1996 Berkshire Hathaway Annual Meeting (Full Version)

[Applause] Just a little early, but I think everyone's had a chance to take their seats. I must say this is the first time I've seen this program. They told me they'd surprise me, and they certainly did. Mark Hamburg, our Chief Financial Officer, who is now known around the office of CB, was in charge of putting all this together. And we have—I want you to know—we have no multimedia. This entire meeting is handled by a regular staff. We have no public relations department or investor relations or multimedia department or anything of the sort. So everybody just pitches in, and Mark will forever more be in charge of the pregame ceremonies.

We have a very large crowd today. I hope everybody has found a seat either in this main room or in the three overflow rooms. I think we can handle around 5,400, and historically, 62% or just about exactly 62% every year of the people who request tickets have come to the meeting. And if that percentage holds true today, we have just filled the rooms. We will have a problem in the future, which we haven't figured out the answer to yet, but we've got another year.

The way we'll run the meeting is that we'll get the business out of the way at the start, and we'll talk about the Class B issuance, then too. So it'll take a little longer than historically has been the case, and then we'll have Q&A until about noon. We'll have a short break at noon. There'll be sandwiches outside, which you can buy, and Charlie and I will have a couple of sandwiches up here at the podium. Then we will stay around until about 3:00 to answer more questions.

At that time, I'm sure everybody in the overflow rooms will be able to find a seat here in the main room, but people have come from great distances to attend this meeting, so we really want to give everyone a chance to get their questions asked. And Charlie and I are delighted to stick around. You can leave any time, obviously. As I've explained in the past, it's much better form to leave while Charlie is talking, but feel free to do that. And then at noon, you'll get a chance to do it in mass.

We have buses available to take you to other establishments of Berkshire locally if you have any money left at all after yesterday. So that will be the plan. I hope everyone does get their questions answered. We've got a system where we break this room into six zones. We have a couple of zones in other rooms, and then this afternoon, everybody will be able to be here in the main room. So that is the procedure.

I'm sure you recognize Charlie Munger, the vice chairman of Berkshire Hathaway, who also had not seen that movie before. We were—I think Mark was afraid to show it to us, but in any event, we will go on. I thought you might be interested. This is a list of people that came in for tickets, and we had—in addition to 99 from Canada and, of course, the U.S.—we had Australia, the Channel Islands, England, Greece, Hong Kong, Israel, Portugal, Puerto Rico, Singapore, Sweden, and Switzerland. I'm not sure all of those people are with us today, but they did send for tickets, and I've met a number that did come in from a distance.

So with that introduction, I will call the meeting to order. I'm Warren Buffett, chairman of the board of directors, and I do welcome you to this meeting. I hope everybody has a good time this weekend, and I'd like to introduce the directors in addition to myself and to Charlie. Now you don't get quite your money's worth this year from our directors. Collectively they've lost 100 pounds since our last meeting. I think they've been trying to live on the director's fees.

We have with us Howard Buffett, Wally, Susan T. Buffett, Malcolm G. Chase III, and Walter Scott Jr. Along with us today are our partners in the firm of Deloitte and Touché, our auditors, Mr. Ron Burgess and Mr. Craig Christensen. They're available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire. Mr. Forest Crutter is secretary for Berkshire; he will make a written record of the proceedings. Mr. Robert M. Fitz Simmons has been appointed inspector of elections at this meeting; he 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 D. Hamburg. Proxy cards have been returned through last Friday representing—they're representing. There's another script. Okay, there’s another. Oh yeah, here’s a script on that one. 1, 41,0 567 Berkshire shares are to be voted by the proxy holders as indicated on the cards. That number of shares represents a quorum, and we will therefore proceed directly with the meeting.

We will conduct the business of the meeting, then adjourn the formal meeting. After that, we will entertain questions that you may have. The first order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott Jr. to place a motion before the meeting. I move that the reading of the minutes of the last meeting of shareholders be dispensed with. Do I hear a second?

I second the motion. The motion has been moved and seconded. Are there any comments or questions? We will vote on this motion by voice vote. All those in favor say "I." Opposed? Motion's carried. The secretary have a report of the number of Berkshire shares outstanding entitled to vote and represented at the meeting?

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 8, 1996, being the record date for this meeting, there were 1,193,512 shares of Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting. Of that number, 1,415,167 shares are represented at this meeting by proxies returned through last Friday.

Thank you. If a shareholder is present who wishes to withdraw a proxy previously sent in and vote in person on the two items of business provided for in the proxy statement, he or she may do so. Also, if any shareholder present has not turned in a proxy and desires a ballot in order to vote in person on those two items, you may do so if you wish to do this. Please identify yourself to meeting officials in the aisles, who will furnish you with two ballots—one for each item. With those persons desiring ballots, please identify themselves so that we may distribute them. The first item of business of this meeting is to elect directors.

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 III, Charles T. Munger, and Walter Scott Jr. be elected as directors. Is there a second?

I second the motion. Are there any other nominations? Is there any discussion? I learned a lot in China, we did know—so 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 elections with the proxy holders. Please also submit to the inspectors of elections a ballot on the election of directors voting the proxies in accordance with the instructions they have received.

Mr. Fitz Simmons, when you are ready, you may give your report. My report is ready.

The ballots of the proxy holders received through last Friday cast not less than 114,660 votes for each nominee. That number far exceeds a majority of all shares outstanding. The certification required by Delaware law regarding the precise count of the votes, including the votes cast in person at this meeting, will be given to the secretary to be placed in the minutes of this meeting. Thank you, Mr. Fitz Simmons.

Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase III, Charles T. Munger, and Walter Scott Jr. have been elected as directors. The second item of business at this meeting is to consider the recommendation of the Board of Directors to amend the company's restated certificate of incorporation. The proposed amendment would add a provision to the restated certificate of incorporation authorizing the Board of Directors to issue up to 50 million shares of a new class B common stock, with each class B share having economic rights equivalent to 1/30th of a share of the current common stock, and with 1/200th of the vote, and to redesignate the company's current common stock as class A common stock and to make each share of class A common stock convertible into 30 shares of the new class B stock at the option of the holder.

I think before we get into moving that motion, I think this would be a good time to have a discussion and take your questions regarding the issuance of the Class B, and I should give you a little background. I think many of you know the background on this, but over the years we've had probably half a dozen people at one time or another propose the creation of an all-Berkshire Investment Company or unit trust, in other words an entity that would hold nothing but Berkshire stock and then would parcel out its own shares in smaller denomination pieces to the public.

We have generally discouraged that because we felt that there was considerable potential for abuse in such an arrangement, and our discouragement has been successful up until last fall when there was one prop—or there were two proposals that went as far as submission to the SEC for clearance that involved unit trusts, and these unit trusts would have owned nothing but Berkshire shares and then been sold to the public in small denominations, probably with a minimum investment of around $1,000 or so.

Holders of those trusts would have bought into an entity that had a defined life but that had considerable in the way of costs and some tax consequences that they might not anticipate when they came in. Charlie and I were worried that a combination of Berkshire's past record, which cannot be repeated, and high sales commissions and a low denomination and a lot of publicity about Berkshire and myself, which, as you've seen this morning, we attempt to discourage, would lead a great many people to end up buying the unit trust holdings without any idea really of what they were buying and with unrealistic expectations as to the future.

That would, in turn, create a considerable demand because these unit trusts would go out and buy Berkshire shares, that would create a considerable demand against a fixed supply, much of which is almost unavailable because people have a low tax basis and are reluctant to sell—and I hope they're reluctant to sell for other reasons—and that the very action of the creation of these and that push on the demand might very well create some speculative spurt in the stock, which in turn would induce people who had been approached about the trust to feel they were missing even more of a good thing by rushing in. Rising prices in certain kinds of markets create their own kind of demand; it's not a sustained demand, and it's a demand that the reversal of which later on, when people become disillusioned, can cause a lot of problems. But that potential was there with the flood of buyers with unrealistic expectations, high commissions, and a fixed supply.

So we attempted to dissuade both of the promoters. One backed away, and then came out a few months later with something that was a combination of Berkshire and some other securities which were at least thought to be in our portfolio. We started hearing from people that it was clear that they had no understanding of what they were buying or the costs involved or the potential tax implications or anything of the sort.

So at that time we faced—we had to make a decision, and we had to make it rather quickly, as to what would be the best solution to this problem that, in turn, wouldn't create the same sort of thing that we felt had potential harm when being done by these promoters. Obviously, we considered a split of the stock, but we were worried that a split would send out signals to all kinds of people who want to believe in things that may not be too believable about future performance and that they would look at it as some grand chance to buy at a lower price.

Of course it wouldn't really be a lower price in relation to value, but it would be a lower denomination, and that again against a fixed supply might very well have created the same kind of problem—maybe even a greater problem than would occur with the unit trust. So we came upon the idea of the class B shares, which would create a supply that would match the demand for, in effect, split shares and that would be offered in a way that did not create special inducements or create false, false inducements to people thinking of buying.

One of the things we did was we stuck a commission on it on the issuance of the class B shares that was about as low as any I've ever seen in many years in Wall Street because we did not want salespeople to have a great inducement to go out and sell the shares. We wanted anyone that was interested to read the prospectus and think about it and make their own decisions.

We did another thing which is quite counter to the normal commercial approach, which is that we said we would issue as many shares as people wanted to buy. You know, you do much better in this world if you're selling something to say only one to a customer, and you have to get in early, or you have to know somebody in order to get shares. Many new issues are sold that way, and it's very effective. I mean, you like those old stories about in Russia where there'd be lines and people would get in them without knowing what they were going to buy when they got to the front of the line.

That's a very effective selling tool, and one that Wall Street is not unfamiliar with. But we decided that to reduce any of that feeling that you have to get in early or only the big guys are going to get it, or something of the sort, that we would announce loud and clearly that we would have shares available for everyone that wanted. So there was no reason to assume that it couldn't be a hot stock in effect, and we've done various other things.

So our hope is that the class B shareholders that we attract are of the same quality as the people in this room, that they have an investment attitude, that where they feel they are buying into part of a business that they expect to stay with it for the indefinite future, maybe the rest of their lives. They do not think of it as a little piece of paper that may be hot because it's a new issue or something of the sort. It lets the people who are happy with the present shares stay in exactly the same position, which is what I'm going to do and what Charlie will do.

We have made the B very slightly disadvantageous in two respects to the A. It has a lower vote, and it will not participate in the shareholder contributions programs. There were reasons for both of those, but in addition to the explicit reasons, there also is the desire that the B not be made fully. It's just a slight bit inferior, but it's not fully as attractive as the A because we did not want to do anything that pushed everybody into converting into the B.

If that started in a big way, the B would then enjoy the better market and it would create its own dynamic where it made sense for everybody to do it. So we have left it so there is no reason for you—if you own the A—to convert to the B unless you wish to sell or give away some portion of your holding that would be less than a full A share, and it will be convenient for that reason. But beyond that, there should be no incentive. If the B should trade slightly above 1/30th of the price of the A, there will be arbitrage activity that will keep that from being anything other than a negligible amount.

It, of course, could trade well below 1/30th because the B is not convertible into the A. Charlie, would you like to add anything before we start taking questions on this? I encourage everyone to ask. There are no bad questions about this; I mean it. Last year, we talked about a preferred issue and people had very valid questions. I might take those two points of difference between the A and B just to start with.

On the shareholder designated contributions program, which was $12 a share last year, in addition to wanting the A to have a very small edge over the B, which would be a reason for not having the B participate, it also would get very impractical in terms of taking $12 and dividing it by 30 and soliciting the names of charities and to designate contributions. We can handle the present program fairly efficiently, but we would not want to be sending out checks for a dollar or two and it would get very inefficient. So we've told prospective B holders that that's not going to happen, and so they're fully informed coming in.

In connection with the vote, the issuance of the B does create more votes outstanding, so absent any change in the situation through the issuance of shares—which we're not particularly eager to issue—the vote—my vote will be diluted somewhat by this. Frankly, I had no desire to create a lot more shares which would dilute the vote of the Buffett family; it will be diluted somewhat by this action because we will have all the present votes outstanding plus some votes from the B.

If there is a lot of conversion to the B, it is true that our holding will go up percentage-wise, but I see no reason why people really should convert, so I don't think that's likely. I think in the end, it will stay very much the same, and—as I mentioned earlier—we want there to be a slight disadvantage to the B in all other respects.

We will treat the B just as the A. We have a problem with numbers at this annual meeting. We're going to have to do something next year, and we haven't figured it out yet either. But the suggestion was made by someone that maybe the B would get second-class seating or something. We're not going to have any of that. From this point forward, with the exception of the two things we put in the prospectus, the B shares will be treated in every way as equivalent to the A.

So with that and with Charlie's reluctance to elaborate, we have a six-zone system in here, and then we have another two zones in the overflow room. So if there are any questions in Zone 1, somebody just raise your hand and somebody will bring a microphone to you. We've got a question in Zone 1.

Good morning, I'm Marshall Patton from Bandera, Texas, and when the price is struck on the Class B shares, those of us who buy our shares through computer programs, do we have assurance that that whoever we buy from, that will be the price that we pay for these shares? Well, there'll be a price established probably Wednesday night or thereabouts of this week, and everybody will pay the same price. A very high percentage of that price, incidentally, will come to Berkshire; I mean there's a very, very low underwriting spread compared to any other offering.

Now once the initial offering is completed, everybody will pay the same price. Large institutions, the buyer of one share will pay the same price. Subsequently, the stock, we expect, will be listed on the New York Stock Exchange probably Thursday morning, and we have the world's greatest specialist here, I believe Jimmy Maguire, who handles the trading now of the common and will handle the trading of both the A and B. Jimmy, are you here? You want to stand up? There he is, the world's greatest specialist, Jimmy Maguire.

Okay, thanks. I think he leads the singing of "Wait Till the Sun Shines, Nelly" too annually at the annual meeting. You can see him on CNBC occasionally and the Nightly Business Report. I want to give equal time here. But Jimmy will be trading both classes of stock starting Thursday, as I said. The way I said, it will be impossible after the first few days, it would be impossible for the B to sell much above 1/30th of the A because people would buy the A and sell the B if more than a very small withholding—even the smallest of arbitrage differentials.

But there will be markets in two shares and in two classes. They will both trade in 10-share lots; that will be the round lot. The so-called round lot, usually the round lot on the New York Stock Exchange is 100 shares, but in the case of both Berkshire shares, the round lot will be 10 shares. Now I read one or two press accounts that said therefore the minimum purchase is 10 shares; that's not true.

The minimum purchase of each class of stock is one share; I mean, you can buy one share or two shares, or you can sell one share or two shares. And you have an odd lot differential just as you would if you were working with less than 100 shares of a company whose stock traded in 100-share round lots. But there is no minimum size in the case of either share, and you will see when they get the mechanics straightened out—they may have a little trouble with it—but you will see Berkshire A and Berkshire B quoted in the papers, and I think that you're that it'll be quite clear after Thursday what is going on on that.

I don't know about the computer purchases, but I don't that certainly in terms of the initial offering that will be through one of I think 137 people or brokers in the selling group, and it's the same no matter who you deal with. Zone 2.

My name is David Hendle; I'm from Boar Atone, Florida. To your knowledge, will this program effectively discourage the unit trusts? Well, it's certainly designed to, and the answer to that is yes because I see no way that a unit trust either in connection with the initial offering or with the subsequent trading—I see no way that a unit trust could offer people as an efficient and inexpensive way of participating in Berkshire as direct purchase of the B.

Bear in mind that the unit trust, if a unit trust were established, it would have to buy Berkshire shares in the market so it would have the costs that people have in buying shares and then on top of it, it would superimpose these other costs. In addition to the initial commission, they even had a valuation fee that was a job I wanted to have because every three months or however often—maybe every day somebody—it was their job was to evaluate this trust value, which involved the great skill of being able to locate it alphabetically in the newspaper. The figure was left blank as to what the evaluator's fee would be, but I had a feeling that it was one of the more cushy jobs available, and there was an added problem too.

I mean if these unit trusts started and did not get off the ground very far, they could have become something in the way of orphans, and they certainly would have become expensive to operate. And then with Berkshire paying nothing in the way of dividends, but with the trust incurring expenses, including this evaluator's fee, among others, but with the trust incurring expenses, they would have to sell small amounts periodically to pay the expenses, and that would create tax consequences for every unit trust holder.

And I mean people would not know what we felt. They would not know what they were getting into. The more serious problem is that somebody would flash our past record in front of them or show them some chart on Berkshire stock price and say, you know, this is your chance to do the same thing, and it obviously wouldn't have been. But based on what we have seen, right now we anticipate the offering being 350,000 shares. But the extent to which the number of tickets involved that even seeking out informed purchasers only, there's very substantial demand. So I think if you widen that circle to include uninformed, it might have been quite an experience.

I think the answer is that we will not have a problem with the unit trust in the future. Zone 3.

I'm Adam Angle from Boulder, Colorado. In terms of the number of shares that you're going to issue as B shares, do you plan to just look at the book on Wednesday and issue enough to totally satisfy the demand? Do you have any plans to do a secondary if it starts becoming a hot number? Yeah, well, I think what we plan is to tailor the size of the offering to fit the demand that appears Tuesday night or Wednesday morning or whenever the exact moment will be on that. But the offering will be designed to do that.

Like most offerings, I anticipate that the underwriter will—and this is a supposition at the moment, but it's frequently done—would sell some more shares than the initial offering with the intention of creating some short position in the security, and then they have an option to take from the company for 30 days up to 15% of whatever we initially sell, which protects them on their short position, but the short position also helps in terms of having an orderly market in the stock subsequently. But we will essentially tailor the size of the issue to the demand as it appears to us midweek.

We have no plans for any secondary offering. I think this has been sufficiently publicized; there's a large network of selling group members, so that people that are interested but wanted to buy in a smaller denomination will have had their chance. I think there will be a—present indications there'd be 350,000 shares out; there would be a fairly large number of holders based on what we're seeing, so the market should start Thursday morning on the exchange.

There should be, in my opinion, a reasonable market based on that kind of quantity and the number of people buying, and so I anticipate nothing subsequently. Zone 4.

You hear me? Yep. I've been that said that you [Laughter] I think I'll leave that one up to you what I said; I said at present prices Charlie and I do not think Berkshire stock is undervalued. Now that is not what's gotten reported sometimes. I mean sometimes people have said we thought it was overvalued; we did not. If you look at the prospectus or if you look at the annual report, you will see that what we said was we do not think it's undervalued.

I find it somewhat entertaining that people regard that as an amazing statement by somebody making a public offering, but if you think about it a bit, can you imagine a management that goes out and says to the world, “We are selling you something in the new stock, and it's way undervalued”? What do you say to your present shareholders if you go out and say to the public, “We're selling you something that's worth a dollar, and we're going to sell it to you for 80 cents?” Now, that would leave me very unhappy.

So I feel that any management that is talking about selling something in their stock and they say, “It's very undervalued,” either doesn't know what's good for their present shareholders or they may have their tongue in cheek. We would not be selling— we would not sell a part of your interest in Berkshire at a price which we did not feel was adequate for the present shareholders; it's that simple.

If we sell 1% of the company—and 350,000 shares is close to that figure B—we are selling 1% of your ownership in Sees Candy; we're selling 1% of your ownership in Geico; we're selling 1% of your ownership in the Buffalo News. Those are all valuable assets.

We have no intention of selling 1% or 10% or 100% of any of those entities at a price that is not fair to present shareholders. That doesn't mean it's unfair to new shareholders, but we're not going to—we would not be selling the stock if we thought it was undervalued. I'm not sure what we would have done if we had that position when the unit trust came along, but we have put in the perspective that we are not selling any of our shares.

Frequently on a new offering, you see present holders, but you know I have very close to 100% of my net worth in burkshire, and it leaves me quite happy. I've got a trust I run set up in 1964; I'm the sole trustee; I can do anything in that trust I want, and I am freed by the person who set up the trust of responsibility for a concentration of investments.

I have some members of my family who are beneficiaries of that trust. That trust owns nothing but Berkshire Hathaway stock. That doesn't bother me at all. I'm not recommending purchase, but I'm perfectly happy owning Berkshire. But we do not want [Applause]— we do not want people to think when they buy into Berkshire that they're buying something that's undervalued because it's not, and we say in that fourth caveat on the prospectus that we want people to buy it only if they expect to be holders for a very long time.

Charlie and I expect to be holders for a very long time, and in fact, you may see us up here sometime where we don't know who the guy next to us is, but we'll put on an act though. We— you know, that is our attitude toward Berkshire; we do not want people to come in who think it's going to be a hot stock or selling for more a year from now because we don't have the faintest idea whether it's going to be selling for more or less a year from now, never have had.

We do think that to the extent that Berkshire attracts a special class of shareholder that really looks at themselves as owning a part interest in a business like they'd own a part of a farm or a part of an apartment house and they expect to hold it really for the rest of their lives, we think that it's a perfectly sensible thing to do because we're doing it ourselves, but we don't want to go beyond that.

I'm not sure whether we got zone four. Can we go back there? My name is Gordon Shepard from Montreal. I wondered whether you had any plans for what to do with the money.

Well, the answer to that is in the prospectus. We have no immediate plans for the money, but we've faced that situation a number of times. I mean the money—the inflow of money and outflow of money should not be, in our view, attempted to be matched too carefully in this world because you get investment and business opportunities at times that differ from the times that funds come in.

One of the most important disciplines in running a business or managing investments is to not get your—not try to coordinate your actions simply with the availability of cash. Over time, we've found a way to use money; it's much tougher for us to run $17 billion than it was when we had $20 million in the business, there's no question about that, and we pointed that out many times, and it'll get tougher still if we get larger, which I hope we do.

But the fact is that if $400 million comes in on this offering or whatever, that's really no different than $400 million coming in in some other manner. When our float grows, we take in more money; when our earnings are retained, we take in more money; when we have—I forget what the checks would have been on the Cap Cities transaction, but it was certainly well over a billion dollars that came in on a single day.

So money's fungible, and we have to keep looking for bigger and bigger things as we go along, and that's what we do focus on, but it doesn't bother me to take it. It wouldn't bother me if we weren't taking it; it wouldn't bother me if we took in three times as much. It doesn't make a lot of difference, and we will have—we—the constant challenge for Charlie and me is to allocate capital as we go along, and it's a nice challenge.

Zone five. Hi there, Lee Dubro, longtime shareholder. I think going back a number of years now to when it was a little more intimate affair. Not quite sure whether I should look at you on the TV here or in real life on the stage, but anyway, I'm on the very right of you, and I see all the guards around you, and I see all the security and that sort of thing, and then I see this offering of the Class B, and I sort of wonder whether, from your perspective, you feel you might be in the same boat that the Pope and the president are. I mean this absolutely sincerely because I don't think that you have perhaps as good a handle as some of us do on the renown that you carry outside of Omaha, Nebraska. People who have no idea what investments are about are fully aware of who you are, and when they see this offering, I think you may find that there are substantially more people who are interested in just having a piece of you for the sake of saying they have a piece of you than having absolutely any idea what they're doing.

And I noticed that when I tried to read the fine print here on page 14, first paragraph, second line, you indicate some 50 million shares of Class B common stock may be offered, and so I would like you to comment on this situation that you find yourself in, where you may be perhaps out of touch with the popularity that you have.

Well, my first reaction is maybe I should tell Barbara we could save the clippings and sell them. I don't think it's quite as extreme as you say, but I in relation to the 50 million, first, we have to authorize enough shares because we are going to allow every share of Class A or present common stock but the Class A to convert to B, so we have to have the shares authorized to take care of 30 times the present 1.2 million shares.

So 36 million shares in effect are reserved for the present common stock, and as long as we were authorizing it, we need that much. Or we wouldn't have the shares available—if everybody came around to convert, that's not going to happen, but we still have to be prepared for it. We have no plans to issue a lot of shares, but the point you mentioned, which I think you stressed a little more than I would have, but that is what we were worried about in terms of the unit trust.

There are people that think that it can all happen again from this kind of base, which is mathematically a joke, and Charlie and I would settle for one whole lot less. Right today, and we have done everything we can. If we hadn't done this, the unit trust would have moved forward, and I think they would have cashed in on that phenomenon you suggested, and in a few years it would not have been in a somewhat different position because people can get very disillusioned if they have hopes that aren't realized.

And we have done everything possible to, I think, to filter out those who might have an unrealistic belief. Everyone should read a prospectus before they buy shares, and I think we've tailored and designed what we're doing about as well as we can to moderate that phenomenon you're talking about. There may be a few come in, but not too many. Charlie, do you have any thoughts on that?

Well, if we only issue the amount we're now talking about, it's sort of a non-event for Berkshire B, 1% or something that of the it solves the problem of these disreputable followers. 1%, what does it [Applause] matter? You heard that remark we were referring to Charlie earlier about all I want to know is where I'm going to die, so I'll never go there.

Well, we think about that. We believe in reverse engineering, and how do we keep people from buying it who really are going to be unhappy, you know? It's a little like singing country songs. You all should sing them backwards; that way you get your home back and your auto back and your wife back. Zone six, so we got was right here.

Good morning, I'm Raina Liy from Chicago, proud to be here. Oh, over here. Okay, I have a question that's been asked of me, and I really don't know. Several people wanted to know if they could buy directly from the company. The answer to that is no, but Solomon Brothers is the underwriter of the issue. They have 10, I think 37 or something, broker dealers—virtually all the major ones in the country in the selling group.

The cost to the company of doing this are really very, very low compared to any issue I’ve seen. When AT&T had their spinoff or the sale of Lucent, which was close to a $3 billion deal, their percentage costs were more than double what our costs will be, for example, on this offering of Berkshire.

So it's almost as if you're buying it; the Class B holder is buying it from us in terms of what I would call the frictional costs involved of getting the issued done. In fact, if we handled it ourselves, it might cost more. The company itself is not a broker-dealer, and it would require a whole group of different hoops to jump through in order to have a direct issue.

It will be sold only through broker-dealers. Zone seven. Even this will come in from another room here. We are there aren't any questions. In Zone Seven, no questions in Zone seven, Zone eight.

No questions from Zone eight. Okay, then we'll go back to Zone one. Mike Rockher from Flint, Michigan, God's country. I noticed in the press when this issue of the unit trust was going on that there apparently also were some people trying to form mutual funds to carry Berkshire stock, which I kind of thought was a good idea because there is one potential class of Berkshire owners that could only own Berkshire stock via either an open-end mutual fund or a closed-end mutual fund, and that is those thousands of teachers and hospital employees whose future retirement money is in 403(b) plans that are limited to investing in mutual funds only. And so I wonder if first of all, if you were aware of that and if so, if you considered that, and if not, if you might.

The answer is I wasn't aware of that, so it wasn't considered. There are, of course, some mutual funds that own Berkshire shares, but there's no all Berkshire Fund outstanding. I would say this: that if the law was set up to in some way to restrict investments of this group you're talking about to options that involve mutual funds but that don't involve individual stocks, I would think it might even be regarded as a way around it if a fund don't nothing but one stock.

Because if you can't buy General Motors directly under, I assume, the relevant rules or statutes on that, it would seem that a fund that owns nothing but General Motors might be regarded as a way of getting around that. But the answer is it was not considered. I don't know where the rules are derived, whether they can change by some organization, or they're part of some statute. But if they're part of some organization, by a vote of their directors, they might be able to allow purchase of individual stocks within those plans that you described.

But if not, it does seem to me that an all-one-stock fund might be regarded as simply a way around the rules. Zone two. Allan Rank, Pittsburgh, Pennsylvania. Have you determined what the symbol will be for the Class B? The symbol? No, we haven't.

May I make a suggestion? As a broker, the stocks that have come out and given themselves Class A and Class B cause massive confusion. If there'd be any way to make the symbol something like BRB and just keep it a simple three-letter symbol, it aids people both in following it on the tape on CNBC as brokers. Four four-letter symbols on the New York restrict a lot of things we can do as far as punching them in, if there's any way you could keep the symbol for the B a simple one, two, or three-letter symbol, it would be greatly appreciated.

Well, thanks for the suggestion on that. The Exchange has generally been exceptionally cooperative and trying to work with us. I mean a 10-share trading unit is no piece of cake for them, and I'm sure at times they have wished we were a little more like some of the other companies that list on the exchange. But they've been very, very cooperative and helpful and we are—they'll listen to things we suggest. We listen to things they suggest.

So we will try to do whatever facilitates things at the exchange and the reporting of prices, and it's nothing we will try to impose on them, believe me. I have no favorite name that I'm looking for, so we'll see what ideas they have and we'll include that suggestion. Zone three.

Paula Finster from Tulsa, Oklahoma. I'm very glad to be here. I'm one of those few second generation finally finagled a ticket out of my dad. Three years ago, her dad has a soda fountain; if you ever go to Tulsa, be sure to see him; he certainly does, and you're certainly invited to come back. I was here three years ago for the movie theater, and considering the growth, I know you won't leave your beloved Omaha, but maybe you could build a stadium that's covered considering the growth, with adequate parking.

Here's my question: You said there's going to be unlimited offering as much as they want. This question is not designed to get a rise out of Mr. Munger; however, that's not easy to do considering the bridge game of yesterday.

Anyway, my question is: You're authorizing up to 1%. What happens if it goes bananas as Zone five suggested, and it goes greater? You said this 1% is yours; is the next 1% yours? Is the next 1% ours? Do I know we are limited partners, and you're a controlling partner, but how far does this ball game go? Well, in terms of the size of the offering, whatever the size of the offering, it affects everybody economically the same. I mean it—our shares are no different than the ones of the people in this room.

So we do not care from an economic standpoint whether the issue turns out to be approximately 1% or whether it was one and a half or three-quarters or 1%. It simply—as long as we're not selling the stock below its true value—we're not going to be hurt by it. So it's inconsequential to us. We're not going to be helped in any significant way by a large sale. It would appear to me—we're just a few days away from the offering—and it's been out there a while, so I would doubt if there's huge changes.

But I don't know the answer to that. I mean, that could depend on what happens in the general stock market, but I don't think you'll see any huge change in the offering. If there were a big change, we obviously would very promptly let the SEC know. The SEC has wanted us, as we have seen changes in demand as we've gone along legally, to promptly change the size of the offering, and the covering page gets modified.

We've done that. As every day as indications come along, we've tried to be responsive to their instructions on that. The 350,000 shares is our best estimate as of last Friday, and we'll look at it in the next day or two. But I don't think it's going to change dramatically.

Zone four: Micah Sable from New York City, with a question for Charlie about his investment models. I'd like to know the most useful models on industry consolidation, vertical integration, and models which explain the special cases when it makes sense to invest in retailing stocks. Ah, well, I think I don't want to interrupt you now, but I think we'll say that we'll save those to the general question and answer session. This is only on the issuance of the Class B right now, but we're glad to have that question later on. It'll give Charlie time to figure out the answer for one thing.

We'll go through all of the questions regarding the Class B, and then we'll have a vote on the authorization of the Class B, and then we'll get into general questions and answers. Sir, somebody over there.

Well, we'll take another one from Zone four if there's somebody. Monitor Mark Fidi from Connecticut. I apologize ahead of this; this isn't meant to be an impotent question, or in any way, shape, or form. Do you think that the issuance of the B in any way might exact an effort to protect the folks who might be out there suckered in by the trust, if you will, in any way penalizes the A shareholders?

Either one, might penalize them either one financially or, two, philosophically, in the brick experience. I don't mean that in any kind of elitist fashion because I don't think you've ever propagated that. Berkshire doesn't propagate that; but clearly, there's a room full of people or rooms full of people who have made a commitment financially to show that their philosophy is with you.

Does does that get diminished? The other part of the question is the trust, as you portrayed them. They didn't sound terribly attractive in the long term. Would they perhaps have ultimately failed as folks realized that they hadn't gotten into what they thought?

Well, they might have, but I think the rub-off would have been on us rather than on the promoters of the trust. Probably much stronger on the promoters too, but in terms of the failure of the trust, I don't mean failure in an absolute sense, but in terms of disappointing their investors.

I really think if tens of thousands or hundreds of thousands of people had come into something that was sold as being an all-Berkshire type trust if people came away disappointed some years, I think they would tend to project that disappointment upon Berkshire fully, as much as the promoter who sold the trust to where they might not even be able to find at that time.

As for the first question, I don't think we wouldn't be doing this if we thought it would hurt present shareholders. I think as much as we might detest something else that was going on, and we designed it so it wouldn't hurt present shareholders in terms of having a philosophy of new shareholders, having a philosophy similar to the present ones we've tried to filter those out coming in.

But I intend after the offering to send out a booklet, you know, kind of like a freshman at college, you know, orientation greetings to Sashu. We'll send it to everybody new shareholders and the old shares explaining our philosophy, just as an orientation.

Of course, on the company, we'll get that out probably in a month or so after the offering settles down. I don't see any reason that Berkshire has evolved over a long period of time. We had 12 shareholders at the annual meeting 15 years ago, and it seems we have been able to retain the same class and group of shareholders in terms of people who really understand the business.

It's a different group than you find at other companies, and I think we can—as long as we've had this filter in effect operating, as new people join us, I think we can keep it. Charlie, yeah, if the offering went wild and you issued 3% of the company new, you were also taking in a billion. That is a non-event for us.

He's very excitable; don't say anything to him. Zone five, I would like to ask the chairman and Mr Munger about Freddy Mac. A few years ago, I think they're earning most of their money from the guarantee fees and the float. Now they've got the huge balance sheet, a lot of short-term liabilities. Do you think that's a more risky business now in that the spread might go away in some less than foreseen event?

Charlie, I think he aimed that one at you. Horrible risks; it's still a very good business. Yeah, what the question referred to is that formerly Freddy Mac emphasized and normally just the guarantee of credit, and then passed all interest rate risks onto the market. Now they've retained for their portfolio a greater percentage of the mortgages that come through their hands.

I think they've structured the liabilities quite intelligently to handle what they call in the investment world the convexity problem, which is that the borrower has the option of calling off the deal tomorrow or retaining it for 30 years, and that is a very disadvantageous contract to enter into if you lend money.

They've done a quite intelligent job of attacking that by callable debt and various things, but you can't address a problem like that totally. There's no way to set up some model that satisfies that entire risk. They've done a good job, but Charlie says the larger the portfolio as compared to guarantee fees, because you still got the credit risk on the portfolio, and you've added a little interest rate risk at the extremes, and it doesn't keep us up at night, but it is a tiny bit riskier than it used to be.

Zone five: Yes, I'd like to ask the chairman and Mr Munger about Solomon. Solomon experienced quite a lot of volatility in profits and even revenues in the past years. What are your views on how this will develop in the future with respect to volatility in profits and revenues? I think get 100%. Charlie, want to take that one too?

Well, I can see he can hear that's we, we make a great [Laughter] combination. Well, you can see we aren't wasting much around the joint. Solomon's earnings have always been volatile, at least all the time I've been around the place, and I don't think that that volatility is likely to disappear.

All that said, we very much like the people at Solomon, and they've done a ton of business with Berkshire over the years, and a whole lot of different capacities, and they've done it very well.

So we're high on the firm as a customer, and firms we like as a customer, we think maybe other people will like as a customer. Generally, we love it—volatile or no. If you look at Solomon as well as other firms of that type, they mark their Securities to Market, and so that changes in those marks go through earnings daily actually, but you see them quarterly.

Interestingly, if you took Berkshire over the last 30 years and marked it to market as we do now for balance sheet purposes, but not for income state purposes because the rules are different, you would see enormous volatility quarter to quarter in Berkshire's figures. You would—and you would see, I don't think you'd necessarily seen any down year, but you would have seen swings between a few percent and perhaps 50% or something.

So if you looked quarterly, you'd have seen a number of quarters of losses and you would have seen some great upsurges too, and the volatility would be extreme if it had all been run through the income account. But accounting convention does not call for running it through the income account in the case of Berkshire, and it does in the case of Solomon.

The nature of their business is volatile earnings. The nature of most Wall Street businesses is going to be volatile earnings. Some may follow policies that tend to make it look a little less volatile than it might actually be. Even the real thing that counts is two things really.

I mean, is running it so that the volatility never kills you in any way? And then second is having a decent return on equity over time, and I think that the people at the top of Solomon are very focused on that. I think it's illogical for the credit rating agencies to mark down Solomon as much as they do because the earnings are volatile, but they're in a style business. The business is not an easy business to predict unless you have a business that's very institutional in character, and there aren't many of those in Wall Street.

Zone six, I'm sorry; we got it. The microphone's over in here—just raise your hand, and the monitor will supply the microphone. Thank you, Warren, for including me out of order. It's good to have here.

Norton represents a family that came in 1956 and been with us ever since. Very fortunate connection, and it both ways, both ways. And careful, Norton; we don't want you mobbed on the way out, but I might say that it all began with my father discovering, thanks to Professor Finance, who was also at the University of Oklahoma: Ben Graham back in 1940.

And then later, when Ben Graham was about to retire, we were trying to find his Protege, and clearly that was Warren. So he belongs to that long tradition, but my question is: You've mentioned the very strong companies that Berkshire has that are really International companies like Coca-Cola and Gillette, but are you considering, or have you ever thought of considering the foreign companies that are undervalued, or have you, for some reason, not included that in your Universe of companies to consider?

We’ve looked at companies domiciled in other countries, and we continue to look at companies domiciled in other countries. We wouldn't—we're happy for the U.S. and for Atlanta that Coca-Cola is domiciled in Atlanta, but would we pass on it if it happened to be domiciled in England? No, we'd love it if it were domiciled in England too, and we feel that the important thing is the business, not the domicile.

Although we're more familiar in a general way with domestic companies that are domiciled here, although they may make their money internationally, we feel a tiny bit more comfortable—but just a tiny bit—in terms of understanding the nuance of taxes and politics and shareholder governance and all of that in something where we've been reading and thinking about it daily than some place where we've had a little less experience.

But we'd love to find a wonderful business that is domiciled in any one of 30 or so countries around the world. We look some. We don't look as hard as we look at domestic companies because we're not as familiar with them, but we do not have such a surplus of ideas that we can afford to ignore any possibilities.

And if we can find something with a market cap probably at least $5 billion or greater that strikes us as having our kind of qualities and the price is right and everything, we will buy. Zone one.

John Lauer from Boulder, Colorado, are there some worthwhile books that you could recommend to us? And secondly, with respect to Eisner and Disney, how would you define Michael Eisner's circle of competence? And are you concerned that he might step outside it?
Well, I would say that he has proven himself very good at understanding what Disney is really all about, and you can look back to the predecessor management between Walt and Eisner. They didn't really do much with that.

You know, what is special about Disney? How do you make it more special to more people? I mean, those are the things that you want to M. You've got wonderful ingredients to work with when you're working with something like Disney. I mean, one of the advantages we were talking about the mayale clinic and brain surgeons and the nice thing about the mouse is that he doesn't have an agent.

I mean, the mouse is yours, and he's not in there renegotiating every week or every month and saying, “Just look at how much more famous I’ve become in China,” you know, or something. So if you own the mouse, you own the mouse, and Eisner understands all of that very well.

I would say he's been very skillful in terms of how he's thought about it. I worry about any manager; it has nothing to do with Michael Eisner. Charlie and I worry about ourselves in terms of getting out of our circle of competence. We've done it.

It is very tempting. It's probably part of the human condition in terms of Huus or something that, if you know, if you're as Charlie would say, if you're a duck floating on a pond and it's been raining and you're going up in the world, after a while, you think it's you and not the rain. So, you know, that you're some duck.

But right and we all succumb to that a little bit, but I think that Disney, Coca-Cola, Gillette, I think those companies are very focused. I think our operating units are very focused, and I think that gives us a huge advantage over the managers that are getting a little bored and decide that they better fool around with just how talented they really are.

Charlie, do you have anything to add?

Zone five, I believe. Yes, my name is Ted Elliott from Connecticut. The press reported a recent investment you made in the real estate business, and I wondered if you would comment as to your outlook for that business.

Well, that's just sort of a—a um an asterisk. I’ve got virtually everything in Berkshire, and I own a few municipal bonds outside and a few other things, but I don't want to buy anything that Berkshire's involved.

It just complicates life, and all the best things I like are in Berkshire, so every now and then some little thing happens to hit the radar screen that is too small really for Berkshire, and I'd bought 100 shares of that company back when I—it's called Property Capital Trust. I bought 100 shares of that back when we owned NHP, which had done a couple of deals with them.

So I, in my policy of reading every annual report in sight that can further my knowledge about anything, I bought 100 shares and then I happened to see a year or so ago where they said they were going to liquidate. So having some money around, I bought that, but it's not based on any feeling about the real estate business or any sophisticated analysis of the company or anything else; it’s just a minor personal investment.

I have no insights whatsoever. We've done a few things in real estate at Berkshire, but they've enlarged things, uh— and there was a brief period when there were a couple things that were intelligent to do. If we’d started a little earlier, there might have been a lot more things, but we started a little late. So we’re doing nothing now, but we listen to things occasionally, and we're basically looking for big things at Berkshire, and we haven't found anything in real estate in a long time.

And we may never, but who can tell? I mean, we got our—from the egg in the water, and the couple things we're in are working out fine, but they're not significant relative to Berkshire’s size.

We'll go to zone six, and this is the last question because it's going to be three o'clock, and let's have Zone six.

Hi, my name is Mike Nolan from New Jersey. My wife and I have been shareholders since 1984, and happy ones. Thank you both.

Two questions today: The retail store industry, in light of Berkshire's outstanding 23% annual growth in book value per share and the industry's roughly 8% growth in equity over the last several years, we wonder why would Berkshire exchange stock for securities, such as these, when the growth in the net worth of the acquired companies, if they're anywhere near the industry average that you’ve acquired this year, are one-third or less to quote Bartlett?

The average diner would put the growth of the market simply by raising the price to meet the consistently strong performance of Berkshire? And what is your general view on executive stock options, which could lead to a focus on short-term returns rather than long-term stability?

You answered a related question regarding Dow Auto opportunities; are there other insurance businesses potentially worth expanding into? Is your focus on super catastrophic opportunities in autos enough? You answered a related question regarding Dow Auto opportunities; are there other insurance businesses potentially worth expanding into?

Well, the focus on super catastrophic is certainly going to expand in terms of opportunities, but there are plenty of people who are not willing to consider it over the long haul. There will be situations that arise just like with our float businesses where we have no interest in accumulating too much capital, and we should ensure that is done so efficiently. But as Charlie said, the retail store industry will change at times based on changing tastes and changing trends, and I could be short-sighted if we don't adapt to that as a company.

But we find businesses that allow us to move with that changing environment that could work to our favor in the end.

Thank you. Well, I think we’ve also created arrangements and the way we've written the prospectus and rewarded selling brokers that tend to dampen demand both individual and institutional. And we sometimes accomplish what we try to do.

We don't anticipate that happening, and I think the way we've arranged it, it won't happen, but it could. Thank you for your questions, and thank you for your time.