Warren Buffett & Charlie Munger: 100 Years of Financial Wisdom in 4 Hour - Investing/Market Analysis

investing is not that is really not complicated I mean the the basic framework for it is simple now then you you have to work at it some to find the best pockets of of uh undervaluation maybe or something but you didn't have to have a you didn't have to have a high IQ you didn't have to have lots of investment smarts to buy junk Bonds in 2002 or even to do some of the stuff that was available when ltcm got in trouble you really just had to have sort of the courage of your convictions you

had to have the willingness to do something when everybody else was petrified and but that was true in 1974 when you know we were buying stocks at very very very low multiples of earnings it wasn't that anybody didn't didn't know that they were cheap they were just paralyzed for one reason or another and and you know that the lesson a following logic rather than emotion you know is something that it's obvious and some people have great trouble with it and others have less trouble Charlie can you give him any more help from there well I

think this is different when we were young we had way less competition than you people have now there weren't very many smart people in the Investment Management Field they really weren't and you should have seen the people who were in The Bank Trust departments I mean so now we've got armies of brilliant young people and all these private Partnerships and all these proprietary desks and all the big investment Banks it's a and we've got a vast amount of talented in the investment management business so and there's a lot of competition there were suddenly a crisis

now there would be 500 firms that would be studying it intensely each having Capital that they could commit on a hair trigger in our day we would frequently be all alone but in 2000 would be the only we'd be the only buyer but in 2002 Charlie there were tons of people that had investment experience and high IQs and lots of money was around one main question about money it's just they were terrified of that particular Arena well when you have it huge convulsion which is like a big fire in this Auditorium right now you know

we get a lot of weird behavior and if you and if you can particularly if they had table and if you can be wise when everybody else is going crazy sure there will still be opportunities but that may give you a long dull stretches if that's your strategy three years ago two three years ago you could find a number of Securities and Korea population 50 million advanced Society strong balance sheets strong industry positions at three or so times earnings now but that took a convulsion to create that a real a big convulsive yeah but the

convulsion happened three or four years earlier five years earlier and plenty of smart people in Korea in the investment business plenty of smart people here scouring the information was all available you you you can you can go to the Internet and get information about Korean companies as just as good as you get up from the SEC and there they were dozens of companies that very very very cheap prices now we're all these smart people and with all this money it did happen but I asked you to name 20 more like it you would have great

difficulty I'm gonna name them number eight my name's Simon Dennison Smith from the UK my question is this if you were starting out today with a million dollars with a vision of building a business with 20 average growth in value over 40 years what type of Investments and investment strategy would you look to make in the first five years interesting that perform the first partnership 50 years ago last two days ago Thursday on May 4th 1956 which was 105 000. um that's my sister clapping she would she was in the partnership they would Charlie and

I were starting all over again and we were in this Charlie would say we shouldn't be doing this but but uh but if we if we were to succumb to Satan and engage in same kind of activity we would I think be doing something very similarly if we are investing in securities we would look around the world and we would look at a Korean and Charlie says you can't find 20 of them but you don't have to find 20 of them you only have to find you only have to find one really you do not

have to have tons of good ideas in this business you just have a good idea that's worth a ton occasionally and insecurities we would we would be doing the same thing which would probably mean smaller stocks it would mean smaller stocks because we would find things that could have an impact on a small portfolio that will have no impact on a portfolio the size of Berkshire uh if we were trying to buy businesses we'd have a tough time um we would have no reputation so people would not be coming to us we'd be too small

a player if you're talking about a million dollars so we would not have much success I don't think with small amounts buying businesses Charlie started out you know in real estate development because it took very very little capital and you could magnify brain power and energy uh uh or I should say brain power and energy could magnify some small amounts of capital in a huge way that was not true in securities um Financial inclination was to look at Securities and and just kind of do it one foot in front of the other over time but

the basic principles wouldn't be different uh you know I think if I'd been running a partnership a couple of years ago with a small amount of money I think I'd have probably been 100 in Korea and uh you know I would be looking around for something that was very mispriced and which and and that I understood and every now and then that's going to happen Charlie well I agree with that the concept that you're likely to find just one thing where it'll make twenty percent per annum and you just sit back for the next 40

years that tends to be Dreamland and in the real world you you have to find something that you can understand that's the best you have available and uh and once you found the best thing then you measure everything against that because it's your opportunity cost that's the way small sums of money should be invested and the trick of course is is getting enough expertise that your opportunity cost meaning your default option which is still pretty good is very high and so the game hasn't changed at all in terms of its basic arithmetic that's why modern

portfolio theory is so asinine it really is folks yeah when Warren said he would have been all in one country that's pretty close to close to right he wouldn't have quite done that when he had the partnership but he would have been way more concentrated than is conventional if you listen to Modern portfolio Theory most people aren't going to find thousands of things that are equally good they're going to find a few things where one or two of them are way better than anything else they know and the right way to think about it and

investing is to Act thinking about your best opportunity cost number nine that's in the Freshman course in economics everywhere in the basic textbook it just had it hasn't made its way into modern portfolio Theory we don't get asked to do book reviews it's it's Andreas Viga from Munich Germany thank you very much for the open discussion that you have with us actually I'd like to ask a question on a book so I come back to the book review um Jeremy Siegel had some ideas in his second book and I would like to understand what how

this would impact your investment strategies if there are any changes from his ideas and how you react to these recommendations that he makes thank you this is which book Jeremy sprinkle Jeremy Siegel the second book by the try and the true triumph over the world and the new now that it's had no effect on on us Charlie no is that the fellow who's very optimistic about common stock investment over long periods of time the University of Pennsylvania yeah yeah well I think he's demented well he's a he's a very nice guy Charlie well he he

may well be a very nice guy but he's comparing apples against elephants and trying to make accurate projections number 10. I'm Bob Klein from Los Angeles you've so eloquently stated that you can't see who's swimming naked until the tide goes out could you discuss the issue of trying to employ a rational decision-making process in investing or in business generally as opposed to focusing on outcomes or results of just a few instances or over a short period of time for example it may not be a good idea to underwrite some insurance policies if competition is lowered

the premiums too far and likewise in the stock market momentum investors may get good results for a while but buying high and trying to sell higher isn't a good long-term strategy so I'd just like to hear you guys provide some detail on the importance of using an effective decision-making process even though it may lead to some bad outcomes and underperformance in the short run yeah well Ben Graham said long ago that you're neither right nor wrong because people agree with you or disagree with you in other words being being contrarian has no special virtue over

being a trend follower a you're right because your facts and reasoning are right so all you do is you try to make sure that the facts you have are correct and that's usually pretty easy to do in this country I mean the information is available on all kinds of things internet makes it even easier and then once you have the facts you got to think through what they mean and you don't take a public opinion survey you don't pay attention to things that are unimportant I mean what you're looking for is something things that are

important and knowable if something's important but unknowable forget it I mean it may be important in order to know whether somebody's going to drop a nuclear weapon tomorrow but it's unknowable it may be all kinds of things but so you fo and and there are all kinds of things that are knowable but are unimportant in focusing on business and investment decisions you try to think you narrow it down to the things that are knowable and important and then you decide whether you have information of sufficient value that you know compared to price and all that

that will cause you to act what others are doing means nothing it Thrice and all that it will cause you to act what others are doing means nothing it's what Graham writes in chapter eight of the intelligent investor that the market is there to serve you and not to instruct you that's of enormous importance when people talk about momentum in stocks or or charting or any kind of things like that they're saying that the market is instructing you the market doesn't instruct us the market is there to serve us if it does something silly we

get a chance to do something because it's doing something silly we do it but it doesn't tell us anything it just tells us prices and the price is out of line where the facts and reasoning lead you then you then action is called for and if it doesn't you forget it and you know go play bridge that day and the next day see whether there's something new and the nice thing about it is there always is something new I mentioned the ltcm crisis you know we on Sunday from for people that had portfolios that were

in trouble now I will tell you that if you can make a lot of money on Sunday you may not get a chance very often but any calls you get on Sunday you're probably going to make money on things you're things are really screwed up if you're getting calls on Sunday and all you have to do is make sure that you're the collie and not the caller on Sunday and but if you get those calls you get a call on a Sunday and somebody says that the off the run is trading 30 basis points away

from the on the Run you know all you have to do is decide whether how you handle that particular piece of information whether it's correct in the first place but how you handle that piece of information whether you can play out your hand you never get in a position obviously where the other fellow can call your tune you have to be able to play out your hand under all circumstances but if you can play out your hand and you've got the right facts and you Reason by yourself and you let the market serve you and

not instruct you you can't miss Charlie well I would say some of you probably can miss okay I would say Charlie can't miss I'll put it that way he'll agree with that do you have anything further Ado okay at least I've got them off that previous subject number 11. it really doesn't make any difference I mean what what we don't pay any attention to what what people say about Coca-Cola stock or Gillette stock or any of those things I mean on any given day two million shares of Coca-Cola May trade that's a lot of people

selling a lot of people buying it if you will talk to one person you'd hear one thing and talk to another it really you really should not make decisions and securities based on what other people think if you're if you're doing that uh you should you should think about doing something else because it's a public opinion of poll will just it will not get you rich in Wall Street uh uh so you really want to stick with businesses that you feel you can somehow evaluate evaluate yourself and uh I don't think I mean Charlie and

I we don't read anything about what business is going the economy is going to do or the Market's going to do or what anybody anytime I see some article it says you know these analysts say this or that about some business it just it doesn't mean anything to us you cannot you cannot get uh rich with a Weather Vein and I would say this in terms of the of predictions and I know the spirit in which you ask the question but there's just there's a market out there all the time uh and and people love

to hear predictions I mean if I said I was going to offer a bunch of predictions today I mean we would we would have a million people here I mean that they're dying to have predictions and speeches at Rotary clubs or trade associations or whatever that's they they just plain love it and that's what a whole industry is built upon you know the people coming out of Washington that talk about political predictions and the I don't read those in the paper at all because it's just it's it's space fillers uh basically and uh uh you

mentioned Edgar Casey Ben Graham and knew Edgar Casey pretty well but I I just have never seen any utility to any of that at all there will be some huge surprises in the world uh there's no question about that but I don't I don't think that betting on any specific one is is a very smart policy in fact our we usually bet against them in terms of super catastrophes we know there will be a 7.0 or greater quake in California in the next 50 years we don't know where it'll be or when it'll be anything

like that we're willing to pay out a lot of money if it happens tomorrow and because people do worry about catastrophe and in this case it's perfectly proper with with insured values but it it just isn't any way in in our view to get through economic life Charlie all of these economists with 160 IQs have spend their life studying it can you name me one super wealthy Economist that's ever made money out of securities you know I may just go down the list no no Keynes Cain's actually in his early years tried to make money

in stocks by predicting what business would do and he gave it up and then he went over to a Graham type approach I mean it's very interesting to read his history on this because he thought he could by looking at various economic variables pick what he called the credit cycle and make a lot of money and and he what broke a couple of times and doing it had to borrow from people and then he settled on buying good businesses cheap that he understood and concentrating his Investments and he did very well it's an interesting history

but if you if you look at the whole history of them you know they don't make a lot of money buying and selling stocks but people who buy and sell stocks listen to him which is I have a little trouble of that you know I I'm not I've not earned any uh any uh stars for my past economic predictions and the good thing about my economic predictions if I even do make them is that I pay no attention to them myself so uh I I really uh and the way we pick our investments is we

just don't get into the macro factors I can't recall a time when Charlie and I have looked at a business either buying it in its entirety or buying uh pieces of it for the stock market I just macro the conclusions or just never never enter into the discussion I mean you know I'll pick up the phone we've had these two in recent months and I'll tell Charlie about it and you know we we talk about a few things but we don't talk about anything remotely macro uh and and that's really the way it'll stay you

know I I I've seen a lot of Bank mergers recently and one of the things they do because they want to cut the costs and and justify a merger which they're dying to do I mean that's the reason they they so they they cut costs they wouldn't have cut if they if they weren't dying to do the merger in the first place and get bigger but that frequently I know one in particular that I'm thinking of that you know they'll cut out the economics Department you know I always wonder why the hell they had it

in the first place you know because what what do they do you know I mean the guy comes in I says I think GDP will be 4.6 this year instead of 4.3 so what you know I mean you're still trying to make every good loan you can make and you're still trying to take into positives could be trying to cut costs worry again it's got nothing to do with running the business but but you know it it's it's fashionable and every bank at its Economist and economics department and when a big client will come in

they take them to lunch and it just it always just struck me as it's just a lot of nonsense uh you know so if we ever get a economics department at Berkshire sell the stock shortened there was one other item in here I believe which I think achieved a little added relevance in the last year I said we therefore need someone genetically programmed to recognize and avoid serious risks and then I put in italics including those never before experienced and I said certain perils that lurk and investment strategies cannot be spotted by one of the

models by use of the models commonly employed today by financial institutions well I think that proved to be somewhat prophetic of what happened last year all of these places had models I mean the major Banks the major investment Banks and they would meet weekly at a risk committee probably and go over their models and all of the statistics would be printed in nice columns and everything and they didn't have the faintest idea what risk they were involved you really need in the investment world someone very solid someone you trust uh reasonable analytical skills but you

also need someone that actually can contemplate problems that haven't popped up yet but which are starting to become uh possibilities in terms of new financial instruments or new behaviors and markets and that sort of thing and that's the rare quality I mean that that inability to Envision something that doesn't show up in your past model uh you know can be fatal and Charlie and I spend a lot of time thinking about things that could hit us out of the blue that other people don't include in their thinking and the we may miss some opportunities because

of that but we feel it's essential when managing other people's money or for that matter managing our own money so I would say that that you might go back and read the 2006 annual report again but those are the criteria uh we're looking for and we have identified as being met by the four people we're thinking about Charlie yeah you can see how risk-averse Berkshire is the first place we try and behave in a way so that no rational person is going to worry about our credit and after we've done that and done it for

many years we also behave in a way and after we've done that and done it for many years we also behave in a way that if the world suddenly didn't like our credit we wouldn't even notice it for months that if the world suddenly didn't like our credit we wouldn't even notice it for months uh because we have such liquidity and are so unlikely to be unable to be pressured by anybody that double layering of of protection against risk is is like breathing around Berkshire it's just part of the culture and the alternative culture is

just the opposite you call a man the chief risk officer but often he is functioning as a guy that makes you feel good while you do dumb things so he's like the delphic oracle convinced the Persian king to attack somebody or other I mean it's it's just a dumb sister and and how can a guy be Donald he's got a PhD and he can do all this advanced math well you can you can but you can it's very well all you've got to do is crave system and computation so much that you torture reality in

defending some model mathematical model which really doesn't match particularly under extreme conditions and then because of this work that you're putting into everything and these computations about daily trading risk and so forth you feel confident that you've clobbered the risk but you haven't you've just clobbered up your own head yeah we we really want to run Berkshire you know I'll even applaud that one we we really want to run Berkshire so that if the world isn't working tomorrow the way it's working today or the and it's working in a way nobody expected that we don't

have a problem we do not want to be dependent on anybody or anything else uh and yet we want to keep doing things so uh we found a way to do it we think we found a way to do that it may give up some of them well it obviously gives up earning higher returns 99 percent of the time and maybe 99.9 percent of the time obviously we could have run Berkshire with more leverage over the years than we have but we wouldn't have slept as well and and we wouldn't feel comfortable we have a

lot of people in this room that have almost all their net worth in Berkshire including me and we wouldn't feel comfortable uh running a business that way why do it I mean it doesn't it just doesn't make any sense to us to to be exposed to ruin and disgrace and embarrassment and uh for something that's not that meaningful if we could earn a decent return on Capital you know what's an extra percentage point it just isn't that important so we will always try to behave in a way that uh a is not dependent on anybody

else evaluating the risk except for us it cannot be farmed out and you've seen what happened to some institutions where the management thought they were farming it out and you know if that means so a reasonable return instead of a slightly unreasonable region we just accept it number two hello Mr Buffett hello Mr Monger my name is Brooke athletic and I'm from Munich Germany I would like to get back to your point that as a professional investor one should be able to act quickly and decisive that means being able to know what the intrinsic value

is and to act within a day or within an hour if the market offers an opportunity my question is how large is the universe of companies which you have in your head whose intrinsic value you know where you would be able to act within a day or two if the market offered an attractive price to you and secondly how come you suddenly invest in southern Korea or China yeah we can we can act our our immediate decision is whether we can figure the what's being offered out to us or not I mean there's a there's

a go no go signal and Charlie and I are often thought to be rude when we think we're just being polite and not wasting the other person's time so as they start mid-sentence in their first conversation with us we just say forget it and uh Charlie's pretty good at that and I'm picking it up the it's we know very very very early in the conversation whether somebody's talking about something that there's any chance is actionable by us and we don't worry about the ones we miss we we want to make sure that we don't waste

any time thinking about things that when we get all through thinking about them we're not going to know enough to make the decision on so we just rule those out and that rules a lot of things out then if it gets through a couple of these filters and makes it in to an area where it says this is something that we know enough about to make a decision on we're ready to move right then so we make decisions we can make a decision in five minutes very easily I mean it just is not that complicated

now we know about a number of businesses and industries and there's a lot of businesses and industries we don't know anything about we know about a lot of things about certain kinds of bonds and we know some there's a variety of things we know about and it's nice that we can expand that Universe of of knowledge but the most important thing is that that anything that gets through is in an area of knowledge and the truth is if we can't make a decision in five minutes we can't make it in five months you know there's

we're not going to learn enough in the following five months to make up for the fact that we went in deficient in the first place so it's it's it's just not a problem around Berkshire if we get a call and somebody says either they've got a business for sale or well that's that's what we're going to get on the calls or if I'm reading a paper or a magazine or an annual report or a 10K and I look at a price and there's a significant differential between price and value we move right then and Charlie

and I don't need to talk to each other about it I mean we both think the same way and and we have generally similar spheres of knowledge Charlie oh it's the answer to your question is we can make a lot of decisions about a lot of things very fast and very easily and the and and we're unusual in that respect and the reason we're able to do that is there's such an enormous other lot of things that we won't allow ourselves to think about at all just that simple I mean I have a little phrase

when people make pictures to me and about halfway through the first sentence I say we don't do startups they don't exist oh look you blot out startups there's a whole layer of complexity that goes on in your life and we've got other little water out systems and and using those we finally find out that what remains is still a pretty large territory that we can't handle I think that's fair warm yeah and yeah and an awful lot of giveaways that people in the first sentence or two uh throw out that you know we just know

we aren't you know it isn't going to work and uh we waste very I would say we waste a lot of time but we wasted on things we want to waste our time up and we we we're very selective about that and then we're good at it we waste a lot of time uh but we're not going to waste it on things we don't want to waste it up number three it's just the way it is uh yeah if you it's as though God made the world so the only people fluent in math could understand

it either you can handle ordinary human activity pretty well but if you want to understand say science you can't do it without math that's just the way it is and in business if you're enumerate you're going to be a klutz keep talking I'm chewing and we'll go back go ahead the good thing about business is you don't have to know any High math it may be a disadvantage no no high math yes I think it is because you you look for opportunities to use this marvelous complicated tool and uh and by and large that doesn't

work nearly as well as just using the simple math when my mother's sang me songs about compound interest there really wasn't any need to go further let's go back to number one my name is David Farlow from Minnesota Minneapolis thank you Warren and Charlie a few minutes ago you mentioned the importance of learning from history what have you learned from the Investments you did not make over the last few years that you now regret refraining from well the mistakes we made and we made them some of them big time are of two kinds one is

one we didn't invest at all in something that we understood that was cheap maybe because we weren't even working hard enough but at looking at the whole list or because for one reason another we just didn't we didn't take action and the second was starting in on something that could have been been a very large investment and and and not maximizing it Charlie is a huge believer in in the idea that you don't sit around sucking your thumb when you can when something comes along that should be done that you you pour into it and

and that's generally what we've tried to do but but there have been times and it's usually happened when I've started buying something at X and it went up to X plus an eighth or some intolerable amount like that and I I quit or waited for it to come back and we've missed in some cases billions of dollars of profit because of the fact that I'd gotten anchored in effect to some initial price when I could have paid more subsequently and it really was inconsequential do you have anything worse to confess than Walmart a Walmart I

cost us about it's up to 10 billion now I cost us about 10 billion uh I set out to buy 100 million shares of Walmart pre-split at about 23. and Charlie said it didn't sound like the worst idea I ever came up with which is from him I was just ungodly praise and and then you know we bought a little and then it moved up a little bit and I thought well you know maybe it'll come back or what who knows what I thought I mean you know only my psychiatrist could tell me and that

thumb sucking reluctance to pay a little more the current cost is is in the area of of of 10 of 10 billion and there have been other examples too uh uh and there will probably be more examples in the future unfortunately but that is that's on the other hand it doesn't bother us I mean you know it uh it's it's maybe instructional to talk about it just a little and I'm glad to respond to the question but in the end we're going to make a lot of mistakes at Berkshire and we've made them in the

past we'll make them in the future you know it if every shot you hit in golf was a hole in one it wouldn't be my you know the game would soon lose interest uh so you have to hit a few in the woods occasionally just to make it make it a little more interesting that we'll try not to do that too often but those will be the kind of mistakes we make we probably won't make the kind of mistakes although we have we made one with Dexter shoe but we we probably won't make the kind

that where they cost us a ton of money uh that uh they'll be much more of omission than commission I think you'll find in the future Charlie won't add any more at least we are constantly thinking about the past occasions when we blew opportunities since those don't hit Financial reports the opportunities you had but didn't accept most people don't bother thinking about them very much at least that is a mistake we don't make we rub our own noses in our mistakes in Blowing opportunities as we just did okay number two how many hours per week

on average did you spend with reading about companies thank you well when we were younger we spent um probably Charlie compared to now spent a lot more time I spent a fair amount more time looking at companies uh but we would we would if we were doing it over again we would do it over again pretty much the same way we would look at everything in sight that we thought we could understand and uh it the world hasn't changed in that respect there may be some more people doing it but there are a lot more

companies to look at now uh and we would we would read everything in sight about the businesses in the industries we thought we could understand we would look for things that that jumped out at us as as being very cheap in relation to to value and we would have one enormous Advantage because we would be working with far less Capital which means the universal potential ideas would be would be far greater but there's no there's nothing different in my view about analyzing Securities now than it was 50 years ago Charlie yeah we we read a

lot and we thought a lot I don't know anybody who is wise who doesn't read a lot and on the other hand that that alone won't do it you have to have a a temperament really which which uh grabs the correct ideas and and does something with those ideas and I think most people who read a lot don't have the necessary temperament and they grab the ideas or they're simply confused by the massive material and of course that won't work there's probably something Phil cray used to talk about having a money mind or and I

would call it a business mind and you know there are people that are better with you know identical IQs that are that are better adapted for one than the other and and the temperament is all important I mean if if you can't control yourself uh no matter what the intellect you bring to the pros process you know you're going you're going to have a you're going to have disasters and Charlie and I have seen one after another that uh uh it's it's not a business that requires uh extraordinary intellect uh it doesn't require an extraordinary

discipline and uh uh that shouldn't be so difficult but as I look around the world sometimes it apparently is quite difficult I mean the whole world when little mad a few years back in terms of Investments and and uh you say to yourself how could that happen don't they learn anything from the earlier ones but but you know what we learned from history is that people don't learn from history and you certainly see that in the National markets all the time them incidentally you mentioned books Charlie did you didn't recommend any books this year well

one book I really like I couldn't buy because it's published only in England but it'll get here in due course and that's called Deep Simplicity by John gribben it's a perfectly marvelous book and of course that's a great title deep simplicity that's what we're all looking for I've been reading a short history of nearly everything and it it it is it's very impressive to you know to read about people pondering how to figure out the weight of the Earth or something in the 18th century and you would think Minds that could do that would do

we work do very well in financial matters but you know if you remember Isaac Newton spent a significant part of his life trying to turn lead into gold and he might have made a good stockbroker but it didn't do much for him financially he Charlie knows more about Isaac than I do so and he lost an enormous yeah the bubble chunk of his net worth in the South Seas bubble so he invested in an absolute crooked Mania and here was the smartest man in the world so just IQ points alone won't do it microphone 11

please Wall Street and financial planning firms charge a lot of money for their asset allocation models say 50 stocks 40 bonds Etc I know you take a more opportunistic approach to building your portfolio and managing risk as you mentioned by as you illustrated by your junk bond example and so I just want you to hammer out how you use price and value as a tool of risk management and US allocation as opposed to coming at it with a preconceived idea of how much should be allocated to each asset class yeah we think the best way

to minimize risk is to think the and the idea that you have you know you'll say I've got 60 in stocks and 40 in bonds and and then have a big announcement now we're moving it to 65 35 as some strategist or whatever they call them in Wall Street I mean that has to be pure nonsense I mean it uh UH 60 40 or 65 30. it just doesn't make any sense what you ought to do is have your default position is always short-term instruments and whatever you see anything intelligent to do you should do

it and you shouldn't be trying to to match up with some uh some goal like that I I found it entertaining I was just reading yesterday an article I think it was the about the two fellows at Google and and all of the problems they're going to have because they're each going to get a few billion dollars and I mean it was it was I mean I want to send a sympathy card I almost went down a Hallmark store because this article went on they've got this this terrible problem that terrible problem they're going to

need lawyers and they're going to need financial they don't need anybody those guys are smarter than the people that are coming to them and they do not have a big problem and and they're very capable of thinking it through themselves the people that have the problem are the people who want to sell their services to them and are going to have to convince them that they have a problem but uh so much of what you see when you talk about asset allocations I mean it's just merchandising it's a way to make you think that if

you don't know how to determine whether it should be 60 40 or 65 35 that you need these people and you don't need them at all in investing I mean most of the professionals that that uh tell you you're that you're going to get in great trouble unless you listen to them and and adopt and and sign up for their services you know they're good at selling but uh um my brother-in-law former brother-in-law that worked at the Stockyards used to say with the people were bringing cattle or something and I'd say to him you know

how do you get how do you get the farmer to employ you to sell the Swift or armor or Cudahy instead of them guy right next to you I mean you know it's a cow is a cow and armor is going to buy it the same way and he gave me this disgusted look and he said Warren it's not how you sell them it's how you tell them well there's a lot of that in Wall Street and Charlie people have always had this craving to know the future you know the King used to hire the

magician or the forecast or any looking sheep guts or something for an answer as to how to handle the next war and so there's always been a market for people who reported to know the future based on their expertise and there's a lot of that still going on it's just as crazy as when the King was hiring the the forecaster who looked at the Sheep guts and people have an economic incentive to sell some nostrum it can be sold over and over and over again the really interesting figures are when you combine the underperformance of

the market say by the mutual fund industry which is probably a couple of points per annum that that understates it now if you take all of the investors in the mutual funds who are constantly whipsawing from One Fund to another by a bunch of brokers who want commissions now you take a subnormal performance and it goes down another three or four percentage points due to the shuffling of the mutual fund Investments so the poor guy in the General Public is getting a terrible result from uh from from contacting the experts and these guys are heading

the Scout Troop and the community chest drive and are locally reputable people I think it's disgusting it's much better to make a living but by being part of a system that delivers value to the people who are who are buying the product but nobody nobody uh refrains from creating gambling casinos or something on my theory if it'll work to make money away we tend to do it in this country microphone four can you please elaborate your views on risk you clearly aren't a fan of relying on statistical probabilities and you highlight the need for 20

billion dollars in cash to feel comfortable why is that the magic number and has it changed over time yeah well it isn't the magic number and uh there is no magic number uh I would get very worried about somebody that walked in every morning and told us precisely how many dollars of cash we needed to be you know secured to three sigma or something like that but Charlie and I have had a lot of we saw a lot of problems developing in an organization that that expressed their risks and sigma uh and we even argued

sometimes with the appropriateness of of how they calculated their risk and they it was truly horrible yeah and they were a lot smarter than we were that's what was depressing but um we we both have the same band of mind whereby we we think about worst cases all the time and then we add on a big margin of safety and uh we don't want to go back to go I mean I I enjoy tossing those papers in the other room but uh I don't want to do it for a living again it so we undoubtedly

build in layers of of of safety that others might regard as foolish uh but we've got 600 000 shareholders and we've got members of my family that have 80 or 90 percent of their net worth in the company and I'm I'm just not interested in explaining to them that we went broke because there was a 100 to one percent chance that we would go broke and there was a remaining uh probability was filled by the chance of doubling our money and I decided that that was just a good gamble to take we're not going to

do that it it uh it doesn't mean that much we are never going to risk what we have and need for what we don't have and don't need we'll still find things to do where we can make money but we don't have to stretch to do it and uh as my job and and you know and Charlie thinks the same way I mean we're uh we don't talk have to talk about it much but but it's our job to figure out what can really go wrong with this place and you know we've seen September 11th

and we've seen we've seen September of 2008 and we'll see other things of a different nature but similar impact in the future and we not only want to sleep well of those nights we want to be thinking about things to do with some excess money we might have around so it is if you're calibrating it in some mathematical way I would say it's really dangerous I could give you a couple of examples on that but that unfortunately there I've learned about them on a confidential basis but but some really great organizations have had dozens of

people with Advanced mathematical training and make and thinking about it daily making computations and they don't really they don't really get at the problem uh so it it's at the top of the Mind always around Berkshire and your returns in 99 years out of 100 will probably be penalized by being us being excessively conservative and one year out of 100 will survive when some other people won't Charlie yeah but how do these super smart people with all these degrees and higher mathematics end up doing these dumb things I think it's explainable by the old proverb

that to a man with a hammer every problem looks pretty much like a nail they they've learned these techniques and they they just twist the problem absolutely fit the solution which is not the way to do it and they have a lack of understanding of History I would say that one of the things in 1962 when I set up our office Key West Plaza where we still are at some different floor I put seven items on the wall our art budget was seven dollars and I went down to the library and for a dollar each

I made photocopies of of the pages of from Financial history and one of those cases for example was in May of 1901 won the Northern Pacific Corner occurred and it's kind of interesting in terms of being in Omaha because Herriman was trying to get control of the Northern Pacific and James J Hill was trying to control the Northern Pacific and unbeknownst to each other they both bought more than 50 percent of the stock now when two people buy more than 50 percent of the stock each and they both really wanted they're not just going to

resell it you know interesting things happen to the shorts and in that paper of May 1901 the whole rest of the market was totally collapsing because Northern Pacific went from 170 dollars a share to one thousand dollars a share in one day trading for cash because the shorts needed it and there was a little item at the top of that paper which we still have at the office uh where a brewer in Troy New York committed suicide by diving into a vat of hot beer because he'd gotten a margin call and to me the lesson

that that fellow probably understood sigmas and everything and knew how impossible it was that in one day a stock could go from 170 to a thousand to cause margin calls on everything else and he ended up in the vat of hot beer and I've never wanted to end up in Nevada so had those seven days that I put up on the wall life and financial markets has got no relation to sigmas I mean if if everybody that operated in financial markets had never had any concept of standard errors and so on they would be a

lot better off don't you think so Charlie well sure there have some questions it's created a lot of false confidence and now it has gone away again as I said earlier the business schools have improved so has risk control on Wall Street they now have taken the gaussian curve and they just changed it away they threw it away well they put they just made a different shape than Gauss did and uh and it's it's a better curve now even though it's less precise they talk about fat tails but they still don't know how fat to

make them they have no idea well but they knew that they've learned through painful yeah they weren't fat enough yeah they learned the other was wrong yeah but they don't know what's right um but we we always knew that they were there were fat tails Warren and eye of the Solomon meetings would look over at one another and roll our eyes when the risk control people were talking thank you Bill Ackman from New York New York for the handful of AAA rated companies AIG Fannie Mae Freddie Mac and mbia are under formal investigation for accounting

Shenanigans and are in the process of restating their financials like Charlie said before I think of AAA rated company as an Exemplar a company that should behave in the with the highest accounting and ethical standards my questions this leads me to are how can investors comfortably invest in any Financial Service Company when even when a decent percentage of the AAA rated companies have false and misleading financials and I guess the follow-up question is why don't the rating agencies do some independent due diligence uh from an accounting standpoint so that they can help serve as a

watch on this issue well Financial companies are more difficult to analyze than uh than many companies I mean the it is more if you take the insurance business you know the biggest single element that is very difficult to evaluate even if you own the company uh uh is is the loss and loss adjustment expense reserve and that has a huge impact on reported earnings of Any Given period and the shorter the period the more the impact can be from just small changes in assumptions uh you know we carry we'll say 45 billion of loss reserves

but you know if I had to bet my life on whether 45 billion turned out to be a little over a little under I mean it said it'd be it I think a long time and uh you could just as easily have a figure of 45 and a half billion or forty four and a half billion and if you were concerned about reporting given earnings in a given period that would be an easy game to play in a bank you know it it basically is what whether the loans are any good and I've been on

the boards of Banks and that's you know I've gotten surprises at stuff to tell uh it's Financial companies if you're analyzing something like WD-40 you know or See's candy or um our brick business or whatever you know they they may have good or bad prospects but you're not likely to be fooling yourself much about what's going on currently but with financial institutions it's much tougher then you can add throw in derivatives on top of it and you know it's it's no one probably knows you know perfectly what some of it or even within a reasonable

range the exact condition of some of the biggest you know banks in the world and but that brings you back to the due diligence question of the agencies you had very high grade very smart financially smart people on the boards of both Freddy and Fanny and yet you know one was five billion and one was apparently nine billion those are big numbers and I don't think those people were negligent and it's just it's very very tough to know precisely what's going on in a financial institution Charlie and I were directors of Solomon and Charlie was

on the audit committee and I forget the size of a few of those things that that you found but you know what that you found but you know what what what wasn't found and that isn't that doesn't mean the people below are Crooks or anything like that it just means that it's it's very tough with thousands and thousands and thousands of complicated transactions sometimes involving the computations involving multiple variables it can be it can be very hard to figure out where things stand at any given moment and of course when the numbers get huge on

both sides and you get small changes in these huge numbers they have this incredible effect on quarterly or yearly figures because it all comes lumped in those adjustments come lumped in a short period of time so I just think you have to accept the fact that insurance banking finance companies we've seen all kinds of finance company uh both frauds and and just big big mistakes over time just one after another over the years uh and that it's just a more dangerous field to analyze it doesn't mean you can't make money and we've made a lot

of money on it but but it's it's difficult now obviously a Geico where you're insuring pretty much the same thing Auto drivers and you get your statistics are much more valid in something like that than they will be if you're if you're taking something that like asbestos liability uh you're subject to far greater errors and estimation doesn't mean that people aren't operating in good faith but you know I would take just take the asbestos estimates of the 20 largest insurance companies I will bet you their way off but I don't know in which direction and

that's uh that's sort of the nature of financial companies I wouldn't fault the rating agencies in terms of not being able to to dig into the the uh financials and find things that that uh you know all of the companies that you've talked about have had big name Auditors and uh our auditors Berkshire how many hours did they spend last year man I don't know whether what it would be probably 60 70 000 hours uh and I'm sure another you know if you take major Banks they're spending more than that but you know can they

be certain of the numbers I I doubt it Charlie yeah Warren is obviously correct that where you've got complexity which by its very nature provides better opportunities to be mistaken and not have it come to notice or to be fraudulent and have it not be found out you're going to get more frauded mistakes than you are if you're selling a business where you shovel sand out of the river and sell it by the truckload and just as a business that sells natural gas is going to have more explosions than a business that sells sand a

business like these major financial institutions by its nature is going to have way more problems and that will always be true and it's true when the financial institutions are owned by governments in fact some of the worst financial reporting in the world is done by governments and governments institutions like government banks in China Etc so if you don't like the lack of perfect accounting and financial institutions you're in the wrong world hello my name is Jeff Colbert and I'm from Olathe Kansas I got started in investing in 1999 right before the big Tech bubble and

unfortunately I learned Buy and Hold and uh don't fret about market price fluctuations before I learned the importance of valuing a business and applying a margin of safety so as Charlie said I got my feet wet with huge failure right away and we're in the club thank you I don't feel so bad now um so that leads to my my question it seems like to me I've read all the Berkshire reports and all the reading I can do about you two and and I thank you for these wonderful meetings but it seems like it boils

down to some simple things valuing a business and applying a margin of safety so my question is what do you recommend for an approach to getting better and better at valuing companies it was a very very good question and in my own case you know I started out without doing anything about value in companies and then Graham taught me a way to value a certain type of company that would prove successful except the universe of those companies dried up but nevertheless it it was almost a guarantee against failure but it wasn't it was not a

guarantee that these things would continue to be available Charlie taught me a lot a lot about the value of a durable competitive advantage and and a really first class business but over time I've learned more about various types of businesses but you do be amazed how many businesses I don't feel that I understand well the biggest thing is not how big your circle of competences but knowing where the perimeter is if you you don't have to be an expert on ninety percent of the businesses or 80 or 70 or 50. but you do have to

know something about the ones that you actually put your money into and if that's a very small part of the universe that still is not a killer and I I think if you think about what you would pay for a McDonald's stand what you think you would pay for you know think about the businesses in your own hometown of it's a laughing uh you know which would you like to buy and do which do you think you could understand their economics which do you think will be around 10 or 20 years from now which do

you think it would be very tough to compete with just keep asking yourself questions about businesses talk about with other people about them you will extend your knowledge over time and always remember that margin of safety and I think you basically have the right attitude because you do you recognize your limitations and that's enormously important in this business you will find things to do six or seven years ago maybe not that long yeah six or seven years ago when I was looking at Korean stocks for example I never had any idea that Korean stocks would

be something that I would be buying but I looked over there and and I could see that there were a number of businesses that met the margin of safety test and they're right Diversified because I didn't know that much about any specific one but I knew that a package of 20 was going to work out very well even if a crook might run one of them and a couple of might run into competition I didn't anticipate because they were so cheap and that was sort of the old Graham approach you will find Opportunities from time

to time and the beauty of it is you don't have to find very many of them currently well obviously if you want to get good at something which is competitive you have to think about it a lot and learn a lot and practice doing it a lot and the way the world is constructed in this field you have to keep learning because the world keeps changing and your competitors keep learning so you just have to get up each morning and and try and go to bed that night a little wiser than you were when you

got up and if you keep doing that for a long time and and accumulate some experience good and bad as you try and master what you're trying to do people do that almost never fail utterly they may have a bad period when luck goes against them or something but very few people have ever failed with that with that if you have the right temperament you may rise slowly but you you're sure to rise Charlie did you take any business courses in school no I took accounting and when did you start valuing businesses and how did

you go about it when I was a little boy I can remember I would come down to the Omaha club and it was an Old Gentleman who hit the Omaha Club about 10 30 every morning he obviously did almost no work and yet was quite prosperous he became your ideal yeah so well but he made me very curious as a little boy I said to my father how in the hell does he do that and he said Charlie he's in a business where he enjoys practically no competition he gathers up and renders dead horses well

that was an example of avoiding competition by one stratagem and and if you keep asking questions like that of reality starting at a young age you gradually learn and where you were doing the same thing well yeah thankfully he extrapolate he went beyond his original [Laughter] insight there but I noticed it's rather interesting you take the rulers of the businesses when I was a little boy a awful lot of those business in Omaha a lot of those businesses went broke a lot of them sold out at modest prices under distress and some of the people

who Rose like key Whit from Small Beginnings nobody thought of as the great glories of of that early time and I think that's kind of the way life is it's hard to get anywhere near the top and it's hard to hold any position once you've attained it and uh but I think you could predict the key what was likely to win they cared more about doing it right they cared more about avoiding trouble they put more discipline on themselves if you knew the individual well it would have it would have been right what if you

knew the individual beat him I would not have bet on any of the people I knew who were already wealthy but I would have bet on Pete Kiewit his sister taught me math and and half Dutch half German you know this is a tough culture and there's your there you've just heard it folks half Dutch half German well but go out looking for him well the man was recommending this is named monger and anyway the uh uh no I I don't think it's that but if you're I was just automatically doing that what was working

what was failing why was it working why was it failing if you have that temperament you are gradually going to learn and and uh if you don't have that temperament I can't help you if you'd followed Peak even around for 10 years you never would have seen him do anything dumb right oh yeah and so it it's avoiding the dumb thing you don't it really don't have to be brilliant but yeah you know you have to avoid just sort of put almost seem the obvious mistakes but I would say that you're on the right track

back there on the in in terms of having the basic fundamentals knowing your limitations but still seeking to learn more about various kinds of businesses surely I think when he practiced law any client that came in Charlie was thinking about that businesses if he owned the place and he probably generally felt he knew more about the place and the guy that actually owned it it was it was quiet who was the client but but I remember talking to him you know 50 years ago and he would start talking about caterpillar dealerships in Bakersfield or something

of the sort it was it was incapable of looking at a business without thinking about the fundamental economics of it how'd that guy do with the caterpillar well he sold it for a perfectly ridiculous price to a dumb oil company it wasn't worth half what he got for it yeah but they had a concept they had a concept in the strategy and no doubt they had Consultants uh Becky this question comes from Carson Mitchell in Aberdeen South Dakota who asked both of you what business has had the best return on capital for Berkshire and what

business of any on Earth has had the best return on Capital and he adds PS I would have come by rail but there are no seats in the grain rail cars they there's two ways of looking at it if you talk about the capital necessary to run the business as opposed to what we might have paid for the business I mean the if we buy a wonderful business you could run the Coca-Cola Company assuming you had the bottling systems ever you could run it with no capital yet now if you buy it for 100 billion

dollars I mean you can look at that as your capital or you can look at the basic Capital we when we look at what's a good business we're defining it in terms of the capital actually needed in the business whether it's a good investment for us depends on how much we pay for that in the end there are a number of businesses that operate on negative capital uh Carol's with Fortune Magazine you know any any of the great magazines and operate with negative capital I mean they those subscribers pay in advance there are no fixed

assets to speak of and and the receivables are not that much the inventory is nothing so a magazine business my guess is that People magazine operates or Sports illustrate Opera Sports illustrator operate with negative capital and particularly people make a lot of money so there are certain businesses well we had a company called Blue Chip Stamps that that where we got the float ahead of time and operated with really substantial negative Capital uh but there are a lot of great businesses uh that need very very little Capital Apple doesn't need that much Capital that you

know that uh the best ones of course are the ones that can get very large while needing no Capital C's is a wonderful business needs very little capital but it we can't get people eating 10 pounds of of boxed chocolates every day except here we want to uh generally the great consumer businesses need relatively little Capital uh um the the businesses where people pay you in advance you know magazines of Christians being a case Insurance being a case uh you know you're using you're using your customers capital uh and we like those kind of businesses

but of course so does the rest of the world so they can become very competitive and and buying them we have a business for example this won't run wonderfully uh like Catherine Kathy Barron Tamara it's called Business Wire Business Wire does not require a lot of capital that has receivables and everything but it is a service type business and many of the service type businesses and consumer type businesses require a little capital and when they get to be successful you know they can really be something uh Charlie I've got nothing to add but at any

rate the the formula never changes if you get all if you could own one business in the world what would it be Charlie I hope I already own them myself you and I got in trouble by addressing such a subject many decades that's right I don't think I'll come back to it okay number 13. if you name some business that has incredible pricing power you're talking about a business that's a monopoly or a near Monopoly sure and I don't think it's very smart for us to sit up here naming is our most admired business is

something that other people regard as a monopoly okay we'll move right along Brian Zen from China as a Coke addict myself I'm excited to report to you our worldwide promoter in Chief that the cokes in Beijing taste just as wonderful as in Omaha as ex-zen monk today I feel like visiting the Buddha of the financial world we have the investment club with a name that ends in.com believe it or not which tells you that the frenzy .com friends even seduced Zen monks when we try to follow you we find that Mrs Susan Buffett used to

send Zen Buddhism books to her sorority sisters that's probably why she always has a peaceful smile due to her low expectation of Life which according to Buddha is full of sufferings but Mr Monger would tell me that Susan's smile is because you as the husband exceeded her low expectations that's right yeah and her father's even lower expectations anyway um my question is uh did Susan also send those Zen books to your office or your bedroom and if you have read those books what are the key ideas that contributed to your investment Tau which even made

sense to secluded narrow-minded Zen monks like me thanks for the financial enlightenments you've given us today thank you I sent those books on to Charlie so I'll let him answer actually I tend to be a follower of Confucius and I think this room is full of Confucian values you know if the first law of Confucianism is filial piety particularly toward the elderly males you can see why I like that system area four [Laughter] good afternoon Mr Buffett Mr Munger my name is Kevin Truitt from Chicago I have three questions for you Mr Munger at last

year's shareholder meeting you stated that you didn't feel that the concept of the cost of capital made True economic sense would you explain why you felt this way and what you would do to replace it with anything my second question is to Mr Buffett you've stated the importance of an occasional big idea how were you able to in fact tell when you had a big idea and my third question Mr Buffett you have talked about the importance of the franchise and sustainable competitive advantage companies like Kellogg and Campbell Soup are companies that most people would

have said had those qualities however over time those qualities were lost as a result of a change in consumer taste what gives you confidence that the same things won't happen to Coke or Gillette well caution Capital cost of capital first obviously considerations of cost are important in business and obviously opportunity costs which is a doctrine of economics really a doctrine of lifemanship are also very important and we've always had that kind of basic thinking uh of course Capital isn't free and of course you can figure cost of capital when you're borrowing money or at least

you can figure cost of loans but the theorists had to develop some theory for what Equity cost and there they just went bonkers they they said if you earned 100 on Capital because you had some marvelous business your cost of capital was a hundred percent and therefore you shouldn't look at any opportunity that delivered a lousy 80 percent that is the kind of thinking which came out of the capital assets pricing models and so forth that I've always considered inanity what is berkshire's cost of capital we have this damn capital it just keeps multiplying and

multiplying what does its cost you have perfectly good old-fashioned doctrines like opportunity cost you know at any given time when we consider an investment we have to compare it to the best alternative investment we have at that time we had perfectly good old-fashioned ideas that are very basic to use but they weren't good enough for these modern theaters so they invented all this ridiculous mathematics which concluded that they companies that made the most money had the highest cost of capital well all I can say is this not for us now the other half of that

question I leave for Mr Butler yeah what what you find of course is that the cost of capital is about a quarter percent below the return promised by any deal that the CEO wants to do very simple it uh you know we have three questions on Capital at the the with capitals around and leaving aside whether we want to borrow money which we generally don't want to do and one is does it make it more sense to pay it out to the shareholders than to keep it within the company sub question on that is if

we pay it out is it better off to do it by our repurchases or by a dividend the test for whether we pay it out in dividends is can we create more than a dollar of value within the company uh with that dollar then paying it out and you never know the answer to that but so far the answer is judged by results is yes we can and we think that perspectively we can but that's that's a let's say uh you know that's a Hope on our part and it's Justified to some extent by past

history but it's not a certainty once we've crossed that threshold then do we repurchase stock well obviously if you can buy your stock at a significant discount from conservatively calculated intrinsic value and you can buy it in reasonable quantity that's a use for Capital beyond that then the question becomes if you have the capital you think you can create more than a dollar how do you create the most with the least risk and that gets to business risk it doesn't get to any calculation of the volatility I don't know the the risk in See's Candy

is measured by its stock volatility because the stock hasn't been outstanding since 1972 does that mean I can't determine how risky a business sees is because if we don't have a daily quote on it no I can determine it by looking at the business and the competitive environment which it operates and so on so once we cross the threshold of deciding that we can deploy Capital so as to create more than a dollar of present value for every dollar retained then it's just a question of doing the most intelligent thing that you can find and

you know that is the cost of every deal we do is measured by the second best deal that's around at a given time including more doing more of some of the things we're we're already in and I have listened to cost of capital discussions at all kinds of corporate board meetings and everything else and and you know I've never found anything that made very much sense in it except for the fact that that is what they learned in business school and that's what the Consultants talked about and and and most of the board members would

nod their head without knowing what the hell was going on and that's been my history with the cost of capital now moving on to the Big Ideas you know when you've got a big idea and I can't tell you you know exactly what happens within your nervous system or uh brain at that time but uh we've had a relatively few Big Ideas good ideas over the years I don't know how many you think we've had in aggregate probably in career maybe 25 each you took the top 15 out of Berkshire Hathaway most of you people

wouldn't be here so roughly one every two years yeah one every year or two men sometimes there'll be a bunch of them like in 1973 and four but the problem is for us is that big now really means big I mean it it has to be billions of dollars to to move the needle very much at Berkshire uh but I I would say that when I would turn those pages 50 years ago in the Moody's manuals I would know when I hit a big idea I've got half a dozen of them that I keep the

xeroxes from those reports around uh from 50 years ago just because it was so obvious that they they just they were incredible and that happens every now and then when I met when I met Romer Davidson you know and end of January 1951 and he spent four hours or five hours with me explaining Geico I knew it was a big idea eight months later or probably 10 months later I wrote an article to the commercial Financial chronic on the security I like best it was a big idea when I found Western Insurance Securities I knew

it was a big idea they you know I couldn't put billion millions of dollars into it but I didn't have millions so it didn't make any difference and I we've seen things subsequently and we'll see you know we if we have a normal lifespan we'll see we'll see a few more before we get done but I I can't tell you that uh exactly how I I can't tell you exactly what transpires in my mind that that says uh you know flashes of neon sign up that says this is a big idea what happens with you

Charlie actually one of my well I have a real system my idea of a truly big idea is one I get and I call Charlie and he only says no rather than that's the worst idea I've ever heard of but if he just says no it's a hell of an idea mm-hmm you know the game in our kind of life is being able to recognize a good idea when you rarely get it and uh we're rarely is presented to you and I think that's something you have to prepare for over a long period what is

the old saying that opportunity comes to the prepared mind and I don't think you can teach people and two minutes how to have a prepared mind but that's the game things we learned 40 years ago though will help and recognize the next big idea an on opportunity cost going back to that the current freshman economics text which is sweeping the country has write in practically the first page and it says all intelligent people should think primarily in terms of opportunity cost and that's obviously correct but it's very hard to teach business based on opportunity cost

it's much easier to teach the capital assets pricing model where you can just punch in numbers and outcome numbers and therefore people teach what is easy to teach instead of what is correct to teach it reminds me of Einstein's famous saying he says everything should be made as simple as possible but no more simple write that down interesting question about franchises too I mentioned Campbell's Soup and Kellogg and and you know I I am no expert on that but I would say that that just based on on my general observation over the years is that

the problems there came from two different things I think that the problems when with cereal ready to eat cereal were not so much changes in taster consumption patterns but I think they may just push their push their pricing too far to the point that they they lost market share without getting in without having the molt that they thought they had as opposed to the General Mills cereals and the general food cereals and all of that sort of thing I mean if your pricing really gets out of whack and people regard uh Wheaties or or or

great months in the same categories that write regard Kellogg's Corn Flakes you know you're going to lose share and once you start losing shares it it's hard to get back problems with soup I think relate more to Lifestyle I think that it's become it's a it's a little less uh it fits in a little less well with with uh current Lifestyles maybe than 40 years ago uh soft drinks uh the consumption of soft drinks I don't have the figures here but I would wager that in a hundred and 10 years the per capita soft drinks

has gone up virtually every year throughout that history I mean it it's now 30 close to 30 percent of U.S consumption of of liquids so if the average American has about 64 ounces of liquids a day you're talking about say 18 ounces of that being soft drinks and 43 percent of that 18 or almost eight ounces a day of being Coca-Cola products in other words 1 8 of all the liquid man woman and child of the United States take in comes from Coca-Cola products but that has gone up virtually well throughout the world that's gone

up on a per capita basis you know almost in soft drinks were discovered that people I would say that that trend is almost impossible to reverse on a worldwide basis I mean there's so much potential in countries where per capita consumption it's like well I think it's I don't know maybe eight per capita which is eight ounce servings they talk in terms of 64 ounces a year so you have one 50th of the consumption per capita on Coke products and many in some important countries that you have here I don't I just don't see it

as being now it you can push pricing too far I mean there there comes a point depends on the country in which you're doing it but and it depends even on areas within the country in which you do it but if you establish too wide a differential between uh Coke and and a private label product you will change consumption patterns somewhat not huge but enough so that you don't want to do it but I don't think I don't think you'll see it's interesting coffee's going down every year people talk about Starbucks and all that but

if you look at Coffee consumption in this country if you look at male consumption in the country you know per capita just goes down down down down year after year after year after year and uh I think it's pretty clear what people like to drink once they get used to it and with the price is when I was born in 1930 a six and a half ounce Coke cost a nickel and you put a two two cent deposit on the bottle but forget about that just take the nickel now you buy a 12 ounce can

or a larger product and you're you're paying as you buy it on the weekends at the supermarket specials I'm you're paying maybe a little more than twice per ounce what you were paying in 1930 70 years ago and compare that to the price behavior of almost any product you know that you can find except for all Commodities but compared to cars housing anything and it there's been very very little price inflation in it and I think that's contributed of course to the the growth and per capita's over time Charlie how about cereals and soup well

I think those are examples where the moats got less uh hostile for the competitors part of the trouble was the the buying power got more concentrated and tougher I mean the big grocery chains now have a lot of clout and then you add the Walmarts and the Costcos and the Sams and the it just it's a different world faced by the Kellogg's than the one they had 30 or 40 years ago yeah there will be a battle always between Brands and retailers because the retailer would like his name to be the brand and to the

extent that people trust Costco or Walmart more than they or as much as they trust the brand then the value of having the brand moves over to the retailer from the product itself and that's gone on for a long long time I you know the first I would cases I know about in any real quantity back with a p in the 30s and a p I believe was was the largest food retailer in this country and they were also a big promoter of private labels and Paige I think was was a big private label with

them for example and and they felt they could convince the consumer in the 30s that their brand meant more than having Del Monte on it or or or Campbells or whatever it might be in the different categories and and people thought they were going to win that war for a while but it and who knows I mean I don't know all the variables that went into the amps decline but it was dramatic I mean it was one of it was a great American success story for a while and then it was a great American failure

Charlie the muscle power of the Sam's Clubs and the Costcos has gotten very extreme a little earlier this morning when I was autographing books a very good looking woman came up to me and said she wanted to thank me and I said For What and she said you told me to buy this pantyhose I'm wearing from Costco and evidently made some previous comment about how amazing it was that Costco could be at Haines of all people to allow a co-branded pantyhose Haynes Dash Kirkland in the Costco stores that wouldn't have happened 20 years ago she

must have been pretty desperate as she was consoling with you on where to buy pantyhose okay and we'll start just one second everybody has a chance to get to their seats Charlie has promised to stop tapping the Coke can during this session number two okay I used to have a friend that was a stock salesman many years ago and when you'd have lunch with him he would just keep going like this and finally I would get to you and say what's that and he said that's opportunity [Laughter] he was pretty good okay let's uh Kelly

tells me we should start with uh with number two zone two so we're going to start with zone two yes I'm uh Fred cooker from Boulder Colorado and this is a question about intrinsic value and it's a question for both of you because you have written that perhaps you would come up with different answers you uh write and speak a great deal about intrinsic value and you indicate that you try to give shareholders the tools in the annual report so they can come to their own determination what I'd like you to do is expand upon

that a little bit first of all what what do you believe to be the important tools either in the Berkshire annual report or other annual reports that you review in determining intrinsic value and secondly what rules or principles or standards do you use in applying those tools and lastly how does that process that is the use of the tools the application of the standards relate to what you have previously described as the filters you use in determining your valuation of a company if we could see in it looking at any business what it's future cash

inflows or outflows from the business to the owners or from the owners would be over the next we'll call it a hundred years or until the business is extinct and then could discount that back at the appropriate interest rate well which I'll get to in a second uh that would give us a number for intrinsic value in other words it would be like looking at a bond that had a whole bunch of coupons on it that was doing 100 years and if you could see what those coupons are you can figure the value of that

Bond compared to government bonds if you want to stick an appropriate risk rate in or you can compare one government bond with five percent coupons to another Government Bond with seven percent coupons each one of those bonds has a different value because they have different coupons printed on them businesses have coupons that are going to develop in the future too the only problem is they aren't printed on the instrument and it's up to the investor to try to estimate what those coupons are going to be over time as we have said in high-tech businesses or

something like that we don't know the faintest idea what the coupons are going to be when we get into businesses where we think we can understand them reasonably well we are trying to print the coupons out we were trying to figure out what businesses are going to be worth in 10 or 20 years when we bought See's Candy in 1972 we had to come to the Judgment as to whether we could figure out the competitive forces that would operate the strengths and weaknesses of the company and and how that would look over a 10 or

20 or 30 year period and if you attempt to assess intrinsic value it all relates to cash flows the only reason for putting cash into any kind of an investment now is because you expect to take cash out not by selling it to somebody else because that's just a game of who beats who but by in a sense by what the asset itself produces that's true if you're buying a farm it's true if you're buying if you're buying a business and the filters you described were there are a number of filters which say to us

we don't know what that business is going to be worth in in 10 or 20 years and we can't even make an educated yes obviously we don't think we know the three decimal places or two decimal places or anything what like that what precisely what's going to be produced but we have a high degree of confidence that we're in the ballpark with certain kinds of businesses the fillers are designed to make sure we're in those kinds of businesses we basically use long-term risk-free that's Government Bond type interest rates to think back in terms of what

we should discount at uh and you know that's that's what the game of investment is all about investment is putting out money to get more money back later later on from the asset and and not by selling it to somebody else but by what the asset itself will produce if you're an investor you're looking at what the asset you're looking at what the asset is going to do in our case businesses if you're a Speculator you're primarily focusing on what the price of the object is going to do independent of the business and that's not

our game so we figure if we're right about the business we're going to make we're going to make a lot of money and if we're wrong about the business we don't have any hopes we we don't expect to make money and and in looking at Berkshire we try to tell you as much as possible as we can about our business of the key factors those are the things that Charlie and I what the things we put in our report about those businesses are the things that we look at ourselves so if Charlie had nothing to

do with Berkshire but he looked at our report he would probably in my view he would come to pretty much the same idea of intrinsic value that he would come to uh for being around it and you know for X number of years the information should be there we give you the information that if the positions were reversed we would want to get from you and in companies like Coca-Cola or Gillette or Disney or those kind of businesses you will see the information in the reports you have to have some understanding of what they're doing

but you have that in your everyday activities you'll get that you'll get that kind of knowledge yeah you won't get it you know in terms of some high-tech company but you'll get it with those kind of companies and then you sit down and you you try to print out the future Charlie I would argue that one filter that's useful in investing it's the simple idea of opportunity cost if you have one opportunity that you already have available in large quantity and you like it better than 98 of the other things you see where you can

just screen out the other 98 percent because you already know something better so that people who have a lot of opportunities tend to make better Investments than people that don't have a lot of opportunities and and people will have very good opportunities and using a concept of opportunity costs they can make better decisions about what to buy with this attitude you get a concentrated portfolio which we don't mind that practice of ours which is so simple is not widely copied I do not know why now it's copied Among The Berkshire shareholders I mean all you

people have learned it but it's not the standard in Investment Management even at Great universities and other intellectual institutions very interesting question if we're right why are so many eminent places so wrong there are several possible answers to that question yeah the [Laughter] the attitude though I mean if somebody shows us a business you know the first thing goes through our head is would we rather own this business and more Coca-Cola would we rather own it than more Gillette now we it's it's crazy not to compare it to things that you're very certain of there's

very few businesses that we'll find that we're certain of the future about as as companies such as that and therefore we will we will want companies where the certainty gets close to that uh and then we'll want to figure that we're better off than just buying more of those if every management uh before they bought a business uh and some unrelated field that they might not have even heard of you know more than a short time before that's being promoted to them if they said is this better than buying in our own stock you know

is this better than even buying you know buying Coca-Cola stock or something there'd be a lot fewer deals done but but they don't they tend not to measure uh against what we regard as as close to Perfection as we can get Charlie anyone well I will say this that the concept of intrinsic value used to be a lot easier because there were all kinds of stocks that we're selling for 50 percent or less of the amount at which you could have easily liquidated the whole Corporation if you own the whole Corporation indeed in the history

of Berkshire Hathaway we bought things at 20 percent of of then liquidating value and in the old days the Ben Graham followers could run their Geiger counters over Corporate America and they could spill out a few things and you could easily see if you were at all familiar with the market prices of of whole corporations that you were buying at a huge discount well no matter how bad the management if you're buying it 50 of asset value or 30 percent or so on down you have a lot going for you and uh and as the

world is wised up and as docs have behaved so well for people that stocks generally have gone to higher and higher prices that game gets much harder now to find something at a discount from intrinsic value those simple systems ordinarily don't work you've got to get into Warren's kind of thinking and that is a lot harder I think you can predict the future in a few places best if you understand a few basic ideas that come from a good general education and that's what I was talking about in that talk I gave at the USC

Business School in other words Coca-Cola is a simple company if it's stripped down and analyzed in terms of some Elemental forces majority it's hard to understand Costco either you know I mean there are certain fundamental models out there that do not take you don't have the kind of ability that quantum mechanics requires you just have to know a few simple things and really know them Charlie talks about liquid email you're not talking about closing up the Enterprise but he's talking about what somebody else would pay for that stream of cash too I mean if you

could have looked at a collection of television stations uh owned by a cap cities for example in them in the early well 1974 and it would have been worth we'll say four times what the company was selling for uh not because you'd close the stations but just their stream of income was worth that to somebody else it's just that the marketplace was uh very depressed depressed although like I say on a negotiated basis you could have gone and sold the properties for four times what the the company was selling for and you got wonderful management

and I mean those things happen in markets they will happen again at uh uh but part of part of investing and calculating intrinsic values is if you get the wrong answer when you get through in other words if it says don't buy you can't buy just because somebody else thinks it's going to go up or because your friends have made a lot of easy money lately or anything of the sort you just you have to be able to uh to walk away from anything that doesn't work and and very few things work these days you

also have to work walk away from anything you don't understand which in my case is a big handicap but you'd agree with Joanne that it's much harder now yeah but I would also agree that almost at any time over the last 40 years that we've been up on a Podium we would have said it was much harder in the past but it is harder now it's way harder it the part of part of it being harder now too is is the amount of capital we run I mean if if we were running a hundred thousand

dollars our prospects for returns would be and and we really needed the money our prospects for return would be considerably better than they are uh running Berkshire it's just it's very simple our universe of possible ideas would expand by it a huge Factor we are looking at things today that by their nature a lot of people have to are looking at and and there were times in the past when we were looking at things that very few people were looking at but there were other times in the past when we were looking at things where

the whole world was just looking at them kind of crazy and and that that's a decided help Michael zanga from Danvers Massachusetts that's a town who's missed who's banned Mr Buffett so generously sent to the Rose Bowl Parade last year so you're a very popular guy in my town good morning Mr Buffett Mr Munger Mr Buffett I want to ask you this question last week when I ran into after gillette's annual meeting but I choked so now there's no pressure here goes in the years from my reading in the years from 1956 through 69 you

achieved the best results of your career quantitatively 29 annually against only seven percent for the Dow your approach then was different than now you look for lots of undervalued stocks with less attention to competitive advantage or favorable economics and sold them rather quickly as a capital base grew you switch your approach to buying undervalued excellent companies with favorable long-term economics my question is if you're investing a small sum today which approach would you use well I would use the approach that I think I'm using now of trying to search out businesses that were I think

they're selling at the lowest price relative to the discounted cash they would produce in the future but if I were working with a small amount of money the universe would be huge compared to the universe of possible ideas I work with now you mentioned that 50 6 to 69 was the best period actually my best period was before that was from right after I met Ben Graham in 19 early 1951 but from the end of 1950 through the next 10 years actually returns averaged about 50 percent a year and I think they were 37 points

better than the Dow Peri or something like that but that I was working with a tiny tiny tiny amount of money and so I would pour through volumes of businesses and I would find one or two that I could put ten thousand dollars into or fifteen thousand dollars into that which is ridiculous they were ridiculously cheap and obviously as the money increased uh then the universe of possible ideas started shrinking dramatically the times were also better for doing it in that time but I I think that I think if you're working with a small amount

of money with exactly the same background that Charlie and I have and same ideas same same whatever ability we have you know I think you can make very significant sums but you but as soon as you start getting the money up into the Millions many millions the the the curve on expectable results falls off just dramatically uh but that's that's the nature of it you've gotta you know one you've you when you get up to things you could put millions of dollars into you've got a lot of competition looking at that and they're not looking

as I did when I started when I started I went through the pages of the manuals Page by page I mean I probably went through 20 000 Pages uh in the Moody's industrial Transportation Banks and finance manuals and I did it twice and I actually you know looked at every business I didn't look very hard at some well that's not a practical way to invest tens or hundreds of millions of dollars so I would say if you're working with a small sum of money that and you're really interested in in the business and willing to

do the work you can you will find something if you were there's no question about in my mind you will find some things that promise very large returns compared to what we will be able to uh deliver with large sums of money Charlie well yeah I think that's right a brilliant man who can't get any money from other people is working with a very small something probably should work in very obscure stocks searching out uh unusual mispriced opportunities but you know you could that's such a small world it may be a way for one person

to come up but it's a it's a long slog yeah most smart people unfortunately in Wall Street figured that they can make a lot more money a lot easier just by uh one way or another and um uh getting an override on other people's money or or or uh delivering services in some way that people and the monetization of Hope and greed you know as a way to make a huge amount of money and right now it's very just take hedge funds I mean it's I I've had calls from a couple of friends in the

last month that don't know anything about that investing money they've been unsuccessful and everything else and you know one of them called me the name said well I'm forming a small hedge fund 125 5 million he was talking about like the thought that since it was only 125 million maybe we ought to put in 10 million or something I mean if you looked at this fellow Schedule D on his 1040 for the last 20 years you know you'd think you ought to be mowing lawns but yeah but he may get his 125 million I mean

you know it's it's just astounding to me how willing people are during a bull market just uh just to toss money around because they you know they think it's easy and and of course that's that's what they felt about internet stocks a few years ago they're thinking about something else next year too but uh the the biggest money made you know in Wall Street in recent years has not been made by great performance but it's been by been made by great promotion basically Charlie do you have anything well I would have stated even more strongly

I think the current scene is obscene I think there's too much Mania there's too much chasing after easy money there's too much misleading sales material about Investments there's too much on the television emphasizing speculation in stocks Matthew Monahan from Palo Alto California Mr Buffett Mr Munger first of all I want to thank both of you so for so freely sharing your wisdom and knowledge over the years even though we've never met in person I consider Ebola to be close personal mentors and attribute your teachings and philosophies to any success I've had in business so far

so thank you here's my question for a 23 year old with high Ambitions some initial working capital and a genetic wiring as you call it for disciplines like Investments Mathematics and Technology what do you foresee is the significant areas of opportunity over the next 50 even 100 years and if you were in my shoes what would be your approach and methodology for really learning tackling and mastering these areas of opportunity for the purpose of massive value creation well I I remain very and and frankly when you get the chance to talk to somebody like Lorimer

Davidson as I did was when I was 20 years old I probably learned more from Laura Marr Davidson in those four or five hours than I learned in in college with the you know exception of learning some accounting or one or two subjects like that so you just want to soak it up if you have those qualities you talked about you'll see the areas as you go along I mean we have Charlie and I probably you know we've made money in a lot of different ways some of which we didn't anticipate you know when we

were 30 or 40 years ago but we did have the ability to recognize some we didn't have the ability to recognize others but we did know when we knew what we were doing and when we didn't and we just kept looking we had a curiosity about things you would know at a time like the long-term Capital Management crisis for example that there were going to be ways to make money I mean it just was they were going to be out there and all you had to do was just read and think uh eight or ten

hours a day and you were going to cover a lot of possibilities probably a very high percentage of them good and it's and some of them sensational so you can't really lay it out ahead of time you can't you can't have a you can't have a defined road map but you can have a reservoir of thinking looking at different kinds of businesses looking at different kinds of Securities looking at markets in different places and you will then spot a reasonable number of things that come along you won't spot every one of them we've missed all

kinds of things but the biggest thing too is to have something in the way you're programmed so that you don't ever do anything where you can lose a lot I mean our best ideas have not been better than other people's best ideas but we've never had a lot of things that pulled us way back so we we never went two steps forward and one step back we probably went two steps forward in a fraction of a step back but but it uh avoiding the catastrophes is a very important thing and it will be important in

the future I mean you will have your chance to participate in catastrophes Charlie yeah and of course the place to look when you're young is in the inefficient markets you shouldn't be trying to guess whether you know one drug company has a better drug pipeline than another you want to go when you're young someplace that's very inefficient me trying to guess whether the stock market is going to go up or whether long-term bonds are going to change in yield I mean you don't have anything to going in that kind of a game but you can

have a lot going in in in in games that very few people are are playing and maybe where they're even got their heads screwed on wrong in terms of how they're thinking about the subject the RTC was a great example of a chance to to make a lot of money I mean here was a seller of ten hundreds of billions of dollars worth of real estate where the people that were selling it had no economic interest in it were eager to wind up the thing you know and they were selling at a terrible time when

the people who had been Ventures cement and lending were no longer lending the people who have been venturesome in in the equity end of real estate had gotten cleaned out so you had a great background of environment and then you had you had an imbalance of intensity in terms of analyzing situations between the seller which was the government with a bunch of people who had no economic interest in it were probably eager to wind up the job and buyers on the other side who were of the generally cautious type because the more Ventures some time

it had taken themselves out of action so and there were huge amounts of property so you get these opportunities and you'll get more I mean it there won't be any scarcity of opportunities in in your life although it would be days when you feel that way yes uh hi Mr Buffett Mr Monger this is uh Whitney Tilson a shareholder from New York for many years both of you have been warning about the dangers of derivatives at one point calling them Financial weapons of mass destruction uh yet every year tens of trillions of dollars of derivatives

are bought and sold it just seems to be getting bigger and bigger and almost certainly improperly accounted for and so I was wondering if you could comment uh if specifically if you have any thoughts on how much longer this might go on do you see anything imminent that could derail this ever inflating bubble what might trigger it and who should be doing what to try and mitigate this looming Danger well we've tried to do a little to mitigate it ourselves by talking about it but the you're right that and it isn't the derivative of itself

and there's nothing evil about a derivative instrument as I mentioned we we have 60 some of them at at Berkshire and on Monday I will go over the directors with the directors I'll go over all 60 some and believe me we'll make money out of those particular instruments uh but the usage of them on an expanding basis more and more imaginative ways of using them introduces essentially more and more leverage into the system and it's an invisible or largely invisible sort of Leverage if you go back to the 1920s uh after the crash the United

States government held hearings they decided that leverage margin in those days that they call leverage contributed to perhaps the crash itself and certainly to the extent of the crash and it was like pouring gasoline on a fire was When people's Holdings got tripped you know when stocks went down 10 percent people had to sell another 10 more people had to sell and so on leverage was regarded as dangerous in the federal and the United States government empowered the Federal Reserve to regulate margin requirements regulate leverage and that was taken very seriously and for decades it

was a a source of real attention if you went to a bank and tried to borrow money on a stock they may just sign certain papers as to you weren't in violation of the margin requirements and they policed it and it was taken quite seriously when the FED increased or decreased margin requirements it was a signal of Love they felt about the level of speculation well the introduction of of derivatives and index future all that sort of thing uh it's just totally made any regulation of margin requirements a joke they still exist and the you

know it's it's a it's an anachronism so I believe I think Charlie probably agrees with me that we may not know where exactly the danger begins and where and at what point it becomes a super danger and so on we certainly don't know what will end it precisely we don't know when it will end precisely but we probably at least I believe that it will go on and increase to the point where at some point uh there'll be some very unpleasant things happen in markets because of it you saw one example uh of what can

happen under four sales uh back in October 19 1987 when you had so-called portfolio Insurance well now portfolio insurance and you ought to go back and read the literature for the couple years preceding that I mean this was something that came out of Academia and it was regarded as a great advance in financial theories and everything it was a joke it was a bunch of stop-loss orders which you know go back 150 years or something except that they were done automatically and in large scale by institutions and they were merchandise people paid a lot of

money to people to teach them how to put in a stop-loss order and what happened of course was that if you have a whole series of stop-loss orders by very big institutions you are pouring gasoline on on fire and when October 19th came along you had a 22 shrink in the value of American Business caused essentially by a Doomsday Machine a dead hand was selling as each level got hit and three weeks earlier you know people were proclaiming the the beauty of this well that is nothing compared it was a formal arrangement to have these

this Dynamic hedging or portfolio Insurance uh sell things but you have the same thing existing when you have fund operators operating with billions in in aggregate trillions of dollars leveraged who will respond to the same stimulus they have what is they have what we would call a crowded trade but they don't know it it's not a formal crowded trade it's just that they're all ready to sell if a certain given signal or certain given activity occurs and when you get that coupled with extreme leverage which derivatives allow you will someday get a very very chaotic

situation I have no idea when I have no idea what the exogenous factor I didn't know that shooting some Archduke you know would start World War one and I have no idea what will cause this kind of a thing but it'll happen trying yeah and of course the the accounting being deficient enormously contributes to the risks if you get paid enormous bonuses based on reporting profits that don't exist you're going to keep doing whatever causes those phony profits to keep appearing on the books and and what makes that so difficult is that most of the

accounting profession doesn't even recognize how stupidly it is behaving and one of the people in charge of accounting standards said to me well this is better this derivative accounting because it's Mark to Market and don't we want current information and I said yes but if you marked a model and and you create the models and your accountants trust your models and you can just report whatever profit you want as long as you keep expanding the positions bigger and bigger and bigger the way human nature is that will cause terrible results and terrible Behavior and this

person said to me well you just don't understand accounting if four years ago or whenever it was when we started to liquidate Henry's portfolio we we had it we had reserves set up for in the hundreds of Millions with and all sorts of sorts of things and our auditor and I emphasize any other of the big four Auditors absolutely would have attested to the fact that our stop was marked to Market you know I just wish I'd sold the portfolio to the Auditors that day maybe 400 million better off so it it's a real problem

now there's one thing that's that's really quite interesting to me you know if if I owe you on my dry cleaning bill or something 15 and they're auditing the dry cleaners they check with me and they find out that I owe you fifteen dollars and it's all fine if they're auditing me they find out that I owe the dry cleaner 15 bucks there are only four big auditing firms you know basically in this country and I will and so in many cases if they're auditing my side of the derivative transaction you know what I'm valuing

it at the the same firm May often be value at valuing or attesting to the value of the of the mark by the person on the other side of the contract I will guarantee you that if you add up the marks on both sides they don't they don't equate out to zero we we have 60 some contracts you know and I will bet that people are valuing them differently on the other side than we value them themselves and it won't be to the disadvantage of the trader on the other side I don't get paid based

on how ours are valued so I've got no reason to want to game the system but there are people out on the other side that do have reasons to gain the system so if I'm valuing some contract at plus a million dollars for Berkshire that contract on the other side is just one piece of paper should be valued at a minus one million by somebody else but I think you probably have cases and this is I'm going to talk about our Auditors I'm talking about all four of the firms but they have many cases where

they are attesting the values that of the exact same piece of paper where the numbers are widely different on both sides you have any thoughts on that Charlie sure as God made little green apples this is going to cause a lot of trouble in due course as long as it keeps expanding and ballooning and so on and the convulsions are minor it can just go on and on but eventually there will be a big a big denomo my name is Ethan Berg I'm from Cambridge Massachusetts and I'd like to thank you for the education you've

provided particularly with the annual reports I've got three brief questions years ago you wrote to your friend Jory orange the you applying to Columbia's business school because they had a pretty good finance department and a couple of hot shots in Graham and Dodd if you're considering graduate or business school today with which individuals or professors would you want to study second question is a friend who wants to know your thoughts on the concrete cement and Aggregates business and the third question is from my wife you mentioned earlier if someone were buying a parachute they wouldn't

buy based on lowest bid we saw you touring around in a car this week that were to be bought today could probably be bought at a relatively low bid as someone interested in your health she's wondering whether you've considered a newer automobile possibly one with lots of airbags actually I picked out the car I have based on the fact that had airbags on both sides so that that was a that was a factor and maybe the first garbage type ever made with airbags but I think I think I I I think my car actually it's

both heavy and has airbags and and that those are two primary factors in safety I don't think any any any uh I don't think it's safer car is necessarily being made it might be safer to drive around in a big heavy duty truck or something but I'm not ready for that uh the uh incidentally on a car I look at that like anything else it would take me probably a half a day to go through the you know the exercise of buying a car and reading the owner's manual and all that and that's just a

half a day I don't want to give up in my life for for no benefit uh you know if if I could if I could write a check in 30 seconds and be in the same position I'm in now with a newer car I'd be glad to do it this afternoon but I I don't like to I don't like to trade away when there's really no benefit to me at all I'm totally happy with the car I'm I just don't want to trade away the the amount of time I'd have to spend fooling around to

get familiar with the and get title to and do all the things rest of the things pick one out saw a new car but if there's a safer car made you know I'll be I'll be driving in it um the the uh the Aggregates business concrete all of that those are businesses and Charlie probably knows more about them than I do we've looked at businesses like that in fact we've even owned a few shares at one time or another because it's an understandable business and in it's a business that well particularly if you get into

concrete cement I mean you know there have been periods of substantial over capacity particularly on a regional basis but but those are fundamental businesses and and at a price you know for low cost capacity and uh advantageously located raw materials and so on um you know we would do in fact Charlie and I look talked about one probably 10 or 15 years ago quite a bit uh and he's had fair amount of familiarity with it uh and what was the other one I jotted it down here let's see he wanted to know what business school

all Business Schools yeah well I would I would say this that that uh I think Bruce Bruce greenwald's class at Columbia is very good he gets in a lot of people that uh that uh our practitioners so there's a lot of practicality to the course and I think Bruce is good he's got a new book coming out that that uh probably within the next six months or so that that we'll deal with that and then they're also been a uh endowed at the University of Florida certain courses relating to Value investing and I think there's

been one at the University of Missouri so I would suggest you at least check out the curriculum at the University of Missouri in Columbia and and Florida and uh and do a little comparison and maybe check with a few graduates recent graduates as to what kind of experience they had that I think you can if you can find them I think that's the best the best system for evaluating a place but those three at least have courses that based on the on the catalog sound sound like uh uh they might be of interest to you

Charlie yeah a huge majority of the business school teaching on the field of investment of passive portfolios of securities is not what we believe and not what Warren was taught Years Ago by Ben Graham and they're just little pockets of of our attitude left there's one at Stanford Jack McDonald yeah sure and uh yeah that's graduate school he's a graduate school and what's interesting about that is I think it's the most popular course in the whole Stanford Business School they've got some kind of a bidding system and yet I asked Jack how he felt and

he's he said he felt lonely he's got the most popular course but in the whole professoriat dealing with investment matters the Jack McDonald's are a little clan of their own and a in a side pocket so to speak now they're right and they can take whatever consolation they get from that but but mostly if you go to a business school you will learn a lot of things we don't believe yeah Jack um Bob Kirby comes in and works with Jack sometimes too and you couldn't and Bob has got a terrific mind in terms of investment

so that I mean there's no question about that if it you know it's not the easiest School in the world to get into and and it is at The Graduate level but there are these occasional uh little anomalies as they would say uh in in the teaching world I mean what you really want a course on investing to be is how to value a business that's that's what the game is about I mean if you don't know how to value a business you don't know how to value a stock and if you look at what

is being taught uh I think you see very little of how to value a business and and the rest of it is playing around maybe with numbers or you know uh Greek symbols or something of the sort but but it doesn't do you any good I mean then you have to decide you know whether you're going whether you're going to value a business at 400 million dollars or 600 million dollars or 800 million dollars and then you compare that with the price and that's that's what investing is and I don't know any other kind of

investing you know basically to do and there's that just isn't taught and the reason it isn't taught is because there aren't teachers around you know who know how to teach it I mean they don't know themselves and since they don't know themselves they teach something that says nobody knows anything and which is the efficient market theory and if I didn't know how to do it if I ever teach physics I'm going to come up with a theory that nobody knows anything because it's the the only only way I can get through the day you know

but uh it's fascinating to me I'll I'll uh how the you know the really great universities operate in this respect they uh uh if you get a sacred writ I mean you get in the finance department because you sign on you know to whatever the present group thinks and if they think the world is flat you better think the world is flat too you know and your students better answer the world's flat when they got a on exams listen I I would say investment Finance teaching in this country is is uh in general is kind

of pathetic well I think the Business Schools do a pretty good job when it comes to accounting or or personnel management or or a whole lot of subjects I think they do quite well with but they miss one enormous opportunity if you learn to think intelligently about how to invest successfully in businesses you'll become a much better business manager than you will if you aren't good at uh understanding what's required for successful investment so they're missing a huge opportunity to improve the management profession by doing such a lousy job in teaching investment you see Charlie

and I see CEOs all the time who who in a sense don't know how to think about the value of businesses they're acquiring and then you know so they go out and and hire investment bankers and guess what the investment banker tells them what to do it tells them to do it because they get 20x if they do it and X if they don't do it and guess how the advice comes out so it it's uh when a manager of a business feels helpless which you won't say out loud but but inwardly feels helpless in

in the question of asset allocation you know you've got a real problem and and their art they have not gone to business schools that have given them any real help I think in in terms of learning how to think about valuation in businesses and that's one of the reasons that the we write and talk about it some because it's there's a gap there when you try and you've got a wonderful business and you is your shares in it to buy another business I I say at least two times out of three it's a terrible idea

well Geico is a great example Geico is a wonderful business uh absolutely wonderful it's more Wonderful by the day has the world's best manager Tony nicely running it Geico in the last 20 years went into three at least three other insurance businesses I can think of they went into Resolute insurance which was a reinsurance operation started in the mid 80s it was a disaster they went into two others Southern something or other and another one that started with an M you know they I don't know why in the hell they would go into them I

mean they had a great great Insurance business and there aren't that many great Insurance businesses and that neither one of those amounted to anything I think there's you know they sold them off at some point but why would you have an absolutely wonderful business and and start one and buy two others that are obviously mediocre where you bring nothing to the party but Management's it's it's it's very human to want to do that it's no it's no great sin that the Geico management did it because we see it happen Time After Time After Time I

can tell you this Charlie and I have no urges like that I mean we want to buy easy things we do not have to prove our manhood by doing something terribly difficult and I think a lot of managements feel that necessity they've got a wonderful business the cigarette companies did that cigarette companies had these great businesses and you know they it it irritated them that they uh they they like to think they were business Jesus said so they would go out and buy other things and those other businesses generally did not do that well I'm

not saying they should have been in the cigarette business in the first place but they were not business Geniuses because they got to make a lot of money selling an addictive you know product that did not make them business Geniuses and so they wanted to prove it other ways and they they bought businesses and fell on their face in many cases Charlie do you have any more to add on cigarette coming no but I think a lot of people rise to the top in in public we held corporations who come up in sales or organize

you know engineering or drug development or what have you and it's natural to assume once you're sitting in the top chair that now you know pretty much everything or at least how to get wisdom out of this wonderful staff and all these outside advisors that are now available to you and so I think it's very natural at perfectly terrible acquisition decisions get made I'd say more often than not area six yeah we had a break in about five minutes well in fact we'll do this question then we'll break okay my name's Paul thomasic from Illinois

I'd like to talk about your thinking if you don't mind in the Fortune magazine article that you sent to all the shareholders you referenced a practice by Darwin that when he found something that was contrary to his established conclusions he quickly wrote it down because the mind would have pushed it out and if you read the Origin of Species Darwin's very careful to avoid fooling himself he very carefully asked and answers the hard questions it's a feedback mechanism and you've picked up on one of his feedback mechanisms to avoid fooling yourself so the two questions

are this if you look at model how you think Charlie thinks how physicists thinks how mathematicians think you see the same pattern you want to use logic you're dedicated to logic but logic's not enough you have to avoid fooling yourself so you build feedback mechanisms so the first question is do you see it that way that you're thinking just like mathematicians physicists and some of the other exceptional businessmen by being logical and being careful to have feedback mechanism and the second question is about other feedback mechanisms your partnership sitting next to you is is a

great feedback mechanism it's hard to fool yourself when you partner with Charlie Munger right this meetings are hard to fool him too but that's not an accident um the meeting on one levels of feedback mechanism the way you attack the annual report letter is a feedback mechanism so could you comment both of you on other feedback mechanisms you develop thank you well you've come up with two very good ones I mean there's no question that that Charlie will not accept anything I say because I say it uh whereas a lot of other people will you

know I mean it's just the way the world Works they and it's it's terrific to have a partner who will uh uh say you know you're not thinking straight uh it doesn't happen very often the there's no question the human might what the human being is best at doing is interpreting all new information so that their prior conclusions remain intact I mean that is that is a talent everyone seems to have mastered and and how do we guard ourselves against it well we don't we don't achieve it perfectly I mean Charlie and I have made

big mistakes because in effect we have been unwilling to uh to look afresh at something uh uh you know that happens but we do have I think the annual report is a good feedback mechanism I think that reporting on yourself and particularly being reported honestly whether you do it through an annual report or do it through some other mechanism is is very useful but that I would say a partner who is not subservient and who himself is extremely logical you know it's probably the the best mechanism you can have and I would say that I

on the contrary to get back to looking things you have to have to uh be sure you don't fall into I would say the typical corporate organization is designed so that the CEO uh opinions and biases and previous beliefs are reinforced in every possible way I mean uh having staffs around you that know what you want to do uh you are not going to get a lot of uh you're getting a lot of contrary thinking I mean most most staffs if they know you want to buy a company you're going to get a recommendation whatever

your hurdle right there but it's 15 internal rate of return which very few deals ever work out at you know or 12 or you're gonna they're gonna come back and and they're going to come back with whatever they feel that you want and if you arrange your organization so that you basically have a bunch of uh you know sycophants who are are cloaked in other you know uh titles uh you're not going to get you're going to leave your prior conclusions intact and you're going to get whatever you go in with your biases wanting and

the board is not going to be much of a check on that uh uh I've seen very very few boards that can stand up to the CEO on something that's important to the CEO and just say you know you're not going to get it so I you've hit on a terribly important point that uh you know all of us in this room want to read new information and have it confirm our cherished beliefs I mean it is just built into the the human system uh and that can be very expensive uh in the investment and

business world and like I say I think we've got a a pretty good system uh and I think that most of the systems aren't very good that exist in Corporate America uh uh to avoid falling in the Trap you're talking about Charlie yeah I think it also helps to be willing to reverse course even when it's quite painful as we sit here I think Berkshire is the only big Corporation in America that is running off a derivative book and we originally made the decision to allow the general red derivative book to continue it's a very

unpleasant thing to do to reverse that decision yet we're perfectly willing to do it nobody else is doing it and yet it's perfectly obvious at least to me to say that derivative Accounting in America is a sewer is an insult to sewage yeah yeah I would I would I would second that I might not have chosen those exact words and we may not even use those words in describing why we got out of it but uh um yeah and and in the first in the first quarter of this year uh will show quite a bit

of income and anything we say here we ought to put on the internet Mark but I think we'll show what a hundred and I don't know 60 million or something like that of Financial or maybe it's 140 I'll take a look here uh yeah what about 160 odd million of of income in that funny little line we have from financials uh income but that will be after an 88 million dollar loss in terms of getting the first steps of getting out of the general General re uh what used to be called General refinancial products derivative

book you know those losses were there uh I mean some of that is the shutdown loss 30 odd 30 million or thereabouts is severance pay and that sort of thing but the truth is that derivative accounting is absolutely terrible in this country and there are a lot of companies that will not want to face up to what would be involved if they actually got out now you're seeing derivative accounting Unwound at Enron in a very major way and believe me it's not being unwounded to profit except to the extent of the bankruptcy court lets them

disaffirm certain contracts and I mean it is that there was no place where there was as much potential for phoning numbers uh uh at a place like Enron then in the derivative kind of they were marking the model they were doing all these things you give a whole bunch of Traders the ability to create income by putting Little Numbers down on a piece of paper that nobody can really check and it you know it just it's it can get out of control uh it will get out of control and so we we decided finally to

bite the bullet on it and we get out of it and it would incidentally we would not have reported 88 million dollars of loss if we'd stayed in it might have reported a tiny profit or something but but uh in the end you know the loss was there and there there will be there could well be some more to come in that because once you get into derivatives I think our longest contract may run 40 years or something like that and then the guy who put the 40-year contract on the book probably got paid you

know that week for putting it on virtually and uh you know we've got a bunch of assumptions as to how it's all going to work out over 40 years it it you couldn't devise a worse system and uh in the end you know we didn't want to be in the business when we got in it and we we're now in the process of getting out but you don't get out of fast out fast of something like this I mean it the uh uh you know it's a little it's a little like hell it's easy to

get into and it's hard to get very hard to get out of them well with that we'll go off to lunch and I'll see you here in another half hour or so thanks [Applause] hello Mr Buffett Mr Munger my name is James Claus from New York City and I just wanted to ask you a question both you and Mr Munger have repeatedly said that you don't believe that business valuation is being taught correctly at our universities and as a PhD student at Columbia business school that troubles me understandably because in a couple of years I'll

be joining the ranks with those teaching business valuation my question isn't what sources such as Graham or Fisher or Mr monger's talks you would Point people that are teaching business valuation to but do you have any counsel about the techniques of teaching business valuation well I I was lucky I had a sensational teacher in Ben Graham and we had a course there there's at least one fellow up in the audience here that attended with me and and Ben made it terribly interesting because what we did was we walked into that class and we valued companies

and he had various little games he would play with us sometimes he would have us evaluate company a and Company B with a whole bunch of figures and then we would find out that A and B with the same company at different points in its history for example and then there were a lot of little uh games he he played to get us to think about what were the key variables and you know how could we go off the track I remember one time Ben met with uh with Charlie and me and about nine or

so other people down in San Diego and in 1968 or so and he gave gave all of us a little true false test and we all thought we were pretty smart and we all flunked but that was his way of teaching us that teaching us that a a smart man playing his own game and and working at fooling you could do a pretty good job at it but I would you know if I were teaching your course on investments there would be simply one valuation study after another with with the students trying to identify the

key variables in that particular business and uh evaluating how predictable they were first because that is the first step if something is not very predictable forget it you know you don't have to be right about every company you have to make a few good decisions in your lifetime but then when you find the important thing is to know when you find one where you really do know the key variables which ones are important and you and you do think you've got to fix on them where we've been where we've done well Charlie and I made

a dozen or so very big decisions relative to net worth but not as big as they should have been and we've known we were right based on those going in I mean they did they just weren't that complicated and we knew we were focusing on the right variables and they were dominant and we know that even though we couldn't take it out to five decimal places or anything like that we we knew that in the general way we were right about them and that's what we look for the fat pitch and that's what I would

be teaching trying to teach students to do and I would not try to teach them to think they could do the impossible Charlie yes if you're planning to teach business valuation and what you hope to do is uh teach the way people teach real estate appraising so you can take any company and your students after studying your course will be able to give you an appraisal of of that company which will indicate oh really it's future prospects compared to its uh market price I think you're attempting The Impossible you're probably on the final exam I

would I would take an internet company and I would say the final exam the question is how much is this worth and anybody that gave me an answer I would flunk right [Applause] make grading papers easy too my name is Phil Young from LA California Mr Warren Buffett Mr I am one of the poor persons who highly admire you both I have two questions question one you of you on World Financial business involvement in the next decade question two U.S position for economic competition in the next decade thank you well you've asked two big questions

but but you're going to get very small answers I'm afraid and that's no disrespect but we we just we don't have that we don't think about those things very much we we just we just are looking for decent businesses and incidentally our views in the past wouldn't have been any good on those subjects and we try to we try to think about two things we try to think about things that are important and things that are knowable now there are things that are important that are not knowable in our view those two questions that you

raised fall on that there are things that are knowable but not important we don't want to cut our minds up with those so we're we say what is important and what is knowable and what among the things that fall within those two categories can we translate into some kind of an action that is is useful for Berkshire and and we really there are all kinds of important subjects that Charlie and I we don't know anything about and and therefore we don't think about them so we have our view about what the world will look like

over the next 10 years in in business or competitive situations we're just no good we do think we know something about what Coca-Cola is going to look like in 10 years or what your what's going to look like in 10 years or what Disney's going to look like in 10 years or what some of our operating subsidiaries are going to look like in 10 years we care a lot about that we think a lot about that we want to be right about that we're right about that the other things get to be uh you know

they're they're just they're they're less important and and if we started focusing on those we would miss a lot of big things I've used this example before but Coca-Cola went public and I think it was 1919. and the first year one share costs forty dollars the first year it went down a little over 50 at the end of the year it was down to 19 there were some problems with bottler contracts there's problems with sugar various kinds of problems if you'd had perfect foresight you would have seen the world's greatest depression staring you in the

face when when the social order even got questioned you would have seen World War II you would have seen atomic bombs and and hydrogen bombs you would have seen all kinds of things and you could always find a reason to postpone uh why you should buy that Shira Coca-Cola but the important thing wasn't to see that the important thing was to see if they were going to be selling a billion eight ounce servings of beverages a day this year or some large number and that the person who could make people happy a billion times a

day around the globe ought to make a few bucks off doing it and so that forty dollars which went down to 19 I think with dividends reinvested has to be well over five million dollars now and if you developed a view on these other subjects that in any way forestall do acting on this more important specific narrow view about the future of the company uh you would have missed either missed a great ride so that's that's the kind of thing we focus on Charlie yeah we're not predicting the currents that will come just how some

things will swim in the currents whatever they are good morning my name is Ronald Towell I'm from Brooklyn New York I'm very uh appreciative of your graciousness as a host for this wonderful weekend my question has to do with the [Applause] my question has to do with the retailing industry particularly the department stores and mass merchants my question has two parts without resorting to comments about specific companies may I ask your opinion as to the long-term prospects for growth and profitability of this Industry Group the second part of my question is given the fact that

it is difficult to pick up a newspaper or to be an investor without being bombarded by what is purported to be the potential for exponential growth in the internet E-Business particularly directly to Consumers which could possibly eat into the revenues of these retailers and if even if we assume a relatively low impact of say five to ten percent Revenue reductions and given the fact that Top Line growth is critical to any business especially the bricks and mortar retailers with their High proportions of fixed overhead what advice could you give to a CEO of such a

company and in turn based on the preceding scenario what would be your opinion of the medium and long-term prospects for this industry well that's a good question too and obviously the internet is going to have an important impact on retailing it will have a huge impact on some forms of retailing change them in maybe revolutionize them I think there's some other areas where the impact will be less but anytime we buy into a business and anytime we bought in for some time we have tried to think of what that business is going to look like

in 5 or 10 or 15 years and we recognize that the internet in many forms of retailing is likely to pose such a threat that we simply wouldn't want to get into the business I mean it not that we can measure it perfectly but but there are a number of retailing operations that we think are threatened and we do not think that's the case in Furniture retailing and we have three very important operations there we could be wrong but uh so far that you know that would be my judgment that furniture retailing will not be

hurt you've seen other forms of retailing where you're already starting to see some inroads being made but but it's just started the internet is going to be a huge force in many Arenas but it'll certainly be a huge Force in retailing now it may benefit us in certain areas I would expect the internet to benefit abortiones in a very big way and you noticed in the in the movie that we talked about borsheims.com coming online in in May there's something up there now but you'll see a new format uh within a month or so now

you might say in in jewelry retailing you know with millions of things that you can click onto 10 years from now you know who is going to be important in terms of online uh retailing of jewelry I would argue that that two firms have a an enormous Advantage going in I would argue that Tiffany has such an advantage we don't own any Tiffany but I would say that because of their name brand names are going to mean very very much when you have literally you know thousands and thousands of choices people can't they have to

trust somebody and I think that Tiffany has a name that that people would trust and I think borsheim's has a name that people with trust and borsheim sells jewelry a whole lot cheaper than Tiffany so I would say that that people who are price conscious but also want to deal deal with a jeweler that they trust implicitly will find their way to to uh to borsheims in increasing numbers uh over the internet and I would say that people that like the blue box you know are going to find their way to Tiffany's uh over time

and they'll pay more money but I don't see them going for Brand X in buying Fine Jewelry over the Internet so I think that with the brand that borsheims has and with with the careful nurturing of that brand I I would say that the internet offers borsheims a chance to have the advantage in cost that comes from a huge one-store location and yet also go into the homes of people in in every part of the world and uh that kind of a company should prosper um there are other of our companies I worry about you

know I can worry about them being heard in various ways Geico is a is going to be a big beneficiary of the internet we already are developing substantial business through it but I I if I were to buy buy into any retailing business whether I was buying the stock of it or buying the whole business I would think very hard about what people are going to be trying to do to that business through the internet and and you know it affects it affects real estate that is dedicated to retailing and if you uh substitute five

percent of the retail volume uh uh via the Internet where real estate is essentially free they're they're you know you can have a store in in every in every town in the world through the internet without having any rental expense uh so I would be think I would I would give a lot of thought to that if I were if I were owning a lot of retail a rental space Charlie well I think it is uh tricky predicting that technological change either will or won't destroy some business when I was young the department stores had

a bunch of sort of monopolistic advantages a they were downtown where the streetcar lines met B they had sort of a monopoly on extending revolving credit and D they had one stop shopping and all kinds of weather and nobody else did and they lost all three of those advantages and yet they've done well a lot of them for many decades since at other times you get a change and you just get destroyed our trading stamp business was destroyed by changes in the economic world and our world book business has been seriously hurt by the personal

computer and the CD-ROM and so forth yeah I agree it's a big risk but it's it's not easy to uh to make predictions in which you have great confidence if you go down to 16th and Farnam area where the streetcar tracks used to cross that was the that was the best real estate in town and and people sign 100 Year 50-year leases on it and it it looked like there was nothing more safe because they weren't going to move the streetcar lines the only thing was that they moved the streetcars they just took and converted

them into junk and it seemed very permanent the advantage of the big department store the Marshall Field in Chicago or the Macy's in New York was this incredible breadth of merchandise you could go and you could find 300 different types of spools of thread or 500 different you can see 500 different wedding dresses or whatever and you had these million square foot and even 2 million square foot downtown stores and they were these huge emporiums and then the shopping center came along and of course the shopping center created in effect a store of many stores

and so you had millions of square feet now and and but you still had this incredible variety being offered the internet becomes a store in your you know in your computer and it has an incredible variety of of offerings too some of them don't lend themselves very well it seems to me too the retailing and and you know and others do uh uh but Charlie's right it it it's hard to predict exactly how it will turn out I would expect I would expect you know automobile retailing to change and in some important ways and in

part in in very significant part influenced by the internet but I wouldn't you know I can't predict exactly how that will happen but uh I don't think it'll look the same 10 or 15 years from now zones good morning my name is Jad Corey I'm from Gaithersburg Maryland I just want to thank you for sharing your wisdom and my question is um what criteria do you use to sell stock I kind of understand how you buy it but I'm not sure how you spell yeah well the best thing to do is buy a stock that

you don't ever want to sell I mean that and that's what we're trying to do uh and that's true when we buy an entire business I mean we've bought all of Geico we bought all of C's candy or the Buffalo news we're not buying those to resell I mean what we're trying to do is buy a business that we will be happy with if we own it the rest of our lives and we expect to with those it's the same principle applies to marketable Securities you get extra options with marketable Securities you can you you

can add the Holdings obviously easier we can never own more than 100 of a business but if we own two percent of a business and we like it at a given price we can add and have four or five percent so that's that's a that's an advantage sometimes if we if we need money to move to another sector like we did last year we will trim from some Holdings but that doesn't mean we're negative on those businesses at all I mean we think they're wonderful businesses or we wouldn't own them and we would sell uh

a if we needed money for other things the Geico stock that I bought in 19 51 I sold in 1952 it was you know went on to be worth 100 or more times before the 1976 problems 100 or more times what I'd paid but I didn't have the money to do something else so you sell if you need money for something else you may sell if you believe that valuations between different kinds of markets are are somewhat out of whack and uh you know we we have done a little trimming last year uh uh in

that matter but that will be a mistake I mean the real thing to do with a great business is just hang on for dear life Charlie yes but this the sales that do happen the ideal is when you found something you like immensely better isn't that obvious that's the that's the ideal way to sell and incidentally the ideal purchase is defined as is to have something that you already like be selling at a price where you feel like buying more of it I mean that uh we probably should have done more of that in the

past and in some situations but that's the beauty of marketable Securities you really do if you're in a wonderful business you do get a chance periodically maybe to double up in it or something to sort uh if if the market the stock market would sell a lot cheaper than it is now we would probably be buying more of the businesses that were all we that we already own that they would certainly be the first ones that we would think about they're they're the businesses we like the best really nothing more okay Charlie and I I've

thought about options all our life I mean my guess is Charlie was thinking about that and in grade school and uh um you know and I I mean you have to understand you don't have to understand Black Shoals at all but you have to understand uh uh the utility uh and in a general sense the value of options and you have to understand the cost of issuing options which is very unpopular subject in certain quarters any option has value I mean I bought a house in 1958 for thirty one thousand five hundred dollars and let's

assume the seller of that house has said to me I'd like an option on it good in perpetuity at two hundred thousand dollars well that wouldn't have seemed like it cost me much if I'd given it to him but an option has value any option has value and that's why some people who are uh you know kind of slick in business matters sometimes get options for very little or for nothing uh I'm talking about stock options I'm just talking about an option to purchase anything they got options for far less than really a market value

would be Black Shoals is an attempt to measure the market value of options and it cranks in certain variables but the most important variable that cranks in that that might be subject uh well might be a case where if you had differing views you could make some money but it it it it's based upon the past volatility uh uh of the asset involved and past volatilities are not the best judge a value I mean if you looked at a at a five-year option at Birch on Berkshire stock at various times Berkshire stocks had a fairly

low beta as they call it the betas is a measure that people in Academia always like to give Greek names or things that are fairly simple and so that they have sort of a priesthood you know so it's you know it's like priest talking in Latin or something I mean it it it kind of cows the the laity but they beta is a measure of past volatility Berkshires had a low volatility but that didn't mean that the option value of it to anybody that really understood the business was low than than a stock with a

higher beta and I think Charlie what Charlie said is that last year is that over that for longer term options in particular uh Black Shoals can give some silly results I mean it it misprices things but it's a mechanical system and any mechanical system in Securities markets is going to misprice things from time to time and that's we we made one as I mentioned last year we made one large commitment that basically was uh uh had somebody on the other side of it using Black Shoals and using market prices took the other side of it

and we made 120 million dollars last year and we love the idea of other people using mechanistic formulas to price things because they may be right 99 times out of 100 but we don't have to play those 99 times we just play the one time when we have a differing View Charlie you want to comment on yeah Black Shoals is a what I would call an a no-nothing value system if you don't know anything at all about value compared with price in other words if if if price is teaching you all that can be known

then Black Shoals on a very short-term basis is a pretty good guess you know for what a 90-day option may be worth in some stock or another the minute you get into longer term options where you don't have the know nothing Factor so extreme it's crazy to use Black Shoals people use it just because they want some kind of a mechanical system but at Costco for instance with a fairly short period we issued stock options at 30 and we also issued stock options at 60. and Black Shoals valued the options we issued at 60. was

a strike price way higher than me options we issued a 30. well this is insane but we like a certain amount of insanity yeah well it's good for Warren who picked up this extra 120 million dollars but and so he he's he's founder of this kind of insanity than I am no we will pay you real money if you will deliver to our officers at Key West Plaza somebody who wants to use the black shoals model and is willing to price uh a hundred options for three years willing to using the black trolls model and

letting us pick and choose among those because as Charlie says it's a know nothing uh Affair and and we are know nothing guys in respect to an awful lot of things but every now and then we find something where we think we know something and and uh and anybody that's using a mechanistic formula is going to get in trouble in in that situation but options have value I mean we we issued options in a sense last year when we when we sold those the 400 million of of bonds uh and we know what we're giving

up when we when we when we sell those bonds I mean we may have gotten what uh a negative coupon of sorts but but that's because we gave up option value and then uh it wasn't it isn't truly a negative cost instrument at all because options have value let's go to number four hello my name is Martin Wiegand from Bethesda Maryland and first I'd like to thank you and all the folks working here at the microphones and Staffing the booths for hosting this wonderful shareholders weekend we enjoy your efforts Thanks Martin [Applause] my question is

about a a company getting its employee compensation aligned with shareholder interest Charlie Munger in one of his outstanding investor digest interviews cites the case of FedEx getting it right in the newspapers we've all just read about American Airlines Bethlehem Steel and a lot of other companies getting it wrong I find precious little written about compensation systems would you share with us how you get it right at Berkshire companies also your old golf coach and racetrack friend Bob Dwyer asked me if you would like to share with us you're picking the Kentucky Derby is Bob is

Bob back there with you Martin no in the middle oh Bob yeah Bob Bob and I did spend a lot of time at the racetrack in high school he was a he was not on the basketball coach at Woodrow Wilson High but he was also the golf coach and whenever I wanted to go to the races he would he would write an excuse to my other teachers saying that we had to go out for the golf team and then we would head off to Charleston or Robert aguara Pimlico or someplace and and uh he he

cleaned up his act subsequently uh it's good to have Bob with us he was known for his famous three iron shots he was known as trolley wire Dwyer in in in those days Charlie do you want to talk about comp a little well as the shareholders know our system is different from that of most big corporations we think it's less capricious the stock option system will give extraordinarily liberal Awards sort of by accident to some people and it will deny other people any reward at all at some different time in spite of great contributions made

by the people who are getting nothing so except where we inherited we just don't use it but we must be in a minority far less than one percent right it's where we like to be right oh they it's interesting we inherited some stock options at Berkshire primarily in the general re-transaction and not through any failing of anybody or or or there's no dispersion to be cast but at all but those options turned out to be quite valuable they would not have been valuable if General Reed had been left alone as a standalone company uh they

were they profited from the fact that other parts of Berkshire did well and the money went to the people that had these options who delivered nothing to the performance of Berkshire for a while now that's that's that is not an indictment of anybody in the least a genre it's an indictment of an option system which represents a lottery ticket and also a royalty on the passage of time because as you know an option holder has benefits from retained earnings and benefits not at all from dividends and that puts his interest well maybe quite contrary to

that of the shareholders so We Believe in paying for performance but we believe in tiring performance to what is actually under the reasonable control of the person that's being measured and and we to give a lottery ticket on on the overall results of Berkshire Hathaway to someone who is running a business that's one percent of the whole is really crazy and and I would say that you have seen probably more misdirected compensation throughout the corporate system Corporate America in the last five years you know then in the hundred years before that it's been extraordinary and

uh there was there there was wealth creation in the 90s just like in the 80s and the 70s and the 60s and the 50s but there was a wealth transfer like I've never been experienced before and you know you can't blame people for wanting to cash in on it you know if anybody wants to walk up and hand me a half a dozen lottery tickets for the Nebraska Lottery you know I'll accept them but it will have nothing to do with how I do in terms of running Berkshire uh actually Charlie and I think a

properly designed option system which includes cost of capital and some other factors and and ties it to the performance of the people involved we think that can make sense when we've used various incentive programs that are similar to that but the idea of just passing them out and telling people that for 10 years they get a free ride and then repricing you know if your stock goes down their stock doesn't go down their option price goes down you know that is not our idea of a great compensation system yeah if we're if we're right with

our general approach uh it has considerably important implications because the natural implication is that more than 99 of corporate compensation systems are more than a little crazy in America and and I want to emphasize that Berkshire is not illiberal I mean we've got various incentive systems out where people make tens of millions and they make hundreds of Millions so we're not against rewards for people who make vast contributions but a system that's basically capricious and which doesn't tailor the results per person and per activity very well we just think it's crazy we love to see

people that are associated with Berkshire making money as long as they're making money for you at the same time it's very simple and but we don't want them to get a free ride off your money compensation is an interesting subject and I'm going to write about it next year or something but you know it it's not a market system you can read all you want I mean you know the the pr people will tell you you know that ex Joe Smith's conversation was determined by a market system and he's just like a baseball player or

anything of the sort but he's not just like a baseball player and the baseball player negotiates with somebody who's spending his money to hire the baseball player making a calculation whether he's better off laying out the money out of his own pocket the owner of the team to get that player but when you get a cop committee at a large American corporation you have somebody with an enormous interest in the amount of comp on one side of the table and you've got somebody on the other side of the table who was not picked because they

were the Doberman of the board believe me uh and who is dealing with what many times is what my friend Tom Murphy would used to call play money I mean it you know it's it's almost meaningless to the person on one side of the table whether somebody gets a hundred thousand shares of restricted stock or a million shares of restricted stock and it's not meaningless to the guy on the other side of the table almost every other negotiation in American Business you have some parody of concern but you do not have a parody of concern

you know in terms of the uh in terms of comp at the top levels you have a parody of concern when you get down to labor unions I mean the management wants to keep down the prices and the union wants to get more money and you know and and that's a real negotiation and you have you know I mean you have lots of other real negotiations in American business but the compensation in many companies not all obviously but but in many many companies has not been a real negotiation at all and the management is hired

comp Consultants to come in and I have never seen a comp consultant come in and say we ought to reduce this guy's salary I've also never seen a comp consultant come in and say why don't you get rid of this bozo you know I mean you know they can't all be wonderful but uh you know can you imagine a comp consultant doing that never getting another assignment it wouldn't happen so it's it's a bad system and it needs Improvement and it may be getting a little Improvement and as I wrote in the annual report this

year what happens with comp is the acid test of corporate reform because frankly the CEOs of America they don't care whether their boards are diverse or not diverse or anything of the sort they care about how much money they make in in the great many cases and and you the owners and big owners in particular you know have to provide some countervailing force or you'll have what you've had in the last 20 years which is an enormous disparity in the rates of compensation of people at the top compared to people at the bottom and also

a disconnect between the comp of people running businesses and the results of the owners who gave them the money so arise you know shareholder [Applause] let's go to number five the um well the answer is I do believe in dividends and in a great many situations including many of the ones that companies in which we own stock to test about whether to pay dividends is whether you can can continue to create more than one dollar of value for every dollar you retain and there are many business we take seeds candy which we own See's Candy

has paid everything virtually out to us that they've earned because they do not have the ability Within These candy to use large sums which they earn uh intelligently in their business so it'd be an enormous mistake for See's Candy to retain money so they distributed Berkshire and we hope that we move that around in some other area where that dollar becomes worth a dollar ten cents or a dollar twenty cents in terms of present value terms if we do that the shareholder whether they're taxable or whether they're not taxable whether they're a foundation or whether

they're living on income even they are better off if if we retain the money because if in if they were going to get a dollar in dividends and it became worth a dollar ten or a dollar twenty in market value immediately on a present value basis uh they're better off selling a small percentage of their stock and and realizing uh the required amount that way and they will have more money when they get all through doing that than if we paid it in dividends but if the time comes uh and it will come someday when

the if the time comes when we don't think we can use the money effectively to create more than a dollar a market value per dollar retained then it should be paid out and like I say we do that individually within Berkshire but because we have this ability to redistribute money uh in a tax efficient way within the company we probably had more we had more reason to retain all of our earnings if See's Candy were Standalone company we would simply pay out a lot of the the earnings practically all of the earnings and dividends just

like we do now except it goes to Berkshire that we like our we like the companies in which we have Investments to pay to us the money they can't use efficiently in their own business in some cases that's a hundred percent of what they earn in some cases is zero percent of the year and we own some stocks that don't pay any dividends big opportunities in life have to be seized uh we don't do very many things but when we get the chance to do something that's right and big we've got to do it and

even to do it in a small scale is just as big a mistake almost as not doing it at all I mean you've really gotta you gotta grab them when they come and because they you're not going to get 500 great opportunities you would be better off if when you got out of school here you got a punch card with 20 punches on it and every big Financial every financial decision you made you used up a punch you'd get very rich because you'd think through very hard each one I mean he went to a cocktail

party and somebody talked about a company he didn't even understand what they did or couldn't pronounce the name but they made some money last week and another one like it you wouldn't buy it if you only had 20 punches on that card there's a temptation to dabble if uh particularly during bull markets uh uh in stocks it's so easy you know it's easier now than ever because you can do it online you know just you click it in and maybe it goes up a point and get excited about that and you buy another one the

next day and so on you can't make any money over time doing that but if you had a punch card with only 20 punches you weren't going to get another one the rest of your life you would think a long time before every investment decision and you would make good ones and you'd make big ones and you probably wouldn't even use all 20 punches at the in your lifetime but you wouldn't need to hi I'm uh Steve casbell from Atlanta um my question involves interest rates when you calculate the intrinsic value of a business and

a period of low interest rates like we have currently do you use a higher discount rate to factor in higher rates in the future and also um when do you ever look at a company's free cash flow yield relative to current rates and if I could also get your thoughts on the dividend tax cut if by some miracle the politicians think logically and get rid of the dividend taxes would Berkshire ever pay a dividend the question on discount rates we we use the same discount I mean in theory we would use the same discount rate

across all Securities because if you really knew the cash they were going to produce you know that would that would take care of we may be more conservative in estimating the returns of cash from some but the the discount rate we would use as a constant now in terms of where we commit you know we don't want to use the fact that short-term rates are one and a quarter percent to think that something that yields us three percent or four percent is a good deal so we sort of have a minimum threshold in our mind

about which we're below which were unwilling to commit money and we're unwilling to commit it with their interest rates are six or seven percent or whether they're three or four percent or whether they're on a short-term basis one percent we just we don't want to get hooked into long-term Investments at low rates just because they're a little bit better than than short rates would be or or low government rates would be so we we have minimum thresholds in our mind I can't tell you precisely what they are but they're uh they're a whole lot higher

than present government rates would be and at other times we'd be very happy owning governments just because we feel that they offer attractive enough rates uh uh I would when we're looking at a business we're looking at holding it forever and and we want to be sure we're getting an adequate return on Capital we don't regard what we can get on short-term rates now is adequate but we'll still sit then you know a little bit and start settling for lower rates for 30 years because rates for 30 days or so low we would rather just

sit it out and wait a while um the tax on dividends uh you know I've used this illustration before but I'm paying about the same percentage of my income to the federal government as my secretary does now I pay more in income tax rates than she does I pay a higher marginal tax rate by some margin than she does but she pays way more in Social Security taxes than I do because I only pay out the first whatever it is 70 or 80 000 of income and so she's paying between what we pay at the

company for and what she pays who are paying 12 or 13 percent or whatever it is of that so we both end up paying fairly similar percentages of our income to the federal government every year if Berkshire were to declare a billion dollar dividend and my share of it was 330 million and it were tax-free as the bush people originally suggested and it would be tax-free I mean we have lots of taxable earnings at Berkshire you know I might be paying one tenth of the rate to the federal government of my income that she would

be now I can make the argument about the fact that structure shouldn't govern tax rates that that sub chapter S and sub chapters and chapter C and Partnerships and all of these things that the tax code should be neutral between them and I've made those kind of arguments in the past but I can make no argument in my mind that says that I with everything that you know all the luck I've had in life you know I was wired a certain way at Birth that enabled me to make a lot of money and frankly it

was better to be born a boy than a a girl in terms of money making possibilities in 1930 and probably still is but not to the same degree I mean the fact that that I would send one-tenth portion of my income in the year to the federal government that my secretary would I it just it screams at Injustice to me in terms of what the society gives back to me so I'm not I am not for the I'm not for the bush plan at them Charlie well I I agree with you even if you assume

that the whole economy would work better if we'd never gotten into this double taxation system on corporate earnings which I don't think is a clear thing anyway but even if you even if you assume that I think even you live in a democracy where there's lots of envy and resentment and what have you to have the absolute most fortunate people paying practically no income taxes I I just think it's unacceptable I think there has to be some fairness in in uh in some of these Arrangements uh even if there's some theoretical argument that the economy

might work a little better some other way yeah there are IRAs now obviously that work very well for people with modest amounts of dividends that they they're getting tax deferred for a very long period of time which has huge benefits the big benefits of exempting dividends would go to fellows like me and Charlie you know and that's not going to stimulate the economy it's going to stimulate us but uh and it's going to result in US sending a very small percentage of the income of our income to Washington compared to what the people you know

working in our shoe factories send and uh that you know when somebody says you know what did you do during the war Grandpa I'm not sure that's what I want to explain to them number three hi my name is Charlie rice and I'm a stockholder from St Louis Missouri appreciate hearing your comments on publicly held companies using their cash for uh dividends versus stock BuyBacks well we the equation is pretty simple but the practice doesn't necessarily follow logic the it's obviously as long as you're telling the truth your shareholders about what's going on so that

you aren't manipulating the stock downward or something when a stock can be bought well below its business value uh that probably is the best use of cash it's something the Washington posted on a huge scale back in the 1970s Teledyne may have bought 90 or something or close to it of their stock back and that was the reason a very significant percentage of companies bought stock back in the past because they actually thought it was selling for less than it was worth uh like I say that that can be abused if you do various things

to bury your stock in one way or another but but that wasn't the usual case it stock repurchases were relatively unpopular in those days they become quite popular now and and and to the extent that I've been around a good number of them and and been able to pick up on what I thought was the underlying rationale if not the professed rationale you know I think it's often done for people that that are hoping that it causes their their stock price not to go down and uh and they're you know and often done at prices

that don't really make a lot of sense for continuing shareholders um if we wanted to return a bunch of cash to shareholders we would if our stock was undervalued we would we would we would go to the shareholders and say we think it's cheap and and we think that this cash can be better used by you than by us and we will therefore have be repurchasing at what we think is a discount intrinsic value and the people that remain will be better off and the people to get out will get out at a little bit

better price than they would otherwise um in terms of dividends you get into an expectational situation and for most companies that follow a that pay a cash dividend it doesn't make sense to be to bounce around the dividend from year to year although private companies frequently do that and we do it ourselves with our subsidiaries they have some some subsidiary can pay us a lot of money one year and not so much money the next year but with public companies people do a lot of people do buy stocks to obtain dividends and they hope for

regularity and if there's a signaling aspect to it and everything so I would I would say that once you establish a dividend policy with a public company you should think a long time before you change that policy in a material way but I think the best use of cash if you don't have a good use for it in the business if the stock is underpriced as to repurchase it and if it's over a price you've got no business buying in a single share but a lot of companies do it Charlie yeah the Dividends are a

very interesting subject if you count the unnecessary stock trading and the cost of investment advice and the cost of making a lot of errors in the trading costs in and out I don't think would be too extreme to say that now the total amount that's paid out in dividends is roughly equal to the amount that is wasted in illustrating and investment advice so that the net dividends that come to the shareholders are approximately zero this is a very peculiar way to run a republic and very few people comment about it yeah actually I did in

an article some time ago and Fortune the frictional costs to American shareholders in sort of changing chairs for All American businesses to hold those frictional costs are probably not much different than the entire amount paid out by American corporations so but getting to the individual Corporation level a company that expects to regularly earn more than it than it can profitably employ in its business should be paying out dividends take a subsidiary of ours like See's Candy we would love to expand C's candy to double or triple its present size but it doesn't work we've tried

it a lot of different ways so it should be paying out attorneys if it was a public company and it was at one time you know you could argue that something approaching a 100 payout would would make sense there but most Management's worrying about earnings falling off at some time in the future would rather establish a lower level and and and and and and therefore ensure regularity of dividends uh by by going with it with a conservative level uh I you know we it's obviously something we think about at Berkshire when we have 30 odd

billion dollars around if we can't figure out a way to employ that over time you know it's it's a mistake to keep it in corporate form but we have this expectation and I think it's a reasonable expectation that we get the put it to work if we ever came to the different conclusion if our stock we thought our stock was significantly undervalued we'd probably figure in terms of dispersing it through repurchases particularly where now dividends and capital gains are are neutral for for individuals uh and if our stock was not underpriced and we felt we

would we would probably do something by a dividend it's not going to happen soon however good afternoon Mr Buffett Mr Munger my name is Mark stender from San Francisco um my question involves if you live in California which I understand you do sometime of the year it's almost mandatory that you shop at Whole Foods Markets they sell a lot of organic food there and I was wondering if anyone ever tried to feed you organic food or organic food stock I've never been near the place but um Charlie well I've never thought it was a health

nut but he may have some comment to make on this being a Californian no my idea of a good place to shop is Costco has these heavily marbled filet steaks in the finest grade and the idea of eating a little whole grain whatever I'm washing it down with some carrot juice is just never appeal to me we don't have a lot of arguments between the two of us about where to eat number nine hello thank you I'm Sherman Silber from St Louis I'm a fertility doctor in St Louis we kind of view ourselves as the

Berkshire Hathaway of infertility treatment we don't know anything really about business we're doctors and scientists and so first I'd just like to say I really appreciate you the people that you have on your board and would like to keep it that way because we do know a lot about character and I'm happy to have our savings safe with you and the people of character that represent the company I just had an opportunity a couple of weeks ago I was talking to one of the former managers of the Fidelity Magellan fund manage huge amounts of money

and he he never really met you and I was saying I may have a chance to ask Warren Buffett and Charlie Munger a question what would that question be I wanted to have some idea of something intelligent I could ask business-wise and he thought if he had the opportunity to talk to you the best thing is to give you what would sound like a softball question because um because you could maybe bring more profoundness to this than we hear usually what in view of the Iraq War uh Consumer Debt that's increasing declining job growth declining

pay in the jobs that are growing prospects of increased interest rates he has this view that the next five to ten years are going to be very difficult what would your view be about this the investment future for the next five to ten years in view of all these negative factors going on [Laughter] well I would say that at any given point in history including when stocks were their cheapest you could find um an equally impressive number of negative factors I mean you can you could have sat down in 1974 when stocks were screaming Bargains

and you could have written down all kinds of things that would would have caused you to say you know the future is just going to be terrible and similarly it at the top you know or anytime you can write down a large list of of things that would be quite on the bullish side we don't panic we really don't pay any attention to that sort of thing I mean we we have uh you might say that our underlying premise and I think it's a pretty sound underlying premise is that this country will do very well

um and and in particular it will do well for business businesses done very well you know the Dow went from 66 to ten thousand plus in the Hundred Years of the 20th century and we had two world wars and nuclear bombs and flu epidemics and we you know you name it cold war there's always they're always there's always problems in the future there are always opportunities in the future and in this country the opportunities have won out over the problems over time and I think they will continue to do so absent the weapons of mass

destruction which is another question and business won't make much difference if anything really drastic happens along that line so we don't I don't I can't remember any discussions Charlie that I have had ever going back to 1959 that where we would have come to the conclusion at the end of them that we would have passed on a great business opportunity a business to buy because of external conditions nor did we ever buy anything we thought was uh mediocre simply because we thought the world was going to be wonderful at the uh it won't be the

American economy in my view the Dozen investors over a 5 or 10 or 20 year period it will be the investors themselves uh if you look at the record of the 20th century you'd say how could anybody have missed you know and owning equities during that time and yet you know we had we had all kinds of people wiped out you know in the 2932 period we had we had all kinds of things that were bad but if if you would just own stocks right straight through didn't leverage them you know you would you have

gotten a perfectly decent return so we're were unaffected in essence by the by the variables you mentioned just show us a good business tomorrow and we'll jump at the hook Charlie yeah I think but it's also true that both of us have sat at various times over the last three years that we wouldn't be at all surprised if professionally invested money in America had a pretty modest result over a fairly extended period of the future compared to the very dramatically High returns that it had achieved up to about three years ago and so far that's

been proved out to be pretty much right certain stretches are easier than other stretches yeah our expectations were were more modest than most people's a few years ago we didn't say the world was coming to an end or anything we just said that people have gone crazy in certain sectors and that and that anybody that thought that that you could you know sit at home and day trade and make double-digit returns over time or do anything that you were entitled to that you know by just sticking a little money in your 401k or something was

really living in a Fool's Paradise but that was never accompanied by any predictions of disaster for the American economy as a whole or for American Business as a whole uh it's people get crazy Notions from time to time in financial markets you know with coming on this earlier but they just believe things that there's it's hard to understand how they can believe now since some extent they get sold up by other people but uh uh American Business really is has never let investors Down Under the group but investors have done themselves and quite frequently Lauren

and Charlie my name is Peter brochie from Beverly Massachusetts and I would like to thank you both for helping me become a better businessman and a better investor perhaps more importantly you have created by example a kind of True North on the moral compass for me to steer by while the education has been fantastic I have found that the demands of owning a successful business and having a large family do not leave time to apply the research stance I have become so wonderfully accustomed to by being a member of this cult please imagine for a

moment that you are 30 years younger and have only a few holes left in your investment punch card if you were in my situation to the extent that you would diversify your Holdings Beyond Berkshire Hathaway given this environment how would you choose the investment managers or as Charlie has just discussed when addressing foundations would you hunt for two more great companies to invest in Via Common Stocks Charlie why don't you take a swing of that well of course you're hunting that's part of the fun of life and uh but I would say they the chief

lesson would be that you're unlikely to find very many in a whole lifetime and when you find one in which you really have thought it out and have confidence for God's sakes don't do it in a niggardly fashion the idea that very smart people with investment skills should have hugely Diversified portfolios is madness it's a very conventional Madness and it's taught in all the Business Schools but they're wrong the question of finding other advisors is a tough one I mean when I wound up my partnership in 19 the end of 1969 and I had all

these partners that had counted on me and I was going to mail them back a lot of money um you know I felt an obligation to at least suggest some alternatives for them and i s i recommended two people who I knew were exceptionally good and exceptionally honest uh we put one of them on the board not long ago and reaffirmed it today uh Sandy gottisman the other one was Bill ruane now I've been around the investment world for a long time at that point and those were the two I knew but they were more

or less contemporaries of mine and I'd gotten to gnome over the years and I'd seen them for a long time so I not only knew their results but I knew how they'd accomplish their results which is terribly important uh I don't know that generation of managers now but the fact that with the number of people I knew that I could only come up with two at a time when I was very active says something about the difficulties of of finding managers the one thing I can almost guarantee to you is that the promotional types going

around to solicit the institutional investors are very unlikely to meet any long-term tests of of ability and sometimes integrity it's not an easy job spotting an investor I think it's probably easier depending on the amount of time you know you mentioned having children in the business and the amount of time you can spend on every now and then you do if you if you're if you're conscious of the investment world and you have some kind of sort of grounding knowledge about what's going on you can see something you know as we did in junk bonds

a couple of years ago or as we did with all kinds of things some years back when stocks were cheaper you you will occasionally say something that that you should load up on and and Charlie says that's what you really have to do I mean some of the people in this room loaded up on Berkshire many years ago and the truth was they didn't need diversification you know I loaded up on it that uh Charlie did and you'll see opportunities occasionally but you're not going to see them every day or every week if you if

you think you're going to see an opportunity every week you're going to lose a lot of money because people will come around and tell you that they've got them and they may not be quite as flagrant as that fellow we had in the movie but they're a version of that Charlie yeah the business of selecting investment managers was recently shown to be even harder than than I had previously thought it was a significant fraction of the institutional investment managers who run the nation's mutual funds actually accepted propositions to take bribes for betraying their own shareholders

it was as if a man came to you and said I have a wonderful proposition why don't I kill your mother and we'll split the insurance money and it was that ridiculous and yet a significant number of the people said Gee I would like some insurance money and they just went right ahead and they were already rich beforehand yes the the Absol and they've destroyed themselves many of them by making this insane decision and and I think many of them are probably think the outcome is unjust and I mean the the downfall they've had and

the interesting thing about it of course is that here is a huge industry that where the people who weren't doing it have a great interest in having that reputation of the industry not get stained and a number of them had to know what was going on I mean this would I don't I I it's hard for me to imagine that people at most large mutual funds even the ones that didn't their mutual fund management companies even the ones that weren't engaging in the activities mentioned uh weren't aware of it I mean you just if you're

in an industry like that you're going to hear what's going on and the Investment Company Institute was busy patting itself on the back you know one meeting and after another and and becoming very cozy with legislators and there wasn't one thing done until a whistleblower went to Elliot Spitzer and uh uh and he got active in the very strong way with a very limited staff and he uncovered and put on the front pages what was taking place but the industry itself with hundreds and hundreds and hundreds of people that must have known what was going

on uh and it went on for a long time never said a word it's it's a you know it makes you wonder a little bit number three number three Dear Mr Buffett Dear Mr manga My Name is Oliver crouchite from Frankfurt in Germany the subprime crisis has led to inconsistent pricing in capital markets credits are trading at large discounts and at the same time the equities do not respect do not reflect this my question is when will this be over and how do you take advantage of Market dislocations well when there are Market dislocations there

are always ways to take advantage of it but we'll we'll leave you the joy of searching for those the but there have been some really important dislocations and I brought along just for your amusement uh a few figures on something that that we've done recently but it doesn't have any big significance for Berkshire I mean Berkshire will make some extra money out of this it doesn't take any time to think about but it does illustrate just how dramatic the changes were and the ones I brought along relate to the the tax-exempt money market funds uh

there were 330 billion of these that's a lot of money 330 billion and they relied on repricing a really almost all cases first grade municipal bonds every seven days they had these auctions and it was all set up very elaborately so that people could have their money more or less in their minds instantly available and something that was tax exempt and they were marketed extensively and I brought along for example here's one that related to the they were backed by various Municipal issues this happens to be one by the L.A County Museum of Art just

pull that out and on January 24th uh it was marketed at 3.15 percent January 31st 4.0 February 7th 3.5 February 14th eight percent now how can a tax-exempt bond of short-term nature be selling at a three and a half percent rate one week and one week later on Valentine's Day be it eight percent and one week after that be at 10 percent it's now back to 4.2 percent now those are in huge dislocations in markets that's crazy it'd be one thing to be some little obscure item but this happened with billions and billions and billions

of dollars of Securities it even happened we got these bid sheets every day and this happens to be a bid sheet I think from Citigroup and they were repricing these every seven days and what you would find on these are you'll see there's lots of issues involved the same issue would appear on several different pages because it would represent some different auction although handled by the same broker at the same time on one page you would find an issue we would bid all these we have to bid these at 11.3 percent on one page we

bought them at eleven three percent on another page the same issue we bid the 11.3 percent and somebody else bid six percent so you had the same issue with the same broker at the same time being sold at 11.3 percent and six percent those remarks of extreme dislocation and you find those occasionally you found that after the long-term Capital Management crisis in 1998 you found the equivalent of it in the stock market in 1974 and so on and those are great times to make unusual amounts of money and if you there's certain things we can't

figure out I see in the Wall Street Journal I see advertisements these days of auctions taking place in some esoteric mortgage Securities if you had enough time you could probably figure out some of those who were very mispriced we don't fool around with that that we just don't have the time we were able to do four we have about four billion in this right now when we got all through we'll have made some extra money for a couple of months it won't be significant in relation to Berkshire size but but it's something that's very easy

to do you may be able to find by working very very hard on some smaller issues you might be able to find in this mess in mortgages and it's gone beyond subprime it's gone into all days and it's gone into option arms and that sort of thing you may there very well could be some great opportunities out there that Charlie and I will no longer spot because we just can't be looking at that many things Charlie yeah what is interesting is that how brief these opportunities to take advantage of this locations frequently are some idiot

hedge fund bought unlimited municipal bonds that you know incredible margins I think they bought 20 times more Minnesota bonds than they could afford with their own money borrowing all the rest of them those things were dumped on margin calls municipal bonds suddenly got mispriced in America but to this location was very brief so you but very extreme you've been very extreme and so if you can't think fast and act resolutely it does you no good so you're like a man standing by a stream trying to spear a fish and the fish just comes by once

a week or once a month or once every 10 years and you've got to be there to throw that spear fast before the fish swims on it's a pretty demanding business if you do it right but there have been times I mean the in the junk Mark mon Market there was a three or four month period in 19 in 2002 with some really incredible things happen and they happened on a large scale so that um uh yeah it happens about twice a century which means that he and I have only had four or five times

when we could do it my question is is you know how do you what are the mental tricks you have or how do you overcome these behavioral and emotional traps like anchoring and what advice do you have for us well that's a good question and of course it first in recognition of the fact that they can be traps and that you and that you will be affected by them and you will make some mistakes because of them but uh Charlie and his in poor Charlie's Almanac which I probably do take credit for the name of

and uh the uh he talks about the various psychological traps that people fall into and and simply reading that section you will come away wiser than than before you started on it we will our personalities are such that Charlie and I probably are a little less prone to some of those mistakes than other people are but as our record clearly indicates we still are prone to them and we we make them and we'll make them again we're probably a little less inclined to make some of them than we were 30 or 40 years ago but

uh you know the nice thing about it is though is that if you make fewer of those mistakes than others you know they will continue making their share and you'll get very rich Charlie yeah you don't have to have perfect wisdom to get very rich all you've got to do is have slightly more than other people on average over a long time it's the old story about the guy out running the bear I mean they don't have to outrun the bear I just have to outrun that other fellow and number five I think what has

happened that at Berkshire is just wonderfully for the good and I do think we have a perfectly marvelous board what makes me sad as I said earlier is I don't see more of the same practice followed elsewhere a director getting a hundred and fifty thousand dollars a year from a company who needs it is not an independent director that director it automatically becomes an inside director and so it's a typical government intervention ah it's just it says it's doing one thing and it does another yeah I have never I've been on 19 boards I've never

seen a director where the director's fees were important to them object to an acquisition proposal object to a compensation arrangement of the CEO it's just never happened you know and uh in my in my experience and and uh you know they do not they frequently do not behave as they would if they own the place and and basically we want people that that the behaviors if they own the place the correct system is the Lu root system Ellie who wrote who had three different cabinet appointments if I remember right said no man was fit to

hold public office it wasn't perfectly willing to leave it at any time and the fellow who wrote didn't approve of something the government asked him to do he could always go back and be the most sought after lawyer in the world he had an identity to go back to and he didn't need the government's salary and I think that ought to be more the test in corporate directorships is a man really fit to make tough calls who isn't perfectly willing to leave the office at any time my answer is no yeah we have one of

our directors who was who's been removed twice from compensation Committees of other corporations because he had the temerity to actually question whether the compensation Arrangement being suggested was the appropriate one I mean it uh it's not it's it's it's being put on the comp Committee of American corporations as I've said they're not they're looking for Chihuahuas and and and not Great Danes and governments and uh yeah and I hope I'm not insulting any of my friends that are on cop committees you're insulting the dogs [Laughter] [Applause] okay number one number seven well it's more uh

it's more nerve-wracking than I thought it would be um hello Warren Charlie um my name is Aki progakis I'm from Montreal Canada a Warren I wrote a letter back in January um I wrote a letter to you recommending a beautiful Canadian retail company in which I described the my analysis to you I'd like to thank you for taking the time to respond to me uh you said some nice kind words it meant a lot to me and I think you're an amazing individual um my question uh people what is the single most difficult decision you've

had to make in your lifetime whether it be business or personal I think I want to let Charlie answer that one first yeah I would argue that that may be one that you shouldn't ask [Applause] Ed or let's put it this way I think you should answer it with several interesting examples before you ask us to answer [Music] that's a little dirty joke it's interesting but as Charlie was talking I was I haven't I I I can't think of a lot of difficult I think of a lot of wrong decisions I've made uh but I

I certainly can't think of I can't think of anything I agonized over making for any long period of time uh like I say that isn't you know I mean it's calling balls and Strikes I mean you gotta you got a second there and if you don't do it that you're you're no longer an Umpire uh so I uh I made I made plenty of wrong decisions I'm going to make plenty more that that that's just part of the living but I don't I don't think in terms of being difficult as measured by the time it

took me to do it or the uh not a lot of them pop to mind and if they do I'll probably I'll probably give you the same answer surely Charlie Charlie have you thought of any more there while we were talking oh let's go on to another okay that was not a bad decision number eight would you say that the USS uh quote-unquote a castle with a moat and if so how can we make the mode any bigger thank you yeah well the US has been pretty remarkable as I indicated in my earlier comment I

mean you know essentially the the same population pool pretty much and and they've garnered over this 215-year period a remarkable share of the world's wealth uh and it's an interesting question as to just why this group of people here have been able to do so much better than the rest of the world considering we're not any smarter or anything of the smart and uh um it's not an economic hassle anymore I wouldn't I wouldn't call it that what we do is no secret and I think that the relative importance of America I mean when you

know we've we have been a dominant factor in the world and post-world War II and I think it will decline somewhat although I'm not an alarmist on that but I think to some extent the rest of the world or much of the rest or some of the rest of the world is catching on and adopting some you know sort of best practices as they say in industry and our our Castle will grow in size but there will be more castles around it and I basically think that's a very good thing for the world I think

the more prosperous generally the rest of the world is uh you know the better generally it will be for us and you know I've talked about our trade problems the more trade we have the better we had 1.1 trillion of real trade last year in the country we would have with the world and then we had another 600 billion six tenths of a trillion that unilaterally we bought well I I would love to see the 1.1 trillion grow and grow and grow it'd be good for us and good for the rest of the world but

I don't think that our Prosperity will come in the future will come at the expense of the rest of the world at all and I I do think that there were parts of the world that will grow economically from a lower base but much faster than the US and basically I think that's that's a good thing I mean there's six billion people in this world and a lot of them don't live very well and and I would hope that 20 or 50 years from now that it's a higher percentage of them would live well and

that but I don't think it comes out of our height at all Charlie well I don't think it comes out of our height in that sense but if we're well I don't think it comes out of our height in that sense but if we are now the richest and most powerful nation in the world and 50 or 100 years from now now the richest and most powerful nation in the world and 50 or 100 years from now we're a poor third some country in Asia uh sure we're richer but it's A peculiar type of richness

where you've lost your relative position in the world uh it's not all I think if I had to bet I would bet that the part of the world that does best is Asia in terms of percentage gains per annum and uh and I think it might do amazingly well if it doesn't blow up in some way and if it does amazingly well it will eventually be a much richer place than than ours my understanding is that the University of Florida has instituted a couple of courses that actually Mason Hawkins gave them a significant amount of

money to finance and I believe they're they're teaching something other than efficient markets there there's there's a very good course at Columbia I know that it gets a lot of visiting uh teachers to come in I I go in there and teach occasionally and and and but a number of practitioners do so they're I think the efficient market uh theory is less wholly written now than it was 15 or 20 years ago and in uh in universities but it's it it's there's a lot of a talk but I think you can find more diversity in

what is being offered now than than 10 or 20 years ago and I'd recommend you know looking into those to schools you know it's really quite useful uh if you had a merchant shipping business if all of your competitors believe the World is Flat you know that it is a huge Edge because they will not take any uh they will not take on any any cargo to uh to go to places that are Beyond where they think they will fall off and so we should be encouraging the teaching of efficient market theories in in universities

and it amazes it it amazes me but what it you know it I think one time that uh was it canes that said that uh most economists are most economical about ideas that they make the ones they learned in graduate school last a lifetime and what happens is that you spend years getting your PhD in finance and you you learn theories with a lot of mathematics and then that the average Layman can't uh can't do and and you become sort of a high priest and you get an enormous come out of yourself an ego and

even Professional Security invested in those ideas and it gets very hard to back off after after a given point and I think that to some extent has contaminated that uh the teaching of investing in the universities Charlie well I would argue that the contamination was massive but it's waning it yeah it is waning it's winning it the good ideas eventually Triumph