2012 Berkshire Hathaway Annual Meeting (Full Version)

[Applause] Good morning. I'm Warren, and this hyperkinetic fellow is Charlie, and we're going to conduct this pretty much as we have in the past. We'll take your questions, alternating among the media and analysts in the audience until 3:30, with a break around noon for an hour. Then we'll have the regular meeting of the shareholders beginning at that time.

Feel free to drift away and shop in the other room; we have a lot of things for you there. We only have one scripted part of this meeting, and See's Candy has placed on all of the seats a little packet. What we'd like you to do, we're going to like, we'd like to videotape everyone eating their pops at the same time for posting on Facebook and for use by the media in today's meeting. So if each of you will open up the lollipop now, now first of all if you've got them open, we'd like you to hold them up above your head. We're gonna get a shot of eighteen thousand Guinness; here we come, and we'll get a few shots of that. We got it all melee, okay?

And now you can take off the cover, and the good part comes. Charlie and I have fudge up here and we have peanut brittle, and I said the meeting would run till 3:30. If we've consumed 10,000 calories each, we sometimes have to stop a little early at that point.

The only slide we have at this point is we did put out our earnings, first quarter earnings, yesterday, and in general, all of our companies, with the exception of the ones in the residential construction business, which was the case last year and it's the case this year, that all of the companies except those in that area pretty much have shown good earnings. And in the case of the bigger ones, the five largest non-reinsurance companies earned, all had record earnings last year, aggregating of those five companies something over nine billion pre-tax.

In the annual report, I said I thought they would, if business didn't take a nosedive this year, that they would earn over 10 billion pre-tax this year, and certainly nothing we've seen so far would cause me to backtrack on that prediction.

The insurance, if you read our 10-Q and turn to the insurance section, you will see that there was an accounting change mandated for all property casualty insurance companies, which is rather technical and I won't get into the details. It changed something that's called the deferred policy acquisition cost, called DPAC. It has no effect on the operations at all, on the cash, but it did change the earnings downward by about 250 million pre-tax for Geico in the first quarter. It's based on whether you defer some advertising.

It has—Geico had a terrific first quarter. It had a real profit margin of almost nine percentage points, and the float grew, and everything good happened at Geico in the first quarter. We had good growth, but we did make that accounting change that also affects to a lesser degree the second quarter and it may even trail just a bit into the third.

But the underlying figures are somewhat better than the figures that we've presented there and so overall I feel good about the year. Maybe we should, even though we'll do it again at the meeting, but we should probably introduce the directors, and I don't know whether the audience can see the people here, if you can turn up the lights or something so they can.

We'll start off, of course, with Charlie Munger, and then alphabetically, if the directors are just—I was going to suggest that you withhold your applause until the end, but I know he's sort of irresistible, so we'll make an excuse for him. For the remainder of the directors, if they stand and remain standing, then you can applaud them at the end, if you will.

We've got Howard Buffett, Stephen Burke, Susan Decker, Bill Gates, David Gottisman, Charlotte Geyman, Don Keogh, Tom Murphy, Ron Olson, and Walter Scott Jr. Now you can go wild. [Applause] Now we'll start with the questions, and what we will do is we'll start over here with the media with one of them, move to one of the analysts, and then move to one of the shareholders. We'll go by stations with the shareholders, and if we get—sometimes we've had as many as 60 or 62 questions. If we get to 54, at which point each person on the panel here has had a shot at six questions, then from that point on we'll do nothing but the shareholders from 54 on, so we'll see how that goes.

And with that, we'll start off with Carol Loomis of Fortune magazine.

"Good morning. I'll make my mini-speech, which the most important point is that neither Warren nor Charlie have an idea what we're going to ask. The other thing is that we received hundreds if not thousands of questions; we don't know the exact count, so we certainly couldn't use every one. If we didn't use yours, we're sorry."

So for the first question, Warren, two shareholders wrote me about the heavy responsibilities that will fall on your successor and his or her ability to deal with them. So I'll make this a two-part question.

From Chris Eng: "Mr. Buffett, you have stated that you believe the CEO of any large financial organization must be the chief risk officer as well. So at Berkshire, does the leading CEO candidate for successor, as well as the backup candidates, possess the necessary knowledge, experience, and temperament to be the chief risk officer? The related question is about the Goldman Sachs, GE, and Bank of America deals all giving Berkshire warrants that you have negotiated. Shareholder Jacques Cartier—inexcusable—asks whether these specific transactions could have been done with similar terms without your involvement. If not, what implications would that have for Berkshire's future returns?"

"Yeah, I do believe that the CEO of any large—particularly financial-related company—and it should really apply beyond that, but certainly with a financially-related company should be the chief risk officer. It's not something to be delegated. In fact, Charlie and I have seen that function delegated at very major institutions, and the risk committee would come in and report every week, every month, and they'd report to the directors, and they'd have a lot of nice figures lined up and be able to talk in terms of how many sigmas were involved and everything, and the place was just ripe for real trouble.

So I do—I am the chief risk officer at Berkshire. It's up to me to understand anything that could really hit us in any catastrophic way. My successor will have the same responsibility, and we would not select anybody for that job that we did not think had that ability. It's a very important ability. It ranks right up there with capital allocation and selection of managers for the operating units.

It's not an impossible job. The basic risks involve excessive leverage and they could involve excessive insurance risk. Now we have people in charge of our insurance businesses that themselves worry very much about the risk of their own unit and therefore the person at the top really has to understand whether those three or four people running the big insurance units are correctly assessing their risks and then also has to be able to aggregate and think about how they accumulate over the units. That’s where the real risk is unless you're engaging in a lot of leverage in your financial structure, which isn't going to happen."

Before I answer the second, Charlie, would you like to comment on that?

"Well, not only was this risk decision frequently delegated in America, but it was delegated to people who were using a very silly way of judging risk that they'd been taught in some of our leading business schools. So this is a very serious problem this man is raising—the so-called value at risk and the theories that outcomes in financial markets followed a Gaussian curve invariably. It was one of the dumbest ideas ever put forward.

He's not kidding either; we've seen it in action. And the interesting thing is we've seen it in action with people that know better, that have very high IQs, that study a lot of mathematics, but it's so much easier to work with that curve because everybody knows the properties of that curve and can make calculations to eight decimal places using that curve. But the only probability is that the curve is not applicable to behavior in markets, and people find that out periodically."

The second question, "But we're well-equipped." Carol, to answer that question, we would not have anybody; we're not going to have an arts major in charge of Berkshire.

"Yeah, the question about negotiated deals—there's no question that partly through age, partly through the fact we've accumulated a lot of capital, partly the fact that I know a lot more people than I used to know, and partly because Berkshire can act with speed and finality that is really quite rare among large American corporations, we do get a chance occasionally to make large transactions, but that takes a willing party on the other side.

When we got in touch with Brian Moynihan at Bank of America last year, I had dreamt up a deal which I thought made sense for us, and I thought it made sense for the Bank of America under the circumstances that existed. But I'd never talked to Brian Moynihan before in my life, and no real connection with the Bank of America.

But when I talked to him, he knew that we meant what we said, so that if I said we would do 5 billion and I laid out the terms of the warrants, and I said we'd do it and he knew that that was good and that we had the money and that ability to commit and have the other person know your commitment is good for very large sums. Maybe complicated instruments is a big plus. Berkshire will possess that subsequent to my departure.

I don’t think that every deal that I made would necessarily be makable by a successor, but they'll bring other talents as well. I mean, I can tell you the successor that the board has agreed on can do a lot of things much, much better than I can do, so if you give up a little on negotiated financial deals, you may gain a great deal just in terms of somebody who's more energetic about going out and making transactions.

And those deals have not been key to Berkshire. If you look at what we did with General Electric and Goldman Sachs, for example, on those two deals in 2008—I mean they were okay, but they are not remotely as important as maybe buying Coca-Cola stock, which was done in the market over a period of six or eight months. We bought IBM over a period of six or eight months last year in the market; we bought all these businesses on our negotiated basis, so the values in Berkshire that have been accumulated by some special security transaction are really just peanuts compared to the values that have been created by buying businesses like Geico or Iscar or BNSF of the sort. It's not a key, but the ingredients that allowed us to do that will still be available and, to some extent, peculiar to Berkshire in terms of sizable deals that if somebody gets a call from most people and they say, 'You know, we'll give you 10 billion dollars tomorrow morning and we'll have the lawyers work on it overnight and here are the terms and there won't be any surprises,' you know, they're inclined to believe it's a prank call or something of the sort. But with Berkshire, and they believe it can get done."

Charlie?

"Yeah, and in addition, a lot of the Berkshire directors are terrific at risk analysis. Think of the keyword company succeeding as it has over decades in bid construction work on oil well platforms and tunnels and remote places and so on. That’s not easy to do—most people fail at that eventually—and Walter Scott has presided over that bit of risk control all his life and very routinely. And Sadie Sandy Gottisman created one of my favorite risk control examples. One day he fired an associate, and the man said, 'How can you be firing me when I'm such an important producer?' And Sandy said, 'Yes, he says, but I'm a rich old man, and you make me nervous.' Yeah, we do not have anybody around Berkshire that makes us nervous."

Okay, now we go to our new panel. Cliff Gallant of KBW, we're getting the first question here from an analyst.

"I don't think that is honest. Can you hear me? No? Oh, okay. Sorry. Thank you again for the opportunity. The subject generally still is mortality. In your 2011 annual report, Berkshire disclosed that Berkshire Hathaway reinsurance group made changes in its assumptions for mortality risk, which resulted in a charge specifically saying that mortality rates had exceeded assumptions in the Swiss Re contract. Conversely, in January's Life Health segment, they reported lower than expected mortality, and I believe these trends continued into the first quarter that we saw in the report last night. What was the surprise in the Swiss Re contract, and is there a difference in basic assumptions and trends for things like mortality rates among Berkshire’s different businesses?

In the property casualty businesses, for example, are the same assumptions and reserving philosophies applied company-wide?"

"Starting off with the Swiss Re example, we wrote a very, very large contract of reinsurance with Swiss Re, I would say, I don't know, a year and a half ago now or thereabouts, and it applied to their business written, I think in 2004 and earlier. They had a lot of business; it was American business. We started seeing—we got reports quarterly, and we started seeing mortality figures coming in quarterly that were considerably above our expectations and what looked like should be the case, should have been the case looking at their earlier figures.

So at the end of last year, we have a stop-loss arrangement on this, so we set up a reserve that really reserves it to the worst case, except we present valued that. But until we figure out what can be done about that contract, and we have some possibilities in that respect, we will keep that reserved at this worst case. We took a charge for that amount.

We do—we are reinsuring Swiss Re, and then they are reinsuring a bunch of American life insurers, and there is ability to reprice that business as we go along, but the degree to which we and Swiss Re might want to reprice that may be a subject of controversy. We'll see. So we just decided to put it up on a worst-case basis.

Getting to the question of how Geico reserves, how January reserves, I'd say that it's described to some extent in our annual report, but I would say that the one overriding principle is that we hope—and our plan is—to reserve conservatively. I mean, it's a lot different reserving in the auto business where on short-tail lines and physical damage and property damage, you know, you find out very quickly how you're doing, and if you look at Geico's figures, you know we've had redundancies year after year after year.

Jenree was under reserved at the time we bought it, and back in those 1999, 1998 years, those developed very badly. Now they've been developing favorably for some time. I think with Tad Mantras, we've got a fellow where I feel very good about the way he reserves, but he is not—there's no coordination between him and Tony at Geico, nor with the Jeet at Berkshire Hathaway Reinsurance. They all have, I think, the same mindset, but they're three very different businesses."

Charlie?

"Well, there's always going to be some contract where the results are worse than we expected. Why wouldn’t anybody buy our insurance if that weren't the case? The interesting thing is, just take 9/11. It's very hard to reserve after something like 9/11 because to what extent is business interruption insurance, you know, when you close the stock exchange for a few days, are you going to be able to collect on insurance? And you know when you close restaurants at airports, you know, 2,000 miles away because the airport's closed for a few days, is that business interruption insurance?

And, I mean, a lot of questions come up. We turned out to be somewhat over-reserved for 9/11 as it turned out. You’ve got the same situation going on in both Thailand and Japan because, as you know, the supply chain for many American companies was interrupted by the tsunami in Japan and the floods in Thailand. And if you're a car manufacturer in the United States and you aren't getting the parts, you know, does your business interruption insurance cover the fact that there were floods for your supplier in Thailand or the tsunami hit in Japan? And sometimes that stuff takes years and years to work out.

On balance, I think you will find that our reserves generally develop favorably."

Okay, we go to the audience now up at post number one and there he is, there he is.

"Good morning, Mr. Chairman, Mr. Vice Chairman. My name is Andy Peak, and I'm from Weston, Connecticut. In the past, you've made a few investments in China, PetroChina and BYD to name two. Given the growing importance of China in the world, what advice would you give the new Chinese leadership and corporate CEOs such that you would make more investments in China?"

"Well, Charlie's made the most recent investment in China, so I'll let him handle that one."

"Yeah, we're not spending much time giving advice to China. That's not because they're not hungry for our advice, but if you stop to think about it, China's been doing very, very well from a very tough start. To some extent we ought to seek advice there instead of giving.

And I would say that we found it almost useless in sixty years of investing to give advice to anybody in business. We have found that we have a lot of control. It's kind of like controlling the pears by pushing on a noodle. It's amazing how little influence we've had when we've had 20 percent of the stock, and people have this illusion of vast control of headquarters.

The beauty of Berkshire is that we created a system that doesn't require much control of headquarters. Now, if you look at our four largest investments, which are worth, we'll say, they're certainly worth 50 billion dollars today. We've had some of them for 25 years, another one for 20 years. The number of times that we have talked, unless we were on the board, which was at Coca-Cola, but the number of times we've talked to the CEO of those companies where we have 50 billion dollars, I would say doesn't average more than twice a year.

And we are not in the business of giving them advice. If we thought that the success of our investment depended upon them following our advice, we'd go on to something else."

Becky, this question comes from a shareholder named Ben Knoll. And I got several different emails that were very similar to this one, but I'm choosing Ben's question. He writes that while pleased by your announcement to buy back stock at 110 percent of book value, he feels like a bit of a chump for sometimes having paid nearly 200 a book in the past few years. Since you've stated repeatedly that it's as bad to be overvalued as to be undervalued, why didn't you warn us previously when the price-book relationship was very different, or have you not felt that Berkshire was trading above intrinsic value over the last decade?

"Yeah, we've written in the back of the report how we prefer not to see our shares sell at the highest possible price. I mean, we've got a whole different view on that than many managers. If we could have our way, we would have the stock trade once a year, and Charlie and I would try to come up with a fair value for intrinsic business value, and it would trade at that.

That's incidentally what some private companies do, but you're not allowed that luxury in the public market, and public markets do very strange things. If Charlie and I think Berkshire is overvalued, it would be a very interesting proposition to have us announce, you know, half an hour before the market open someday and have us both saying, 'Gee, we think your stock is overpriced.'

We would have to do that with every shareholder simultaneously, and who knows how they would react? We have never—I don't think—certainly never consciously done anything to encourage people to buy our stock at a price we thought was above intrinsic value. The one time we sold stock under some pressure back in the mid-1990s when somebody was going to do something with a stock that we thought would be injurious to people, we created a stock.

We thought the stock was a little on the high side then, and we put on the cover of the prospectus something I don't think has ever been seen, which is we said that neither Charlie nor I would buy the stock at the price nor would we recommend that our family did it, and if you want a collector's item for a proxy for material offering material, get that because I don't think you'll see that one again.

We think that if we are going to repurchase shares from people that we ought to let them know that we think we're buying them too cheap. I mean we wouldn't buy out—if we had two or three partners and somebody wanted to sell out, we’d probably try to arrive at a fair price. But if it was established by a market and they were going to sell too cheap, we'd tell them we thought they were selling it too cheap.

We are not selling—we are not saying that 111, but we're using 110 percent of book; 111 or 112 is intrinsic business value. We know it's significantly above 110, and I don't think we will ever announce, because I don't see how we would do it, I don't think we'll ever announce that we think the stock is selling considerably above intrinsic business value, but we will certainly do nothing to indicate that we think the stock is attractively priced if that comes about."

Charlie?

"I've got nothing to add."

Jay Gelb from Barclays, thank you. My question is also on share buybacks. Warren, in last year's annual letter you said not a dime of cash has left Berkshire for dividends or share repurchases during the past 40 years. In 2011, Berkshire changed course and announced a share purchase authorization. What I'd like to focus in on is what is Berkshire's capacity for share buybacks based on continued strong earnings power? How attractive is deploying excess capital in share buybacks compared to acquisitions even above 1.1 times book value? What are your latest thoughts on instituting a shareholder dividend?

"Yeah, the one point one is a figure that we feel very comfortable with, so we would probably feel comfortable with a figure somewhat higher than that, but we want it to be dramatically or very significantly undervalued to do buybacks. And we want to be very sure that every shareholder that sells to us knows that we think that it's dramatically undervalued when we do it.

But we have a terrific group of businesses. The marketable securities that we own we think are going to be worth more in the future, but we carry them with what they're selling for today, so that's not an undervalued item. You know, in the balance sheet, but some of the businesses we own are worth far more money than we carry them at, and we have no significant business is worth any significant discount from the carrying value.

So we would, from strictly a money-making viewpoint, we would love to buy billions and billions and billions of dollars worth of stock, and we'll move that up to tens of billions at 110 a book. You know, I don't think it'll happen, but it could happen. You never know what kind of a market you'll run into, and if we get the chance to do it, as long as we don't take our cash position below 20 billion, we will—we would buy it very aggressively at that price.

We know we're making significant money for remaining shareholders. The value per share goes up when we buy at 110 a book, and therefore—and it's so obvious to us that we would do it on a big scale if given the chance to, and if it did not take our cash position down below a level that leaves us comfortable."

Charlie?

"Well, some people buy their own stock back regardless of price—that's not our system. Well, we think it's—we think a lot of the stock share repurchases are idiotic. I mean, I'm trying to say that more gently—you've never done it before. They—I mean, it's for ego. I’ve been in a lot of boardrooms where share repurchase authorizations have been voted, and I will guarantee you it's not because the CEO is thinking the way we think at all.

They like buying their stock better at higher prices, and they like issuing options at lower prices. You know, it’s just exactly the opposite; we would think we will only do it for one reason, and that's to increase the per share value the day after we've done it. And if we get a chance to do that with both, you know, with a big way, we'll do it in a big way.

I don't strictly operating as a financial guy; I would hope we get a chance to do a lot of it. Operating as a fiduciary for hundreds of thousands of people, I don't want to see them... yeah, we hope the opportunity never comes, but if it does, we'll grab it."

Okay, station two, shareholder.

"Hello. Hi, Mr. Buffett. My name is Bernard Fira from Austria, Vienna. My question is about banks. What's your view on the European banks? What's your view on U.S. banks, and what must happen that you invest in European banks? Thank you."

"Well, I have a decidedly different view on European banks and American banks. The American banks are in a far, far, far better position than they were three or four years ago. They've taken most of the abnormal losses that existed or that were going to manifest themselves in their portfolios from what's now three and a half or four years ago. They've buttressed their capital in a very big way; they've got liquidity coming out their ears.

The bigger banks, the American banking system isn't in fine shape. The European banking system was gasping for air a few months back, which is why Mr. Draghi opened up his wallet at the ECB and came up with roughly a trillion euros of liquidity for those banks. Now a trillion euros is about 1.3 trillion dollars, and 1.3 trillion dollars is about one-sixth of all the bank deposits in the United States. I mean, it was a huge act by the European Central Bank, and it was designed to replace funding that was running off from European banks.

European banks had more wholesale funding than American banks on average. If you look at Bank of America or Wells Fargo, they get an enormous amount of money from a natural customer base. European banks have tended to get much more of it on a wholesale basis, and that money can run pretty fast. So the European banks need more capital. In many cases, they've done very little along that line.

One Italian bank had a rights offering here three or four months ago, but basically they have not wanted to raise capital, probably because they didn't like the prices at which they would have to do so, and they were losing their funding base. The problem on the funding base has been solved by the ECB because the ECB gave them this money for three years at one percent. I'd like to have a lot of money in three years at one percent, but I’m not in trouble, so I can't get it.

But I just, if you look at our banking system, it's really remarkable what's been accomplished. I thought at the time that the Treasury and the Fed were maybe a little overdoing it when they brought those bankers to Washington and banged their heads together and said, 'You're going to take this money whether you like it or not,' but overall I think that policy was very sound for this country's economy. If some banks were forced to raise capital that they didn't need, you know, which I might not have liked as a shareholder of one of them, overall I think our society benefited enormously and I think the Fed and the Treasury have handled things quite sensibly during a period when if they hadn't handled this sensibly, our world today would be a lot different."

Charlie?

"Yeah, Europe has a lot of problems; we don't. We've got this full federal union, and the country that runs the central bank can print its own money and pay off its own debt. And in Europe, they don't have a full federal union, and that makes it very, very difficult to handle these stresses.

So we're more comfortable with the risk profile in the United States. It's night and day. I mean, in the fall of 2008, when essentially Bernanke and Paulson, and implicitly the President of the United States said, 'We’ll do whatever it takes,' you knew that they had the power and the will to do whatever it took. But when you get 17 countries that have surrendered their sovereignty as far as their currency is concerned, you know, you have this problem.

Henry Kissinger said it a long time ago; he said, 'If I want to dial if I want to call Europe, what number do I dial?' You know, and when you have 17 countries, just imagine if we'd had 17 states in 2008 and we had to have the governors of those states all go to Washington and agree on a course of action when money market funds were... there was a panic in there, the panic in commercial paper, you name it, we would have had a different outcome. So, I would put European banks and American banks in two very different categories."

Andrew, thank you. Warren, this question comes from a shareholder who works at a coal mining company, and he asks the following: "Burlington Northern and MidAmerican are two key links in a critical supply chain. Can you describe your views on coal and natural gas as investments, and can you discuss how the current low price environment impacts the prospects for each of these businesses? You seem to have created an elegant hedge as Burlington Northern suffers from the decline in coal. MidAmerican may benefit from the fire sale in its fuel sources."

"Yeah, well, MidAmerican will never really benefit or be penalized too much by the price of coal because if coal is cheap, the benefit's going to be passed on to customers. If it's expensive, the costs are going to be passed on. You know, MidAmerican really is a regulated public utility. It has several—we have two MidAmericans: we have a MidAmerican holding and a MidAmerican that operates in Iowa, and then we have utilities on the West Coast.

But those utilities are pass-through organizations. They need to be operated efficiently in order to achieve their rate of return. But if they are operated efficiently and in the public interest, whether coal or labor or whatever it is may go up or down really doesn't affect them, although it affects their customers.

Coal traffic is important to all railroads in the United States, and coal traffic is down this year. This may interest you: this year, in the first quarter, kilowatt hours used in the United States went down four percent—four point seven percent—and that is a remarkable decrease in electricity usage. Four point seven percent, and that affected of course the demand for coal.

But the other thing that's happening is, as you mentioned, natural gas got down under two dollars; it's a little higher now, but it got down under two dollars at the same time oil was a hundred dollars. If you told Charlie or me five years ago that you’d have a 50 to 1 ratio between oil and natural gas, I don’t think we would have asked you what you were drinking.

Did you ever think that was possible, Charlie?"

"No."

"I think what's happening now is, to use your word, it's idiotic. We are using up a precious resource which we need to create fertilizer and so forth and sparing a resource which is precious but not as precious, which is thermal coal. If I were running the United States, I would use up every ounce of thermal coal before I touched a drop of natural gas.

But that's the conventional view; it's exactly the opposite. I think those natural gas reserves we've just found are the most precious things we could leave our descendants. I'm in no hurry to use it up, and gas is worth more than coal despite the wild things we've seen in pricing, particularly this ratio of natural gas prices to oil.

You can't change—I mean, the installed base is so huge when you get into electricity generation that you can't really change the percentages too much, although there have been a shift in recent months to where gas generation is feasible. It has supplanted some coal generation, and certainly in the future you're going to see a diminution in the percentage of electricity generated from coal in this country. But it won't be dramatic because it can't be dramatic; the megawatts involved are just too huge to have some wholesale change.

It's going to be very interesting to see how this whole gas-oil ratio plays out because it has changed everyone's thinking, and it's changing in a very short period of time. I mean, three years ago, people wouldn't have said this was possible. Conventional wisdom of the economics professors is, if it happens in a free market, it must be okay, and it'll work out best in the end. That is not my view with 100 percent accuracy. I think there are exceptions to that idea, and I think it's crazy to use up natural gas at these prices."

Okay, Gary Ransom of Darling Telemetrics is up, and he asks about the latest pricing technology in the auto insurance business, whereby you put a little device in your car, and you can either get a discount or some other determination of your pricing based on actual driving behavior. What is Geico doing to keep pace with that change, and are there any other initiatives that Geico has in place to maintain its competitive advantages in pricing?

"Yeah, well, Progressive, as you know, has probably been the leader in what you just described, and we have not done that at Geico, but if we think there becomes a superior way to evaluate the likelihood of anybody having an accident, you know, I think we have 50—I think you have to answer 51 questions, which is more than I would like if you go to our website to get a quote, and every one of those is designed to evaluate your propensity to get in an accident.

Obviously, if you could ride around in the car with somebody for six months, you might learn quite a bit about the propensity if they didn't know you were there, you know, like with your 16-year-old son.

The—but I do not see that as being a major change, but if it becomes something that gives you better predictive value about the propensity of any given individual to have an accident, we will take it on, you know, and we will try to get rid of the things that don't really tell us that much.

All the time, we're always looking for more things that will tell us if we look around at these people in this room, one by one, you know, what tells us their likelihood of having an accident the next year. We know that youth is, for example—there's no question that a 16-year-old male is much more likely to have an accident than some guy like me that drives 3,500 miles a year and is not trying to impress a girl when he does it.

So you know, that one's pretty obvious. Some of these others—some things are very good predictors that you wouldn't necessarily expect to be. Credit scores are, but they're not allowed in all places, but they will tell you a lot about driving habits. We'll keep looking at anything, but I do not see in this new experiment anything that threatens Geico in any way.

Geico, in the first quarter of the year—now the first quarter is our best quarter—but we added a very significant number of policies. I forget what the exact number was, but February turns out to be the best month for some reason, but we were up there, you know, getting pretty close to 300,000 policies. So our marketing is working extremely well and our risk selection is working extremely well and our retention is working well. So Geico is quite a machine.

That's one of the—that's the business that we carry, as I've mentioned in the past, I think we carry it at a billion dollars, roughly a billion dollars over its tangible book value. You know, it's worth a whole lot more than that. I mean based on the price we paid, that figure would come up these days to, you know, certainly something more like 15 billion more than carrying value, and we wouldn't sell it there; we wouldn't sell it at all. But that would not tempt us in the least."

Charlie?

"Nothing to add."

Okay, station three.

"Hi, Charlie and Warren. My name is Chris Reese. I'm here with a group of MBA students from the University of Virginia in Charlottesville. In recent years, business schools have taken a lot of blame for some of the recent state of the economy. What would you suggest to change the way that business leaders are trained in our country?"

"Well, I wouldn't—I don't know, Charlie, I wouldn't blame business schools particularly for most of the ills. I think they've taught the students a lot of nonsense about investments, but I don't think that's been the cause of great societal problems. What do you think?"

"No, but it was a considerable sin."

"Well, do you want to elaborate on what was the more—simple most—no, no, I think business school education is improving is the implication from a low base, or yes, I'd agree with that. Now, in investing, I would say that probably the silliest stuff that we've seen taught at major business schools probably has been maybe it's because it's the area that we operate in, but it has been in the investment area. I mean, it is astounding to me how the schools have focused on sort of one fad after another in finance theory, and it's usually been very mathematically based.

When it's become very popular, it's almost impossible to resist if you hope to make progress in faculty advancement, going against the revealed wisdom of your elders can be very dangerous to your career path at major business schools. And, you know, really investing is not that complicated. I would have a couple of courses; I wouldn't have a course on how to value a business, and I would have a course on how to think about markets.

I think if people grasped the basic principles in those two courses that they would be far better off than if they were exposed to a lot of things like modern portfolio theory or option pricing. I mean who needs option pricing to be in an investment business? And that, you know, when people—when Ray Kroc started McDonald's, I mean he was nothing but the option value of what the McDonald's stock might be or something; he was thinking about whether people would buy hamburgers, you know, and what would cause them to come in and how to make those fries different than other people's and that sort of thing.

It's totally drifted away. The teaching of investments—I look at the books that are used sometimes and there's really nothing in there about valuing businesses and that's what investing is all about. If you buy businesses for less than they're worth, you're going to make money. And if you know the difference between the businesses that you can value and the ones that you can't value, you know, which is key, you're going to make money. But they've tried to make it a lot more difficult and, of course, that's what the high priests in any particular arena do; they have to convince the laity that the priests have to be listened to."

Charlie?

"Yeah, but the folly creeps into the accounting too. A very long-term option on a big business, you understand the stock of a big business that you understand or even the stock market index should not be valued optimally. It is not by using Black-Scholes. And, yet, the accounting profession does that; they want some kind of a standardized solution that requires them not to think too hard."

"And they have one—you know, is there anybody we've forgotten to offend, at this point? Send a note up, Carol."

"Well, talking about not offending, a talk of the Buffett Rule is all over newspapers and TV, but I believe your concept of what should happen to taxation of very high earners is different from what is now promulgated as the Buffett Rule. Could you clear us up on this? This is a question from Leo Slaserman from the Kansas City metropolitan area."

"Yeah, I would say this: it has gotten used in different ways, I think intentionally in some cases, because it was more fun to attack something that I hadn't said than it tried to attack what I had said. Basically the proposal is that people that make very large incomes a rate that is commensurate with what people think is paid by people with those incomes. I mean, I think most people believe when they look at the tax rates and all that, that if you're making 30 or 40 or 50 million dollars a year, that you're probably paying tax rates in the 30 area at least, and many people are.

But the figures are such that if you look at the most recent year and you aggregate both payroll and income taxes because they both go to the federal government on your behalf, if you take the 400 largest incomes in the United States, they average 270 million dollars each, that’s per person, 270 million each. 131 of those 400 paid tax rates that were below 15, now counting payroll taxes too.

In other words, they were paying at less than what the standard payroll tax was. Until we'd had this give-back here recently, but a payroll tax was 15.3 percent for most of the last decade. So, under the Buffett Rule, we would have a minimum tax only for these very, very high earners that essentially would restore their rate to what it used to be back in 1992 when the average income of the top 400 was only 45 million.

There were only 16 out of the 400 that were 15 or below, but now there’s 131. There are still plenty of them; they're paying in the 30s; I wouldn't touch them. But I would say that when we’re asking for shared sacrifice from the American public, when we're telling people that we formally told were given promises on Social Security and Medicare and various things, and we're telling them, 'We're sorry, but we kind of over-promised; we're gonna have to cut back a little,' I would at least like the people with these huge incomes to get taxed at a rate that is commensurate with the way they used to be taxed not that long ago, and probably is commensurate also with the way that two-thirds of the people in that area get taxed at higher rates.

So it's gotten butchered a little bit, but it would affect very, very, very few people. It would raise a lot of money." [Applause]

"Warren, isn't the suggestion that you can give about half of the 30 to charity instead of the government?"

"Well, but the tax rate still—after the charitable deduction, you have to give—if you're going to get 50 and get a deduction, it has to be all cash. If you start giving appreciated securities, and then if you give to a private foundation, you're down to 20. Yeah, but there is some exception in this proposal now, isn't it? Obama’s proposal that charitable contributions help you?"

"Well, there is a bill actually by Senator Whitehouse of Rhode Island. I mean, that is the only actual bill that was voted on, and it did not get the vote; he got 51 votes in the Senate and needed 60. I can't tell you the exact precision on what it included there; I don't have any. You know, there can be all kinds of other ways of getting at the same proposition. I just think that people like me that have huge incomes, and I have no tax planning, I don't have any gimmicks, I don't have Swiss bank accounts; I don't have any of that kind of stuff. But when I get all through, you know, I've done—I've made the calculation four different times, three different times: 2004, 2006, and 2010.

And all three of those years, when my income was anywhere from 25 to 65 or so million, I came in with the lowest tax rate in our office, and we had maybe 15 to 22 or so people in the office at different times during that. And everybody in the office was surprised; they were all in the 30s and I was several times, you know, in this area of 17. And that's because the tax law has gotten moved over the years in a way to favor people that make huge amounts of money.

Imagine having 270 million of income, and I believe there were 31 of the 400 that were below 10 on tax rates, and that counts payroll taxes as well, and like I say, you know, my cleaning lady,"—and I keep being asked to explain—I kept talking about my cleaning lady. Well, my wife wants it very clear she doesn't have a cleaning lady; this is my cleaning lady at the office, Mary, that my wife has gotten very hot; she does not have a cook, she does not have a cleaning lady; she got a little tired of me implying that she had one, so it's my cleaning lady at the office.

"She’s been paying 15.3 percent on Social Security taxes at the same time that that appreciable number of people making hundreds of millions of dollars a year are paying less than 10 percent. I think it's time to take a look at that."

"Okay, Cliff. Over the past two years, the world has witnessed a number of surprisingly large financial losses from major catastrophes, including earthquakes in Chile and Japan and New Zealand, as well as floods in Thailand. Near term, what do you expect the impact on reinsurance pricing will be for catastrophe risks, and longer term, does this trend of increased frequency of major catastrophes affect Berkshire's view on the global reinsurance business?"

"Yeah, it's very hard to—you know, because the random nature of quakes and hurricanes and that sort of thing, it's very hard to know when you really have had a trend. We've had that situation in global warming. I mean, it has been ungodly warm here in the last few months, but a few years ago, it was extremely cold, and anything that moves as slowly as the things affecting our globe, separating out the random from new trends, is really not easy to do.

We tend to sort of assume the worst; I mean, if we see more earthquakes in New Zealand than have existed in the last few years and exist over the last hundred years, we don't say that we'll extrapolate the last couple of years and say that's going to be the case, this huge explosion of quakes. But we also don't take the hundred-year figure anymore.

We have written in the last few months—written far more business in Asia, and by that I mean New Zealand, Australia, Japan, Thailand. We've written quite a bit more. A lot more business than we wrote a year ago or two years ago or three years ago because they've had some huge losses, and they have found that the rates that they had been using were really inadequate, and they are looking for large amounts of capacity in some cases.

And we are there to do that if we think the rate's right. But nobody knows for sure what the right rate is. I mean, we can tell you how many 6.0 or greater quakes have happened in California in the last hundred years and how many category three hurricanes have hit both sides of Florida, whatever. There's all kinds of data available on that, but the question is, how much does it tell you about the next 50 years?

If we think we're getting a rate that if a fairly negative hypothesis would indicate, then we move ahead, and we've done that in the Pacific. I don't know whether you know it, but if you last year, I feared when they had two or three quakes in Christchurch in New Zealand, but I believe the second one caused like 12 billion dollars of insured damage, and if you think of that in relation to a country of four or five million, and you compare that to the kind of cats we've had in the United States, that's 10 Katrinas. You know, there have been some really severe, and Thailand was the same way with the floods, is that it was— the losses were just huge in respect to the entire premium volume in the country.

So when that happens, everybody reevaluates the situation, and we are perfectly willing to take on very big limits if we think we're getting the right price. We have propositions out for as much as 10 billion of coverage. You know, now we don't want that 10 billion to correlate with anything else, and we want to be sure we get the right price, but—and we may write some. You know, at some point, it certainly— the market for cat business in some parts of the world is significantly better from our standpoint than it was a year or two ago, but that's not true everywhere."

Okay, station four.

"Good morning, Mr. Buffett, Mr. Munger. My name is Vern Cushingberry, and I asked this question on behalf of a group of investors that made the trip up from Overland Park, Kansas. MidAmerican has a large investment in wind and solar power. What effect do subsidies and incentives have on that business, and could you share your thoughts on a sustainable energy policy? I gather we should be conserving our natural gas. What is the most appropriate use of that resource?"

"Yeah, well, I believe the—on wind and we're much bigger in wind than solar, although we've entered solar in the last six months or so. We've got two solar projects that we own about a half of each one of them, but we've been doing wind for quite a while, and I think the subsidy is 2.2 cents for 10 years per kilowatt hour. That's a federal subsidy, and there's no question that that makes wind projects in areas where the wind blows fairly often, that makes wind projects work, whereas they wouldn't work without that subsidy; the math just wouldn't work out.

So the government, by putting in that 2.2 cent subsidy, has encouraged a lot of wind development, and I think if there had been none, my guess is there would have been no wind development. I don't think any of our projects would make sense without that subsidy.

In the case of solar, the projects we have have got a commitment from Pacific Gas and Electric to a very long-term purchase commitment. How that ties in with their particular obligations or anything, I mean, there may be some subsidy involved in why they wish to buy it at the price they do from us; I'm sure there is. I don't know the specifics of it, but neither one of those projects, neither solar nor wind—and if Greg Abel is here and wants to go over to a microphone and correct me on this, would be fine—but I don't think any solar wind would be working without subsidy.

And, of course, you can't count on wind for your base load. I mean, it's clean, but if the wind isn't blowing, you know, it does not mean that everybody wants to have their lights off. So it's a supplementary type of generation, but it can't be part of your base generation."

Charlie, do you have any thoughts on that?

"Well, I think, of course, eventually we're going to have to take a lot of power from these renewable sources, and of course we're going to have to help the process along with subsidies, and I think it's very wise that that's what the various governments are doing."

"You can say the future is subsidizing, you know, oil and natural gas now, in a sense."

"Greg, up there?"

"Just to touch on both the wind projects and the solar, you were exactly right. Obviously, the subsidy associated with the wind has allowed us to build now three thousand megawatts across our two utilities, and you were absolutely correct. We would not have moved forward without that type of subsidy.

On the solar, there's actually a couple of other incentives that are in place. You get a very large incentive associated with constructing the assets. We recover 30 percent of the construction costs as we build it—significant advantage there relative to Berkshire being a full taxpayer where a lot of other entities in the U.S. are not, or the corporate entities that are competing for those projects relative to ourselves often don't have the tax appetite for those types of assets. So we do benefit from the underlying tax structure; there's no question both in wind and in solar.

Greg said on a point that people don't or often don't understand about Berkshire: we have a distinct competitive advantage. It's not unique, but it's a distinct competitive advantage in that Berkshire pays lots of federal income tax. So when there are programs in the energy field, for example, that involve tax credits, we can use them because we have a lot of taxes that we're going to pay, and therefore we get a dollar-for-dollar benefit."

"I don't have the figures, but I would guess that perhaps 80 percent of the utilities in the United States cannot reap the full tax benefits or maybe any tax benefits from doing the things that we just talked about because they don't pay any federal income taxes. They have used bonus depreciation, which was enacted last year, and then where you get 100 percent write-off in the first year, they wipe out their taxable income, and if they've wiped out their taxable income through such things as bonus depreciation, they do not—they cannot have any appetite for wind projects where they get a tax credit or in the solar arrangement.

So by being part of—by being part of Berkshire Hathaway, which is a huge taxpayer, MidAmerican has extra abilities to go out and do a lot of projects without worrying about whether they've sort of exhausted their tax capacity."

Okay, Becky. This question comes from John in Brunswick, Georgia. He says, "You are clearly entitled to speak your mind on any and all subjects as an individual, but the recent publicity around the Buffett tax has become quite loud, and as a shareholder, I fear it is limiting to some degree the interest in the Berkshire stock on principle for some people. For instance, my 84-year-old father is not interested in investing in Berkshire because of his opposition to this tax position, and otherwise he likely would while being a public company CEO. Should some of the political dialogue be somewhat muted for the betterment of the company and its share price?"

"Yeah, that's a question that gets raised frequently, but I really, in the end, you know, I don't think that any employee of Berkshire, I don't think that the CEOs of any of the companies that we own stock in should, in any way, have their citizenship restricted.

When Charlie and I took this job, we did not decide to put our citizenship into a blind trust. And the, you know, people are perfectly willing; you know, it's fine if they disagree with us. I think it's kind of silly. I don't know the politics of necessarily if Ken Chenault or Muhtar Kent or John Stumpf—I got a pretty good idea with Kovacovich at one time, but they run these businesses in which we have ten—Ginny Rometty, I mean we've got 11 or 12 billion dollars with her. I don't know what her politics are, and I don't know what her religion is. She's got all kinds of personal views, I'm sure, that probably are better than mine, but it doesn't make any difference. I just want to know how she runs the business.

And I really think that 84-year-old, 84-year-old man making a decision on what he invests in based on who he agrees with politically sounds to me like you ought to own Fox.” [Applause]

“Well, I want to report that Warren's view on taxes for the rich has reduced my popularity around one of my country clubs. If it keeps them from hanging around the country club, I’m all for it.” And it's a disadvantage I'm willing to bear to participate in this enterprise.

"Yeah, Charlie and I—we don't disagree on as many things as you might think, but we certainly have disagreed on some things over 53 years. And it's never in any—we've never had an argument in 53 years, and maybe you can get one started here if you work on it.

And, you know, and it just—it's irrelevant. I mean, you know, roughly half of the country is going to feel one way this November, and the other half's gonna feel a different way, and if you start selecting your investments or your friends or your neighbors based on trying to get people that agree with you totally, you're gonna live a pretty peculiar life, I think."

Okay, Jay. Warren, this question is on acquisitions: Would you consider an acquisition in excess of 20 billion dollars? And if so, would it be funded in terms of existing cash as well as issuing debt and equity or perhaps even selling existing investments?

"Yeah, we considered one here just a month or two ago, which we would have liked. I wish we could have made it. There was about probably about 22 billion. I mean it gets above 20 billion; it gets to be more and more of a stretch, particularly because we won’t use our stock at all. We used stock in the Burlington Northern acquisition, and we felt that it was a mistake, but we were using it for what in effect turned out to be about 30 percent of the deal, and we felt that we were doing well enough with the cash that overall, that the mix was okay.

But we would not use our stock now, and we wouldn't even use it for 30 or 40 percent of some deal, and it's hard to imagine. But it could conceivably— it could happen, but I don't think it will happen. I don't either.

So we looked at this 22, 23 billion deal, and we would have done it if we could have made the deal, but it would have stretched us, but we would not have pushed it to the point where it would have taken our cash below 20 billion. We would have sold securities; we would have done whatever was necessary to have a 20 billion dollar cash balance when we got done with the deal.

But I would have had to sell some securities I didn't want to sell; I liked the deal well enough, so I would have done it. Now, if that had been 40 billion, I don't think we—you know, no matter how well I liked it, I don't think I would have wanted to peel off 25 billion or so in marketable securities trying to get it done, and I certainly wouldn't want to be in limbo not knowing exactly where the money was going to come from and therefore be subject to some terrible shock in the world in the market.

If you have a 20 billion dollar deal, though, I've got an 800 number."

"So you've actually sort of hit the point where we start squirming a little bit as to where we would come up with the money. On the other hand, the money's building up month by month. So we will—we if we can make the right 20 billion deal, we'll do it, and next year if we haven't made a deal, I'll probably say if we can find the right 30 billion deal, we would do it."

Okay, station five.

"Glenn Molinar, West Lake, Ohio. First of all, I want to thank you for having us here today—very nice. Warren, I'd like to have dinner with you tomorrow night at Garats. They'll have a bidding and glide here in June. It went for 2 million six last year.

My question is about jobs coming back to the U.S. I noticed a number of companies have started to bring jobs back here. Is Berkshire Hathaway looking at doing that for any job they've shipped out of the United States?"

"Well, I have to finish my fudge here. I would say that of the number of jobs we have, as listed in the back of the report, I think it's about 270,000—270,858 at your end. I'm just trying to think—we probably, I don't think we have more than 15,000 on the outside of those 270 outside the United States.

So, as I put in the annual report, you know, we invested in plant equipment, not in stocks, but in plant equipment, and not in acquisitions, over 8 billion dollars last year, and 95 or so of that was in the United States. So we don't really have a lot around the world. I'm not opposed to it; I mean our Iscar operation, which is based in Israel, operates throughout the world. I mean I've been to their plants in Japan, I've been to their plants in Korea, I've been to their plants in India.

The product they sell is going to be sold throughout the world. The U.S. is an important market for them, but it's not a majority of their business or anything like it. So that company has about 11,000 employees or so, and relatively few of theirs are going to be in the United States.

We'd like to do more business in the United States, but we'd like to do more business in Korea and Japan and India and, you name it. I mean we have utility operations in the UK. But other than—we just bought a business in Australia at Marmon here recently. What we bought just last day or so has been announced. We're buying a—for CTB, which we've had a terrific history with. Vic Mancini has been a great man to manage businesses, and just in the last day or two, we bought an operation based in the Netherlands, although they have employment here.

But I would say that it's extremely likely that 10 years from now, when you look at the breakdown of our employees, that we have many, many more employees, you know, maybe hundreds of thousands more employees, and some of those will be outside this country, but most of them will be in the country. We find there's lots of opportunity in the United States; there is no shortage of opportunity."

"Yeah, you can't bring a lot back if it never left—that's the long version of my answer."

Andrew?

"Well, Warren, I should say I was not planning to ask you this question, but in the past hour I've received probably two dozen emails from shareholders in this room who want the question asked, so I will ask it.

And it's a very simple question: How are you feeling?"

"I feel terrific, and I always feel terrific. Incidentally, that's not news. [Applause] I love what I do; I work with people I love. It's more fun every day, and basically, I seem to have a good immune system, you know? I mean my diet is such that, you know, as any fool can plainly see that I'm eating properly. All I can say is it works.

And I have four doctors; at least a few of them I think own Berkshire Hathaway, but not a screen I put everybody through. But I—and my wife and my daughter and I listened to the four of them for an hour and a half about two weeks ago, and they described various alternatives, and none of them are, well not—that the ones that they recommend do not involve a day of hospitalization.

They don't require me to take a day off from work; the survival numbers are way up. I read one where it's 99 and a half percent for ten years. So maybe I'll get shot by a jealous husband, but this is not—a really minor event, and Charlie will tell you how minor it is."

"Well, as a matter of fact, I rather resent all this attention and sympathy Warren is getting. I probably have more prostate cancer than he does, but he's bragging."

"I don't know because I don't let them test for it; he's not kidding either. At any rate, I want the sympathy. My secretary was getting too much attention, so I decided to throw the spotlight back on myself.

In all seriousness, it is a non-event. The med center is about two minutes from the office, and for two months I’ll have to drop over there every afternoon, and it'll take a few minutes. And I may have a little less energy, but that I mean I do fewer dumb things—who knows?"

"Okay, Gary?"

"Yes, your insurance operations have taken on a good chunk of some runoff property casualty businesses. There's another business that has an increasing amount of runoff, and that's the annuity businesses: Hartford, ING, Cigna, etc. Is there a time or are there conditions under which you might consider taking on some of those liabilities?"

"Sure, in effect, in some of our businesses, we're taking on some annuity, but not like—I mean it's generally classified as property casualty. But we would take on annuity books. The problem is we're not going to assume anything much better than the risk-free rate in making a bid for that sort of thing.

I mean we do not like the idea of taking on long-term liabilities and paying 150 basis points, you know, above treasuries or something to do that. And there are people that will do that. They may not be quite as likely to fulfill those promises in the years to come as we would, but we want to get money on the liability side at attractive rates.

Now the most attractive is if we can write property casualty business and an underwriting profit and get it for nothing. But we're willing to pay for annuity-type liabilities, and I don't think it's impossible you'll see us do a little bit. We've done some in the UK; we've actually taken on a little bit, but it's not huge, but we're game to take on more."

Okay, station six.

"Good morning, Warren and Charlie. Glad you're feeling well. My name is Ryan Boyle, and I'm working for a private equity firm in Chicago. If you were me and had the chance to start over, what areas would you look to get into? And do you think that my generation will have the same number of opportunities as yours? And if not, would you look to focus on emerging markets?"

"I think you have all kinds of opportunities. I would probably do very much what I have done in life, except I'd do it a little—I'd try and do it a little earlier, and I would have tried to be a little bit better when I was running a partnership in terms of aggregating the money faster. I used to work with $5,000 contributions from partners, and I would try to develop an audited record of performance as early as I could.

I would try to attract some money, and then when I built up a fair amount of money out of investing, I would try to get into something much more interesting, which would be buying businesses to keep. You mentioned private equity, which very often is buying businesses to sell. But I don't want to be buying and selling businesses. I mean, if I establish relationships with people that come to me with their business and they want to join Berkshire, I want it to be for keeps, and that's been enormously satisfying.

But it takes some capital to get into that business, and I didn't have any capital when I started out, so I built it through managing money for myself and other people combined. And like I say, I would get through that process as fast as I could and then into a game where I could buy businesses of significance and interest to me, and then spend the rest of my life doing it just as I've done."

Charlie?

"Well, I've got nothing to add to that either, and I do it with Charlie, incidentally."

Carol, this question comes from a man who believes the stock that Berkshire stock is being held down some—you were talking about the Buffett Rule. I know you've said you doubt that, but he suspects that at least 95 percent of the people in this arena believe that Berkshire Hathaway stock is undervalued. If you don't think it's the Buffett Rule, could each of you give us your opinions about why the stock stays locked at these levels?"

"Yeah, we've run Berkshire now for 47 years. There have been several times, four or five times, when we thought it was significantly undervalued. We saw the price get cut in half at least four times or roughly in half in fairly short periods of time, and I would say this: if you run any business for a long period of time, there can be times when it's overvalued and sometimes when it's undervalued.

Tom Murphy ran one of the most successful companies the world has ever seen, and in the early 1970s, his stock was selling for about a third of what you could have sold the properties for. And, you know, Berkshire back in 2000, 2001, whenever it was that I wrote in the annual report that we were also going to repurchase shares, was selling at what I thought was a very low price, and we didn't get any repurchase.

But that stock—the beauty of stocks is they do sell at silly prices from time to time. I mean that's how Charlie and I have gotten rich. You know, Ben Graham writes about it in Chapter 8 of The Intelligent Investor. Chapters 8 and Chapters 20 here are really all you need to do to get rich in this world, and Chapter 8 says that in the market, you're going to have a partner named Mr. Market, and the beauty of him as your partner is that he's kind of a psychotic drunk, and he will do very weird things over time.

And your job is to remember that he's there to serve you and not to advise you, and if you can keep that mental state that all those thousands of prices that Mr. Market is offering you every day on every major business in the world, practically, that he is making lots of mistakes, and he makes them for all kinds of weird reasons, and all you have to do is occasionally oblige him when he offers to either buy or sell from you at the same price on any given day, any given security.

So it's built into the system that stocks get mispriced, and Berkshire has been no exception to that. I think Berkshire, generally speaking, has come closer to selling around its intrinsic value over a 47-year period or so than most large companies. If you look at the range from our high to low in a given year and compare that to the range high and low on 100 other stocks, I think you'll find that our stock fluctuates somewhat less than most, which is a good sign.

But I will tell you, in the next 20 years, Berkshire will someday be significantly overvalued and then some at some point significantly undervalued, and that will be true for Coca-Cola and Wells Fargo and IBM and all of the other securities that I—I don't—I just don't know in which order and at which times, but the important thing is that you make your decisions based on what you think the business is worth, and if you make your buy and sell decisions based on what you think a business is worth and stick with businesses that you think you've got good reason to think you can value, you simply have to do well in stocks.

The stock market is the most obliging money-making place in the world because you don't have to do anything. You know, you sit there with thousands of businesses being priced at the same price for the buyer and the seller, and you don’t—you don’t have to do anything. Compare that to any other investment alternative you've got. I mean, you can't do that with farms. If you own a farm and the guy has the farm next to you and you kind of like to buy him out or something, he's not going to name a price every day at which he'll buy your farm or sell you his farm. But you can do that with, you know, you can do it with Berkshire Hathaway or IBM. It's a marvelous game and the rules are stacked in your favor if you don't turn those rules upside down and start behaving like the drunken psychotic instead of the guy that's there to take advantage of him."

Charlie?

"Well, what's interesting about this place is that I think we've had a lot more fun when we've got rich enough so we bought businesses and stocks to hold instead of to resell. It's an enormously more constructive life, so as fast as you can work yourself into our position, the better off you'll be, and you should be very encouraged by the fact that he's only 88 and I'm only 81. Just it may take you a little while."

Cliff? Actually, I guess along those lines, we talk about the drunken market. Have systemic fear risks or systemic risk fears ever caused you to pause in your eagerness to buy equities? You know, back in 2008-2009, you know, were you—why weren't you more aggressive back then?

"Yeah, you’ll probably find this interesting: Charlie and I, to my memory, in 53 years, I don't think we've ever had a discussion about buying a stock or a business or selling a stock or a business that has been where we've talked about macro affairs. I mean, if we find a business that we think we understand and we like the price at which it's being offered, we buy it, and it doesn't make any difference what the headlines are, what the Federal Reserve is doing, what’s going on in Europe.

We buy it, you know, there's always going to be good and bad news out there, and which gets emphasized the most depends on the moods of people or newspaper editors or whomever, and there's a ton about it. I bought my first stock, you know, in June of—in June of '42, and, you know, what had happened? We were losing the war, you know, until the Battle of Midway, I mean, it—and so it was a country that every, you know, all my older friends had gone, you know, were disappeared.

We weren't going to make any kinds of goods that were people wanted; we were going to build battleships and things to drop in the sea, and we were losing, you know. But stocks were cheap, and I wrote that article in October of 2008 in the Times that I should have written a few months later. But in the end, I said we've just had a financial panic, and it's going to flow over into the economy, and you're going to read all kinds of bad news, but so what? You know, America's not going to go away and stocks are cheap.

You've got to—we look to value, and we don't look to headlines at all. And we really don't—everybody thinks that we sit around and talk about macro factors; we don't have any discussions about macro factors."

Charlie?

"Yeah, but we did keep liquid reserves at the bottom of the panic that if we'd known it was not going to get any worse, we would have spent it. But that's because we didn't know that."

"We know what we don't know and we all—we know we don't want to go broke. I mean we start with that, and we know you can't go broke if you've got a fair amount of liquid reserves around, and you don't have any near-term debts and so on. So our first rule is always to play tomorrow.

And no matter what happens, but if we've got that covered and we can find things that are attractive, we buy."

"Well, Charlie has a little company called the Daily Journal Company, and he sat there with a whole lot of cash, and when 2008 came along, he went out and bought a few stocks. He won't tell me the names of them, but he—you know that was the time to use the money, not to sit on it."

"Well, we know everything at this point!"

"Station seven. Mr. Mr. Buffett, Mr. Munger, thank you for your inspiration and insight. When you look at the stable of businesses that Berkshire owns, which business has greatly improved its competitive position over the last five years, and why? And then conversely, perhaps you might name a business that was not so lucky."

"Yeah, we don't like to dump on the ones that haven't done as well, but there's no question—and unfortunately the big ones—the big ones have done well. There's no question that even though we didn't own all of it, we actually have owned a significant piece of Burlington Northern over the last five, but the railroad business, for very fundamental reasons which I should have figured out earlier, has improved its position dramatically over the last maybe 15 or 20 years, but it continues to this day.

I mean, it is an extremely efficient and environmentally friendly way of moving a whole lot of things that have to be moved, and it's an asset that couldn't be duplicated for, you name it, three, four, five, six times, you know, what it's selling for. So it's a whole lot better business than it was five or ten years ago. Now Geico's a whole lot better business than it was five or ten years ago, although I think you could have predicted that the chances were good that that was going to happen.

But, you know, we have— we're approaching 10 percent of the market now, and you go back to 1995, we had two percent of the market. We had the ingredients in place to become much larger, and then fortunately we had Tony Nicely who absolutely maximized what was there to be done. And Geico's worth billions and billions and billions of dollars more than when we bought it, and Burlington is worth considerable billions more than when we bought it, even those recently.

MidAmerican has done a great job; we bought that stock at $34 or so a share in 1999, and I think we appraise it now around $250 a share, and that's in the utility business. So this car has been wonderful since we bought it. We bought that six years ago, and they just don't stop; you know, they do everything well, and I would not want to compete with them.

So there are a number of them, and we're having 80 or so of our businesses, by value at least, increased their market strength."

"Yeah, by value, I would say more than eight percent—more than that."

"Yeah, so not by number but by value—by value we’re not suffering at all. We're never going to get the rate disease of 100 percent, and the mistakes have been made in the purchasing. I mean, it’s where I misgauged the competitive position of the business; it isn't because of the faults of management; it's because I just—we either because I had too much money around or because I was, you