2000 Berkshire Hathaway Annual Meeting (Full Version)
Good morning! The first thing I'd like to do is to thank everybody that's helped us put this on. As you saw in the movie, I think at the time we may have had 45,000 or so people working with Berkshire with 12.8 at headquarters. We're probably up to about 60,000 now, and we still have 12.8, and they take care of putting on this whole meeting. We get help from people in internal audit, and we get terrific help from the people at all of our companies who work very hard to put on the exhibits. We hope that you not only visit them but patronize them, and we'll give you ample time to do that.
As you can see, I enlisted my family for the movie, and I want to thank them. I particularly want to thank Kelly Muchmore and Mark Hamburg for their work in putting this on. It’s a real project. A lot of companies have a whole department that does this. At Berkshire, Kelly processes 25,000 requests for tickets and coordinates everything with exhibitors. It’s a fabulous job.
Now, we'll follow our usual routine. We do have a small surprise at 11:45. It's not that Charlie's going to say anything that would be a big surprise, but we will have this small surprise at 11:45. The plan is to go through the business part of the meeting here in just a second, and we’ll run from 9:30 to 12. Then, after conducting the business meeting, we’ll take your questions. We'll go around the room. We have ten stations; I guess we’ll probably only be using eight stations in this room. We have microphones everywhere that the stations will see, and you can step up to those, and we’ll just keep answering questions. We'll break at 12 o'clock, and there will be food available down below where you can also purchase things from us. We’ll reconvene about 12:45, and then we’ll stay until 3:30, and we’ll try to answer whatever questions you have.
In the past, we had about the same number of ticket requests. We had a different mix this year. As most of you know, we had to change the venue and the time because Sarbanes is winding down, so there's a little different rhythm to this meeting. A much higher percentage of our tickets than usual were requested by people from Omaha. Of course, you've heard me say before that we're a little suspicious of these figures because we know that a lot of people claim to be from Omaha that aren't, for status reasons. We can't really give you the geographical breakdown we normally would.
I'd like to introduce our directors, and then we'll proceed into the formal business of the meeting. On my left here is the ever animated Charlie Munger, our vice chairman. If the other directors will stand up as I announce their names, we have my wife, Susan Buffett; Howard Buffett, you can see we find these names in the phone book; Kim Chaisem; Walter Scott, the star of "How to Be a Jillionaire"; and Ron Olson.
[Applause]
Okay, we'll now take on the formal part of the meeting. Mine set a new record, I think, five minutes 38.4, but with the four-minute miles, that's always been our ambition on this. So I will go through this, and then we'll get to the questions. The meeting will now come to order. I’m Warren Buffett, chairman of the board of directors of this company. I welcome you to this 2000 annual meeting of shareholders.
I've introduced the directors. Also with us today are our partners in the firm of Deloitte & Touche, our auditors. They are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire. Mr. Forrest Crutcher, secretary of Berkshire, he will make a written record of the proceedings. Ms. Becky Amick has been appointed inspector of elections at this meeting; she will certify to the count of votes cast in the election for directors. The named proxy holders for this meeting are Walter Scott Jr. and Mark Hamburg.
Does the secretary have a report of the number of Berkshire shares outstanding entitled to vote and represented at the meeting?
I do, yes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent by first-class mail to all shareholders of record on March 3, 2000, being the record date for this meeting, there are 1,341,174 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 5,385,320 shares of Class B Berkshire Hathaway common stock outstanding, with each share entitled to one two-hundredth of one vote on motions considered at the meeting. Of that number, 1,116,155 Class A shares and 4,342,959 Class B shares are represented at this meeting by proxies returned through Thursday evening, April 27th. Thank you. That number represents a quorum, and we will therefore directly proceed with the meeting.
The first order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott Jr., who will place a motion before the meeting.
I move that the reading of the minutes of the last meeting of the shareholders be dispensed with. Do I hear a second?
The motion has been moved and seconded. Are there any comments or questions?
We will vote on this question by voice vote. All those in favor say aye.
[Responses: Aye]
Opposed signify by saying no.
[Responses: No]
The motion is carried. The one item of business of this meeting is to elect directors. If a shareholder present who wishes to withdraw a proxy previously sent in and vote in person on the election of directors, he or she may do so. Also, if any shareholder that is present has not turned in their proxy and desires a ballot in order to vote in person, you may do so if you wish. To do this, please identify yourself to the meeting officials in the aisles who will furnish a ballot for you.
With those persons desiring ballots, please identify themselves so that we may distribute them. I now recognize Mr. Walter Scott Jr. to place a motion before the meeting with respect to the election of directors.
I move that Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase, Charles T. Munger, Ronald L. Olson, and Walter Scott Jr. be elected as directors.
Is there a second?
It’s been moved and seconded that Warren Buffett, Susan Buffett, Howard Buffett, Malcolm Chase, Charles Munger, Ronald Olson, and Walter Scott Jr. be elected as directors. Are there any other nominations?
Is there any discussion?
The nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the election of directors and allow the ballots to be delivered to the inspector of election for the proxy holders. Please also submit to the inspector of elections a ballot for the election of directors, voting the proxies in accordance with the instructions they have received.
Ms. Amick, when you are ready, you may give your report.
My report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast not less than 1,136,497 votes for each nominee. That number far exceeds a majority of the total votes related to all class A and class B shares outstanding. The certification required by Delaware law of the precise count of the votes, including the additional votes to be cast by the proxy holders in response to proxies delivered at this meeting as well as those cast in person at this meeting if any, will be given to the secretary to be placed with the minutes of this meeting.
Thank you, Becky. Warren Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase, Charles T. Munger, Ronald L. Olson, and Walter Scott Jr. have been elected as directors.
Does anyone have any further business to come before this meeting before we adjourn? If not, I recognize Mr. Walter Scott Jr. to place a motion before the meeting.
I move that this meeting be adjourned.
Is there a second?
A motion to adjourn has been made and seconded. We will vote by voice. Is there any discussion?
If not, all in favor say aye.
[Responses: Aye]
Opposed no.
[Responses: No]
This meeting is adjourned. Thank you.
[Applause]
We will advise Guinness of those results, and maybe we’ll get in the book. Just want to make one more announcement, and then we’ll start in on the questions with Area One, which I believe will be right over here. About 3,500 of you are attending the ball game tonight. You know what you're supposed to do, incidentally. We've, in the past, had some traffic jams at where the interstate goes off into 13th Street, so the police, who are wonderfully cooperative throughout this whole weekend in many ways, are going to do their darndest to make sure that we don’t have much of a jam. But if those of you who are attending the game would like to go a little early, that will probably be quite helpful.
And I might say that we’ve probably got, well, we think it’s probably the best zoo in the world here, thanks in very large part to our director Walter Scott and his wife Sue, who have really turned our zoo into a huge attraction, drawing well over a million people a year. It’s right adjacent to the ballpark, so if you go down a little early and you want to go to the zoo, then you won’t even have to move your car—you can come over to the ballpark. And there’s also food there, and we serve Coca-Cola products.
If you don’t all try to come at 6:45, it will be a help to us. I will be pitching at 7:05, but my fastball will arrive at the plate almost instantaneously with the moment that it leaves my hand. So unless you're there, you’ll miss it.
And so with that, let’s start in Area One, and we will go around. Feel free to ask any questions. You might identify yourself and where you’re from before asking your question.
Area One.
Good morning, Mr. Buffett. Mr. Munger, my name is Steve Yates. I'm from Chicago. I'm a Berkshire shareholder, and this is my sixth year coming to this meeting. I'd like to thank you for all your time and advice through the years—it's been great. I'd also like to thank all those wonderful people who sold Berkshire this year for giving us an opportunity to purchase more of the world's greatest company for dirt cheap prices.
We will convey your thanks. I own another stock that sells for four times current trailing earnings. Every quarter we get a report—earnings go up, sales go up, cash flow goes up, the equity base expands, and they gain market share, and the stock goes down. The company has a 60 percent five-year annualized growth rate and sells at four times earnings. I have two related questions. First, is this a growth stock or a value stock, and could you please give us your definitions of these terms?
Second, the company sells recreational vehicles. Demographic trends in the recreation and leisure areas—RVs, cruise lines, golf equipment, etc.—seem to be quite good. Do you see any opportunities for Berkshire here? Thanks!
Well, the question about growth and value is that we've addressed in past annual reports. They are not two distinct categories of business. Every business is worth the present value of the cash it can produce. If you knew what it was going to be able to generate in cash between now and judgment day, you could come to a precise figure as to what it’s worth today.
Now, elements of that can be the ability to use additional capital at good rates, and most growth companies characterized as such have that as a characteristic. But there is no distinction in our minds between growth and value. Every business we look at is a value proposition. The potential for growth and the likelihood of good economics being attached to that growth are part of the equation in evaluation, but they're all value decisions. A company that pays no dividends growing 100 percent a year, you know, is losing money now. That’s a value decision. You have to decide how much value you're going to get.
Actually, it’s very simple. The first investment primer that I know of, and it was pretty good advice, was delivered in about 600 B.C. by Aesop, and Aesop, you’ll remember, said a bird in the hand is worth two in the bush. Incidentally, Aesop did not know it was 600 B.C. He was smart, but he wasn’t that smart in that. Now, Aesop was onto something, but he didn’t finish it because there are a couple of other questions that go along with that.
But it is an investment equation—a bird in the hand is worth two in the bush. He forgot to say exactly when you were going to get the two from the bush and he forgot to say what interest rates you had to measure this against. But if he’d given those two factors, he would have defined investment for the next 2,600 years because a bird in the hand—you know—you will trade a bird in the hand, which is investing. You lay out cash today, and then the question is as an investment decision, you have to evaluate how many birds are in the bush. You may think there are two birds in the bush or three birds in the bush, and you have to decide when they’re going to come out and when you’re going to acquire them.
Now, if interest rates are 5 percent and you're going to get two birds from the bush in five years versus one now, the two birds in the bush are much better than a bird in hand now. So you want to trade your bird in the hand and say "I'll take two birds in the bush" because if you're going to get them in five years, that’s roughly 14 percent compounded annually and interest rates are only 5. But, if interest rates were 20, you would decline to take two birds in the bush five years from now. You would say that’s not good enough because at 20, if I just keep this bird in my hand and compound it, I’ll have more birds than two birds in the bush in five years.
Now, what’s all that got to do with growth? Well, usually, growth people associate with a lot more birds in the bush, but you still have to decide when you’re going to get them, and you have to measure that against interest rates and you have to measure it against other bushes and other equations. That’s all investing is—it’s a value decision based on what it is worth, how many birds are in that bush, when you're going to get them, and what interest rates are.
Now, if you pay $500 billion, and when we buy a stock we always think in terms of buying the whole enterprise because it enables us to think as businessmen rather than as stock speculators. So, let’s just take a company that has marvelous prospects, is paying you nothing now, and you buy it at a valuation of $500 billion. Now, if you feel that 10 percent is the appropriate rate of return—and you can pick your figure—that means that if it pays you nothing this year but starts paying next year, it has to be able to pay you $55 billion in perpetuity each year. But if it’s not going to pay until the third year, then it has to pay you $60.5 billion in perpetuity to justify the present price. Every year that you wait to take a bird out of the bush means that you have to take out more birds—it’s that simple.
I question in my mind sometimes whether people who pay $500 billion for a business by buying 10 shares of stock at some price are really thinking of the mathematics implicit in what they are doing. Let’s just assume that there’s only going to be a one-year delay before the business starts paying out to you, and you want to get a 10 percent return, and you pay $500 billion. That means $55 billion of cash that they have to be able to generate to you year after year after year. To do that, they have to make perhaps $80 billion or close to pre-tax.
Now, you might look around at the universe of businesses in this world and see how many are earning $80 billion pre-tax or $70 or $60 or $50 or $40 or $30, and you won’t find any. So it requires a rather extraordinary change in profitability to give you enough birds out of that particular bush to make it worthwhile to give up that one that you have in your hand.
The second part of your question about whether we’d be willing to buy a wonderful business at four times earnings, I think I could get even Charlie interested in that, but let’s hear it from Charlie.
I’d like to know what that is.
He was hoping you would ask that.
The fellow that’s got all his net worth in a stock and who has a captive audience, tell us what it is.
You’ve got to tell us—we’re begging you.
You want the name of the company?
We want the name of the company.
We’re dying to get the name—you can take my pencil out!
[Laughter]
It’s called National RV, and it’s based in California, and they sell recreational vehicles.
Okay, well, you’ve got a crowd of people who have birds in hand, and we’ll see what they do in terms of National RV.
Charlie, do you have anything further on growth and value, etc.?
Watch him carefully, folks!
Well, I agree that all intelligent investing is value investing. You have to acquire more than you really pay for, and that’s a value judgment. But you can look for more than you’re paying for in a lot of different ways. You can use filters to sift the investment universe, and if you stick with stocks that can’t possibly be wonderful to just put away in your safe deposit box for 40 years but are underpriced, then you have to keep moving around all the time as they get closer to what you think the real value is. You have to sell them and then find others.
It’s an active kind of investing. The investing where you find a few great companies and just sit on your ass because you’ve correctly predicted the future—that is what it’s very nice to be good at!
The movie was G-rated even though—was it, Charlie?
[Applause]
Okay, we will move to Area Two.
Good morning, gentlemen. Wayne Peters. Where I come from, ladies are referred to as birds, and I’m sure I know a lot that would trade one for the hand for two in the bush irrespective of the interest rate. I have two small questions. Firstly, with the speculation and some would say rampant speculation in the high-tech and internet arenas, can you share your views on the potential fallout from this speculation for the general economy?
And secondly, how long did it actually take you to perfect that?
And are we going to see it tonight?
I don’t think I want to give anything away about my pitches tonight. Ernie Banks may be in the audience; I know he’s in town, and I just can’t afford to do that.
But you’ll see it tonight, and you can describe it any way you’d like.
The question about the high-tech stocks and possible fallout: any time there have been real bursts of speculation in the market, you know that it does get corrected eventually. Ben Graham was right when he said that in the short-run, it’s a voting machine; in the long run, it’s a weighing machine. Sooner or later, the amount of cash that a business can disgorge in the future governs the value it has that the stock commands in the market.
But it can take a long time, and I mean, it’s a very interesting proposition. For example, if you take a company that, in the end, never makes any money, but the trade changes hands, representing a valuation of $10 or $20 billion for some time, there’s no wealth created; there’s a tremendous amount of wealth transferred.
I think you will see, when we look back on this era, you will see this as a period of enormous amounts of wealth transfer. But in the end, the only wealth creation comes about through what the business creates. There’s no magic to it. If a company that’s not worth anything sells for $20 billion, and only 5 percent of it changes hands, somebody takes a billion dollars from somebody else; but investors as a whole gain nothing.
They all feel richer. It’s a very interesting phenomenon. But they can’t be richer, except as a group, unless the company makes them richer. And it’s the same principle as a chain letter. I mean, if you’re very early on a chain letter, you can make money; there’s no money created by chain letters. In fact, there’s the frictional cost of envelopes and postage and that sort of thing, so the net there’s some money destroyed a little bit, and there’s money destroyed by the frictional costs of trading and investing that comes out of investors’ pockets.
But the media periodically take place, and not just in stocks—we had a similar mania—well, not certainly similar; we certainly had a mania in farmland here in Nebraska 20 years ago, and land which couldn’t produce, we’ll say, more than $70 or $80 an acre, would sell for $2,000 an acre at times when interest rates were 10. Well, that math will kill you, and it killed the people who bought it at those prices, and it killed a great many banks here in Nebraska who lent based on that sort of thing.
But while it was going on, everybody thought it was wonderful because every farm was selling for more than the similar farm sold for a month earlier, and it was momentum investing in farmland, and in the end, valuation does count, but it can go on a long time. And when you get a huge number of participants playing with ever-increasing sums, you know, it creates its own apparent truth for a considerable period of time.
It doesn’t go on forever, and whether it has fallout to the whole economy like it probably did in the late 20s or whether it’s just an isolated industry or sector where the bubble bursts and that really doesn’t affect other values, who knows. But five or ten years from now, you’ll know.
Charlie?
Well, I think the reason we use the phrase “wretched excess” is that there are wretched consequences. If you mix the mathematics of the chain letter or the Ponzi scheme with some legitimate development like the development of the internet, you are mixing something which is wretched and irrational and has bad consequences with something that has very good consequences.
But you know, if you mix raisins with turds, they’re still turds.
That's why they have me write the annual report.
So I think we better move on to Sector Three.
Way back there.
My name is Thomas May. I’m 10 years old and I go to basic school in Canfield, California. I have been a shareholder for two years. This is my third annual meeting. Here’s my question: I know you won’t invest in technology companies, but are you afraid that the internet will hurt some of the companies that you do invest in, such as the Washington Post or Wells Fargo? Thank you.
Well, that’s an absolutely terrific question. You know, I may turn my money over to you.
[Music]
There’s probably no better question we’ll get, and I hope Charlie answers in an appropriate vein considering your age. We do not have a no—it’s no religious belief that we don’t buy into tech companies; we just don’t. We have never found one, as conventionally defined, where we think we know enough about what the business will look like in 10 years that we can make a rational decision as to how much we pay now for that business.
In other words, we have not been able to find a business where we think we know what that bush will look like in 10 years and how many birds will be in it so that we know how many birds we can give up today to participate in that future. Not any.
There will be wonderful things, as Charlie so colorfully explained, that will evolve from many of these companies, but we don’t know how to make that decision. And you’re absolutely right that we should be thinking all the time about whether developments in that tech area threaten the businesses that we’re in now, how we might counter those threats, how we might capitalize on opportunities because of it.
It’s a very, very, very important part of business now and will become more important in the years to come, including many of our businesses. For example, you mentioned the Washington Post. Even closer to home, we own a newspaper called the Buffalo News in Buffalo, New York—we own all of that. So we’re in a position to make our own decisions of an operating nature as to what we should do in respect to the internet, and believe me, Stan Lipsey, who’s here today, who runs that paper and I, have talked many, many hours, including considerable time yesterday about what we are doing on the internet, what we should be doing, what other people are doing, how it threatens us, how we can counter those threats—all of that sort of thing.
And newspapers are a category that, in my view, are very threatened by the internet. Because we had an example, the internet is terrific for delivering information. We have a product, World Book, that’s terrific for delivering information, and 15 years ago, print encyclopedias were the best tool probably for educating not only young children but for educating me or Charlie when we wanted to look up on something on the subject.
The World Book is a marvelous product, but it requires chopping down trees, and it requires operating paper mills, and it requires binding and printing, and it requires the delivery of a 70-pound UPS package. It was put together in a way that was, for 400 or 500 years, the best technique for taking that information and moving it from those who assembled it to those who wanted to use it, and then the internet changed that in a very major way.
So we have seen firsthand and experienced the business consequences of the improvement offered by the internet, and newspapers, although not as immediately susceptible to that problem, still face that overpowering factor when you eliminate the delivery costs. I mean, we pay a significant percentage of our circulation revenue to our carriers, and we pay additional money to the district managers, and we pay for the trucks that deliver the product, and we pay for huge printing presses. And all that sort of thing, and people do chop down trees in order to give us the raw material to transmit information in Buffalo about what the Buffalo Bills did yesterday on Sunday, with all the details.
Now you have the internet that has virtually no incremental unit cost to anything and can deliver the information instantaneously. So it’s a big factor for newspapers, and the newspaper world, in my view, will look very, very, very different in not that many years.
I find it kind of interesting, because the people in the newspaper business are a little schizophrenic about this. They see this; they’re afraid of it; they’re in almost all cases trying to combat it in some way operationally, but some of them, at least, continue to go out and buy papers at a price that sort of reflects the economics that used to exist 20 years ago when, to me, it’s very clear that it doesn’t exist anymore.
So they sort of have their billfold, you know, in the past even though they see the future. And, you know, I think probably they’re making mistakes in many cases. All of our businesses, virtually, Coca-Cola will not be affected in any significant way by the internet. You know, the razor-and-blade business won’t be, although you could dream up things about distribution or so on, but I think that it’s very unlikely.
But other businesses, we have our insurance business, particularly at Geico, will be very affected by the internet. Now that may turn out to be a big advantage to us over time; I wouldn’t be surprised if it is. But our retailing businesses are all threatened in one way or another by internet developments, and there may be some opportunities there too, but it’s a changing world.
It’s going to be changing the world, how the world gets entertainment. It’s going to be changing the world how the world gets information, and it is incredibly low cost compared to most of the methods of conveying entertainment and information now.
Charlie?
Well, he asked if we were afraid if the internet would hurt some of our business, and I think the answer is yes.
I’m learning to appreciate these short answers.
So, Boris, today, I want to thank you for coming to our meeting. Incidentally, you’re way ahead of me; I didn’t buy my first stock until I was 11. So you’ve got a real jump on me, and I wish you well.
Okay, Area Four.
Warren and Charlie, good morning. This is Mo Spence from Waterloo, Nebraska. In 1999, Berkshire Hathaway managed to produce a positive gain in net worth of one-half of one percent. That means that since your management took over 35 years ago, Berkshire Hathaway has realized a positive gain each and every year and produced an average annual gain of 24 percent, including the years you ran the Buffett limited partnership.
You have had a run of 48 consecutive years of positive gains in net worth without one single down year, producing a compounded rate of return of almost 26 percent annually. On behalf of the long-term shareholders of Berkshire Hathaway, we want to thank you from the bottom of our pocketbooks.
Well, thank you.
[Applause]
I hope your question isn’t going to be whether we can continue that, but go ahead, you have a question.
My question is: don’t you think you could have ended the millennium with a bigger bang than one-half of one percent?
Well, I certainly wish we could have, but the interesting thing about those figures, actually, the figures go back before that because the very best period was pre the partnership days because the amount I was working with was so small, but there’s nothing magic about a one-year period. I mean, it’s the way the measurements come out.
We’ve—I wrote a few years ago—it’s interesting; I called their soft drink business and their razor-and-blade business as inevitable. And the truth is they’ve got a higher market share now than they’ve ever had in history; they’re selling more units than a year in history.
But certain other factors hurt their business and therefore hurt their stock performance. But I would still call the soft drink industry and Coca-Cola’s position in the soft drink business in Gillette’s position in the razor-and-blade business, and I would characterize them as inevitable.
They will gain share over time. Gillette has over 70 percent of the share of the blade-and-razor business in the world, which is measured by value. You know, that’s an extraordinary share. Coke has 50 percent of the soft drink business in the world—that’s well over a billion eight-ounce servings per day. A billion per day, eight percent of those are for the account of Berkshire.
So over 80 million eight-ounce servings of soft drinks per day are being consumed by people for which the economic benefit comes to Berkshire Hathaway. In effect, we have, if over six percent of Berkshire Hathaway’s account of the blade-and-razor business in the world, and it’ll go up.
So I don’t worry about the businesses in the least long-term. They will have bad years from time to time, and when they do, our performance will not look good in those years.
Charlie?
Well, it’s been a very interesting stretch. One of the most interesting things about the stretch is that during pretty much the whole period, the company has owned marketable securities in excess of its net worth. And so you have this extraordinary liquidity in a company that has performed very well to boot.
That advantage has not gone away, and in fact, it’s been augmented. Give us reasonable opportunities, and we are prepared.
Well, you’ve heard what you’re supposed to do now. We’ll do the rest, just give us the opportunities.
Area Five.
My name is Greg Blevins from Bardstown, Kentucky. I have a question about intrinsic value. It comes from comments that you made in your annual report this year. In there, you describe the extraordinary skills of a jet in judging risk. When I think about Berkshire and its ability to increase intrinsic value, it seems to me that judging risk has been at least as important as an ability to calculate a net present value.
So my question to each of you is: would you give us some comments on how you think about risk?
Well, we think of business risk in terms of what can happen, say, 5, 10, 15 years from now that will destroy or modify or reduce the economic strengths that we perceive currently exist in a business.
In some businesses, that's very—it’s impossible to figure. At least it’s impossible for us to figure. And then we just—we don’t even think about it. Then we are enormously risk-averse.
We are not risk-averse in terms of losing a billion dollars. That would—were an earthquake in California today, and we’re thinking of writing a policy, for example, in the next week or so on a primary insurance risk of over a billion dollars, which that doesn’t bother us as long as the math is in our favor.
But in terms of doing a group of transactions like that, we are very risk-averse. In other words, we want to think that we’ve got a mathematical edge in every transaction, and we think that we’ll do enough transactions over a lifetime so that no matter what the result of any single one, that the group expectancy would get almost a certainty.
When we look at businesses, we try to think of what can go wrong with them. We try to look at businesses that are good businesses now, and we think about what can go wrong with it. If we can think of very much that can go wrong with them, we just forget it.
We’re not in the business of assuming a lot of risk in businesses. That doesn’t mean we don’t do it inadvertently and make mistakes, because we do, but we don’t intentionally or willingly, voluntarily go into situations where we perceive really significant risks that the business is going to change in a major way.
And that gets down to what you probably heard me talk about before—it’s what kind of a moat is around the business. Every business that we look at, we think of as an economic castle, and castles are subject to marauders. In capitalism, any castle you have, whether it’s razor blades or soft drinks or whatever, you have to expect that.
And you want the capitalistic system to work in a way that millions of people are out there with capital thinking about ways to take your castle away from you and appropriate it for their own use. And then the question is, what kind of a moat do you have around that castle that protects it?
See’s Candy has a wonderful moat around its castle, and Chuck Huggins has taken that moat, which he took charge of in 1972, and he has widened that moat every year. He throws crocodiles and sharks and piranhas in the moat, and it gets harder and harder for people to swim across and attack the castle, so they don’t do it.
If you look since 1972, Forrest Mars tried with FLM, I don’t know, 20 years ago, and I hate to think of how much money it cost him to try that, and he was a very experienced businessman.
So we think of them—we think in terms of that moat and the ability to keep its width and its impossibility of being crossed as the primary criterion of a great business. And to our managers, we say we want the moat widened every year.
That does not necessarily mean that the profit is more this year than last year, because it won’t be sometimes, but if the moat is widened every year, the business will do very well. When we don’t have a moat that’s tenuous in any way, it’s, getting back to your question, it’s just too risky.
We don’t know how to evaluate that, and therefore we leave it alone. We think all of our businesses—virtually all of our businesses have pretty darn good moats, and we think the managers are widening them.
Charlie, how could you say it better?
No, here, have some peanut brittle on that one.
Okay, Area Six.
Good morning, good morning. My name is Hugh Stevenson; I’m a shareholder from Atlanta. My question involves the company's activities before and shortly after the Gen Re acquisition. I remember you saying once that in insurance, virtually all surprises are negative ones, and I’m wondering, given the company’s operating experience in insurance over a long period of time, could you tell us what happened in the Unicover situation?
How come in general, with Gen Re’s experience and the company’s experience that it happened? They didn’t foresee it? We didn’t foresee it? What has the company done? I know they’ve taken a large reserve for the situation, and how do they plan to operate in the future to prevent these things, find them out, and strengthen the company from these kinds of situations in the future?
The Unicover situation was discovered in about, I don’t know, February of last year, thereabouts. It was a mistake; I mean it should not have been made. A lot of other people made the same mistake, but that still didn’t mean that we should have made that mistake.
We set up a reserve of $275 million when the mistake was discovered. That reserve looks like it’s about right still—there have been quite a few developments at Unicover that have defined the limits of it better and resulted in the resolution of many of the issues attached to it.
It still looks like about a $275 million mistake. Now that’s a big mistake, but we’ve made bigger ones. We had one in the mid-70s that probably cost Berkshire, measuring opportunity cost and everything, because we didn’t know how bad it was going to be. I would say that Berkshire would now be worth at least 10 percent more, but that mistake, and wouldn’t you say so, Charlie?
The omni suggestion?
Absolutely.
Yeah, so we had a mistake whose present value would be $8 or $9 billion. It cost us at least that—it cost us less than $4 million at the time.
Yeah, so we didn’t know it for sure; it was $4 million. So it tied our hands in other respects too. In insurance, you will get surprises. Now the test of a good management is how many surprises you get, but there’s no way you’ll get no surprises, and if you look at our history, you will see some years when our float costs us a lot of money. You will also see a history where over 33 or so years, it has been a very, very attractive business.
But we have had cases, I mean that our name causes problems. I think National Indemnity, we had a fraud as I remember down in Texas, where an agent was using our paper, which incidentally was the same problem we had that cost us so much, and some guy was out there writing bonds on surety bonds on construction of schools, and he says he represents National Indemnity, and the contract proceeds, and of course we’ve never heard of the guy.
But if you get a school district in Texas with a half-finished school, and the choice is whether the taxpayers have more, whether you find that this guy had a parent authority as an agent and therefore we should pay on a policy we never heard of written by a guy we’d never heard of on a school we never heard of, we’ll end up paying.
So it’s the surprises are unpleasant. Nine times out of ten, we’ll have more. We had another one last year that shouldn’t have happened, but they do happen.
And General Re has a terrific record over time. We knew last year would not be a good business in the reinsurance business; it was worse than we thought it would be, but that had nothing to do. And if you told me the figures that generally would have at the end of the year, we’d have made the same deal in a moment.
And we didn't do so well with Coke and Gillette ourselves, so that the ratio of mistakes was probably fairly equal between the two organizations, with me contributing my share. I think insurance, which will continue to have surprises in it, will turn out to be a very, very good business for Berkshire over time. It’s the best one I know about that we can do in increasing scale.
As a matter of fact, some of you may not have noticed, but we announced another small insurance acquisition just last week. It’s a tough field. The average company is going to do poorly. We think we have some very special companies, and we really do think over time we will acquire and utilize float at a cost that’s very, very attractive.
It won’t be zero like it’s been in the past. I mean, we’re in some lines of business where we would be crazy to try and hold it to zero because it’s way better to have twice as much money at 1 or 2 percent as half as much money at zero percent.
But we will fully acknowledge that, I mean, Unicover was a surprise, but that I don’t know how many surprises I’ve had in insurance over the 33 years or so we’ve been in it. One of the surprises, incidentally, worked to our incredible benefit.
Geico has been a great, great company since I first went down to Washington and even before that, and met Laura Marc Davidson almost 50 years ago, but they made a mistake in this in the early 70s that really did bankrupt the company.
But fortunately, there was an insurance commissioner named Max Wallach in the district of Columbia who saw that it could be resuscitated, and that mistake enabled us to make many, many billions of dollars. So mistakes can be useful on occasion too.
Charlie, all that said, it is perhaps the most irritating way to lose money—there is—to be taken by a sort of obvious lie, but it happens.
I don’t think it’s likely to happen again on that scale.
Well, I wouldn’t say that. I would say that it’s unlikely in any 20-year period or anything like that. We will get a big surprise, and it will come about very often through one form or another of three or four methods of obvious fraud that we’ve observed in the past, but they spring up again, and there are plenty of people that are, I’d have to say, crooked in insurance.
Because it’s a product where you deliver a piece of paper and somebody hands you money, and that intrigues people. You don’t even hand them a dilly bar or anything in exchange; they hand you a lot of money, and you give them a little piece of paper, and of course, when you get into reinsurance and all that, then you hand that little piece of paper to somebody else and try and get them to hand you money.
And all the way along the line you have brokers who are getting big chunks of money for sort of papering over some of the weaknesses in the project, and sometimes they may even be in on it.
So it’s a field that attracts chicanery, and often the same people come back again and again, and it’s amazing to me. So I would say that we will get a surprise or two over any 10-year period in insurance. It’s almost impossible to avoid. We should try to minimize it; we do try to minimize it, but I would not want to bet my life that we’ve seen the last of a Unicover-type situation.
They’re always just a little bit different enough so that it doesn’t get spotted or somebody down the line doesn’t get the message.
But I don’t know—don’t you think Charlie will see another one?
Well, perhaps so, but it was a long time from one to the other.
Yeah, right.
And maybe I’ll be able to get through without another one of these fraud artists Warren caused me to meet years ago, and his proposition was he had this perfectly marvelous business. He says, “We only write fire insurance on concrete bridges that are underwater.”
He says it’s like taking candy from babies, and we were the babies, and I looked in his eye and I thought he was kidding or something. He wasn't kidding.
I mean, these people believe this kind of stuff.
The truth is, Charlie, if Charlie and I could see everybody we dealt with, we would screen out some perfectly honest people too.
I think we could probably screen out the crooked propositions. I mean, they do have similar characteristics to them, and what happens is you get somebody out in the field who is eager to write business or who’s being wooed by producers, and the intermediaries get very good at it.
It’s the same way lousy stocks get sold. I mean, you get people who are getting paid very well to part, you know, separate you from your money. And that’s worked over the years. The good salesmen find out they can make more money selling phony products with big tickets attached to them than they can selling lollipops.
Number Seven.
Good morning, Mr. Buffett and Mr. Munger. My name is Monish Pabrai, and I have been a student and disciple of yourself, Mr. Buffett, for some time, and especially Mr. Munger. I have adopted quite intensely your theories on capital allocation in the manner in which I run my business as well as my portfolio, and I am quite pleased with the results so far.
My question has to do with the original 1950s Buffett partnerships. There is some conflicting data in the various books about you pertaining to the rules of the partnership and the fees of the partnership.
What I wanted to understand is I think some of the books allude to the principle being guaranteed, I think 6 percent a year being guaranteed, and then you took a fourth, and the partners got three-fourths. In some cases they talk about 4 percent; in some cases they say there’s no guarantee. I would just appreciate a clarification on that.
Okay, we’ll make it short, because I’m not sure how much general interest there is to that, but there was never any guarantee. There was a guarantee that I wouldn’t get a penny myself.
There was none of this 1 percent fee and all that sort of thing that hedge funds now normally have. So there was—and after a short period of time, I told people I have all my capital in it basically.
So there was a guarantee I would follow, have a common destiny. There was never a guarantee of any sort.
Originally, the thing started by accident so that there were 11 different partnerships before they all got put together on January 1st, 1962 into Buffett Partnership.
So with the 11 different partnerships, they had different—some different arrangements based on the preferences of the limited partners. I offered them an option of three or four different choices, and different families made different choices.
When we put them together, we settled on the 6 percent preferential with a quarter of the profits over that with a carry forward of all deficiencies. Nobody was guaranteed anything on them—not Charlie; had a much better partnership.
This was the third, as I remember, wasn’t Charlie?
Yes, but we were smaller and operating specialty posts on the Stock Exchange. The facts were different.
Okay, let’s go to Eight.
Mr. Buffett, Mr. Munger, good morning. My name is Pete Banner, and I’m from Boulder, Colorado.
In the 1996 annual report, Mr. Buffett, you stated companies such as Coca-Cola and Gillette might well be labeled the inevitables, and you just reaffirmed your view of Coca-Cola and Gillette.
My question to you is: do you have the same view of American Express? That is, do you view American Express as “the inevitable”?
I’d like to clarify one point too. I didn’t really say I regard the companies as inevitables. I regarded the businesses—there’s dominance of soft drinks or their competitive strength and soft drinks and in razors and blades.
As a matter of fact, I actually pointed out in talking about that, a few paragraphs later, I pointed out that the danger of having a wonderful business is the temptation to go into less wonderful businesses.
And to some extent, for example, Gillette’s stumble in the last year or two has not been the product of the razor-and-blade business, but it’s been some other businesses which are not at all inevitable.
And that, you know, that is always a risk, and it’s a risk I pointed out that when a company with a wonderful business gets into a mediocre business, that usually the reputation of the mediocre business prevails over the supposed invincibility of the management of the wonderful business.
American Express is an interesting case study because it does have a—we always think in terms of share of mind versus share of market because of share of mind as their market will follow.
People virtually, probably 75 percent of the people in the world have something in their mind about Coca-Cola, and overwhelmingly it’s favorable.
Everybody in California has something in their mind about Sea's Candy, and overwhelmingly it’s favorable.
The job is to have it in a few more California minds or world minds in the case of Coke over the years and have it even be a little more favorable as the years go by. If we have that, everything else follows.
Consumer product organizations understand that American Express had a very special position in people’s minds about financial integrity over the years and ubiquity of acceptance.
When the banks closed in the early 30s, American Express travelers checks actually substituted to some extent for bank activity during that period.
The worldwide acceptance of this name meant that when American Express sold travelers checks, for many years their two primary competitors were what are now Citigroup, First National City, and the Bank of America.
And despite the fact that American Express charged you one percent when you bought your traveler’s checks, and you had two other premier organizations, Citicorp, imagine, and B of A and, actually, Barclays had one and Thomas Cook had one.
And American Express still had two-thirds of the market after 60 or 70 years—two-thirds of the worldwide market—while charging more for the product than these other very well-known competitors charge.
Anytime you can charge more for a product and maintain or increase market share against well-entrenched, well-known competitors, you have something very special in people’s minds.
The same thing came about when the credit card came around originally—American Express went into the credit card because they thought they were going to get killed on travelers checks, and they thought it was going to be a substitute.
Therefore, they had to go into it; it was a defensive move. It came about because a fellow named Ralph Schneider and Al Bloomingdale, a couple of people, came up with the Diners Club idea. And the Diners Club idea was sweeping well, initially New York and then the country in the mid-50s.
American Express got very worried because they thought, you know, people can use these cards. Nobody ever heard of these at that point or anything of the sort.
But they were going to use these cards instead of travelers checks. So they backed into the travelers check business.
They backed into the credit card business immediately, despite the jump Diners Club had on the business because Diners Club had the restaurants signed up already, and they already had the high rollers carrying around their card, and nobody had an American Express card.
But American Express went in, and they started charging more than Diners Club for the card, and they kept taking market share away.
Well, that is a great position to be in people’s minds where they are willing to, when faced with the choice, they’re willing to go with the newer product at a higher price and leave behind the entrenched product.
And it just showed the power of American Express. American Express had a special cachet; it identified you as something special when you pulled out your American Express card as opposed to your Diners Club card and as opposed to the Carte Blanche card, which was the third main competitor at the time. Visa still did not exist.
You could see this dominance prevail; that told you what was in people’s minds.
It’s why I bought into the stock in 1964. We bought five percent of the company for a huge investment at the time for us. I was only managing $20 million at the time, but you could see that this share of mind, this consumer franchise had not been lost in a considerable period of time.
American Express got into other businesses; they got into Firemen’s Fund insurance, which was a very big acquisition.
And to some extent, they let the visas of the world and all of those get established. They still had this preeminent cachet position, but it was eroding.
But I would say that Harvey Golub, along with a lot of other people, the management, has done an extremely good job of reaffirming, intensifying the cachet.
There will be probably $300 billion worth of charges, something in that area, put on American Express this year. The $300 billion—those are big numbers even in today’s world.
The average discount fee is about 2.73. If you look at the average discount fee on Visa/MasterCard, you know it’s going to be probably a full percentage point beneath that.
So you’ve got a percentage point on $300 billion, which is $3 billion of revenue that your competitor doesn't get.
You can do a lot of things for your clientele, and they’ve segmented the card, as you know.
They’ve even recently gone to this black card which sells for $1,000, and it’s got a very special cachet.
I would say that—I know I wouldn’t use the word inevitable, but I would say that, nourished properly, that the American Express name has huge value and is very, very likely to get stronger and stronger as the years go by.
But I don’t think that what they went through showed that it could take quite a beating and come back. But I don’t want to—I don’t think you’d want to test it that way indefinitely.
Incidentally, that’s one of the things we look for in businesses, is how—you know, if you see a business take a lot of adversity and still do well, that tells you something about the underlying strength of the business.
The classic case for me is AOL, four or five years ago. You know, I’m no expert on this, but I got the impression there for a period of time when they were having a lot of problems.
A very significant percentage of AOL’s customers were mad at them, but the number of customers went up every month. And that’s a terrific business. I mean, you have a business where your customers are mad at you and you’re growing, you know, that has met a certain test in my mind of utility.
And you might argue that American Express had that to some degree. It wasn’t that bad, but he had a lot of merchant unrest and all of that.
So occasionally, you will find that an interesting test of the strength of a business. Coca-Cola had some problems, you know, in Europe, but it comes back stronger than ever. They certainly had problems with new coke, and they came back stronger than ever.
So you do see that underlying strength, and that’s very impressive as a way of evaluating the depth and impenetrability of the moat that we talked about earlier.
Charlie?
Well, I think it would be easier to screw up American Express than a wood coca-cola or Gillette, but it’s an immensely strong business, and it's wonderful to have it. We own about 11 percent of American Express, so when there are $300 billion of charges, we’re getting $3 billion of those for the account of Berkshire, and it’s growing at a pretty good clip.
The first quarter, it grew very substantially, and both cardholders and charges, and my guess is that our 11 becomes more valuable over time.
It’s hard to think of anything that would destroy it.
The business is very interesting. They made a deal to put American Express cards into Costco. I think that is a very intelligent thing for American Express to have done, and it’s a very aggressive place that does a lot of interesting things.
Charlie is a director of Costco, so he’s in—Costco is an absolutely fabulous organization. We should have owned a lot of Costco over the years, and I blew it. Charlie was for it, but I blew it.
Okay, we’ll go to Area One again.
My name is Jin Jin Wang from San Diego, California. First, I would like to thank both of you. My question is also about growth and value.
If you look at the business in this country, most of them, if not all, are cyclical to various degrees. Certain businesses are, of course, more cyclical than others. So when you buy a business or make an investment in stock, do you have a cut-off?
Like if a business loses money in a downturn, we are not going to buy? If its earnings begin to decline in a downturn, we are not going to buy? But if the earnings growth slows down, then we can look at a business and make an investment.
So do you have a cut-off in terms of this cyclical factor? And also, when you buy a business in terms of the current P/E ratio, do you also have a cut-off?
Let’s say if its P/E ratio is more than 15 or 16, we are not going to buy the business no matter how much the earnings grow in the future.
So basically it’s about the growth, and I know value.
Yeah, we have no cut-off whatsoever. We don’t think in terms of absolutes that way, because again we are trying to think of how many birds are in the bush. Sometimes the number that are currently being shown could be negative.
One of the best buys we ever made was in 1976 when we bought a significant percentage of what became, through repurchases, 50 percent of Geico at a time when the company was losing a lot of money and was destined to lose a lot of money in the immediate future.
And you know, the fact they were losing money was not lost on us. But we thought we saw a future there that was significantly different than the current situation.
So it would not bother us in the least to buy into a business that currently was losing money for some reason that we understood and where we thought that the future was going to be significantly different.
Similarly, if the business is making some money, there’s no P/E ratio that we have in mind as being a cut-off point at all.
Their businesses—I mean you could have some business making a sliver of money on which you would pay a very, very high P/E ratio, but it’s basically—we look at all of these as businesses.
We are, for example, in executive jets. Yes, we’re losing money in Europe. Well, we expect to lose money until we’re getting established.
So does that mean it’s a bad thing to buy 100 percent of if you own the whole company or three percent of the executive jet that was a public company and you were buying into?
No. I mean, there are all kinds of decisions that involve the future looking different in some important way than the present. Most of our decisions relate to things where we expect the future not to change much, but you get this where American Express was a good example when we bought it in 1964.
A fellow named Tino de Angelus had caused them incredible trouble. You know, it was one of those decisions that looked for time as if it could break the company.
So we knew if you'd been charging for what Tino had stolen from the company against the income account that year or the legal cost, they were going to be attached to it—you were looking at a significant loss.
But the question was, what was American Express going to look like 10 or 20 years later? And we felt very good about that.
So there are no arbitrary cut-off points, but there is that focus on how much cash will this business deliver, you know, between now and kingdom come.
Now, as a practical matter, if you estimate it for 20 years or so, the terminal values get less important, but you do want to have in your mind a stream of cash that will be thrown off over, say, a 20-year period that makes sense just counted at a proper interest rate compared to what you’re paying today.
And that’s what investment is all about. Charlie?
Yeah, the answer is almost the exact reverse of what you were pointing toward. A business with something glorious underneath disguised by terrible numbers that cause cut-off points in other people's minds is ideal for us if we can figure it out.
We’ve had a couple of those in our history that have made us a lot of money. I mean we don’t want to wish anybody ill, but oh, I wouldn’t go that far.
Okay, well, Charlie, I think he’s speaking for both of us. Okay, we’ll move on to number two.
Mr. Buffett, I would like to start my question by giving you and Charlie ten lashes with a wet noodle—not because of 1999 and what happened to your net worth or our net worth, but because you have spoiled your shareholders into expecting 25 percent growth every year since 1965.
And then comes the bad, bad 1990, and it hits all of us. But by my calculations, you personally, Mr. Buffett, have lost over $10 billion—not million, billion dollars during 1999. So I don’t think we should get too mad at you because probably all of us at this point in our life have increased our net worth and made a lot of money now.
So you don’t get a wet noodle today, and the shareholders have, I’m sure, lost thousands and some have lost millions of dollars during the year 1999.
Now, after reading your biography in November of 1998—unfortunately, I didn’t know about you earlier—I started investing on November the 24th of ’98. And, of course, I’m a poor little investor, so I bought your B stock at $2,308.
Then because the market dropped, I bought some more on the 4th of December at $2,229. And then I bought on January the 24th of 2000 at $1,689.
So I do believe in dollar-cost averaging and I’ve been doing that for probably 30 years of my life. My January investment, I’m happy to say, is up 15 percent so the worst may be over. Now, I read your annual report and I want to compliment you that that is the easiest and most entertaining annual report I think created in the whole world.
And I hope you continue that kind of report.
I’m sorry, I was just told that I should have said who I am. My name is Gaylord Hanson and I’m from Santa Barbara, California, where Mr. Munger puts his big multi-million dollar boat in the water.
I’m not going to make any comment on that now with technology, computers, electronics, and software transforming our entire world, not just here, the world, I must admit that I personally invested in four technology, computer, software, and aggressive growth mutual funds and made up all of my 1999 losses on Berkshire Hathaway.
[Applause]
Are we asking too much as shareholders of Berkshire Hathaway for you men to put your brains to work and possibly speculate a little bit, maybe 10 percent of our money into the only play in town, which seems to be technology, electronics?
And I’ve read your report, and I understand a lot of your reasoning that it’s difficult, and it is difficult to project earnings a lot because they’re going to go bankrupt or they’re going to go out of business.
But isn’t there enough left in your brain power to maybe pick a few and see what’s going on? Because I made a— I made over 100 percent profit in 1999 on my aggressive position in the technology field.
Okay, well, the answer is we will never buy anything we don’t think we understand, and our definition of understanding is thinking that we have a reasonable probability of being able to assess where the business will be in 10 years.
But you know, we’d be delighted. We have a man here who has done very well, and if he has any business cards, you know, you could always invest with him, and we’d welcome— you can— we’ll give you a booth in our exhibitor section.
And anybody that wants to do that is perfectly, obviously free to do it with you or through anybody else that they select.
Now, you have a whole bunch of people out there that say they can do this and maybe they can and maybe they can’t, and maybe you can spot which ones can and can’t.
The only way we know how to make money is to try and evaluate businesses, and if we can’t evaluate a carbon steel company, we don’t buy it.
It doesn’t mean it isn’t a good buy; it doesn't mean it isn’t selling for a fraction of its worth. It just means that we don’t know how to evaluate it.
If we can’t evaluate the sensibilities of putting in a chemical plant or something in Brazil, we don’t do it.
Somebody else knows how to do it; more power to them. There are all kinds of people that know how to make money in ways that we don’t, but it’s a free world, and everybody can invest in those sort of things, but they would be making a mistake—a big mistake—to do it through us.
I mean, why pick a couple of guys like Charlie and me to do something like that with when you can pick all kinds of other people that say they know how to do it?
I would say this, incidentally, you mentioned a point earlier which is how the popular press tends to think of things, but we don’t consider ourselves, Charlie and I don’t, richer or poorer based on what the stock does.
We do feel richer or poorer based on what the business does. So we look at the business as to how much we're worth, and we do not look at the stock price because the stock price doesn't mean a thing to us.
I mean, it does— it doesn't for a variety of reasons, but beyond that, imagine trying to sell hundreds of thousands of shares at the stock price. We can always sell the business—we're not going to do it, but we could always sell it for what the business is worth.
We can’t sell our stock for what the stock price is necessarily.
So we look at the business entirely as in terms of evaluating our net worth.
We figure our net worth went up very, very slightly—very slightly in 1999. We would figure that no matter what the stock was selling for, it just doesn’t make any difference because we do look at the businesses.
We really look at it as if there wasn’t any quote on the stock because we don’t know what the stock is going to do.
If the business gets worth more at a reasonable rate, the stock will follow over time, but it won’t necessarily follow week by week or month by month or year by year.
We had a lousy year in 1999, but the stock price did not calibrate with that in any perfect or close to perfect manner.
We’ve had good years other times when the stock price is way overpriced or over-described what happened during the year, so we really measure all the time by the business.
We think of it as a private business, basically, for which there’s a quotation. If it’s handy to use that quotation either in buying more stock or something of the sort, we may do it, but it does not govern our ideas of value.
Charlie?
Yeah, generally, I would say that if you have a lot of lovely wealth in a form that makes you comfortable and somebody down the street has found a way to make money a lot faster in a way you don’t understand, you should not be made miserable by that process.
There are worse things in life than being left behind in possession of a lot of lovely money.
I mean, would you want to name a couple?
No, Charlie, I mean when the farmland went from farmland that probably tripled here in the late 70s without any real change in yields per acre or the price of the command, you know, are we going to sit around and stew because we didn’t buy farmland at the start?
Are we going to stew because all kinds of uranium stocks in the 50s or you can go back on all kinds of things that have—the conglomerates in the late 60s, the leasing companies?
I mean you can just go down the line, and it just doesn’t make any—we’re not in that game. We would know how to create a chain letter, believe me.
I mean we’ve seen it done so many times; you know we know the game, but it just isn’t our game.
[Applause]
Number Three.
Good morning, Mr. Buffett and Mr. Munger. My name is Stacey Braverman. I'm 15 years old and I'm from South Dakota, New York. It was really nice meeting you, Mr. Buffett, yesterday. Thank you.
I especially appreciated your internet stock tips!
[Laughter]
Yeah, keep it to yourself now, Stacey; that's our deal.
I bought the B shares two years ago when I decided that I needed to save some money for college. When the share price dipped below $1,500, I decided to investigate correspondence courses. Maybe you can get a scholarship!
So I’m glad to see that things are back on track now. My question is a lot of the companies that you invest in like Coca-Cola and Gillette seem to do better when the dollar is weak and interest rates are falling.
That seems to be the opposite of what’s happening now. So how is Berkshire positioning itself to take advantage of the current economic position with that assessment in mind?
Yeah, well, that's a good question. But if we thought we knew what the dollar was going to do or what interest rates were going to do, we would—we wouldn't do it, but we would just engage in transactions involving those commodities in effect or futures directly.
In other words, it would not be—if we thought that the dollar was going to weaken dramatically, and we won’t get those kind of thoughts, but if we did, you know we would buy other currencies. And it might benefit Coke in dollar terms if that happened, but it would be so much more efficient directly to pursue a currency play or an interest rate play than an indirect way through companies that have big international exposure.
We would probably do it directly.
We don’t really think much about that because just take currency. If you look at what the yen has traded at, you know over the last, well since World War II—what was it, 360 down to what, $0.70-some general even at the low and back up to $140-some and now I don’t know $105 or whatever it may be.
I mean those moves are huge but in the end, we’re really more interested in whether more people in Japan are going to drink Coca-Cola and over time, we’re better at predicting that than we are predicting what the yen will do.
And if Coca-Cola satisfies people’s needs, liquid needs more for more and more people, we will probably get a reasonable percentage of their purchasing power of those people around the world for their right to drink Coca-Cola or for shaving or whatever it may be.
So if the world’s standard of living improves bit by bit over time in an irregular fashion and we supply something the world wants, we will get our share in dollars eventually.
And what quarter to quarter or year to year how that moves around because of currency moves really doesn’t make any difference to us.
It makes a difference to reported earnings in that quarter but in terms of where Coca-Cola is going to be 10 or 20 years from now, it would be a big mistake I think to focus on currency moves as opposed to focusing on the product itself.
And Japan offers a good example of that because you had this—I mean, you really had a move from 360 or whatever it was to the high 70s or thereabouts.
I mean, that is an incredible move in currency, and it can overshadow in the short run even what’s happening in the business. But long range, what’s really made Coca-Cola strong in Japan is the fact that the Japanese people have accepted their products in a big way, and Coca-Cola has built this tremendous, for example, vending machine presence.
The Japanese market is very different than all the rest of the markets in the world virtually, and that such a high percentage flows through vending machines.
And my memory is that we may have something like 900 and some thousand out of something over 2 million vending machines in the country, so we’ve got this tremendously dominant position.
It’s a little like billboards might be in this country. Plus, we have this terrific product, Georgia Coffee, which is huge over there.
And that’s the sort of thing we focus on because that’s something we understand. We don’t understand what currencies are going to do week to week or month to month or year to year, and we always try to figure out what to focus on what’s knowable and what’s important.
Now, currency might be important, but we don’t think it’s knowable. Other things are unimportant but knowable.
But what really counts is what’s knowable and important. What’s knowable and important about Coca-Cola is the fact that more and more people are going to consume soft drinks around the world and have been doing so year after year after year, and Coca-Cola is going to gain share, and that the product is extraordinarily inexpensive relative to the pleasure it brings to people.
Coca-Cola in the 30s, when I was a kid, I bought four six for a quarter and sold them for a nickel each. That was a six-and-a-half-ounce bottle for a nickel a Coke, and you can buy a 12-ounce can now if you pick a supermarket sale for not much more than twice per ounce what it was selling for in the 30s.
You won’t find any products where that kind of a value proposition has developed over the years, so that’s the kind of thing we focus on.
And interest rates and foreign exchange rates, important as they may be in the short term, really are not going to determine whether we get rich over time.
The best time to buy stocks actually was—in recent years, you know, has been when interest rates were sky high.
And it looked like a very safe thing to do to put your money into Treasury bills at, well actually, the prime rate got up to 21.5, but you could put out money at huge rates in the early 80s.
And as attractive as that appeared, it was exactly the wrong thing to be doing.
It was better to be buying equities at that time because when interest rates change, their values change even much more.
Charlie?
Yeah, we have a willful agnosticism on all kinds of things, and that makes us concentrate on certain other things. This is a very good way to think if you’re as lazy as we are.
We’ll go to Four, please.
Jerry Zucker, Los Angeles, California. Good morning, boss. Calling your attention to the annual report and major investments, I appreciate your comments on two companies—M&T Bank, a new name to that list but not exactly a household name, at least on the West Coast—and Company No. 2, definitely a household name, but missing from the list this year, the Walt Disney Corporation.
Well, we don’t comment much on our holdings, particularly as to purchase or their sales, but we do have the CEO, long-time CEO of M&T here today, Bob Wilmers. Bob, would you stand up?
Norton, he should be up here somewhere—there he is.
Bob’s a terrific businessman, a terrific banker, and a terrific citizen. I’ve known him a long time, a good friend of Stan Lipsey, our publisher