has Dan Aykroyd, and Eddie Murphy, and Charlie's favorite, Jamie Lee Curtis. (Laughter)

And it's a truly great movie.

It brought back Ralph Bellamy and Don Ameche.

Don Ameche had disappeared. Have we got a light on — can we get a light on John? Where's John? He should be right down here. (Applause)

We’re going to find — over here? Come on.

Well, John, thank you, thank you, thank you. He did all that and now came to the meeting. We really appreciate it.

WARREN BUFFETT: The other person I want to say — have a special thanks for — is a young, 30-year-old woman who has a 1 1/2-year-old baby at home and manages to put on this whole event with the help of hundreds that come from our various companies, and that’s Carrie Sova.

I hope Carrie is here, that we can give her a thanks. (Applause)

Carrie, a few months ago, while she was already working on this meeting, I said to Carrie, “I think it would be kind of nice if we had a commemorative book, sort of a retrospective on the 50 years." And I said, "Would you mind turning out a book, you know, in your spare time during these couple months while you're putting together the meeting?"

And she put together what I think is an absolutely terrific book, which we have outside. We printed up — we thought we printed 15,000 copies, but I think there's not quite that many. We sold 5,000 yesterday and then held back copies.

But it’s really a nice history of Berkshire Hathaway. And the credit, 100 percent, goes to Carrie for putting that together. So I'd just like to thank her personally and I hope you'll thank her.

WARREN BUFFETT: Now, we'll have the annual meeting at 3:30, and at that time we will be voting on directors, but many of you won't be here at that time, although we'll have a full house in here.

I should mention all of the overflow rooms in — here at the CenturyLink — are full now.

There may be seats — we've got the grand ballroom and the second ballroom over at the Hilton — and there may be some seats left over at the Hilton. So if you can’t find a seat here at the CenturyLink, either here or in the overflow rooms, at least give it a try over there at the Hilton.

We've got all the rooms we could possibly get, but I think the attendance may have outrun the seats this time.

WARREN BUFFETT: I'd like to introduce the directors, and, like I say, you'll vote on them at a little after 3:30.

And if they'll stand — and we'll get a light down here — and withhold your applause until the end, and you can withhold it then, if you would like. (Laughter)

And we'll do this alphabetically.

You’ve met Charlie, of course, but we'll start with Howard Buffett, Steve Burke, Sue Decker, Bill Gates, Sandy Gottesman, Charlotte Guyman, Tom Murphy, Ron Olson, Walter Scott, and Meryl Witmer. They're a great bunch of directors. (Applause)

We're missing one of our great directors, Don Keough, my neighbor from over 55 years ago.

He was a coffee salesman, then, for Butter-Nut Coffee, for those of you around Omaha.

He broadcast Nebraska football games and around 1950 had a radio show on WOW, for 15 minutes.

He was followed by a fellow named Johnny Carson, who had another 15-minute program. And Don, when I would see him in later years, he'd always say, "What happened to that Carson fellow?" (Laughs)

And Don died a few weeks ago, but we are very grateful that his wife, Mickie Keough, has joined us together, so let's have a hand for Mickie Keough. Mickie, will you stand? (Applause)

Mickie practically raised our kids, so if they have any faults, talk to Mickie about it. (Laughter)

WARREN BUFFETT: OK. We have just — we have one slide that relates to our quarterly earnings that — if we could put up.

We released these yesterday afternoon, and nothing particularly remarkable.

The railroad, BNSF, did dramatically better last year, not only in earnings, but in all kinds of performance measures, in terms of train velocity, and on time, and you name it, so that the —

You know, we got behind last year, early in the year, and there’s been lots of money, and more important, lots of effort, spent to get the railroad operating like it should be.

And in the first quarter those efforts paid off. We gained share. Our earnings, relative to other railroads, improved dramatically, so, you know, we got the trains running. We're going to spend a lot of money making sure we get even better.

But the improvement has been huge, and I want to thank Matt Rose and Carl Ice for a really extraordinary performance and having our railroad running the way it should be running. So thanks, Matt and Carl. (Applause)

VOICE FROM AUDIENCE: (Inaudible)

WARREN BUFFETT: I didn't quite get, it but I'll assume it was complimentary. (Laughter)

WARREN BUFFETT: OK. I think we're ready to move on to our questioners.

We'll handle it the same way as before. We start with the journalists, we move to the analysts, and then we move to the audience, and we keep doing that until about noon.

And at that time, we take a break for about an hour, and then we come back and we repeat the procedure.

After we get through a — I think it’s either 48 or 54 questions, then we just take them all from the audience. We have various zones where people have been selected, by drawing, to ask questions personally.

WARREN BUFFETT: But we start off the first one with a woman who retired after 60 years, setting a longevity record for all of Time Inc. — she retired at Fortune — been my friend for many years, and in my opinion the best print business journalist in the world, Carol Loomis. That doesn't soften her up at all, folks. (Applause)

CAROL LOOMIS: I'll make my customary, very short speech.

The three of us have been getting questions for two months, and there have been a lot of them.

Warren and Charlie have no idea what our questions are going to be, and some of them are very tough. Warren is right that I don't normally soften them up.

And we're sorry, we got hundreds of questions, literally, many hundreds, and we're sorry if we didn't pick yours, which doesn't mean it wasn’t a good question. It's just that the — our ability to ask as many as you'd like — as you would like to get yours in — was limited.

CAROIL LOOMIS: So, my first question is from a man in Timpson, Texas, who happens to have a familiar name, Frank Gifford, but wants to make it clear that he isn’t the football Frank Gifford, but rather a travel photographer.

And his question is a hard one. He says, "I’ve been a shareholder for 15 years, but I'm now suffering heartburn. Until recently I considered Berkshire an ethical company, benefiting society through" — and here he mentions two Berkshire companies headquartered in his home state — he says, "— through BNSF and ACME Brick.

"Two points call that opinion into question now: One is the Seattle Times story on predatory practices at our Clayton Homes subsidiary.

"Clayton mainly responded with platitudes to this article and would not answer questions, so I have to assume the facts in the story are correct.

"The other point that I want to mention is our growing partnership with 3G Capital. I sold my Tim Horton stock in disgust before 3G gutted 20 percent of the corporate staff and plunged this well-run company deep into junk territory.

"Other takeovers 3G has made have been still more brutal.

"You and Charlie have made many statements about upholding Berkshire's reputation, and you have avoided anti-social investments like tobacco and gambling.

"Your efforts years ago to keep Berkshire’s textile mills running show you once aspired to balance capitalism with compassion.

"I cannot make the moral case for practices at either Clayton or 3G, and I wonder how you can do so."

WARREN BUFFETT: OK. Let's talk first about the Clayton article because there was some important mistakes in that, but I think it's first — it's better to back up even to the situation in mortgage lending that's taken place, and why Clayton follows a pattern that, actually, is exemplary and rather extraordinary, in the home building and mortgage business.

If you look back at the housing bubble in — well, ending more or less in 2008, one of the great problems, in fact, maybe the greatest cause, was the fact that the mortgage holder became totally divorced from the mortgage originator and from the home builder.

In other words, the home builder built a house and sold it, took his profit, and that was that. It didn't really make much difference who he sold it to.

And the mortgage originator would originate a mortgage but then package those, securitize them, and often sell them around — even around the world — so people thousands and thousands of miles had no connection with the original transaction.

And the mortgage originator suffered no loss if the loan went bad.

So we had these two parties: the one that connected with the home buyer, and the one that originated the mortgage, and they had no connection with the actual outcome of whether it was a good mortgage or not.

At Clayton, unlike virtually anybody — there's a few — we offer the — we offer mortgages to all the buyers of our homes. And we have retained roughly 12 billion of mortgages on 300,000 homes.

Now, when a mortgage goes bad, two people lose: the person that owns the house loses, and the person that owns the mortgage loses.

And in our case, we have this identity of interest. We have no interest in selling anybody a house, and having that mortgage default, because it is a net loss to us. It is a net loss to the customer.

And like I say, that's not true of most home builders. It's not true of most mortgage originators.

So you — and there's been much talk, in terms of possible changes in mortgage rules, to try and get the mortgage originator to keep some skin in the game. And they've talked about them retaining maybe 3 percent of the mortgage or something like that, just so they would have an interest in, really, what kind of a mortgage they were putting on the books.

Well, we keep — in many cases — we offer to everybody, but we keep — probably in half the cases, we keep 100 percent of the mortgage, so we have exactly the same interest as society has, and as the home buyer has, in not making mortgage loans to people who are going to get in trouble on those loans.

Now, it's true that manufactured housing hits the lower end of the market, in terms of house values. Of the homes selling for $150,000 — new homes selling for $150,000 or less — 70 percent of them are manufactured houses.

And some of those people — most — many — of those people do not qualify, on a FICO score, to obtain loans that are government guaranteed. Some do, but most don't.

And the question is: can you lend intelligently to people who have a good chance of making the payments, keeping that house?

And Clayton has been exemplary in doing that. About 3 percent of the mortgages default in a year, you know, and when they do, we lose money and the person who bought the house loses money.

But 97 percent don't, and most of those people would not be living in the kind of houses that you can see right here at the auditorium, without the financing availabilities that Clayton makes available, and others make available.

And I invite you to go out and look at that house for $69,500. That house will be transported and erected, ready to go — you have to have the land and that — and I'll get to that in a second — but for 69,500, you have that house with appliances, with air-conditioning, with a couple bedrooms, 1200 square feet. And probably you'll put another 25,000 or so in the house, but — in terms of the land and preparation there — so maybe it will be $95,000.

But I just — you know, you can make your own judgment as to whether that's a decent value. And I know most of you are not living in $95,000 homes, but there are an awful lot of people that aspire to do that.

And we help them, with our own money at risk, to move into those homes. And if we make a mistake, it hurts them and it hurts us. And that is a very unusual arrangement in the financial industry.

Now, I read that story, and in it, there was an item in it, which, reading through the story, I just knew wasn't true. I mean, nobody that knew anything about manufactured housing could have put that up.

I'd like to put that up on the slide, where it says, "Another Clayton executive said in a 2012 affidavit that the average profit margin on Clayton homes sold in Arkansas between 2006 and 2009 was 11,170 — roughly 1/5 of the average sales price of the homes."

So this fellow is quoting somebody as saying that we’re making a 20 percent profit on home sales.

Well, I knew that that was nonsense, so I asked for the affidavit. And I read the affidavit about three times, and nowhere in that affidavit was it — was this statement made.

Now, what was said was what I'll show in the next slide. It's hard for me to see what's up there, but it should show Item 6, where it says Clayton Manufactured Homes sold 2,201 homes, and Item 7, that four percent of the gross profit from the home sales totaled 983,000.

So if we'll move to the next slide. I did a little arithmetic and, sure enough, if you take 25 times the commission for — the commission is 4 percent, so you take 25 times — and then you divide by the number of homes, you come up with 11,170.

But, that statement in the affidavit said gross profit, and gross profit is not the same thing as profit. I'm not sure that the fellow that wrote the story understood that.

So I have put on the next page the difference, for example, of a couple other retailers. I put Macy's and Target.

And Macy's has a 40 percent gross profit margin, but a pretax margin of 8 1/2 percent, after taxes of 5.4.

Gross profit is what you — if it's the case of Macy's, what they pay for a sofa or something, and what they sell it for. But they also have the expenses of paying salespeople, rent, utilities, advertising, all kinds of other things.

So the idea that gross profit and net profit are the same thing is — you know — anybody that understands accounting would never make a mistake like that.

In our particular case, on the next page, our gross margin is what the fellow said in the affidavit, and he used the word "gross," of 20 percent. But the writer of the story turned that into a profit margin, and our profit margin is actually three percent. So I'd just like to point out the mathematics on that particular subject.

There's one other item you should see — and, again, I have trouble seeing the — what's up there — but we have a — in every retail Clayton establishment, we have a lender board which shows exactly what a variety of lenders are willing to do and what their terms are.

And we also have a sheet, which I think will be put up there, and it's less than a full page, and it sets out the lenders who are available.

And at the very top — I'm just looking to see whether I can find that right here — at the very top of it, it basically says, you know, check out more than one lender, and you can send the application to any of these people. And we have people sign at the bottom, and there's no small print on it. I can't see it here, but — it may look like small print — but it’s one page, and multiple lenders are put on that sheet.

Sometimes people borrow — if there’s a credit union in San Antonio that’s very big, the local bank is very big, and we also will lend money to the buyer of the home, if they wish.

If you buy that home that's out there, we'll give you a list of four or five lenders, probably including your local bank, and you will probably take the loan that offers you the best terms.

So, I make no apologies whatsoever about Clayton's lending terms.

I get letters from people complaining about our subsidiaries in various ways. I mean, some people call the office, some people write in. I can say, in the last three years I have not received one call — we've got 300,000 loans — I've not received one call from any party in connection with a Clayton Home.

Moreover, we are — at Clayton — we are regulated in almost every state — every state in which we have financing, which is practically every state.

And in the last three years, we have had — I think its 91 examinations by the state, 91 examinations.

They come in. They look at our practices. They make sure that they conform with the laws.

And in those 91, we — I think the largest fine we've had has been $5,500, and the largest group of refunds we had was about $110,000.

Yeah, there were — and, you know, those were regulated, not only by those states, were regulated by HUD, all kinds of people.

When we can, we try to get people an FHA loan, because that's the best loan for them to get.

But, as I say, most of our borrowers are below the 620 FICO score. And it's true that three percent or so will lose their homes in a year. It's true that 97 percent of those people will have a home where their average principal and interest payment is a little under $600 a month, and that takes care of having a two- and perhaps three-bedroom house, well equipped. I invite you to go through it.

And Clayton has behaved, in my book, extraordinarily well.

The article talked about 30-year mortgages. Over 4 1/2 years ago, I said we're not going to have 30-year mortgages. So we don't have them, except for the FHA-guaranteed ones, which, of course, have a very low rate.

So I have no — I'm proud of the Clayton management. I'm proud of the fact they put, this year, maybe 30,000 people in homes at a very low cost, a very good home. And a very high percentage of those people are going to have those loans paid off, probably in 20 years, and have a home that has cost them — has been a real bargain, basically.

I'll get to the other question — the 3G question, too — in just a second, but we'll give Charlie a chance to say what he'd like to.

CHARLIE MUNGER: I don't know a lot about the mortgage practices at Clayton, but I certainly know that we've sold an enormous number of houses and we have a big share of the total market in manufactured.

WARREN BUFFETT: About 50 percent.

CHARLIE MUNGER: Fifty percent.

And it's a very constructive thing. Personally, I've always wondered why manufactured houses don't have a bigger share of the market. It's such an efficient way of creating quite usable houses.

Part of the reason is that the track builders, under capitalism, got so efficient. And isn't Clayton now doing some track building itself?

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: I think so, yes.

So, Clayton is a very productive part of the economy, but we can't make lending to poor people who buy houses 100 percent successful for everybody. We wouldn’t be running the business right if the foreclosure rate was zero. Too many people would deserve credit that wouldn't get it.

WARREN BUFFETT: Yeah. The big causes of default are the loss of a job, death, and divorce. And, you know, that happens with high-priced houses as well, but it happens more often with people that are living closer to the edge.

But I don't think that's a reason to deny them a house, and particularly when so many — it turns out so well for so many.

The 2008 recession was — and '9 — was very interesting, because all kinds of securitized deals, involving houses costing hundreds and hundreds of thousands of dollars, the default rate on those was many, many, many times what happened in our own case.

And similarly with delinquency rates. Our delinquency rates are running 3 percent, currently.

And, you know, it — the people want to live in those houses, and I think they deserve the right to.

Incidentally, we had a — a few years ago we had a couple houses here, we called them the "Warren" and the "Charlie."

The "Charlie" sold first, and it sold to one of the cameramen who was in the credits on the movie you just saw. And you can check with Matt, and he's — Matt Mason — he is very, very happy with that house he bought four or five years ago.

WARREN BUFFETT: The second question was about 3G, and I don’t think you can ever find a statement that Charlie and I have ever made, in terms of Berkshire’s companies or anybody else's, where we said that there should be more people working than are needed in a company.

And the 3G people have been successful in building marvelous businesses. And it is true that they have entered into some purchases where there were considerably more people running the business than needed. And the interesting thing is that after they reduced the headcount to the number needed, the companies have done extremely well.

I mean, you’ve seen Burger King outgrow its main competitor by a significant margin. You've seen Tim Horton have some very good figures in the first quarter.

And I don't know of any company that has a policy that says we're going to have a lot more people than we need. But a good many companies end up in that position, and if 3G buys into one, they quite promptly — and treat people well in terms of the severance — but they get it down to what they need.

And I hope our Berkshire companies are not being run with more people than they need, either. They usually aren't when we buy them, and, you know, we look for those companies that are well managed.

3G is — will — if they find out that 100 people are doing what 50 people can do, they’ll get it to where 50 people are doing it. And I think that actually makes sense throughout American business. Charlie?

CHARLIE MUNGER: Well, the alternate to the system of having your company right-sized, the right number of people, is what eventually happened in Russia. And there, everybody had a job. And the way it all worked out was some workers said, "Well, they pretend to pay us and we pretend to work," and the whole damn economy didn’t work. Of course, we want the right number of people in the jobs.

WARREN BUFFETT: It's interesting. In the railroad business — in the railroad business after World War II, in 1947 or thereabouts — I think there were about 1.6 million people in the railroad business, and it was a lousy business. And capital was short for any kind of improvements.

And now there are less than 200,000. So they’ve gone from a million-six to less than 200,000, carrying more freight, more distance, and doing it in far safer conditions. Safety has improved dramatically in the railroad industry.

And if somebody thinks it would be better to be running the railroads with a million-six, you know, people doing it, you would have a terrible railroad system. You wouldn't have anything like you have today.

Efficiency is required over time in capitalism, and I really tip my hat to what the 3G people have done.

WARREN BUFFETT: OK. Jonny Brandt?

JONATHAN BRANDT: Thank you, Warren, for allowing me — inviting me — to be part of this 50th anniversary celebration. I have a question about Van Tuyl.

Van Tuyl is a fabulously productive auto dealer that has, since its founding, used a traditional negotiated model with a particular successful emphasis on profitable add-on insurance and financial products.

Meanwhile, at least some other auto dealers, CarMax and Don Flow among them, have adopted, or are moving towards, models which emphasize fixed prices, transparency, and low sales pressure.

Given the evolving regulatory environment and changing consumer preferences, will Van Tuyl eventually need to adapt to this new mode of selling, or do you feel the traditional method of selling cars will be viable for decades into the future?

If the market requires a new way of selling, how hard is it for a sales culture that has been successful for decades doing business one way to change to another?

WARREN BUFFETT: Yeah. If a change is required, it will be made. And I don't know the answers to which way it's going to go on that. The — it's true that people are — have been — and that's not new — that's been experimented with before — where people have tried a one-price system and no negotiating, no haggling and everything.

And I think a very large number of people would like to see that system, except when they actually get into it, it seems to break down for some reason.

It — there's negotiation going on in a lot of businesses that — and it always amazes me. People say they don't like it, but it's what ends up happening.

And so Van Tuyl will adapt to what the customer wants. We'll see how some of these experiments go. And I don't think there would be any problem at all if the world goes in that direction and Van Tuyl going to it.

But I wouldn't be surprised if five or ten years from now the system is pretty much the same. I wouldn't be totally surprised if it changes, either, but I can't predict the outcome.

I can predict that Van Tuyl, and the subsequent auto dealerships we buy, I can predict that they will be a very important part of Berkshire and I think will be quite profitable in relation to the capital we employ in the business.

Charlie?

CHARLIE MUNGER: Well, I very much like that acquisition, partly because I think we can do a lot more like it. I —

WARREN BUFFETT: Do you think you’ll be negotiating on cars ten years from now, when you buy a new one?

CHARLIE MUNGER: It's been amazingly resistant to change for my whole lifetime.

WARREN BUFFETT: Yeah. Happens in the jewelry business, too.

I mean, there's certain items — well, it happens in real estate. I mean, let's just say that some real estate firm said we're only going to take listings where you can't negotiate.

Do you think? — I'm not sure how it would do, in terms of obtaining both listings and customers.

People seem to want to negotiate. If they hear a house is priced at 200,000, they're not going — unless it's some unusual situation — they're not going to step right up and pay the 200. They're going to bid.

When people are dealing with a big ticket item — a lot of people — their natural tendency is to negotiate and they particularly will do so if they think that's built into the system.

So I'm not sure how it changes, but we’ll do fine, whatever direction it goes.

WARREN BUFFETT: OK. Now we go to the shareholder at Station 1.

AUDIENCE MEMBER: Hi, Warren. Hi, Charlie. Great to be here. This is my first time here, incredibly lucky to have my question answered.

So my question is this: can you name at least five characteristics of a company that gives you confidence to predict its earnings ten years out in the future? And can you also use IBM as a case study, how we check all those boxes?

WARREN BUFFETT: Charlie, what are your five? (Laughter)

CHARLIE MUNGER: We don't have a one-size-fits-all system for buying businesses. They're all different, every industry is different, and we also keep learning. So what we did ten years ago, we hopefully are doing better now. But we can’t give you a formula that will help you.

WARREN BUFFETT: Now, if you’re looking at the BNSF railroad as we were in 2009 or if you're looking at Van Tuyl in 2014, there are a lot of things that go through our minds. And most of the things that go through our minds are things that will stop us from going further.

I mean, there’s — the filters are there. And there are a lot of things that, if we see it in a business, including, maybe, who we're dealing with, will stop us from going on to the next layer. But it's very different in different businesses.

We are looking for things where we do think we've got some reasonable fix on how it's going to look in five or ten years, and that does eliminate a great many businesses. But it's not the same — it's not the same five questions at all.

Certainly, when we're buying a business where we're going to have somebody that's selling it to us continue to run it for us, you know, a very big question is, you know, do we really want to be in partnership with this person and count on them to behave in the future when they don't own the business, as they behaved in the past when they do own the business. And that stops a fair number of deals.

But I can't give you five — we don't have a list of five. Or if we do, Charlie has kept it from me. (Laughter)

WARREN BUFFETT: You want anything more?

CHARLIE MUNGER: No.

WARREN BUFFETT: Becky?

BECKY QUICK: This question is for Charlie. It comes from John Baylor (PH).

He says, "Charlie, you broke Warren of his cigar butt buying habits. With the significant innovation that is occurring in technology, is IBM similar to those textile mills in the 1960s, and did you try to talk Warren out of buying IBM?"

CHARLIE MUNGER: The answer is no.

I think IBM is a very interesting company. It totally dominated Hollerith machines, you know, the punch card computing. And then when they invented electronic computing, it dominated that for a while.

It's very rare that when a technological change comes along that people adapt as successfully as IBM did that time.

Well, now they have the personal computer, and that's been a mixed bag. And — but I think IBM is a very credible company.

We own a lot of companies that have temporary reverses, or once were mightier in some ways than they are now.

IBM is still an enormous enterprise, and I think it's still a very admirable enterprise, and I think we bought it at a reasonable price.

WARREN BUFFETT: When we bought it, it was a two-to-nothing vote. (Laughs)

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: OK. (Laughter)

WARREN BUFFETT: Incidentally, there’s one thing I always find interesting.

We get asked questions about investments we own, and people think we want to talk them up, you know, or —

We have no interest in encouraging other people to buy what — the investments we own.

I mean, we are better off, because either we or the company is likely to be buying stock in the future. Why would we want the stock to go up if we’re going to be a buyer next year, and the year after, and the year after that?

But the whole mentality of Wall Street is that if you buy something — even if you're going to buy more of it later on, or if the company is going to buy its own stock in — the people seem to think that they're better off if it goes up the next day, or the next week, or the next month, and that's why they talk about "talking your book."

If we talked our book, from our standpoint, we would say pessimistic things about all four of the biggest holdings we have, because all four of them are repurchasing their shares, and, obviously, the cheaper they repurchase their shares, the better off we are. But people don't seem to get that point.

Do you have any idea why, Charlie?

CHARLIE MUNGER: Warren, if people weren’t so often wrong, we wouldn't be so rich. (Laughter and applause)

WARREN BUFFETT: He’s finally explained it to me. OK. (Laughter)

WARREN BUFFETT: Gary?

GARY RANSOM: Thank you.

In his letter, Charlie talked about Berkshire’s insurance success, quote, "being so astoundingly large that I believe that Buffett would now fail to recreate it if he returned to a small base while retaining his smarts and regaining his youth."

Do you agree that you could not repeat that success today? And if so, what do you think are the conditions in the insurance industry today that would inhibit a repeat of that performance?

WARREN BUFFETT: Well, I had many, many, many pieces of luck, but I had three extraordinary pieces of luck, in terms of the insurance business.

One was, when I was 20 years old, having a fellow on a Saturday, a fellow named Lorimer Davidson, be willing to spend four hours with some 20-year-old kid who he never heard of before, explain the insurance business to him.

So I received an education at age 20 that was — I couldn't have gotten at any business school in the United States. And that was just pure luck. I mean, I just happened to go to Washington. I had no idea I would run into him. I had no idea whether he would talk to me, and he spent four hours with me. So just chalk that one up, the chance of that happening again.

In 1967, I got lucky again when Jack Ringwalt, who, for about five minutes every year wanted to sell his company, because he would get mad about something, some claim would come in that he didn't like or something of the sort. And I told my friend Charlie Heider, I said, "Next time Jack is in the mood, be sure to get him to my office." And Charlie got him up there one day, and we bought National Indemnity.

We couldn’t have done that — we not only couldn't have done it a day later, we couldn't have done it an hour later. You know, that — that was lucky.

And then I really got lucky in the mid '80s when, on a Saturday, some guy came in the office and he said, "I've never worked in the insurance business, but maybe I can do you some good." And that was Ajit Jain. And, you know, how lucky can you get?

So, if you ask me whether we can pull off a trifecta like that again in the future, I'd say the odds are very much against it.

But the whole — the whole thing in business is being open to ideas as they come along, and insurance happened to be something that I could understand. I mean, that was in my sweet spot.

If Lorimer Davidson had talked to me about some other business, you know, it wouldn't have done any good. But it just so happened he hit a chord with me on that in explaining it. I could understand what he was talking about. And I could understand what National Indemnity was when Jack had it for sale.

And that's — there's an awful lot of accident in life, but if you keep yourself open to having good accidents happen, and kind of get past the bad accidents, you know, some good things will happen. Might not happen in insurance — you know, it can happen in some other field — probably would happen in some other field — if you were to start in today.

So, no, we could not have — you couldn’t expect to have three lucky events like that happen, and there were many more along the way.

But, you know, we — I think if we were starting over again, we’d find something else to do. What about it, Charlie?

CHARLIE MUNGER: Yeah. I don't think we would have that kind of success.

You know, mostly we bought wonderful businesses and nourished them. But the reinsurance division was just created out of whole cloth right here in Omaha, and it's a huge business. Insurance has been different for us.

WARREN BUFFETT: OK. Station 2? And if you'll say where you're from too, please?

AUDIENCE MEMBER: Dear Warren, dear Charlie. I'm Lawrence from Germany, and in my home country, you two are regarded as role models for integrity. And at Berkshire, its culture is its most important competitive edge.

Hence, my question: how can we, as outside investors, judge the state of Berkshire’s culture long after you depart from the company?

WARREN BUFFETT: Well, I think it's fair that you do, you know, come with a questioning mind to the culture, post-me and Charlie, but I think you're going to be very — I don't think you should be surprised, but I think you will be very pleased with the outcome.

The culture — I think Berkshire's culture runs as deep as any large company could be in the world.

It's interesting you're from Germany, because just three or four days ago, we closed on a transaction with a woman named Mrs. Louis, in Germany.

And she and her husband had built a business [Detlev Louis Motorrad-Vertriebs GmbH]. Over 35 years, they'd spent developing this business of retail shops, dealing with motorcycle owners, and lovingly, had built this business.

Her husband died a couple years ago. And Mrs. Louis, in Germany — it came about in sort of a roundabout way — but she wanted to sell to Berkshire Hathaway. And, you know, that would not have been the case 30 or 40 years ago.

So it does — it's a vital part of Berkshire to have a clearly defined, deeply embedded culture that pervades the parent company, the subsidiary companies. It's even reflected in our shareholders.

And, you know, when you have 97 percent of the shareholders vote and say we don’t want a dividend, I don't think there's another company like that in the world.

So we have a — our directors sign on for it and, there again, we behave consistently. Instead of having a bunch of directors who are — love to be a director because they'd like to get $2- or $300,000 a year for showing up four times a year, we have directors who look at it as a great opportunity for stewardship, and who want their ownership, and have their ownership, represented by buying stock in the market, exactly like you do.

So we — it's — we try to make clear and define that culture in every way possible, and it’s gotten reinforced over the years to an extreme degree. People who join us believe in it; people who shun us don't believe in it, so we — it’s self-reinforcing.

And I think it's a virtual certainty to continue and to become even stronger, because once Charlie and I aren't around, it will be so clear that it's not the force of personality, but it's the — it's institutionalized that, you know, nobody will doubt that it will really continue for decades and decades and decades to come.

Charlie?

CHARLIE MUNGER: Well, as I said in the annual report, I think Berkshire is going to do fine after we're gone. In fact, it will do a lot better, in dollars. But, percentage-wise, it will never gain at the rate we did in the early years, and that’s all right. There's worse tragedies in life than having Berkshire's assets and have the growth rates slow a little.

WARREN BUFFETT: Name one. (Laughter)

CHARLIE MUNGER: Warren and I have one not very far ahead.

WARREN BUFFETT: OK. Yeah, yeah. (Laughter)

OK. Andrew?

I should say culture is everything at Berkshire. And if you run into a terrible culture, it's — you know, the Salomon thing was up there on the screen, and it would be hard to turn Salomon into a Berkshire. I don't think we could have done it, Charlie.

CHARLIE MUNGER: I don't think anybody’s ever done it on Wall Street.

WARREN BUFFETT: No. It's just — it’s a different world.

And that doesn't mean that Berkshire is a monastery, by any means, but it does mean that — I can guarantee you that Charlie and I, and a great, great many of our managers, are more concerned — and Carrie Sova who put this meeting together and everything — they are more concerned about getting a good job done for Berkshire than what they get out of it themselves.

And, you know, it’s great to work around people like that.

WARREN BUFFETT: Andrew?

ANDREW ROSS SORKIN: OK, Warren. This question comes from Simone Wallace (PH) in New York, New York.

And she writes, "Over the last 50 years, we Berkshire shareholders have, effectively, been long sugar consumption, through directly owned companies, such as See's Candies, Dairy Queen, in funding Heinz, and publically-traded investments, such as Coca-Cola today.

"Yet, from improvements in scientific research, we as a society have become increasingly attuned to the true costs of greater sugar consumption, in the form of rising health-care costs.

"We are seeing this awareness of sugar's impact in changing consumer behavior. Carbonated soft drink volumes are declining, and consumer packaged goods companies, focused on the center aisles of supermarkets, are struggling with organic growth.

"If we have reached — have we reached an inflection point in human behavior in how consumers view sugar consumption? And do you think Coca-Cola's moat, and potentially that of Heinz’s or Kraft's, is narrowing? And if not, what news would it take you to be convinced that it is?"

WARREN BUFFETT: Well, I think it’s an enormously wide moat, but I think it's also true that the trends you described are happening.

But, you know, there will be 1.9 billion eight-ounce servings of Coca-Cola products, not Coca-Cola, but Coca-Cola products, consumed in the world today.

I don't think you're going to see anything revolutionary, and I think you will see all food and beverage companies adjust to the expressed preferences of the consumers as they go along.

No company ever does well ignoring its consumers.

But there will be — I would predict — 20 years from now there will be more people — there will be more Coca-Cola cases consumed — than there are now, by some margin.

Back in the late 1930s, Fortune ran an article saying that the growth of Coca-Cola was all over.

And when we bought our Coca-Cola stock in 1988, you know, people were not that enthused about growth possibilities for the product.

I sit here as somebody who, for the — in the last 30 years, one-quarter of all the calories I’ve consumed come from Coca-Cola. (Laughter)

And that is not an exaggeration. I am one-quarter Coca-Cola. I’m not sure which quarter.

But — and, you know, if you really — I don't think there is this choice. I think there's a lot to be said about being happy with what you’re doing.

If I'd been eating broccoli and Brussels sprouts, and all that, all my life, I don't think I’d live as long. You know, I — (Laughter)

Every meal, I would approach, thinking, you know, it's like going to jail or something. (Laughter)

No. I think — I think — Charlie? (Laughter)

Charlie's 91, and his habits aren't that different than mine. They're slightly better, but —

CHARLIE MUNGER: There's no question about it. The way I look at it is, sugar is an enormously helpful substance. It prevents premature softening of the arteries. (Laughter)

And the way I look at it, is that, if I die a little sooner that will just be avoiding a few months of drooling in a nursing home. (Laughter)

WARREN BUFFETT: Charlie and I have enjoyed every meal we ever had, virtually, except when I was eating at my grandfather's and he made me eat those damn green vegetables.

There, obviously, are some shifts in preferences, although it's remarkable how durable items are in this field.

We — Berkshire Hathaway — I believe, was the largest shareholder of General Foods from about 1981 or thereabouts, to about 1984 when it was bought by Philip Morris.

And, you know, that's 30-plus years ago, and those same — those same brands — you know, they went through Philip Morris, they got spun out as Kraft, they broke Kraft into two pieces. But now, we’re going to own those brands, and they're terrific brands.

Heinz — Heinz goes back to 1869. The ketchup came out a little later. They went bankrupt, actually, when they were counting on the horseradish or whatever it was.

But the ketchup came out in the 1870s. Coca-Cola dates to 1886. It's a pretty good bet that an awful lot of people are going to like the same thing.

And when I compare drinking Coca-Cola, you know, to something that somebody would sell me at Whole Foods —(Laughter)

I don't know — I don't see smiles on the faces of people at Whole Foods. (Laughter and applause)

So I like the brands we're buying, Andrew.

WARREN BUFFETT: OK. Gregg Warren?

GREGGORY WARREN: Thank you, Warren. I just wanted to circle back and add on to Jonathan’s question on Van Tuyl Group.

What is it that attracted you most to the deal? Potential for consolidation in a highly fragmented industry, which would allow you to put some of your excess capital to work, or the unique positioning in the auto chain of the auto dealer sector, which has its hands not only in auto sales but financing insurance and parts and services?

I know that Charlie just said that he’d like to do more deals like it, but where do you feel the greatest return will come from longer term? Rolling up auto dealerships or tapping into the advantages that are inherent in the full service model?

WARREN BUFFETT: Yeah. There are not any huge advantages of scale, at least that I’m aware of, in owning lots of dealerships. But running dealerships well is a very good business. It's a local business.

So I don’t see that having some — there's 17,000 dealers in the country, and if you ask the people here in Omaha to name a bunch of dealers, they'd come up with a bunch of local names.

And I don't think that you widen profit margins, particularly, by having a thousand dealers versus having a hundred or even having one very good dealer.

So we will be buying, I hope, more dealerships, but it will be based on local considerations.

We don't see the finance business, in dealers — we don't bring anything to that party.

[CEO] John Stumpf is here from Wells Fargo. I think they’re the biggest auto finance company in the United States. And they have a cost of funds advantage over Berkshire.

Berkshire is able to borrow money at a low price, but I forget whether John’s liabilities cost him something like 12 basis points or something like that last quarter. And we can't come up with money as cheap as the banks can, and they're the natural lenders for loans, so we're not going to be in the finance business.

We will keep looking for dealerships, maybe groups of dealers. It doesn't give us a buying advantage from a manufacturer. And we will hope that we run those local operations very well and that they're regarded by the people who buy cars as a local business, not some part of some giant operation.

So, I think you'll see us buying more, but I don't think you'll see us widening out margins from what existed before, except in the cases where we can run a local dealer better.

Charlie?

CHARLIE MUNGER: Yes. And Van Tuyl has a system of meritocracy where the right people get the power and get some ownership.

So on the — it reminds me a lot of the Kiewit Company, an Omaha company and whose headquarters Berkshire resides as a tenant. And the Van Tuyl and Kiewit are kissing cousins. Those are very successful cultures, and I think they've got a very good thing going for them. The right people are prospering in Van Tuyl.

WARREN BUFFETT: OK. Station 9? And if you'll identify where you're from, please.

Oh, I'm sorry. Station 3. You're number 9. I apologize.

AUDIENCE MEMBER: Apology accepted. (Laughter)

WARREN BUFFETT: We'd have cut off your mic if you hadn't. (Laughter)

AUDIENCE MEMBER: Fair enough.

My name is Stuart Kaye, and I'm from Stamford, Connecticut.

And I wanted to follow up on the questions that have been asked about culture and stewardship at Berkshire Hathaway, because I'm currently in year five of helping build a firm called Matarin Capital Management, and we discuss values and culture quite a bit.

And so I'd like some tips from you about what characteristics you thought about 45 years ago when you were building the culture and values at Berkshire Hathaway.

WARREN BUFFETT: Yeah, well I think culture has to come from the top, it has to be consistent, it has to be part of written communications, it has to be — you know, has to be lived, and it has to be rewarded when followed, and punished when not.

And then it takes a very, very long time to really become solid.

And obviously, it's easier — much easier — to do it if you inherit a culture you like, and it’s easier in smaller firms, I think.

I can think of a lot of companies — very big companies — in this country, and I don't think if Charlie and I were around them for ten years we'd be able to accomplish much of anything.

So it — you know, it is a grain of sand type of thing. And people — just like your child, you know, sees what you do rather than what you say, it's the same thing in a business, that people see how those above them behave and they move in that direction.

They don't all move that way. We've got 340,000 people now working for Berkshire, and I will guarantee you that there's, you know, some number —a dozen, maybe 50, maybe 100 —that are doing something today that they shouldn’t be doing.

And we — what you have to do is when you find out about it, you have to do something about it.

I didn't like, for example, making 30-year mortgages at Clayton five years ago. And I said, “We're not going to make 30-year mortgages, you know, unless they're government guaranteed."

And when we bought Kirby, there was some sales practices we didn't like, and we particularly didn’t like them with older people. So we put in a golden age policy where, if you're over 65 and you bought a Kirby and for any reason you didn't like it, any time up to a year, you could send it and get all of your money back. And I encouraged people to write me if they had a problem on anything like that.

So it takes a lot of time, and you'll — you know, at GEICO we're going to — you know, we’re going to settle millions and millions and millions of claims. And I will guarantee you that when two people are in an auto accident, they don’t agree 100 percent of the time on whose fault it was, so they may go away and be unhappy for a time.

But we work all the time at trying to behave with other people as if our positions were reversed. That's what Charlie's always advised in all our activities, and we've tried to follow it. And we're certainly far from perfect at it, but if you keep working at it, it does get results.

Charlie?

CHARLIE MUNGER: Yeah. I think the one thing that we did that's worked best of all is we were always dissatisfied with what we already knew and we always wanted to know more. And Berkshire, if Warren and I had stayed frozen in time, particularly Warren, it would have been a —

WARREN BUFFETT: I'd like to do it, understand.

CHARLIE MUNGER: It would have been a terrible place. It's what we kept learning that made it work, and I don't think that will ever stop.

WARREN BUFFETT: Carol?

CAROL LOOMIS: This question comes from Mona Dyan (PH). And it concerns two indicators, Warren, that you have discussed in the past about the general level of the stock market.

The first one is the percentage of total market cap relative to the U.S. GNP, which you have said is probably the best single measure of where valuations stand at any given moment.

This indicator is at about 125 percent. That is the ratio of total market cap to U.S. GNP, and that's about what it was when Warren talked about this back in 1999 just before the — shortly before — the bubble broke.

The second indicator, which you mentioned in a famous 1999 speech that subsequently became an article in Fortune, is the corporate profits — is corporate profits — as percent of GNP.

You had said at the time that that number ranged between 4 percent to 6 1/2 percent over a long period of time, which I believe was 1951 to 1999.

Well, as of Friday, it is about 10 1/2 percent, according to the St. Louis Federal Reserve site. That is way above the range you had mentioned.

Are the current levels of either one, or both, of these indicators a matter of concern for the general investing public?

WARREN BUFFETT: Yeah. Well, the — it might be — the second figure, which is the profits as a percentage of GDP, might be a concern for other segments of society because what it indicates is that American business has done wonderfully well in recent years.

And I know it says how — what a terrible disadvantage it has, because of U.S. tax rates and a host of other things, you know, the facts are that American business has prospered incredibly.

And the first comparison is very much affected by the fact that we live in an interest rate environment, which Charlie and I probably would have thought was almost impossible, not too many years ago.

And, obviously, profits are worth a whole lot more if the government bond yield is 1 percent, than they're worth if the government bond yield is 5 percent.

So it gets back — and, you know, Charlie in that movie talked about alternatives and opportunity cost. And for many people, the opportunity cost is owning a lot of bonds, which pay practically nothing, or owning stocks, which are selling at fairly high prices historically, but they weren't selling at those historic prices with interest rates like this.

So I would not — I look at those numbers, but I also look at them in the context of the fact that we're living in a world that has incredibly low interest rates, and the question is how long those are going to prevail. Is it going to be something like Japan that goes on decade after decade, or will we be back to what we thought was normal interest rates?

If we get back to what are normal interest rates, stocks at these prices will look pretty high. If we continue with these kinds of interest rates, stocks will look very cheap. And now I've given you the answer and you can take your pick. (Laughs)

Charlie?

CHARLIE MUNGER: Well, since we failed to predict what happened, and what exists now, why would anybody ask us what our prediction is in the future? (Laughter)

WARREN BUFFETT: Yeah, yeah. We — incidentally, the one thing I can assure you, Charlie and I, to my knowledge, or my memory, I can't recall ever us making an acquisition or turning down one based on macro factors that — you know, and we talk about deals when they come along, but whether it was See's Candy, or whatever it might have been, the Burlington Northern we bought at a terrible time, in general economic conditions.

But we don't — it just doesn't come up, because we don't — we know we don't know what the next 12 months, 24 months, 30 — we know we don't know what that's going to look like. But it doesn’t really make any difference if we're buying a business to hold for a hundred years.

What we have to do is figure out what’s likely to be the average profitability of the business over time and how strong its competitive mode is and that sort of thing.

So, people have trouble believing that. They think we talk about it. We think any company that has an economist, you know, certainly, has one employee too many. (Laughter)

Charlie? Can you think of anything rude to say that I haven't said? (Laughter)

CHARLIE MUNGER: Well, it would be hard to top that one. (Laughter)

WARREN BUFFETT: I know. OK. (Laughter)

WARREN BUFFETT: OK. Jonathan?

JONATHAN BRANDT: There's been an awful lot written about what should be done to improve the safety of the crude-by-rail infrastructure. Both this week and last month, federal regulators introduced new standards. These new standards include thicker tanks, better fire protection, electronically controlled pneumatic brakes, and speed limits in more populous areas to reduce the chance of derailments near where people live.

The railroad association has complained that the brakes are too expensive, while others have complained about what they view as an overly-long timetable to switch out the old tank cars.

Given the tank car industry's limits on manufacturing and retrofitting capacity, and the impact on overall rail network velocity from speed limits, do you think the new rules strike the right balance between efficiency and safety?

For Berkshire, what impact will these new rules have on the operations of Marmon's Union Tank Car subsidiary and on the BNSF Railroad?

Can you also update us on the BNSF initiative to purchase up to 5,000 of its own oil tankers — oil tank cars — which is a departure from historic industry practices, and what drove that decision?

WARREN BUFFETT: Yeah. Well, you’ve asked all the questions I'll be asking.

But I think those rules just came out, what, two days ago now? Yeah. And they're 300 pages. And little as I have to do with this meeting and everything, I have not read those, although I have talked very briefly to Matt Rose and also Frank Ptak who runs our — the company that manufactures and leases tank cars.

You know, our interest — actually, the interest of our railroad and our tank car manufacturing and leasing operation may diverge in various ways.

Clearly, we've got an interest — the country has an interest — in developing safer cars, and we found that the — some cars we thought were safe have turned out to be less safe than we thought going in.

The most dangerous kinds of thing we carry, of course, are — as a common carrier, we have to carry chlorine, we have to carry ammonia, and we're required to carry that. We'd rather not carry it.

There are dangerous products that have to get transported in the country, and they're — it’s more logical to transport them by rail than either truck or pipeline, and some of those we'd rather not carry but we do carry.

I would say that the — probably everybody will be somewhat unhappy with the rules, but the — you know, it's up to — it is up to Washington, and the government, to devise the rules under which something that is potentially dangerous is transported.

And transporting by pipeline has its problems. Transporting by rail has its problems.

And railroads have gotten dramatically safer over the years. Our safety figures — and Burlington Northern leads the industry in safety — but the safety figures get better and better year after year.

And — but you are — but you're going to have derailments, and you better have very safe cars carrying that, and nothing will be perfect.

Charlie?

CHARLIE MUNGER: Yeah. Well, big companies and successful companies, like Burlington Northern and Exxon and Chevron and so on, have a lot of engineers and they have long histories of trying to be way safer than average and knowing a lot about how to do it. And none of that is going to change.

You'd be out of your mind to own these big companies and not run them with big attention to safety. And we're not out of our minds and neither are the people who run Burlington Northern. The safety is going to be improved continuously, and should be.

WARREN BUFFETT: Yeah. And it has been consistently, but —

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: But there are new problems. For one thing, the Bakken crude has been proven to be quite a bit more volatile than most of the crude that is —

CHARLIE MUNGER: It's not really crude. It's condensate. I mean, it's almost misnamed, to call it crude. It is more volatile.

WARREN BUFFETT: Yeah.

I can tell you — and I may write about this next year in the report, though — that Burlington Northern has the best safety record among the big railroads. And Berkshire Hathaway Energy, it's extraordinary, their safety record, in terms of utilities. And every new utility we purchase at Berkshire Hathaway Energy, we’ve brought — the safety statistics, they’ve gotten far better after Greg Abel has taken over.

CHARLIE MUNGER: After they bought the Omaha pipeline, which had been mismanaged and safety had been improperly ignored, we watched those people, the Berkshire employees, just work day and night improving the safety. They didn't want more pipeline explosions.

WARREN BUFFETT: Yeah. We went from last out of 40-some — I think it was — to either second or first. And if we were second, it was because our other pipeline was first. (Laughter)

WARREN BUFFETT: OK. Station 4?

AUDIENCE MEMBER: Hello, Mr. Munger and Mr. Buffett. Nirav Patel from Haverhill, Massachusetts.

What advice would you give to someone who’s trying to network with influential people but doesn’t have access to the alumni network of a top business school?

CHARLIE MUNGER: Let me take that one. I think you should do the best you can — (Laughter)

— playing the hand you've got.

WARREN BUFFETT: Charlie is very Old Testament on this. (Laughter)

He didn't get much past Genesis. (Laughter)

Was his question that he didn't have a lot of associations because of —?

CHARLIE MUNGER: Well, he'd like to have you help him —

WARREN BUFFETT: — tap into —

CHARLIE MUNGER: — tap — do well without business school training. I never had any business school training, why should you have any? (Laughter)

WARREN BUFFETT: And actually, I would say the business school training, particularly in investments, was a handicap about 20 years ago when they were preaching efficient market theory because essentially they told you it didn't do any good to try and figure out what a company was worth because the market had a price perfectly already. Imagine paying, you know, 30 or $40,000 a year to hear that. (Laughter)

CHARLIE MUNGER: You were very lucky to avoid a lot that you've avoided. (Laughter)

WARREN BUFFETT: How do you feel about your law school training, Charlie, while we're on it? (Laughter)

CHARLIE MUNGER: Well I have a son-in-law who recently explained how modern profit-obsessed law school — law firms — work. He said it's like a pie eating contest, and if you win, you get to eat a lot more pie. (Laughter)

WARREN BUFFETT: OK, Becky. You’re on.

BECKY QUICK: This question is a follow-up to the one that Jonathan Brandt just asked. It's an appropriate follow-up for that, though.

It comes from Mark Blakley in Tulsa, Oklahoma, who says that one risk to Berkshire and BNSF appears to be a large railroad accident.

"It appears many recent accidents have occurred in rural areas. However, how would a worst-case scenario, perhaps one in a more urban area or a BP-type accident, impact BNSF and Berkshire Hathaway? And is the company insured or protected against such losses?

WARREN BUFFETT: Our insurance — reinsurance — unit actually went to the four major railroads offering very high limits. I think we — this is from memory, I could be off on this somewhat, but I think we offered something like $5 or $6 billion, excess — or maybe a billion and-a-half or something like that that the railroad retained.

So we — there's no question about it. If you had the exact wrong circumstances, you know, a train with a lot of ammonia or chlorine or something, you know, right in some terrible urban area, the possibility always exists that that can happen.

It can happen — you know, you can have plane crashes. There are things that are very small probabilities.

But if we run trains millions and millions of miles, year after year, something will happen just like, you know, they happen in every other possible accident way.

So you minimize it. You obviously — you run trains slower in urban areas. They've already instituted that with crude. I think they've brought it down to 35 miles an hour in towns of 100,000. That's the maximum.

So you're always working to be safer; you'll never be perfectly safe.

We do not — we have some insurance at Burlington Northern, but we don't need insurance at Berkshire. You know, we've got the capability to take any loss that comes along. So we actually would be more likely to be offering that insurance, and we did offer that insurance, and the railroad industry didn't like our rates, which is understandable, and so they haven't bought it. But that doesn't mean they won't at some time in the future.

I should add one thing that I forgot to say to Jonathan. The — I don't think we will be buying the 5,000 railcars. I think — I don't know that for sure, but, you know, there's going to be a lot going on in terms of retrofitting.

Our Marmon operation has actually taken on a new facility that will be working very hard — once we know what the retrofit requires — we will be, I'm sure, working three shifts on retrofitting cars, probably our own, probably some other people's. We'll be building new cars. The industry has been waiting to see what the requirements would be before moving ahead.

The first quarter of 2015, there were practically no tank cars ordered. There's a backlog, but there’s — no tank cars were ordered, because we need to see what the regulations are.

But we'll be very active in retrofitting and in manufacturing new cars, but I don't think we’ll be — historically the railroads have never really owned tank cars. That goes back to the Rockefeller days.

And I think the present method of having car lessors, such as the one we own, I think will continue in the future rather than having the railroads own them.

WARREN BUFFETT: OK. Gary?

GARY RANSOM: I have a question on intercompany transactions within the insurance companies.

In the last couple of years, you've had a number of them, including 50 percent of the business ceded up to — from GEICO — to National Indemnity.

You did something similar with MedPro and with GUARD. You also moved some of the companies — or the subsidiaries — like Clayton Homes, out of the Geico sub and up into the holding company.

It seems like a lot more activity than normal, and I'm just asking, what is the main purpose of all those movements, what financial flexibility might it provide you, and why now?

WARREN BUFFETT: Yeah. Well, there are a lot of things at Berkshire that the 'why now' is answered by — going to be answered by the fact, well, we just got around to it.

The huge chunk of capital, in the insurance companies, is at National Indemnity. So we have moved through these, quote, "share arrangements," we moved premium volume that is generated at GEICO or MedPro or different companies, we've moved that up to the parent, because that's where all the — there's a — you know, there's just extra layer after extra layer after extra layer of capital there, and it makes it a little simpler that way.

It makes it a little simpler just in keeping all the money invested, as opposed to having 50 pockets or 75 pockets to look at it, if you have a couple of main pockets to look at it.

There's no real change in the certainty of payment of policies or anything of the sort.

It really makes life a little — just a little easier — in terms of managing the money by having most of the — most of the funds concentrated in National Indemnity.

So there's no mastermind to it. We ended up with a few companies in GEICO Corp, which was a holding company for GEICO itself. And it just seemed that we probably ought to get those up to the parent company level and we put them there.

But our general approach is just to keep every place loaded with more capital than anybody could possibly conceive of us needing. And that’s going to result, more and more, probably, in the funds being concentrated in National Indemnity.

WARREN BUFFETT: OK. Station 5.

AUDIENCE MEMBER: Good morning, Warren. Good morning, Charlie. My name is David Tollefson (PH) from Minneapolis, Minnesota.

Currently, the U.S. is not a prospective founding member of the Asian Infrastructure Investment Bank, where many European countries are. The AIIB is relatively small, but if this is part of an ongoing trend in the next 50 years, how will that impact the U.S. multinational corporations? Thank you.

WARREN BUFFETT: Well, that's a subject I know absolutely nothing about, so let's hope Charlie does. (Laughter)

CHARLIE MUNGER: I know a little less than you do. (Laughter)

WARREN BUFFETT: I really apologize to you, in terms of your question, but, you know, if we started talking about it, we'd be bluffing.

CHARLIE MUNGER: Yeah.

WARREN BUFFETT: Do you have a second question? (Laughter)

AUDIENCE MEMBER: Off the top of my head, how about the dollar as a reserve currency? Do you have any issues or concerns in the next 50 again — I know we're in a good position now — but with us losing that position?

WARREN BUFFETT: I think the dollar will be the world's reserve currency 50 years from now, and I think the probabilities of that are very high. Nothing certain, but I would bet a lot of money on that one.

Charlie?

CHARLIE MUNGER: Well, I have a little feeling on that subject. I'm probably more nervous than a lot of people about printing a lot of money and spending it. There are times when you have to do it, I'm sure, and we just came through one.

But I'm happier when we print money and use it improving infrastructure than I am when we just spread it around with a helicopter. (Applause)

WARREN BUFFETT: So what do you think is going to happen if we keep spreading it around with a helicopter?

CHARLIE MUNGER: I think it's always more dangerous than the economic profession thinks.

WARREN BUFFETT: OK. With that, we'll go to Andrew.

ANDREW ROSS SORKIN: This question comes from a local shareholder, Max Rudolph, who writes in:

"Recently, several subsidiaries were renamed to include Berkshire or BH in their name, which Mr. Buffett has avoided doing previously, at least due in part, I imagine, to increased reputational risk should something go wrong.

"Can you discuss how you decide which subs are allowed to rebrand, and discuss those risks, given that Clayton, NetJets, and others, have received negative publicity this year?"

And attached to that question, Steve Rider (PH) of Chicago asks, "Will Fruit of the Loom become Berkshire Undergarments?" (Laughter)

WARREN BUFFETT: Well, if it does, we won't pay him a royalty for the idea. (Laughter)

The — we did create a Berkshire Hathaway HomeService operation, which is a franchise operation.

We bought two-thirds of the Prudential franchise operation a couple of years ago, and we have a contract where we can buy the — where we will — buy the remaining third in another couple of years.

And so we were going to lose the rights to Prudential over time. And Greg Abel asked me about using Berkshire Hathaway, and I told him that they could use it, but that if I started hearing of any abuses of it or anything of the sort, we would yank it, and that maybe that would be a useful tool in making sure that people behaved like we wanted them to. And so far, that's worked out fine.

We've had no idea that we wanted to take Berkshire Hathaway into becoming a household name and that that would create extra value, but we were going to rename a large franchising operation.

And, like I say, as long as the name does not get abused, that will be fine. And the Van Tuyl Auto — we're calling it the Berkshire Hathaway Automotive Group.

Certain of the dealers will have the right to use that as a tag line and others won't. And, again, if there's problems connected with it, we'll change it.

But in a sense, that isn't bad. If there are going to be problems, I'd just as soon hear about them. If I hear about them because the name is "Berkshire Hathaway," that may mean that I get on top of them faster than I would otherwise.

We have no — we have — a good many of our companies, at the bottom of their letterhead or something of the sort, they say a "Berkshire Hathaway Company," and that's fine.

But we have no — we do not anticipate that we're going to turn it into some huge asset by branding a bunch of products that way.

Charlie?

CHARLIE MUNGER: We'd be crazy to try and sell Berkshire Hathaway peanut brittle instead of See's. Those old brand names are worth a lot of money.

WARREN BUFFETT: OK. Gregg?

GREGGORY WARREN: This question is on the energy business.

During last year's meeting, we touched briefly on the topic of distributed generation, a method of generating electricity on a small scale at the point of consumption, from renewable and nonrenewable energy sources. Much of this has come around the last several years due to the growth of renewable energy sources like solar and wind.

Up until now, though, it has been difficult, if not cost prohibitive, for self-generators to store this energy.

Now that Elon Musk has joined the fray this week with his idea of batteries for the home, for his new Tesla Energy initiative, which could lead the way for larger systems, and realizing that disruptive technologies can, at times, upend an industry's business model and competitive positioning, how long do you believe it will be before distributed generation becomes a meaningful threat to your utilities, especially if power can be stored more easily at the end user's place of business or home?

WARREN BUFFETT: Well, you put your finger on storage being the key. And Charlie follows storage a little bit more than I do, and maybe I'll have Greg Abel talk about it.

But obviously, distributed energy is something we pay a lot of attention to.

One of the — probably the best defense is to have very low-cost energy, and MidAmerican has done a terrific job in that respect. And the figures, in terms of people who have adopted solar in our territories, are just minuscule and will stay that way.

But huge improvements in storage would make a difference in a lot of ways. And, Charlie, what are your thoughts on that?

CHARLIE MUNGER: Well, obviously, we’re going to use a lot more renewable energy because the fossil fuels aren't going to last forever. And, obviously, Berkshire is very aggressive and very well located, in terms of this development.

You know, I grew up here in this part of the world, and to have 20 percent of the power of Berkshire utilities in Iowa coming from the wind, I regard as a huge stunt.

And it's, of course, very desirable, in a windy place like Iowa where the farmers like the extra income, to be getting a lot of power out of the wind. And, of course, we're going to have a lot better storage, and the technology has been improving.

And this is — it's not a threat, it's a huge benefit to humanity, and I think it will be a huge benefit to Berkshire. And everything is working for us.

I love owning MidAmerican in an era where we’re going to have more storage, more wind, more solar, more grid.

And I think we're so lucky. What the hell would we do if the fossil fuels run down, if we didn't have the sun to use indirectly in these forms?

And, of course, the — it’s going to be a lot more storage. And, of course, there will be some disruption in the utility industry, but there will be more opportunity, I think, than disruption.

WARREN BUFFETT: Just in the last week, we've announced two different — we're already the leader — and we've announced two different projects.

One in Nebraska — I think it’s 400 megawatts in Nebraska. That will be the first time we've had a wind farm here.

And then, we just got approval in the last couple days for, I think, a billion-and-a-half-worth more of wind in Iowa.

And I think Charlie mentioned 20 percent, but if we could — if Greg Abel could take the microphone, I think it's a lot greater percentage than that now. It's a moving target. So I may not have kept Charlie posted on the number.

But, Greg, would you bring people up to date on what percent we will be in Iowa when the present projects are completed, and also what has happened in Nevada and a few places like that? Greg?

GREG ABEL: So, I'd love to provide an update. Actually, as it's been touched on, we announced our tenth project in Iowa. That brings us to more than 4,000 megawatts built over the last ten years in that state.

And at the end of 2016, we will now have 58 percent of our energy — approximately 58 percent — of our energy that we provide to our customers coming from wind.

And then, if you continue to — thank you. (Applause)

And then, if you continue to look at our other utilities and our unregulated businesses — Warren, you've touched on this in the past — we now have more than $18 billion committed to renewable assets across our different utilities.

And if you look at NV Energy, our Nevada utility, for example, we've committed to retire 76 percent of their coal by 2019, and a large portion of that will be replaced with renewable energy. So, clearly a continued commitment to that. (Applause)

CHARLIE MUNGER: Greg, in our utility business, do you think we have more disruption to fear, or more opportunity to love?

GREG ABEL: Distributed generation and solar bring great opportunities for all of our different utilities, and we'll embrace it.

CHARLIE MUNGER: The answer is, you couldn’t be luckier, is what I'm telling you.

WARREN BUFFETT: And one thing that has helped in this respect, is that wind and solar are — the development of wind and solar at present — are dependent on tax credits.

In other words, the federal government has made a decision that the market system would not produce solar or wind under today's economics, but it has an interest, as a society, in developing it. So they have established a credit — I think it’s one-point — electric is 1.9 cents a kilowatt — for ten years.

And because Berkshire Hathaway Energy is part of the consolidated tax return of Berkshire Hathaway Incorporated, it has been able to invest far more money than it would make sense to invest on a stand-alone basis.

Among electric utilities in the United States, there's really no one situated as well as MidAmerican Energy is, because it's part of this consolidated tax return, to really put its foot to the floor, in terms of developing wind and solar.

So it's become the biggest developer, by far, among the utility industry, and it — I think it's very likely to continue to be, simply because most utilities really don't pay that much income tax and, therefore, they're sort of limited in how far they can push development of wind and solar.

WARREN BUFFETT: OK. Station 6?

AUDIENCE MEMBER: Hello. I'm Linen Cygaloski (PH). I'm from Chicago, Illinois, and Berkeley, California.

I'd like to thank you for giving the opportunity to ask this question. This is my first meeting. I plan to attend once every 50 years. (Laughter)

And also, for your essay on the — both of your essays — on the past, present, and future of Berkshire.

As we reflect on the last 50 years, I'd like to ask you this question: what was your most memorable failure and how did you deal with it? Thank you.

WARREN BUFFETT: Yeah. Well, we've discussed Dexter many times in the annual report, where I — back in the mid-1990s — I looked at a shoe business in Dexter, Maine, and decided to pay 400-or-so million dollars for something that was destined to go to zero in a few years, and I didn't figure that out.

And then on top of that, I gave the purchase price in stock, and I guess that stock would be worth, I don't know, maybe 6 or 7 billion now. It makes me feel better when the stock goes down because the stupidity gets reduced. (Laughter)

Nobody misled me on that, in any way. I just looked at it and came up with the wrong answer. But I would say almost any time we've issued shares, it's been a mistake. Wouldn't you say that, Charlie?

CHARLIE MUNGER: Of course.

WARREN BUFFETT: Yeah. (Laughter)

CHARLIE MUNGER: We don't do it much anymore.

WARREN BUFFETT: No.

We probably could have pushed harder, particularly in the earlier years.

We've always been — well, we've had all of our own net worth in the company, we've had all our family's net worth, and we've had all these friends that came out of our partnership, many of whom put half or more of their net worth with us, so we've been very, very, very cautious in what we've done.

And there probably were times when we could have stretched it a little and pulled off something quite large, that we made a mistake, looking back.

But, I wouldn't want to take a 1 percent chance, you know, of wiping out my Aunt Katie's net worth or something. It's just not something in life that I could live with.

So I would rather be, you know, a hundred times too cautious than 1 percent too incautious, and that will continue as long as I'm around.

But people looking at our past would say that we missed some big opportunities that we understood, and could have swung, if we wanted to go out and borrow more money.

Charlie?

CHARLIE MUNGER: Well, it's obviously true. If we had used the leverage that a lot of successful operators did, Berkshire would be a lot bigger.

WARREN BUFFETT: A lot bigger.

CHARLIE MUNGER: A lot bigger.

And — but we would have been sweating at night. It's crazy to sweat at night. (Laughter)

WARREN BUFFETT: Over financial things.

CHARLIE MUNGER: Over financial things, yes. (Laughter and applause)

WARREN BUFFETT: Well, we won't pursue that.

WARREN BUFFETT: Carol? (Laughter)

CAROL LOOMIS: In your 2008 annual letter, you mentioned that a likely consequence of the Treasury and Federal Reserve's action to stabilize the economy would be, quote, "an onslaught of inflation."

Now that we are presumably nearing the time when the Federal Reserve will begin raising interest rates, could you share your thoughts regarding both the likelihood of accompanying high inflation, and the consequences that might follow?

And if high rates of inflation did occur, how would the consequences for Berkshire compare to those for most large companies?

And this question, I say belatedly, came from James Cook (PH) of Waterville, Maine.

WARREN BUFFETT: Well, so far we've been very wrong — or I've been very wrong. Charlie has probably been a little bit wrong, too. (Laughs)

CHARLIE MUNGER: Of course.

WARREN BUFFETT: Yeah. The —

No, I would not have predicted that you could have five or six years of, you know, close to zero rates, and now get negative rates in Europe, and run fairly large deficit, although the current deficit is not that large. I mean, the country could sustain on average, you know, 2 or 2 1/2 percent deficits forever and not increase the ratio of debt to GDP. So the word "deficit" is not a dirty word. But very large deficits, and sort of uncontrollable, are scary.

But, you know, we've taken the Federal Reserve balance sheet up from a trillion to over 4 trillion, and we've done a lot of things that weren't in my Economics 101 course, and so far nothing bad has happened, except for the fact that people who saved and kept their money in short-term savings instruments have just totally gotten killed, in terms of their — the income that they received from that.

But it's still hard for me to see how if you toss money from helicopters that eventually you don't have inflation.

Certainly, if the money supplied grows faster and faster relative to the output of goods and services, something like that is supposed to happen.

But I've been surprised by what’s happened. I've been — you know, when Poland issues bonds at negative interest rates, you know, I did not have that list — in my list — of forecasts a few years ago.

And so I think we're operating in a world that Charlie and I don't understand very well and that —

And to the second part of the question, I think Berkshire, in almost any kind of environment, will do better than most big companies.

I mean, we are prepared for anything. We'll always be prepared for anything. And if we see really unusual opportunities, we're also prepared to act. And that gives us a real advantage over most big companies.

We don't count on anybody else. We're sitting with over 60 billion right now. I'd rather be sitting with 20 billion and made a great $40 billion acquisition.

But we will — you know, we will be very willing to act if economic turbulence of any kind occurs, and we'll be prepared and most people won't be.

Charlie?

CHARLIE MUNGER: Yeah. We have made very little progress in life by trying to outguess these macroeconomic factors. We basically have abdicated.

We're just swimming all the time, and we let the tide take care of itself.

WARREN BUFFETT: And we really don't see — we've not seen great successes by others who have been all involved in macro predictions. I mean, they get a lot of air time, but that's about all that happens.

CHARLIE MUNGER: The trouble with making all these economic pronouncements is that people gradually get so they think they know something. (Laughter)

It's much better just to say, "I'm ignorant." (Laughter)

WARREN BUFFETT: Yeah. We will find things, though, under any circumstances.

They don't come at an even flow. They may not — and, you know, you cannot predict the size or anything — but you can be sure that over the next ten years, you'll see a lot of things you didn't think were possible.

And we will occasionally see something that makes sense for Berkshire, and we will be prepared to do it both psychologically and financially.

WARREN BUFFETT: OK. Jonathan?

JONATHAN BRANDT: For a variety of reasons, bonus depreciation on fixed assets investments in the noninsurance businesses perhaps being the most important, Berkshire's cash taxes have been meaningfully lower than reported taxes for the last several years.

The cumulative difference between cash taxes and reported taxes, which could be viewed as another form of float, now stands at around 37 billion.

Do you consider any portion of the cash flow from annual increase in deferred taxes to be economic earnings?

Is this a sustainable dynamic, or do you expect the relationship between cash and reported taxes to ever flip, for instance, if bonus depreciation ever expires?

Given Berkshire's massive appetite for capital spending at the utility and the railroad, is it possible, instead, that its deferred tax liability will never have to be paid, no matter what Congress does with bonus depreciation? And is it perhaps even likely that this form of float will continue to grow?

WARREN BUFFETT: Probably the most likely answer — there's two forms of float from deferred taxes.

One is the unrealized appreciation on securities, and they're — who knows what happens? I don't think the appreciation is going to disappear, but we may decide to realize some of it from time to time. In fact, we could realize a lot of it.

If you move over to the depreciation, which you're talking about, on the 37 billion — because the total deferred taxes, as I remember, maybe 60 billion or something like that — that is a factor of accelerated depreciation. And one form or another of accelerated depreciation has been around a long time.

Occasionally the — I think the bonus depreciation one year went to 100 percent. I could be wrong on that.

The — certainly in our utility business, that helps our customer and it doesn't help us, basically. I mean, we get a — we will get a return on equity, and that is not — that's not free equity to us, or anything of the sort.

The regulatory commissions take that into account. Return on invested capital, in terms of how the surface transportation board would look at it, again, I don't think we benefit enormously by that.

But it does mean there's less cash going out the door and we, therefore, don't need to borrow as much money for capital investment as otherwise.

But I don't think I would look at that as a hidden form of equity. I'd rather have the deferred taxes than not have them, but it's not meaningful there.

Now what could happen, is that, overwhelmingly, those deferred taxes were probably, entirely even — to the extent they're in the United States — were accrued at a 35 percent rate.

So if the corporate rate changed, then you would have a major change in the deferred tax item. And there's always a possibility of that.

CHARLIE MUNGER: But it would be a book entry. It wouldn't mean much.

WARREN BUFFETT: It wouldn't mean much. Yeah, yeah.

We do — the float from the insurance business, we regard as a terrific asset. The deferred tax liability is a plus, but it's not — it's not a big asset.

WARREN BUFFETT: OK. Station 7.

AUDIENCE MEMBER: Hi. My name is Dan Hutner from Vermont.

I was wondering if you could talk about Henry Singleton's Teledyne, and whether you learned lessons from that, used it as a model, and what you think about how it ultimately unwound, and how you might want Berkshire to continue differently?

WARREN BUFFETT: Yeah. That's a very good question. And Charlie knew Henry Singleton. I knew a lot about him. I mean, I studied him very carefully, but Charlie knew him personally, as well as studying him.

So I'm going to let Charlie answer that. But there's a lot to be learned from both what Singleton did in his operating years and then what happened subsequently.

CHARLIE MUNGER: Henry Singleton was very interesting. He was a lot smarter than either Warren or I.

Henry was the kind of guy that always got 800 on every test and left early. And he could play chess blindfolded, at just below the grand master level, when he was an old man.

That said, I watched him invest, and I watched Warren invest, and Warren did a lot better. He just worked at it.

Henry was thinking about inertial guidance, and Warren was thinking about securities. And the extra work enabled Warren to get by with his horrible deficit of IQ, compared to Henry. (Laughter)

And the interesting thing —

WARREN BUFFETT: But let's not quantify it. (Laughter)

CHARLIE MUNGER: No. The interesting thing about Singleton is he had very clever incentives on all the key executives, and they were tough, and they were important, and they were meaningful.

And in the end, he had three different Defense Departments that got into scandals.

He wasn't doing anything wrong. He wasn't trying to hurt the Defense Department on purpose. But the incentives got so strong, and the culture of performance got so strong, that people actually — it went too far — in dealing with the government, Teledyne did.

And so, we haven't had any trouble like that, that I know of. Can you think of any, Warren?

WARREN BUFFETT: No. And Charlie and I, we really believe in the power of incentives. And there's these hidden incentives that we try to avoid.

One — we have seen, both of us, more than once, really decent people misbehave because they felt that there was a loyalty to their CEO to present certain numbers — to deliver certain numbers — because the CEO went out and made a lot of forecasts about what the company would earn.

And if you — if you go and say — if I were to say that Berkshire's going to earn X per share next year, and we have a bunch of executives in the insurance business that set loss reserves and do all kinds of things, or companies in other areas that can load up channels at the end of quarters, at the end of years, I've seen a lot of misbehavior that actually doesn't profit anybody financially, but it's been done merely because they don't want to make the CEO look bad, in terms of his forecast. Or he's done it, because he doesn't want to look —

When they get their ego involved, people do things that they shouldn't do.

So we try to eliminate incentives that would cause people to misbehave, not only for financial rewards, but for, you know, ego satisfaction.

I think that's probably pretty unusual to even be considering that in the business, but we've seen enough, so we do consider it.

CHARLIE MUNGER: I might also report that at the end, Henry wanted to sell his business to Berkshire for stock, so he was very smart right to the very end.

WARREN BUFFETT: We had a case at National — it's interesting.

You really have to understand — should understand — human behavior, if you're going to run a business, because when National Indemnity — we're going back to the late 1960s —

Jack Ringwalt was a marvelous man, and he ran it, and he had another marvelous man who worked for him, his tennis partner, and that fellow was in charge of claims.

And when the claims man would come in to Jack and say, "I just received a claim for $25,000" or something, for some long-haul truck or something, Jack would say — Jack — it was just his personality.

He would start berating the fellow and say, "How could you do this to me?" and "These claims are killing me," and all of that, and he was joking.

But the fellow he was joking with couldn't take it, really, and he started hiding claims. And he just didn't — he stuck them in a drawer.

And that caused us to not only misreport fairly minor figures, but it also caused us to misinform our reinsurers, because they had an interest in the size of claims.

And the fellow that was hiding the claims had no financial interest in doing it at all, but he just didn't like to walk into the office and have Jack kid him about the fact that he was failing him.

And you really have to be very careful in the messages you send as a CEO. And if you tell your — if you tell your managers you never want to disappoint Wall Street, and you want to report X per share, you may find that they start fudging figures to protect your predictions.

And we try to avoid all that kind of behavior at Berkshire. We've just seen too much trouble with it. (Applause)

WARREN BUFFETT: Becky?

BECKY QUICK: This question comes from Anthony Sterochi (PH) in Lincoln, Nebraska.

He says, "If government regulators deem Berkshire Hathaway's reinsurance business too big to fail, how would government regulation of the reinsurance business affect Berkshire Hathaway?"

WARREN BUFFETT: Yeah. The question — there's two, essentially, regulatory aspects to it.

One is there's the European — and I hope I'm describing this right — I may be wrong, a little bit, on some technicality — there's a European group that is looking at insurers, generally, and has designated, I believe, nine or so insurance companies as — I'm not sure what they call them — but they deserve special attention, I'll put it that way. There's a technical name for it.

The one that's more relevant in the United States is the Financial Stability Oversight Committee, I believe they call it, which designates so-called SIFIs, systemically important financial institutions.

And large banks are in that category. And then the question is, what non-banks are in it?

And they designated General Electric, and Prudential, and recently, Metropolitan, and Metropolitan is fighting the designation.

The question is whether — question isn’t just whether you're large. I mean, Exxon Mobil is large, Apple is large, Walmart's large, and nobody thinks about them as SIFIs.

The definition on a non-bank SIFI would be 85 percent of revenues coming from financial matters, and we don't come remotely close on that. I mean, we're 20 percent or thereabouts.

But the real question is whether problems that Berkshire might encounter could destabilize the financial system in the country. And we have not been approached. Nobody's ever called me.

They spent a year with Metropolitan, even before they designated them. So there's — we have no reason, in logic, or in terms of what we've heard, to think that Berkshire would be designated as a SIFI.

I mean, during the last time of trouble, we were about the only party that was supplying help to the financial system, and we will always conduct ourselves in a way where the problems of others can't hurt us in any significant way.

And I think we're almost unique, among financial institutions, in the layers of safety that we've built into our system, in terms of both cash, and operating methods, and everything else. So, it's a moot question.

It — the law exists. We haven't been approached about it as we — as I know — as I mentioned.

Apparently it takes a year or so, even if they approach you while they listen to your presentation and look at your facts. And I do not think Berkshire Hathaway comes within miles of qualifying as a SIFI.

Charlie?

CHARLIE MUNGER: I think that's true. But I think that, generally speaking, there is still too much risk in a lot of high finance. And the idea that Dodd-Frank has removed it all permanently is nonsense. And people like hanging onto it.

You know, trading derivatives, as a principle, if you're shrewd, is a lot like running a bucket shop in the '20s or a gambling parlor in the current era. And you have a gambling parlor that you have a proprietary edge in, and you say it's sharing risk, and helping the economy, and so forth. That's mostly nonsense.

The people are doing it because they like making money with their gambling parlor, and they like favorable labels instead of unfavorable labels.

So, I think there's still danger in the financial system. And I also think our competitors don't like it that they deserve regulation and we don't. And I think there's danger in that too.

WARREN BUFFETT: Yeah. One thing that may not be — (Applause)

I haven't read much about it, but my understanding is that Dodd-Frank actually weakens the power of the Fed, and to some extent the Treasury, too, to take the kind of actions they took in 2008, primarily.

And those powers were needed to keep our system, in my view, from really going into utter chaos.

The ability to say, and have people believe you when you say it, that whatever needs to be done, will be done, has resided in the Federal Reserve and with the Central Bank — the European Central Bank.

And the fact that people believed when Hank Paulson said that the money market funds are going to be guaranteed, that stopped a run on 3 1/2 trillion of money market funds that had lost 175 billion in deposits in the first three days, there, back in September of one week.

If that — if people hadn't believed that, you would have seen that 175 billion turn into a trillion very quickly. I mean, the system would have gone down.

So the — when you have a panic, you have to have someone, somewhere, who can say and be believed, and be correctly believed, that he or she will do whatever it takes.

And you saw what happened in Europe when Draghi finally said that, and you saw what happened in the United States when Bernanke and Paulson, more or less together, said it.

And if you don't have that, panics — they will accelerate like you cannot believe.

You know, in the old days, the only way you could stop a run on a bank was, basically, for somebody to come and pile up gold. I mean, they used to race it to the branches that were having a problem. I remember reading the history of the Bank of America on that, and how they would put out runs before the Federal Reserve existed, and the only thing that stopped it was to pile up gold.

I mean, if the CEO of the bank came out and said, you know, our Basel II ratio is 11.4 percent, the line would just lengthen. It would not get the job done.

Gold got the job done. Bernanke and Paulson got the job done, but the only way they got it done was saying, "We’re guaranteeing new commercial paper. We’re guaranteeing that the money market funds won't break the bank. You know, we're going to do whatever’s necessary."

I think Dodd-Frank weakens that, and I think that's a terrible thing to weaken. (Applause)

WARREN BUFFETT: OK. Gary?

GARY RANSOM: You have started a direct workers' comp operation online, BHDWC.com. It looks a little bit like you're Geico-izing some of the commercial lines.

What's the overall strategy of that effort, and how big do you think it can grow, and what concerns might you have on channel conflict with GUARD, who uses independent agents?

WARREN BUFFETT: Yeah. We — well, Progressive did pretty well with the channel conflict between direct writing and agents.

We will find out what the consumer wants. But we are experimenting with online workers’ comp. As you can tell, we've done pretty well with online direct auto over the years.

We’ll find out. I don't think that — I don't think the channel conflict is a big problem for us. It might be a bigger problem for some other companies, but I don't think that's a big problem.

It's a trickier thing. We write commercial auto through GEICO, and that's grown and it's not small, but it hasn't achieved private passenger auto proportions at all. So we'll find out.

But we believe in experimenting at Berkshire, and we've got the know-how to write that business in direct, and we'll find out if the customer wants to buy it that way.

We've got an awfully good insurance business, but the nature of the insurance business has changed. I mean, GEICO was all direct mail back in 1936, when Leo Goodwin and his wife sat there and stuffed envelopes.

And the basic idea of saving people money on auto insurance continues to this day, but it went from direct mail to — it went to the TV and the phone, went to cable TV, and then went to the Internet and — and goes to mobile and it — you know, the world moves on.

And the key is to be able to save people money and give them good service. And whatever way does that in the most effective way is going to be what wins 20 or 30 or 50 years from now, and we'll try to stay on top of it.

WARREN BUFFETT: OK. Station 8.

AUDIENCE MEMBER: Hello. My name is Paula, and I'm from Gainesville, Florida.

And I would just like to ask Mr. Buffett, after all these years of interviews and meetings, what is the one question that you've never been asked that you would like to answer now? (Laughter and applause)

WARREN BUFFETT: Well, I can think of the question I haven't been asked, but I'm not sure I want to answer it now. (Laughter)

I think I've been asked almost all of them, and many of them, time after time after time.

Charlie, do you have anything that you’re just dying to be asked?

CHARLIE MUNGER: Well, if this lady will first tell us the worst thing she ever did in her life. (Laughter)

AUDIENCE MEMBER: Those secrets are not —

WARREN BUFFETT: Paula, I wish we could help you. Have you got another question you’d like to throw at us?

AUDIENCE MEMBER: I could ask you another question.

WARREN BUFFETT: Good.

AUDIENCE MEMBER: Can I buy you lunch? (Laughter)

WARREN BUFFETT: I think she's talking to you, Charlie. (Laughter)

He always wins. You saw him in the movie. He always gets the girl.

CHARLIE MUNGER: Yeah. I'm so heavily involved with those girls in the movie, I just don't have room on my list. (Laughter)

WARREN BUFFETT: Thank you, Paula. (Laughs)

WARREN BUFFETT: OK. Andrew.

ANDREW ROSS SORKIN: This is a toughy, and I should say we've probably got — or at least I got — several dozen emails on 3G, and so this is a follow-up to what you talked about on 3G earlier.

And specifically, actually, it's two questions in one that actually came from the audience after your response about 3G. So just to put it in perspective, those shareholders are in the audience, and they asked not to be named, so here we go.

This shareholder writes, "I intend no disrespect to 3G's money making abilities and, as a Berkshire shareholder, like the partnership very much. However, you took more than a decade to shut down the Berkshire mills.

"You take great pride in letting Berkshire's managers run their companies for you, and as Charlie says, almost to the point of abdication. And that approach has made Berkshire a very attractive home for companies.

"You've even bought newspaper groups in the face of the internet tidal wave, and acknowledged they didn't have the same investment characteristics of other Berkshire businesses.

"Are you actually saying 3G's management method is congruent with yours?

"Asked another way, if 3G ran Berkshire, would there not be significant layoffs and consolidation among the companies and intense focus on short-term profits?"

WARREN BUFFETT: No. I think there would be — there would be some companies they'd make changes in. But I would say that GEICO, for example, 33,000 employees, or whatever the number is, is run just as efficiently as 3G would run it.

I would say our home office, with 25 people — we could have a home office with 500 people. We could have floors devoted to strategy, and floors devoted to human resources and comparing the salaries of everybody at all our different companies, and so on.

If they walked into that situation, they'd cut it back. I don't know whether they'd get it down to the 25 we have, but we do not believe in having extra people around.

And our newspapers, you know, unfortunately, you know, they have had to cut back, as revenue has kept shrinking.

And the idea that you run a fat operation just because you're making a lot of money — we cut back on our textile business — I closed the Waumbec mill considerably before we closed the Berkshire mills. It was only when it became apparent that it was just hopeless, we gave up on it.

But in the meantime, every time at Berkshire — I had a drawer full of proposals that said if we put in this kind of a loom, we'll be able to get rid of eight people, and we put in the loom.

I mean, we were trying to reduce our labor complement all the time because we were in competition with people that were doing the same thing.

So I don't think there's any — I don't think there's anything in — we do have some businesses that probably have more people than we need, and I don't do something about it.

But I don't encourage it in any way and most of our managers don't operate that way.

And it's true, if 3G were running our operations, they would get more active at that than I will. But that doesn't mean that I endorse it. It just means that I basically tolerate it where I've got a manager that I think well of.

I think better of the 3G way — method — of operation than I do of our operators where they really have excess people in it. We've got very few of those, but we do have a few.

So, I would never advocate running a business at a loss. If you — where it's going to continue. And you'll see that in our economic principles that's been in the back of the book — back of the annual report — for 30 years or so.

And the same goes for having excess people around, and I think you'll see our attitude toward excess people best expressed in our office here that has 25 people, and Charlie's office in Los Angeles that has two, counting him.

CHARLIE MUNGER: I'd say we've got two-thirds of one. (Laughter)

We're getting by with practically nothing.

WARREN BUFFETT: Yeah.

WARREN BUFFETT: OK. Gregg?

GREGGORY WARREN: This is sort of a follow-on to the 3G question.

When we look at the body of work that the firm has put together in the consumer staples universe, Anheuser-Busch, InBev, Burger King, Tim Hortons, and now Kraft Heinz, one gets the sense that they view the average consumer staples firm as being undermanaged, with a potential for substantially greater levels of profitability.

Given the ongoing struggles of many packaged food firms, most of which compete in a mature category against private label and/or store brand offerings that undercut them in price and diminish the value of their brands, and many of them having to deal with large retailers, like Walmart, that provide meaningful sales volumes but are also quite demanding and continuously pushing for the lowest price available, do you see the potential for further consolidation in the industry with a firm like Kraft Heinz emerging as a big consolidator? Or do you feel that Nestle's more recent squawking about the deal, and 3G Capital's reputation as being a bit heavy-handed with cost cutting, being enough to keep further consolidation at bay?

WARREN BUFFETT: Well, there will be deals in the future. I mean, there are bound to be.

But the strong brands — you know, just look at the ones that General Foods added in the 1980s and the ones that Kraft has now that come from that same company.

And, I mean, Coca-Cola sold more cases of beverages last year than any year in their history and they'll sell more this year. I mean, it's — a strong brand is really potent stuff.

I mean, take Heinz Ketchup or something of the sort. It's 60 percent brand share in the United States, but it's much higher in many other countries.

So you'll always have the fight between the retailer and the brand, and the retailer is going to use all the pressure they've got and, therefore, the brand has to stand for something in the consumer's mind.

Because, in the end, the retailer may want to shift to a house brand, a private label, but — and they — private labels have been around forever in the soft drink field. I mean, I can remember when I was looking at Cott Beverage and all of those and thinking, what will it do to us?

I remember when Sam Walton sent me the first six-pack. He told me, it's the first six-pack of Sam's Cola, 20 years ago, and believe me, Walmart has plenty of power, but so does Coca-Cola.

And the brand — you've got to nourish them. You know, you've got to take very, very, very good care of them. They have to stand for the promise that's in people's mind about them.

But a lot of people have tried to — I don't know how many dozens, or maybe hundreds, of cola beverages there have been over the years. RC Cola. You know, they came up with the first diet product back in the early '60s, and that looked like a big maneuver.

Wilkinson came up with the blade back in the '60s after Gillette, but Gillette ends up with 70 percent, by dollar value, worldwide of razor blades after 100 years.

So there's all — you've got to protect a brand. You've got to enhance it in every way. You've got to get a promise in people's minds that gets delivered that way.

But that's the question Charlie and I faced in 1972 when we looked at See's. See's was selling for $1.95 a pound, Russell Stover was selling a little cheaper, and you had to decide how much damage could a Russell Stover do if they came after See's, and they copied our shops, and all that sort of thing.

If you protect a brand — if you got a terrific brand and you protect it, it's a fabulous asset.

But you'll always have trouble dealing with Costco and Walmart and the rest of the guys — Kroger, you name it, you know, they're tough, too.

But the great brands will survive and the great retailers will do well.

Charlie?

CHARLIE MUNGER: Well, we've almost exhausted this topic. The — there's no question about the fact that waves of layoffs frighten people. A job is a very important part of a person's life, and it's no small thing to lose it.

So — but on the other hand, I don't think you — what would our country be if we kept everybody on the farms? All this prosperous group would be pitching hay and milking cows at 4:00 in the morning. No, we need — we need our businesses to be right sized.

WARREN BUFFETT: Station 9?

Better have some fudge, Charlie.

AUDIENCE MEMBER: Very exciting to see my superstars here. I'm Leo (inaudible) from China and a loyal fan of you and Charlie.

Many Chinese investors feel all kinds of performance pressure, question, and even laughing, at value investing.

Many also believe that value investing, that doesn't apply to China, where the stock market just doubled over the last six months.

I would like to ask Mr. Buffett, do you think value investment can be widely applied in all markets, or just the (inaudible) markets, just as the ones in the United States?

Do you have any suggestions for value investors to hold against pressure and to be much happy? Thank you.

WARREN BUFFETT: I'm not sure I got all of it, but Charlie will help me.

I certainly think investment principles do not stop at borders. So if I were investing in China or any place else — India, UK, Germany — I would apply exactly the same sort of principles that I learned from "The Intelligent Investor."

I would think of stocks as a small piece of a business. I would think of investment fluctuations being there to benefit me, rather than to hurt me. And I would try to focus my attention on businesses where I thought I understood the competitive advantage they had and where they would — what they would — look like in five or ten years.

So I don't think I would change the principles at all. I'm not sure I got all of the question.

Maybe Charlie can elaborate on the rest.

CHARLIE MUNGER: Well, the Chinese have a history of being very entrepreneurial and gambling very heavily when they have the opportunity, and it has created great volatility in the Chinese stock markets.

And when things get bouncy and prosperous, like our Internet craze here in the United States, China looks a lot like Silicon Valley.

I think China would be way better to be more value investor minded and less absorbed in waves of speculation.

So I think the more China copies the way Berkshire operates, I think the better it will be for China. (Applause)

WARREN BUFFETT: Yeah. There's a certain irony, in that we will — we would — do the best, over decades, if we operated in a market where people operated very foolishly.

And the more people respond to short term events and exaggerated things or — anything that causes people to get wildly enthusiastic or wildly depressed, actually, is what allows people to make lots of money in securities.

And, on the other hand, it's not the greatest thing for a society. And Charlie and I have benefited enormously by the fact that over a 50-year period, there have been a few periods, probably the most extraordinary being 1973 and '74, where you could buy stocks unbelievably cheap, cheaper than happened in 2008 and 2009.

And, you know, it doesn't make sense to have that much volatility in the market, but humans behave the way humans behave, and they're going to continue to behave that way in the next 50 years.

I mean, if you're a young investor, and you can sort of stand back and value stocks as businesses and invest when things are very cheap, no matter what anybody is saying on television or what you're reading, and perhaps, if you wish, sell when people get terribly enthused, it is really not a very tough intellectual game. It's an easy game, if you can control your emotions.

And as Charlie says, we've talked about a little bit that the Chinese market may be more — there may be more speculative influences in it, even than in the United States, because it's a relatively new development and it may lend itself to greater extremes, and that should produce great opportunities. Charlie?

CHARLIE MUNGER: Yeah. But there's great opportunities for excess and nasty contractions after unnatural booms and so on.

I think China is wise to dampen the speculative booms and to — and I think the Chinese — I don't think that value investing will ever go out of style. Who in the hell doesn't want value when you buy something? How can there be anything else that makes any sense except value investing?

WARREN BUFFETT: It never gets that popular though. (Laughs)

CHARLIE MUNGER: People are looking for an easier way.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: And that's a mistake. It looks easier, but, in fact, it's harder. And there's a lot of misery to be obtained by misusing stocks.

WARREN BUFFETT: Yeah. Nobody buys a farm to make a lot of money next week or next month, or they buy, you know, an apartment house. They buy it based on what they think the long-term future is. And if they get a — if they make a reasoned calculation of that and the purchase price looks attractive, they buy it and then they don't get a quote on it every day or every week or every month or even every year, and that's probably a better way to look at stocks.

WARREN BUFFETT: Carol?

CAROL LOOMIS: "Mr. Buffett, you have expressed your optimism about the future of America many times and have often made the point that the U.S. simply has a superior economic system.

"But my question" — and this is from Christopher Gottchio (PH) of New York City — "my question concerns the risk of chemical, nuclear, biological, and cybersecurity problems and the audience should reflect on the initial letters of those words when I tell you that Mr. Buffett has sometimes dubbed that C-N-B-C." Sorry, Becky. (Laughter)

WARREN BUFFETT: I just do that to tease people, but the —

CAROL LOOMIS: Wait a minute. One more. "How do these threats affect your outlook?"

WARREN BUFFETT: Well, they are the great threat to the United States. The — we will have — we have, and will have, a wonderful economic system.

You know, your children are going to live better than you do, and your grandchildren are going to live better than they do. That is — there are fits and starts and ups and downs. But just go outside or — as you fly home, just imagine what you're flying over looked like in 1776, and everything since then is profit.

I mean, the farms are incredibly more productive. The cities have grown. It's all here, you know, and that's all come from unleashing the energies and brains of the American people and the system that has worked quite well despite all the deficiencies that we talk about all the time. So that hasn't been lost at all.

And, you know, people get upset because we're having 2 percent growth. Well, 2 percent growth with 1 percent population growth means 20 percent gain in a generation, and 20 percent on 54,000 of GDP per capita is another 10,000 of GDP per capita coming in the next generation.

This country has a wonderful future, but as the questioner pointed out, that can all be nullified by either madmen, or rogue states, or religious fanatics, or sociopaths, or whatever it may be, who have — who wish to have — access to weapons of mass destruction.

And to nuclear, which, as I used to think was the primary one, you know, you can now add biological and chemical and cyber.

And there will be an increasing number — there already are a huge number — of people that would wish harm, and particularly on the United States, although on others as well.

And those people aren't going to go away, and they're going to look for more ingenious ways of utilizing the raw materials that they have access — or might get access to — and better delivery systems.

And we need an extremely vigilant security operation in the United States, and we will have threats. I can't — I do a little bit about those things in a few ways — but that's something we live with.

But we also live in a country that is going to do extraordinarily well. And if we successfully ward off those threats, or at least minimize their impact on us, I still maintain that the luckiest person ever born in history, on a probabilistic basis, is the baby being born in the United States today. (Applause)

Charlie?

CHARLIE MUNGER: Well, of course, we were a favored place, and we've had a favored outcome, and we've been lucky too.

I think I probably lived in the most ideal era that any man in human history could have been born into. I think you have, too, Warren.

WARREN BUFFETT: Right.

CHARLIE MUNGER: But I don't think we should get too smug. China has come up a lot faster than any other big nation ever came up, and —

WARREN BUFFETT: But that's good for us.

CHARLIE MUNGER: Oh, I think — I can hardly think of anything more important than future close collaboration between the United States and China.

I think you're talking about the two most important nations in the world going forward. And I think it is very important that we like and trust one another, and have very good relations, and work together to avoid bad consequences that come from other people's mistakes and misbehavior.

So I'm — (Applause)

I think both China and the United States would be crazy not to collaborate and increase trust.

I don't think there's anything more important that we could do for our respective safety and for the general benefit of the world. (Applause)

WARREN BUFFETT: If you had your choice, would you rather be born now with all the qualities you've got, or when you were born?

CHARLIE MUNGER: Well, I must say it's very interesting now, but it was always interesting.

And I think that's too tough a question. I don't like these very theoretical questions. (Laughter)

I'd rather think about something where I might gain some advantage or help somebody else to gain an advantage.

WARREN BUFFETT: OK. Then we'll move on to Jonathan. (Laughs)

JONATHAN BRANDT: Warren, you have up to this point said that Berkshire in the future will have a chief executive officer and one or more chief investment officers.

You haven't explicitly said that a chief investment officer cannot be the CEO, but that has, for me at least, been implied.

Berkshire has been successfully managed for 50 years by a chairman and vice chairman whose principal experience was in allocating capital amongst a number of businesses and industries with which they were familiar and whose attributes they could compare.

Since capital allocation is the key skill needed for a company structured the way Berkshire is, why couldn't the company's principal decision maker in the future also be someone who is experienced in choosing among different reinvestment options, with perhaps a second outstanding person expert in operations acting as chief operating officer, albeit a route of the hands-off one, given Berkshire's extreme decentralization?

WARREN BUFFETT: That's a very good question.

It's not inconceivable. It's very unlikely, Jonny, that — but as you say, the — a chief investment officer has a — will have — or should have — a significant array of skills that would be useful, also, for a chief executive officer.

But I would say, also, that I would not want to move — if I were voting on it — I would not want to vote to put somebody whose sole experience had been investments in charge of an operation like Berkshire, who had not had any, also, significant operating experience.

I've said that I'm a better investment manager because I've been an operating manager, and I'm a better operating manager because I've been the investment manager.

But the — you — operations — I've learned a lot through operations that I wouldn't have learned if I'd stayed in investments all my life. I would not have been equipped to run it.

I learned a lot of things about operations by being in operations. So if you had somebody that had the dual experience and was very good at investments, but had a lot of experience in operations, that would be conceivable. Otherwise, I wouldn't vote that way.

Charlie?

CHARLIE MUNGER: Well, every year at Berkshire, as now constituted, the owned and controlled businesses get more and more important, and the measurable securities are relatively less important.

So, I think it would be crazy not to go with the tide to some extent.

And we need more — we need expertise beyond that of a typical portfolio analyst.

WARREN BUFFETT: Yeah. But the CEO should have some real understanding of investments and investment alternatives and all that.

I've seen a lot of businesses run by people that really don't understand the math of investing or capital allocation very well. So having a dual background is useful, but actually our operating managers know — some of them know — a lot about investing.

WARREN BUFFETT: OK. Station 10,

AUDIENCE MEMBER: Hello. Warren, Charlie, it's a pleasure to be here. My name is Douglas Coburn. I'm originally from Caracas, Venezuela, but I'm here with a large group from Columbia Business School. (Cheers)

My question —

Thank you.

My question is regarding Ted Weschler. Can you please share your views regarding his investment philosophy, his investment process, and the qualities that he brings to Berkshire?

WARREN BUFFETT: Yeah. Well, both Ted and Todd [Combs], the two investment managers, aside from myself, at Berkshire, are very, very smart about businesses and investments.

I mean, they understand the reality of business operations. They understand what makes for competitive strength, and all of the things that you'd learn in business school or learn through investing.

And on top of that, they have qualities of character which are terribly important to me and Charlie.

We have seen dozens and dozens and dozens of investment managers with great records over the years. We used to drop in and see some of those guys, you know, that were running — I'm talking back in the 1960s and '70s.

And when I gave up my partnership, I knew probably 20 people with great records from the previous six or eight years, but I picked Bill Ruane to handle the funds of my partners going forward.

And he set up a fund called Sequoia Fund, and 10,000 put in that fund has become over $4 million now.

Well, Bill was a terrific investment manager, but he was a terrific human being. And we really want people where they do more than their share, where they don't claim credit for things they don't do, where they — you know, they — just every aspect of their personality is such that you want to be around them, and you want to hand responsibility over to them.

And Ted and Todd fit that bill, and there's plenty of investment managers in Wall Street with great records that don't fit that bill, in our view. So that's about all I can tell you.

Charlie met — he met Todd first. I met Ted first. And we both — when we talked about them, we talked about their record and the kind of stocks they owned, but we talked a whole lot more about what kind of people they were and we haven't been disappointed.

Charlie?

CHARLIE MUNGER: Yeah, I think the whole thing is working pretty well. And I think those people will be constructive around Berkshire for reasons apart from their expertise in handling securities. In fact, they already are.

WARREN BUFFETT: They already very are.

CHARLIE MUNGER: Oh. They're — they've just — each one has helped buy a business recently.

WARREN BUFFETT: Yeah. And they will help oversee it, too, the businesses. They're smart about business, and they know just exact — they know the right touch to apply in terms of how much they get involved.

I mean, Todd worked on Charter Brokerage. He worked on an acquisition we made from Phillips.

Ted just worked on this operation over in Germany, went over there a couple of times.

And he's just smart. You know, he's got good sense. He knows how to deal with people. You know, if a deal is to be made, he'll get it made.

And we — Charlie and I run into more dysfunctional people with 160 IQs, probably, than anybody alive.

But Salomon gave us a head start on that, as a matter of fact. Wouldn't you say that —?

CHARLIE MUNGER: We've specialized in it.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: We've absolutely specialized in it.

WARREN BUFFETT: We've seen — take the Salomon — we've seen a group of people whose IQs far surpassed those of people at Berkshire, and we've seen them self-destruct to make money they didn't need, when they were already rich. You know, I mean, see, that's madness.

But a lot of people are just incapable of functioning well day after day, even though they're capable of brilliance from time to time.

And we're looking — we've got very solid people in Ted and Todd. They're very bright and they identify with Berkshire and not with themselves, and that's a — it's a huge factor over time.

Any more, Charlie, on that?

CHARLIE MUNGER: Well, yeah. And that trustworthiness is more important than the brains. It's not that they don't have the brains, but we wouldn't hire anybody, no matter how able, if we didn't trust them.

WARREN BUFFETT: Yeah. Very occasionally — (Applause)

Yeah. We'll get disappointed on that occasionally, but not very often.

WARREN BUFFETT: We're approaching noon. We'll come back at 1:00.

I promised — seven years ago I made this bet, which was originally to produce a million dollars for the charity of the winner, and another fellow who was in the hedge fund business — and I offered this bet to anybody. Only one person took me up on it.

And we made this bet where a million dollars goes to the winner's charity, as to whether a group of five hedge funds, the funds would beat the S&P Vanguard fund.

And my point being that the fees would not overcome — would not be overcome — by managerial brilliance and that the hedge funds would fall short.

And the other fellow betting, essentially, that paying people 2-and-20, and having an override to the fund of funds, was nothing to pay for the brilliance of getting Wall Street to manage your money.

And I promised that every year I would report the update.

And the first year I fell far behind, but we reported it then.

So we'll put that slide up. And as you can see, seven years into it, it's interesting that just buying Vanguard fund, you know, with no — nothing but putting the S&P 500 in there, has now given a cumulative return of 63 1/2 percent, and the hedge funds are at 19 percent.

The interesting thing is, some of that is underperformance, but the hedge fund managers have done very well during that period. If they were managing a billion dollars, for example, at 2-and-20, you get $20 million a year just for coming to the office.

It's — you know, it's been — the hedge funds haven't done bad. It's the investors in the hedge funds have paid a very big price. And the — (Applause)

We originally funded this with zero-coupon bonds. We each bought about 350,000 of zero-coupon bonds that would be worth 500,000 at the end of the period.

We converted it to Berkshire Hathaway stock — so — a few years ago, the fellow on the other side of the bet did it with me. So now it now looks like the winner will get appreciably more than a million dollars.

And if you want to entertain yourself, you can go to Long Bets — on search, just put in Long Bets, and you'll find this organization out in Washington that sort of acts as the stakeholder, sets the rules for these long bets.

And now there's hundreds of them up there, and they're on all kinds of predictions, and you can go there, and if you want to disagree with one of the parties on there, you can make these bets that pay off in 50 years or 25 years.