2013 Berkshire Hathaway Annual Meeting (Full Version)
Morning! Kind of all worn out. We're going to—well, first of all, I really want to thank Brad Underwood; he puts the movie together every year, does a terrific job. [Applause] Andy Hayward and Amy are responsible for the cartoon; they also produce "A Secret Millionaire's Club," which has been a huge hit this year, and I really want to thank them for their part in this too. [Applause] And finally, Carrie Silva, who puts this whole affair together, she's four months pregnant, she got her MBA, I think, yesterday, and in addition, she is the ringmaster for all of this. So let's give Carrie a terrific hand. [Applause]
We'll go through a few figures, a few slides. I'll introduce the directors and make one or two more announcements, and then we'll get on to the questions. Now, if we could put up the first slide, which is the earnings that were released yesterday. As you can see, it was a good quarter; it wasn't quite as good a quarter as it looks, which I'll explain in a second. But really, all of our businesses did very well. You should focus on operating earnings—Charlie’s getting a head start here on the peanut brittle and budget, so I’ll catch up later.
It was a good—very good—benign quarter in insurance. But our other businesses, particularly our big businesses, did quite well, and I don't remember whether we've ever had operating earnings of more than three point almost eight billion. But in any event, it was quite satisfactory. Now we'll put up slide two. The insurance earnings were helped a bit; they were still terrific without these factors, but they were helped a bit by the fact that the dollar was strong, and that reduces the liabilities we have on outstanding foreign currency. So if we have losses we're going to pay in the future, and they're payable in pounds or euros, and the dollar appreciates against those currencies, we get a small benefit from that. We also have—it hurts us in other ways—we have so many different kinds of businesses and then we own other earnings through Coca-Cola that operate around the world that I really never know whether when the dollar goes up or down, whether it helps us or not. So I've never been able to figure it out, so we just sort of take it as it comes. But we do want to explain that to you—the insurance earnings.
And then we had another item which is kind of interesting. We’ve had a disagreement with Swiss Re about a life reinsurance contract, and that disagreement probably lasted for well over a year. And that was settled in the first quarter, and as you can see, we showed a gain of 255 million pre-tax from settling this disagreement. But interestingly, Swiss Re showed a gain of 100 million also from settling the disagreement. So we are working on an arrangement with Swiss Re. We'll get into an argument every quarter and both report higher earnings when we settle it. It's magnificent what accounting can do.
One real high point of the first quarter was the pickup, which I noted in the annual report about the gain in both the closure rate and the persistency rate at Geico. These are hugely important factors, and if we'll put up the chart showing the gain of Geico’s auto policies, the strengths I mentioned in 2012 not only continued in 2013, but the trend has become even stronger. And there are a lot of seasonal policy gains, but as you can see, month by month, our gains of ex and policies have very significantly improved over 2012, and again it's because our closure ratio—in other words, the number of people that get a quote from us and then go on to buy a policy—that rate has improved very significantly this year. And with it, we also had a gain in persistency, the people that renew the policies with us, and that's pure gold. A policy has a mathematical value to us of at least fifteen hundred dollars. So if we add a million policies in a year—and I'm hopeful we might do that this year—that's a billion and a half of value that gets built into our intrinsic value, which does not show up on the income statement or balance sheet at all, but it does increase the value of Geico versus what we carry it for.
And I can't resist a little sales pitch on that because this closure rate—which like I say is at incredible levels—means that when people go to our website or call us and get a quote, they find that they can save a lot of money. I mean, people love our little gecko, but they buy the policies because we save them money. And it just so happens that in the auditorium, right near here, the exposition hall, we have a lot of very friendly people that will help you save money too. So I urge you—you can walk out anytime Charlie is talking and go and get a quote, and a very high percentage of you could save money by doing that. And you know that is in the Berkshire spirit—to save money at every opportunity. So I'm hoping you will check that out, and we will set a record for policies sold.
And finally, our railroad this year is doing very well. You saw the earnings in the first quarter report if you've had a chance to look at that, and we've got some figures up that show our gain in car loadings in the first 17 weeks has been 3.8, whereas the other four major class one railroads in the United States have had a gain of four-tenths percent. That's significant money. And we don't have the Canadian railroads here that operate in the United States; they both come down, the Canadian National, Canadian Pacific. But this is representative of what's been happening. We've been helped by the fact that fortunately a lot of oil has been found very, very close to our railroad tracks, and what better place to find oil. And so we've been moving a lot of that, and it's worked, and we'll be moving a lot more the way things are going.
And as a result of all this, we now will put up the next slide—we're now the fifth most valuable company in the world. [Applause] And that will change over time, but I hope it changes for the better. I'd like the business part of this meeting to start at around 3:30, and at that time we'll have the election of directors. But I would like nevertheless for those of you who won’t stick around to the bitter end to introduce our directors, and Charlie and our directors, and if our directors would stand and remain standing when I call your name. And no matter how strong the urge, withhold your applause until they're all finished standing, and then you can withhold your applause if you wish to. But I plan to applaud, okay? Howard Buffett, Steve Burke, Susan Decker. So just stand and remain standing. There we are, okay? Bill Gates, Sandy Gottman, Charlotte Guyman, Don Keel, Tom Murphy, Ron Olson, Walter Scott Jr., and our soon-to-be new member Merle Whitmer. Okay, no more withholding. [Applause]
Now we'll start the questioning in just one minute, but there were one or two announcements to make. We did not put it in the annual report because we hadn't firmed it up yet, but tomorrow at Borsheim’s, our friend Ariela Singh will be available to play table tennis with any of you foolish enough to challenge her. And I met Ariela when she was nine, and she became the youngest women’s table tennis champion of the United States, and then last summer she went on to the Olympics. And at the Olympics, she won her first two matches, and she won more games off the woman that became the eventual Olympic champion than any other participant in that event. So Ariela will be out there tomorrow at one o'clock, and if you're courageous, you'll show up with your paddle and end up looking like an idiot.
One more introduction—I don’t know whether we can get a spotlight on him or not, but Stan Lipsy retired this year as publisher of the Buffalo News. And was Charlie going to test as well as I back in 1978, 79, 80? We had an enormous business problem at Buffalo News. We were locked in a competitive struggle, and we were not doing well, in part because we were operating under a tough judicial order for a while until it got reversed on appeal. And Stan gave up a wonderful life here in Omaha and asked no questions and for no pay came up to Buffalo, and the Buffalo News would not have turned out to be the paper that it’s turned out to be or produced the profits that have been produced for Berkshire without Stan Lipsy. So if Stan could stand, let’s give him a hand. Stan, the man. [Applause]
One other announcement, then we’ll go to the questions. It was announced a couple of days ago that we bought out the final twenty percent of Iscar held by the family for about two billion dollars. It’s a transaction they’re happy with, we’re happy with. Matter of fact, if you saw Eitan Wertheimer dancing on Dancing with the Stars there, you could have seen how happy he was. So we will now own a hundred percent of Iscar, but our relationship with the Wertheimer family will continue. It’s been a sheer joy. The business has done terrifically, the people have behaved magnificently, and Iscar will be part of Berkshire forever. So I want to thank Eitan and his family. And hey Tom, are you here? Can you stand up? And your family right here? Let’s have a light here in the front row, okay? Okay, we’ll now move on to our questions. We’ll continue these till about noon. We’ll take an hour break for lunch, we’ll come back, and then we’ll continue till about 3:30, at which time we will convene the business meeting. And we will start off—we have three journalists who have been here before on the right, and we have a distinguished panel on the left, including a short seller, perhaps a first at an annual meeting. And we will start off with Carol Loomis.
Good morning. Speaking for the three of us, I hope, here, we have received into the thousands of questions; we don't even know how many. And if we didn't pick your question, it was because we just didn't get to it. I do want to tell you that Warren and Charlie have no idea of what our questions are going to be, no hints at all. And so we look forward to sending them curveballs.
I'll start off here. Warren, you measure Berkshire—this is from William Bernard of Colleyville, Texas—you measure Berkshire's corporate performance based on growth and book value per share. The table on page 103 of the annual report shows book value per share has grown at less than an average of 12 percent a year for nine of the last 11 five-year periods. Yet in your last annual letter, you state, quote, "the S&P 500 earns considerably more than 12 percent on net worth." And then you say that seems reasonable for Berkshire. Also, why do you say that, given the past record showing that Berkshire has not been earning that much, or is it that you expect to earn that much recognizing that it is not assured in the future?
Yeah, it certainly is not assured in the future, and the last 10 or so years have not been the best for business generally. But if the stock market continues to behave in 2013 as it has so far, this will be the first five-year period where the gain in book value per share has fallen short of the market performance, including dividends of the S&P. And that won't be a happy day, but it won’t discourage us because it will be a period where the market has gone up in every one of the five years. As we've regularly pointed out, we're likely to do better in down years as we did in 2008, for example, which is the year that gets dropped this year. We're likely to do better in down years relatively than we do in up years.
Charlie, how do you feel about the prospects of—?
I should point out incidentally that we use book value because it’s a calculable figure and it does serve as a reasonable proxy of the year-to-year change in the intrinsic value of Berkshire. If we could really give you a figure for intrinsic value and back it up, that would be the important figure. As I pointed out, if we gain a million policyholders at Geico, that actually adds a billion and a half to intrinsic value, and it doesn’t add a dime to book value. So there is a significant gap, which is why we're willing to buy in stock at 120% of book value. There’s a significant gap between the two, but book value is a useful tracking device.
I should point out also—I did this in the annual report—in respect to Marmon, when we buy the Iscar stock, which we pay about two billion for the day we buy it, we mark it down in terms of our book value by roughly a billion dollars. So a billion dollars comes off our book value for making a purchase, which we regard as quite satisfactory. And so there are these distortions that occur, but in the end we have to do better for you than you would do in an index fund. And if we don’t, we aren’t earning our pay. And I think we’ll do that in the future, but I don’t think we’ll do it every year. And we’ve proven that in the last few years.
Charlie?
Well, I confidently expect that Berkshire is going to do quite well over the long term, and I don’t pay much attention to whether it’s five years or three years. I think we have momentum in place that are going to do okay. Of course, we won’t do as well in the future in terms of annual gain averaged out because our past returns were almost unbelievable, so we’re slowing down. But I think it’ll still be very pleasant.
At 89, Charlie is not really concerned about this stuff year to year. I mean, he’s taking a longer range view.
I’m trying to take care of my old age, which might come on at any time. I haven’t noticed it.
Okay, Jonathan Brandt is a newcomer to the panel; his area is the other than insurance aspects of Berkshire Hathaway, and I can assure you that no one has paid more detail—I played Johnny chess when he was about four years old, and I don’t know, I must have been 40 or something at the time, and he kept insisting during dinner that we played chess afterwards. And we started playing, and of course he got me into some impossible position in a few moves, and I told his parents to put him to bed, so Johnny, I still have those kind of comebacks in me, so be careful what you ask.
John Brandt: Good to see you, Warren. A question about Iscar: What do you feel are the specific competitive advantages that Iscar has over its primary competitor, Sandvik, and in turn, what advantages does Sandvik have over Iscar as the larger player?
Warren Buffett: Yeah, Sandvik is a very good company, and Iscar is a much better company. The advantage it has is brains, and incredible passion for the business. It’s interesting to reflect on Iscar because if you go back to, what would it be, 1951 or thereabouts when Seth Wertheimer, who would come from Germany, was in Israel started Iscar—just think of the prospect that was facing him. Here was a company like Sandvik or even a company like Canada Metal, well-entrenched companies, well-financed, and here’s this fellow in Israel, 25 years old, and the raw material for these cutting tools comes from China. At the time, the raw material was in Israel; so everybody buys their tungsten from China and they sell to customers that are using large machine tools throughout the world. But they’re selling to heavy industry to a significant extent. So they’re selling to people like Boeing or General Motors or big industrial companies in Germany and there’s no great locational advantage in terms of being in Israel doing this, but here’s this 25-year-old fellow getting the tungsten from thousands of miles away, selling it to customers thousands of miles away, competing against people like Sandvik, and this remarkable business, Iscar, comes from that, and there’s no other answer you can give to your question when you see that result than to say that you have had some incredibly talented people who never stopped working, never stop trying to improve the product, never stop trying to make customers happy, and that continues to this day.
Sandvik is a very good company; I can tell you based not only on the figures but on every other aspect of business observation that I possess that Iscar is one of the great companies of the world, and we feel very fortunate to own it and to be associated with their management.
Charlie?
Well, it's a good comparison. Sandvik is a fabulous company, and it's a particular achievement to really do a little better in the competitive market as Iscar has done quite a bit better. Have you really ever seen much better operation than Iscar in the manufacturing business? Surely, it's the only place I was ever in where I saw nothing but robots and engineers working computers. You cannot believe how modern Iscar is.
Yeah, and the game's not over yet, either.
Okay, now we go to a shareholder in station number one.
Hi, Dan Lewis from Chicago. First of all, I wanted to thank you for letting us in the building early today, but let’s not do that again next year, though—I don’t want to wake up any earlier—get in line. If we had a company that sold coats, we would have left you out there.
And then always a comeback, when you think about Berkshire and the decade after you're gone. My question is, what worries you the most? What—I know nothing keeps you up at night—but what are your big worries? And you know, what can go wrong?
Well, it's a good question—it's one we think about all the time and that's why the culture is all important, the businesses we own are all important because, you know, those trains will keep running and people will keep calling Geico the day after I die. There's no question about that. And the key is preserving the culture and having a successor, a CEO that will have more brains, more energy, and more passion for it even than I have, and it’s the number one subject that our board considers at every meeting. And we're solidly in agreement as to whom that individual should be, and I think the culture has just become intensified year after year after year.
I think Charlie would agree with it. I mean, we always knew what we were about when we first got involved with Berkshire, but making sure that everybody that joined us—that the owners, the shareholders, directors, managers—everybody that bought into this what I think very special culture took time. But it is, I think, it's really one of a kind now, and I think that it will remain one of a kind. I think that anything that comes in—any foreign type of behavior would be cast out because people self-selected into this group and into the company, and it would be rejected like a foreign tissue if we got the wrong sort of person in there. We have a board that is especially devoted to Berkshire; we don’t hold them by paying them huge amounts, maybe noted; and we have people who have brought their companies to Berkshire because they want to be part of it, as did Iscar.
So I think that whoever succeeds me—and it’ll be a lot of newspaper stories and people after six months, so there’ll be a story that says, you know, “it isn’t the same thing.” It will be the same thing. You can count on that.
Charlie, what are your thoughts?
Well, my thoughts are very simple. I want to say to the many mongers in the audience, don’t be so stupid as to sell these shares. That goes for the Buffets too.
Okay, Becky, this is a question that comes from Ben Noll, who happens to be the Chief Operating Officer at the Greater Twin Cities United Way, and he writes in that after the Heinz deal, there was a column that was written indicating that you had gotten the better end of the Heinz deal from your Brazilian partners. That column said that your return was likely to come from the preferred stock dividends with the common equity portion being dead money. It also said that the way the deal was structured indicated your low expectations for the market overall. Is this an accurate portrayal of the deal and of your expectations for the market overall?
No, it’s totally inaccurate. The… it’s interesting, Georgie, Apollo Lemon and I were in Boulder, Colorado, in early December. I can’t remember if it was on the way to the airport or when we got on the plane, but he said that he was thinking about going to the people at Heinz then and proposing a deal, and would I be interested? And I—because I knew both Heinz and I knew George Apollo, and I thought highly, very highly of both—I said I’m in. And maybe a week later—I don’t remember exactly how long—I received from George Apollo, who I’d known for many years starting at Gillette when we were both directors, I received a term sheet on the deal and another sheet on governance procedures that he suggested. And he said, “if you’ve got any thoughts about changing this, just let me know; they’re just his thoughts.” It was an absolutely fair deal, and it was—I didn’t have to change a word in either the term sheet or the governance arrangement. Now we, actually, Charlie and I probably paid a little more than we would have paid if we had been doing the deal ourselves because we think that George Apollo and his associates are extraordinary managers. They’re both classy and they’re unusually good, and so we stretched a little because of that fact—we liked the business, and the design of the deal is such that if we do quite well over time at Heinz, that their 4.1 billion will achieve higher rates of return than our overall 12 billion.
We have a less leveraged position in the capital structure than they have. We created—they wanted more leverage, and we provided that leverage on what I regard as fair terms and what they regard as fair terms. If anybody thinks that the common is dead money, you know, we think they’re making a mistake, but we’ll know the answer to that in five years. But the design of the deal essentially—we have more money than operating ability at the parent company level, and they have lots of operating ability and wanted to maximize their return on 4 billion. So my guess is that five years from now or ten years from now you will find that they’ve earned a higher rate of return on their investment, but because we put more dollars in, we will receive that same rate of return on our 4 billion plus of common equity, but we’ve also received a very fair return on the 8 billion that we put into creating more leverage for them.
Charlie?
Well, as you said, the report was totally wrong. That'll teach them.
Okay, we have Cliff Gallant from Nomura who will ask insurance-related questions for this meeting.
Thank you. At Berkshire Hathaway Reinsurance Group, Mr. Jeet Jane appears to be employing a new strategy recently with some high-profile actions. Berkshire signed a portfolio underwriting arrangement with Aeon to do business at Lloyd’s, and then last week there was the hiring of several AIG executives. It appears that Berkshire may be taking a broader share of the market. What is the goal of these moves, and won’t these actions eventually reproduce more average results?
Well, if the goal is to take a greater share of the market, there have been two important moves made by AIG’s operation in the last month or so. One is the— the first one that was announced was this participation of seven and a half percent in all of the—business originally was announced as applying to the Lloyd’s market that I believe it’s been extended to the entire London market. And now bear in mind that the people that are insured still have the right to pick who their insurers shall be, so it isn’t totally automatic that we receive seven and a half percent of every slip. But we had had an arrangement for a couple of years with Marsh on a marine book and perhaps some other areas but not across the board, and we think that we think that the profit possibilities are reasonable for that business, or we wouldn’t have entered into it.
It will give us more of a cross-section of business than we’ve been used to having, but it doesn’t mean that we give up our present business at all either. The second item you mentioned is just in the last week or thereabouts—it was announced that four pretty well-known insurance people that had been from AIG had joined us to write primarily commercial insurance initially domestically perhaps, but around the world. And these are people that reached out to Berkshire—in case of at least one of them even reached out a number of times in the past. But we were ready to enter this field with these people who are very able people. We’ve had a number of people reach out since the announcement was made only a week or so ago.
I think you will see Berkshire, in addition to all of the other insurance businesses that it has had over the years, I think you’ll see it become a very significant factor worldwide in the commercial insurance business. I mean, it could be business that reaches into the billions. In fact, I would hope that it would be, you know, a fair number of billions over time, and we’ve got the right people. We’ve got capital like nobody else has. We have the ability to sign on to coverages that other people have to spread out among others. So I think we’re ideally situated to go in this business and I’m looking forward to it.
Charlie?
Well, generally speaking, I don’t think the reinsurance business is a very good business for most people, and I think it’s a very desirable part of Berkshire’s business the way it’s run. But it’s different from something like the other businesses which would work pretty well if somebody else owned them. I think our reinsurance business under a cheat is very peculiar, and other people who think it’s easier are going to find out that it isn’t.
Yeah, and I should point out, this commercial insurance business also, I mean it will be primary insurance as well; the Aeon arrangement is a reinsurance arrangement, but we will be in the primary business, so it will be large commercial risks. But there’s a lot of premium volume there and there’s a lot of chances to make mistakes, but I’d rather have the group we have overseeing that business than any other group I can think of.
Okay, Station Two.
Hi, Mike Zoremsky from New York. In regards to Geico, Warren, last year you said the firm had no plans to adjust usage-based driving technology similar to what competitor Progressive calls Snapshot. Is that still the case? And if so, why wouldn’t that technology give Geico better data to potentially give discounts to customers?
Yeah, well that still is the case. And Snapshot, as it’s attracted a fair amount of attention and there are other companies doing that, it’s an arrangement essentially to tie or well, the term Snapshot perhaps says it—I mean to get a picture of how people really do drive. Insurance underwriting, you know, is an attempt to figure out the likely propensity based on a number of variables of a person having an accident.
Now, you know, in life insurance it’s very obvious that somebody 100 years old, if you don’t know anything else about them, is more likely to die in the next year than somebody that’s 20.
When you get into auto insurance, figuring out who’s likely to have an accident involves assessing a number of variables, and different companies go at it different ways. Clearly on statistics, if you’re a 16-year-old male, you’re more likely to have an accident than I am.
Now that isn’t because I’m a better driver; it’s because the 16-year-old is probably driving about 10 times as much, and he’s trying to impress the girl sitting next to him, and that doesn’t work with me anymore, so I’ve given it up. But we asked a number of questions, and our attempt, as much as possible, is to figure out the propensity of any given applicant or the possibility that they will have accidents, and there are a number of variables that are quite useful in predicting.
And Progressive is focusing on this Snapshot arrangement, and we’ll see how they do. I would say that our ability to sell insurance at a price that’s considerably lower than most of our competitors, evidenced by the fact that when people call us, they shift to us, is at the same time earn a significant underwriting profit that indicates that our selection process is working quite well.
I mean, if your selection process is wrong, if you treat a 16-year-old male and give him the same rate that you give a 40-year-old that’s driving their car three or four thousand miles a year, you know, you’re going to get terrible underwriting results. So our systems, our underwriting criteria have been developed over many decades. We have a huge number of policyholders, so that it becomes very credible these different underwriting cells, and everybody in the business is trying to figure out ways to predict with greater accuracy the possibilities that a given individual will have an accident.
And Progressive is focusing on this Snapshot approach, and we watch it with interest, but we’re quite happy with the present situation.
Okay, Andrew Ross Sorkin.
Oh, Charlie, I got to give you a chance to comment.
I have nothing to add.
Okay, Andrew.
Okay, Warren, we got a couple questions related to this. Warren, now that you’re on Twitter and the SEC is allowing companies to make material announcements over social media, what are the implications for Business Wire, a unit of Berkshire? Do you agree with the SEC’s new position on the distribution of material information and would you consider selling Business Wire given the new rules? If not, how do you think Business Wire will have to transform itself? And, by the way, what are you doing on Twitter?
I haven’t figured that last one out yet. No, I think it is a mistake. Some companies have announced important announcements on web pages, and in certain cases, they’ve messed it up and caused a fair amount of trouble, but the key to disclosure is accuracy and simultaneity. I mean, if we own stocks or are thinking about owning stocks, we want to be very sure that we get accurate information and we get it exactly at the same time as all other people.
And Business Wire does a magnificent job of that, and I do not want, if I’m buying Wells Fargo or say, or selling it and whatever it may be, I do not want to have to keep hitting up to their web page or something and hoping that I’m not 10 seconds behind someone else if there’s some important announcement. So Business Wire has got a terrific record of accuracy and of getting the information every part of the globe in a simultaneous manner, and that is the key to disclosure, and I don’t think anything has come close to doing that as well as Business Wire has.
So I think we will do very well. We’ve got a sensational manager in Kathy Barron Tamara, and I couldn’t be happier with the business, so we will not be selling it, and if I could clone Kathy, I would do it.
I will not be sure when it puts out its information, and we like to put it out, actually, after the market closes because we think there’s so much to digest, that it’s a terrible mistake to have people trying to figure it all out in reading a one or two-page announcement. But anything important from Berkshire or any of our companies is going to come out on Business Wire so that people get accurate information at exactly the same time.
Charlie?
Well, it’s very hard for me to know anything about Twitter when I’m avoiding it like the plague. He sent me out to venture into it, and he’s going to see if anything bad happens to me.
Okay, we now have a short seller, and a first, I believe, in any meeting, Doug Cass.
Thank you, Warren and Charlie. Thanks for this unusual invitation. I’m honored, and I look forward to playing the role of Daniel in the lion’s den in front of 45,000 of your closest friends and greatest admirers.
You can bring your own crowd next year. [Laughter]
I wouldn’t know you have me asking the last question in the group, though. My first question is a follow-up to Carol Loomis’ first question. Warren had said that size matters. It does. In the past, Berkshire’s purchase cheaper wholesale—for example, Geico, MidAmerican, your initial purchase of Coca-Cola—and arguably your company has shifted to becoming a buyer of pricier and more mature businesses—for example, IBM, Burlington Northern, Heinz, and Lubrizol. These were all done at prices, sales, earnings, book value multiples well above your prior acquisitions.
And after stock prices rose, many of the recent buys might be great additions to Berkshire's portfolio of companies. However, the relatively high prices paid for these investments could potentially result in a lower return on invested capital. You used to hunt gazelles; now you’re hunting elephants. As Berkshire gets bigger, it’s harder to move the needle. To me, the recent buys look like preparation for your legacy, creating a more mature, slower-growing enterprise. Is Berkshire morphing into stock that has become to resemble an index fund, and that perhaps is more appropriate for widows and orphans rather than past investors who sought out differentiated and superior compounded growth?
Yeah, there’s no question that we cannot do as well as we did in the past, and size is a factor. Actually, it depends on the nature of markets too; we might—there will be times when we’ll run into bad markets, and sometimes our size can even be an advantage; it may well have been in 2008.
But I would take exception to the fact that we paid fancier prices in some cases than, say, Geico. I think we paid 20 times earnings and a fairly good-sized multiple of book value, so we have paid up—partly at Charlie’s urging we’ve paid up for good businesses more than we would have 30 or 40 years ago, but it suffers—we get bigger, and we’ve always known that would be the case. But even with some diminution from returns of the past, they still can be satisfactory, and we’re willing—there’s companies we should have bought 30 or 40 years ago that looked higher priced then, but we now realize that paying up for extraordinary businesses is not a mistake.
Charlie, what were you saying?
Well, we’ve said over and over again to this group that we can’t do as well, and percentage terms per annum in the future as we did in our early days, but I think I can make the short seller’s argument even better than he did, and I’ll try and do that. If you look at all the companies that got really big in the past of history of the world, the record is not all that good. You stop and think about it: Rockefeller, Standard Oil is probably the only one that, after it got monstrous, continued to do monstrously well.
So when we think we’re going to do pretty well in spite of getting very big, we’re telling you, we think we’ll do a little better than the giants of the past. We think we’ve got a better system. We don’t have a better system than writing up oil, you know, but we have a better system than most other people.
Yeah, in terms of the acquisitions we’ve made in the last five years, I think we feel pretty good about those, and overall, obviously, including Heinz, we are buying some very good businesses.
We actually, as we pointed out, we own eight different businesses that would each be on the Fortune 500 list if it was a separate company, and in a few months we’ll own half of another one, so we’ll have eight and a half, in effect.
Well, you haven’t convinced me yet to sell the stock, Doug, but keep working.
Section three, thank you. Jonathan Schiff visiting from Macau, China. You briefly touched upon this, but on our side of the world, there’s a lot of discussion about the U.S. dollar status as the world’s reserve currency. Sorry, there’s some feedback, it’s kind of weird. What would be the effect upon the U.S. and the world economy if the dollar loses that status as a world reserve currency?
Well, I don’t know the answer to that, but I fortunately don’t work—I think it’s going to be relevant. I think the dollar bill will be the world’s reserve currency for some decades to come. I think China and the United States will be the two super economic powers, but I don’t see any—I think it’s extremely unlikely that any currency supplants the U.S. dollar as the world reserve currency for many decades, if ever.
Charlie?
Well, there are advantages to a country that has the reserve currency, and if you lose that, you lose some advantages. England had a better hand when it had the reserve currency of the world than it had later when the United States had the reserve. Eventually what happens to the United States it would not be—I think all that significant.
It’s in the nature of things that sooner or later every great leader is no longer the leader over the long run. As Keynes said, we’re all dead, and over the long run, this is the cheery part of the section.
Well, if you stop to think about it every great leading civilization of the past passed the baton.
See, what do you think the probabilities are that the U.S. dollar will not be the reserve currency 20 years from now?
Oh, I think it will still be the reserve currency of the world 20 years from now, but that doesn’t mean that it’s forever.
Okay, Carol, this question comes from John Constable of the Philadelphia area. Mr. Buffett, you have said in the past—specifically in a 1999 speech that was printed in Fortune quote—you wouldn’t bring that up.
I would bring that up, right? I’m so glad he sent this question.
You have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above six percent. Corporate profits are now greater than ten percent of GDP. How should we think about that?
What we should think is pretty unusual, and particularly considering the economic backdrop—corporate profits are extraordinary as a percentage of GDP at least looking back on the history of the United States. And what’s interesting about it, of course, is that American business, to a great extent, is complaining enormously or frequently, anyway, about the level of the corporate income tax. Now the corporate income tax is about half what it was 40 years ago as a percentage of GDP, yet as you point out, corporate profits are at an all-time record as a percentage of GDP.
So I would have you take with a grain of salt the complaint that American business is non-competitive because of our corporate income tax rate, which gets so widely complained about. American business has done extraordinarily well at a time when inequality actually has widened considerably, both measured by net worth and measured by income if you take the top versus the people down below.
Well, we heard from one of the people here and it will be interesting to see whether these levels can be maintained or whether corporate businesses come back very, very strong in terms of profits from the precipice that we were on in the fall of 2008. The panic employment has not come back in the same way and that’s going to be, I would say, a subject of a lot of public discourse.
And you’re seeing—you’re reading more about that currently. If I had to bet on whether corporate profits would be 10% of GDP—and of course we’re talking about profits that are earned outside the United States, I believe in the figures you quote—I would say they’re likely to trend downward, but I think that, of course, GDP will be growing, so that does not mean any terrible things what will be happening to profits.
Charlie, what do you think about that?
Well, I wouldn’t be too surprised if that six percent figure turned out to be, on the low side in the estimate. Just because Warren thought something 20 years ago doesn’t mean it’s a law of nature.
We’ll talk this over at lunchtime.
How do you feel about 10 percent?
Well, I’m a natural conservative on such items, but you’ve got to recognize that the stocks themselves are owned by a lot of endowments and pension funds and so on. That figure doesn't mean that the world's becoming grossly more unequal. There's no automatic correlation between those two figures.
Do you feel the corporate tax rate is too high?
Well, I think when the rest of the world keeps bringing the rates down, there's some to us if we're much higher so I—that's the way I feel.
[A applause]
I rather like Warren's idea that people like us should pay more, but the corporate tax rate, I'm glad to have lower.
Okay, he's the republican; I'm the democrat.
Jonathan, thanks Warren. You probably have a couple of dozen direct reports from the multitude of non-insurance businesses that Berkshire owns, and this arrangement seems to work wonderfully for you. But I wonder if this could potentially pose a challenge to your successors. Adding smaller units like Oriental Trading and the newspaper group, even if they are economically sound transactions, could arguably add to the unwieldiness of the organization. How do you weigh the benefits of adding earnings with the risk of leaving a less focused and harder-to-manage company for even highly capable successors?
Yeah, I think my successor will probably organize things a little differently on that, Jonathan, but not dramatically so. We’ll certainly never leave the principle of our CEOs running their businesses in virtually all important ways except perhaps except for capital allocation, but I actually have delegated a few units to an assistant of mine and my guess is that my successor will modestly organize things in a somewhat different way. I’ve grown up with these companies and with the people and everything, and so it's a lot easier for me to communicate with dozens of managers sometimes very infrequently because they don’t need it just sometimes. It’s their own preference to some degree and somebody coming in fresh would want obviously to be—to understand very well, and that person will understand that understands now very well the major units, but you’re right; when you get down to units that—we have some businesses that make five or ten million dollars a year or something like that.
My guess is that it gets rearranged a little bit, but that won’t really make any difference. I mean the real money is made by the big businesses, it will continue to be made by the big business and the insurance business, and a little change in reporting arrangements maybe one more person or headquarters, if they go crazy—we’ll really take care of things.
Charlie?
Well, I think of course it would be unwieldy to have so many businesses, a lot of them small, if we were trying to run them through an imperial headquarters that dominated all the details. But our system is totally different; our system is decentralization almost to the point of abdication.
What difference does it make how many subsidiaries you have?
Yeah, it’s working pretty well now and it will work pretty well afterwards too. But my successor, I got to do with things identical would be a mistake but the culture will remain unchanged, and the preeminence of the managers of the operating units will remain unchanged. And then every now and then something comes along and a change needs to be made. Sometimes it’s through death or disability, and sometimes a mistake is made; but in the end, we’re now trying to acquire companies that are at least at the 75 million dollar pre-tax level.
Incidentally, the best acquisitions is some extent—the best acquisitions certainly from my standpoint, makes it easier—is the one where there are these bolt-ons that I talked about in the annual report, in which we did, I think, two and a half billion worth of last year because they fall under the purview of managers that we’ve got terrific confidence in, and they add really nothing to what happens at headquarters. And, of course, the best bolt-ons of all are when we do buy an outright minority interest when we buy two billion dollars’ worth more of Iscar or a billion and a half more of Marmon with another billion and a half to come in the next year; you know, that’s adding earning power without it posing any more work. Those are the ultimate and bolt-on acquisitions—getting more of a good thing.
Charlie, any more on that?
Well, if you start to think about it, if we were all that difficult, what we’re doing now would be impossible, and it isn’t.
I’ll have to think about that a little.
I think, wow, think of 50 years; 20 years ago they said to you, can you manage something this size with a staff of 10 or something in a little office in Omaha? People would have thought that’s ridiculous, but it’s happened and it works.
But we'll let it go with that.
Station four. Thank you, Scott Moore, Overland Park, Kansas. With the Fed buying 85 billion per month of mortgage securities and treasuries, what do you think are the long-run risks to this process, and how does the Fed stop this without negative implications? Thank you.
Well, Charlie, you answered that yesterday in an interview, so I’ll let you lead off.
My basic answer is, I don’t know. I might say I have nothing to add, but Scott, you came from Overland, so we’ll do our best. I think your—the questioner is right to suspect that it’s going to be difficult.
It is really uncharted territory. As many people have found out, whether it was the Hunt brothers buying silver or whatever it might be, it’s a lot easier to buy things sometimes than it is to sell them. The Fed's balance sheet is up around 3.4 trillion now, and that’s a lot—those are a lot of securities, and the bank reserve positions are incredible. I mean, Wells Fargo is sitting with 175 billion dollars at the Fed earning a quarter of a percent and really earning nothing after attended expenses.
So there’s all this liquidity that’s been created; it hasn’t really hit the market because the banks have let it sit there. In classical economics, that’s how you juice the economy—you push it out by having the Fed buy securities and create reserves for the banks and all those things. But believe me, the banks want loans. I mean, they are not happy; Wells is not happy having 175 million at the Fed and they’re looking every place they can to get it out with the proviso that they hope to get it back from whoever they get it out to, which can slow down a bank at times. But we really are in uncharted territory.
I’ve got a lot of faith in Bernanke. I mean he—if he’s running a risk, he’s running a risk he knows and understands. I don’t know whether he’s affected by the fact that his term expires pretty soon, so he just hands the baton off to the next guy and says, “Here’s this wonderful balance sheet, and all you have to do is bring it down a few trillion dollars.” I gave a few lectures at George Washington University last year if you care to read them, and maybe it’ll help you.
This is something we haven’t seen, and it certainly has the potential for being very inflationary. It hasn’t been so far. In fact, my guess is that the Fed wishes it had been a little more inflationary. If you’re running up a lot of debt, it gets measured in relation to nominal GDP, and the best way to run up—not the easiest way to run up—nominal GDP is to inflate.
And my guess is that they never would admit it, but that at least some Fed members are probably disappointed that they haven’t seen more inflation.
It won’t be when they start selling it; it’ll be when the market gets any kind of a signal that buying ends, maybe that selling will take place. And that doesn’t mean the world will come to an end but it will certainly mean that everybody that owns securities and who’s felt that they’ve been driven into them by extremely low rates or that the assets have to go up in price because interest rates are so low will start re-evaluating their hand. And people re-evaluate very fast in markets.
So while I’ve been talking, Charlie, have you got any new insights?
Well, generally speaking, I think that what’s happened in the realm of macroeconomics has surprised all the people who thought they knew the answers, namely the economists, who would have guessed that interest rates could go so low and stay so low for so long. Or that Japan, a mighty powerful nation, could have 20 years of stasis after using all the tricks in the economist’s bag.
So I think, given this history, the economists ought to be a little more cautious in believing they know exactly how to stay out of trouble when they print money in massive amounts.
It is a huge experiment.
What do you think the probabilities are that within 10 years you see inflation at a rate of five percent or higher a year?
Well, I worry about even more than inflation. If we could get through the next century with the same results we had in the last century, which involved a lot of inflation over that long period, I think we’d all be quite satisfied. I suspect it’s going to be harder—not easier—in this next century, and it wouldn’t surprise me. I’m not going to be here to see it, but I would predict that we may have more trouble than we think than we now think.
Charlie says he won’t be here to see it, but I reject such defeatism!
Becky, this is actually a follow-up to the shareholder from Overland Park, the question that was just asked. This comes from Anthony Stairs, who is in Lincoln, Nebraska, and he says, “How has the Fed’s zero-interest policy affected Berkshire Hathaway’s various business segments? For example, has it helped or hurt their operations and profitability?”
Well, it’s helped. Interest rates are to asset prices, you know, sort of like gravity is to the apple. And when there are very low interest rates, there’s a very small gravitational pull on asset prices. And we have seen that getting played out; I mean, people make different decisions when they can borrow money for practically nothing than they made back in 1981 and 2 when Volcker was trying to stem inflation, and the government bond rates got up to 15 percent.
So interest rates power everything in the economic universe, and they have some effect on the decisions we make. We borrowed the money on the Heinz purchase a lot cheaper than we could have borrowed it 10 or 15 years ago, so that does affect what people are wanting to pay.
So it’s a huge factor, and of course it will presumably change at some point, although, as Charlotte’s pointed out, in Japan it hasn’t changed for decades. So if you wanted to inflate asset prices, bringing down interest rates and keeping them down first at first, nobody believed they’d stay there very long. So it reflects the permanence that people feel will be attached to the lower rates.
But when you get the 30-year bond down to 2.8 percent, you were able to have transactions take place. It makes houses more attractive. I mean, it’s been a very smart policy. But the unwind of it is going to be much more difficult by far than buying. I mean, it's very easy, if you're the Fed, to buy 85 billion a month; and I don't know what would happen if they started trying to sell 85 billion now when you've got reserves there. That it might certainly be a lot easier than if those reserves had already been deployed out into the real economy.
Then you would really be tightening things up.
But I am—you know, this is like watching a good movie as far as I’m concerned because I do not know the end, and that’s what makes for a good movie.
So while I’m pretty certain some of us will be back here next year, I wish you all luck!
Charlie, this is a follow-up question about the commercial insurance business and Berkshire's interest. If the business is attractive, why not make an acquisition? Do you think that public company valuations are too high today?
Yeah, there aren’t too many commercial operations that we would want to inquire, the big ones that we may—it wouldn’t do much. I mean we acquired—when we acquired Guard Insurance, it’s workers’ compensation, but it’s just it’s a small acquisition and it’s a good acquisition. But that is a commercial in effect underwriter that we acquired late last year.
But if you look at the big ones, some of them we wouldn’t want; there’s a couple that we would, but the prices would be probably far higher than what we think we might be able to develop a comparable operation for. I mean we effectively—I think we’re going to build a very large commercial operation.
And essentially, we build it at book value, and we pick up no bad habits of other companies, at least we hope we don’t. And so it’s really better to build than buy if you can find the right people with the right mindset and everything in the business. And we’ve got a terrific manager, obviously, in Ajit, and these other people have sought him out.
So I think if there are certain commercial operations—if we could have bought them at the right price, we’d have done it, but we’ve not been able to do that, so we will build our own. And I predict we will have a good and significant commercial insurance operation in a relatively short time.
Okay, station five.
Good morning, my name is Benjamin, I'm from Appleton, Wisconsin, and I had a question for you regarding unregulated digital currencies such as Bitcoin. I was wondering what you think the significance of something like that showing up in the last few years is and what you think that might mean for the future. Thank you.
Charlie, I hope you know something about this subject because I don’t know a thing.
I know what he’s talking about. I know what he’s talking about, but I just don’t—I have no confidence whatsoever in Bitcoin being any kind of a big universal currency; that would certainly be my gut reaction. But I don’t—I haven’t really looked into it.
But I’ll put it this way: of our 49 billion, we haven’t moved any to Bitcoin.
Well, the truth is I don’t know anything about it, and that doesn’t always stop me from talking about things, but it will in this case.
Okay, Andrew?
Okay, Bill Ackman, the activist investor who’s also a Berkshire investor, has raised questions in recent months about the legality of the multi-level marketing company Herbalife. He called it a pyramid scheme. Berkshire owns a multi-level marketing company too, the Pampered Chef. Will Ackman’s attack on Herbalife have any impact on the Pampered Chef or Berkshire, and do you believe Ackman’s concerns are legitimate? How do you think about the debate over multi-level marketing companies and decipher which ones are legitimate and which ones are not?
Yeah, I don’t know anything; I’ve never actually even looked at a 10K of Herbalife, so I do not know about their operation.
But I think the key, obviously, is whether a direct marketing operation is really based on selling product to would-be distributors of one sort and loading them up, and instead of in effect selling it to end users. The Pampered Chef is a million miles away from anything where any of the money is made by selling to level A and then those people selling to level B and all that sort of thing.
It is true that certain people—lots of people get paid on the results, the selling results of other people that they recruit, but this business of loading up people with a couple hundred dollars package of something that they never sell and that being sort of the main business, and I don’t know anything about Herbalife on this. I do know about Pampered Chef, and that is not Pampered Chef’s business. Pampered Chef’s business is based on selling to the end user and we have thousands and thousands and thousands of parties every week where people are actually going to use the product, buy it from somebody, and we are not making it—they're not making the money by loading up people and then having them leave the sales force and our profit coming from that.
Charlie?
I think that should be the distinguishing characteristic. If I were regulating the industry, I would look very hard at operations where thousands of people got their hopes to earning a living by selling the product, invested their savings in buying a whole bunch of the product that they didn’t need, and then sort of being abandoned and being left with the product and the parent companies and the main companies just going out and selling millions and millions of people on a dream that was not fulfilled.
Charlie?
Well, I think there’s likely to be more flimflam and selling magic potions than pots and pans at our age. We’re in the market, though, for any magic potions if any of you have them.
That’s the extent of your comment, I assume, Charlie?
Okay, Doug.
Warren, much of Berkshire’s returns over the last decade have been based on your reputation and your ability to extract remarkable deals from companies in duress as compared to the past when you conducted yourself more as a value investor digging and conducting extensive analysis. What gives you confidence that your successes in private equity will be as valuable to Berkshire as yours has been?
Well, the successor will probably have even more capital to work with, and they will have capital, presumably from time to time when markets are in distress. And at those times, very few people have the capital, and a lot fewer people have the willingness to commit. But I have no question that my successor will have unusual capital at times when the ability to say “yes” very quickly with very large sums sets you apart from virtually anybody in the investing universe.
I would not worry about that successor being willing to deploy capital under those circumstances and being called upon. Berkshire is the 800 number when there's really sort of panic in markets, and for one reason or other, people need significant capital. Now that’s not our main business; you know it happened a couple times in 2008, it happened once in 2011, but that’s not been our main business, but it’s fine, and it’ll happen again.
And I would think if you come to a day when the Dow has fallen a thousand points a day for a few days, and the tide has gone out, and we’re finding out who has been swimming naked, that those naked swimmers may call Berkshire. They will call Berkshire if they need lots of money.
And Berkshire’s reputation will become even more solidified in terms of being willing to provide capital for sound deals at times when most people are frozen, and when that happens when I’m not around, it becomes even more the Berkshire brand and not anything attached to a single individual.
Charlie?
Well, I would argue that in the early days, Warren had huge success as a value investor in little-known companies because his competition was so small. He stayed in that field; he would have to be in bigger companies, and his competition would be way more intense. He’s gotten into a field being a good home for big companies that don’t want to be controlled in meticulous detail by headquarters, where there isn’t much competition.
So I would argue that he’s done exactly the right thing, and it’s ridiculous to think that the past is the thing he should have stayed in.
But we will send—I think he’s probably referring to something like the Bank of America transaction or Goldman Sachs and GE, and there will come a time in markets where large sums I’ve gotten calls on other things too, but yeah, but other people are not getting the calls.
Well, they don’t have the money, and they don’t have the willingness to act immediately, and Berkshire will—those qualities will remain with Berkshire after I’m gone. In fact, in a sense, the area we occupy becomes more and more our own as we get even bigger.
I would say, Charlie, that's what I like about it.
Okay, station six.
Hi, my name is Andre from Beverly Hills, California. During very key events like the Sanborn incident when you were buying C’s or when you were buying Berkshire stocks, you persuaded people to sell you their shares when they really didn’t want to. What were your three keys to influencing people in those specific situations?
Yeah, I don’t think you brought up Sanborn, and you brought up C’s, and I don’t think—the C’s family, there had been a death in the C’s family; it was Larry C, he wasn’t at the United Man, and he’d been the instrumental I guess grandson of Mary C and the operator. And there was the rest of the family really didn’t want to run the business so it was put up for sale, and I didn’t even hear about it until they’d had one other party that I don’t even know who it was but that they negotiated a deal with and that it didn’t go through. Charlie probably remembers this better than I do, but we certainly—the C’s family and Charlie persuaded me to buy it.
That we didn’t persuade them to sell it.
Charlie?
Yeah, we didn’t buy anything from any unwilling sellers. Now, and in Berkshire we started buying that in 1962 in the open market; it had quite a few shareholders. It was a—it was a traded fairly actively, and we bought a lot of stock, and we did buy a couple of key pieces. We bought one from Otis Stanton, who was Seabury Stanton’s brother, but Otis wanted to sell; it wasn’t the most attractive business in the world.
I mean, it was a textile company that lost money in most of the previous years, and over a 10-year period had significant losses and it was a northern textile company. So we bought stock in the market, a lot of stock in the market. We had two big blocks from Otis Stanton and from some relatives of Malcolm Chase, but they were happy to sell.
What I never met at the time I bought the stock from Otis Stanton. I had never met him, so I delivered no personal sales talk to him, and the same thing is true of the Chase family that—not Malcolm himself but some relatives. They sold us a block of a hundred thousand shares, but we were not out convincing anybody to sell their stock. So there’s been very little that I can remember where we talked to Betty Peters about avoiding a transaction. We thought was dumb when Musco was considered merging with Financial Corporate. Senator Barbara and I fell out to see her in San Francisco, but she stayed with us. She did not sell her stock and remains a shareholder to this day, almost 40 years later.
Charlie?
Well, I’ve got nothing to add to that at all.
Okay, then we’ll go to Carol. This question comes from Mark Troutman of Crested Butte, Colorado, and you’ve touched on this, Warren and Charlie on little fringes today, but this is a direct question. Warren, both you and Charlie have described over the years how you have built Berkshire Hathaway to be sustainable for the long term. I am having difficulty explaining to my 13-year-old daughter and frankly to many adults also in easy to understand terms Berkshire’s business model and long-term sustainable competitive advantage. Can you give all of us, and particularly my daughter Katie who is here today, the Peter Lynch two-minute monologue explaining the business of Berkshire Hathaway and its merits as a long-time investment for future decades?
Okay, Charlie, you talk to Katie. [Laughter]
I’m going to have some fudge.
All right, I’ll try that. We’ve always tried to stay sane when other people like to go crazy—that's a competitive advantage. Number two, as we've gotten bigger, we've used this sort of golden rule that we want to treat the subsidiaries the way we would want to be treated if we were in the subsidiaries, and that again is a very rare attitude in corporate America, and it causes people to come to us who don’t want to come to anybody else; that is a long-term competitive advantage. You’ve tried to be a good partner to people who come to us who need a partner with more money; that is a competitive advantage.
And so we are leaving behind a field that’s very competitive and getting into a place where we’re more unusual. This was a very good idea; I wish we’d done it on purpose.
A few years ago, a person who’s in this audience I believe came to me, and he was in his 60s, and he said that for about a year he’d been thinking about selling his business. And the reason he’d been thinking about it was not because he wanted to retire, and we very seldom buy business from people who want to retire. He didn’t want to retire at all; he loved what he was doing. But he had an experience in buying a business a few years earlier from a family where he had known the fellow who’d built it, the fellow had died, and then just everything bad started happening in the family, in the business, and the employees, everything else.
So he really wanted to put to bed the question of what happened with this business. He really cared a lot about monetizing it or having the money; he just wanted to put his mind at ease that what he’d spent lovingly building up over 30 or 40 years was not going to get destroyed or that his family would get destroyed if he made a mistake if he died.
So he said he thought about it a year, and he thought about it, and he thought, “Well, if I sell it to one of my competitors”—and they would be a logical buyer; they usually are—“that’s why we have antitrust laws.” If you sold it to a competitor, they would come in and basically they would put their people in charge. They would have all these ideas about synergy, and synergy would mean that the people that had helped him build the business over 30 years would all get sacked, and that the acquiring company would come in like until the hunt and be the conquering people, and he just didn’t want to do that to the people that had helped him over the years.
And then he thought he could sell it to some private equity firm, and they figured that if he sold it to them, they’d load it up with debt, which he didn’t like, and then they’d resell it later on, and so he would again have lost control. They might do the same thing that he didn’t want to have happen in the first place in terms of selling it to a competitor or whatever it might be.
So when he came to me, he said—he described this, and he said, “It really isn’t because you’re so attractive, but he says you’re the only guy left standing.” You know, I mean, yeah, you’re not a competitor; you’re not a private equity firm. And I know I will get a permanent home with Berkshire and that the people that have stayed with me over the years will continue to get opportunities, and they will continue to work for me, and I’ll get to keep doing what I love doing, and I won’t have to worry about what will happen if something happens to me tonight.
Well, that company turned out to be a wonderful acquisition for Berkshire, and our competitive advantage is we had no competitors. And I think we will see more of that. We’ve seen a lot of it over the years; we’ll see more of it surely, and I don’t think you mentioned the fact of developing a shareholder base, too. That’s different than—you know, we do look at shareholders as partners, and it’s not something that a public relations firm wrote for us or anything of the sort. We want you to get the same result we get, and we try to demonstrate that in every way we can.
Jonathan?
[Applause]
I have a couple of questions about Burlington Northern’s two energy franchises, coal and crude. Given that coal fire generation is in gradual structural decline, can you discuss whether the tracks, locomotives, and other assets used to deliver coal can be redeployed equally profitably serving other customers? Are those assets fungible? Can you also discuss whether crude by rail can continue to grow even as pipelines are built to serve the Bakken, and as the currently large geographic spreads in crude prices potentially narrow? You’ve talked about the flexibility of crude by rail on TV; can you elaborate on that please?
Yeah, there was no coal moving; we would not find a lot of use for some of the tracks we have, there’s no question about that. The outlook for coal is not the same as the outlook for oil; a lot of the coal in terms of the year-by-year fluctuations may depend on the price of natural gas because some of the generating capacity can go in either direction in terms of oil.
I think the view a few years ago was that there might just be a little blip in terms of rail transportation, but I’ve talked to some oil producers, one of the largest up there in the Bakken, and I think there will be a lot of rail usage for a long time; in fact, increased rail usage.
Oil moves a whole lot faster incidentally by rail than it does by pipeline. Most people have a sort of a visual conception that the oil is flowing at terrific speeds through pipelines into the rail cars that are sitting on a sideline someplace, but it’s just the opposite. You can move oil a lot faster, and with the changing market prices and different refinery situations and all that, there’s a lot of flexibility in the oil transportation by rail.
Matt Rose is right up front here, and if somebody could give him a microphone, I think he can probably tell you a lot more about moving coal and oil than I can.
Matt?
We got a spotlight some place that could focus right here in front?
Yeah, Warren, the two franchises are really different, that's just the way the geographic is laid out. We expect the coal franchise to basically stay about where it is today, depending on natural gas prices as well as what happens with the EPA.
Our crude by rail--right now we have about 10 loading stations in the Bakken with about 30 destination stations. We’re currently in negotiations, looking at about another 30 destination stations, so it’s really an exciting time right now. We’re handling about 650,000 barrels a day. We think we’ll be at 750 by the end of this year, and we see a pathway to a million two to a million four.
When you think of the whole country producing five million barrels a day not long ago—that is a lot of oil, and of course it isn’t just the Bakken; you know the shale developments. They can open up a lot of things over time.
Okay, station seven.
Good morning, Warren and Charlie. My name is Bill Hensey, and I’m from Milwaukee, Wisconsin. I have a similar question. Back in 2009, you made a substantial investment in Harley-Davidson with a five-year term at 15 percent. I noticed that note comes due in 2014. What are your plans or thoughts once that investment comes due?
Well, what we’d like to do is not answer the mail and just let them keep paying us 15, but that won’t happen. No, those were—we had a few private transactions during a period when the corporate bond market was basically frozen and received unusual terms, although the best terms those companies obviously could obtain at that time. And those deals are coming due.
I wish the five-year deals had been 10-year deals.
But now that was a special time, and in effect, that’s a depleting asset that we have—that’s left over from five years ago. We won’t see anything like that for a while, but we’ll see similar things at some point in the future. I mean, the world is given to excesses, and they have consequences, and we are always willing to act. I mean, we did not think Harley-Davidson was going to go broke; I mean it was that simple.
But any kind of company that gets its customers to tattoo ads on their chest can’t be all bad, you know?
Okay, Becky, this question comes from Andishi Tzu, who asks if Todd Combs and Ted Weschler, if they purchase stock in a company that you have reviewed before and did not believe to be a good investment, would you share your thoughts with them?
I would probably not know they were even buying it until maybe a month after they started. They do not check with me before they buy something. I gave them each another billion dollars on March 31st, and I do not know whether they’ve spent the billion or which stocks they bought or now I will see it on portfolio sheets.
I get a monthly, but they’re in charge of their investment. They got a one or two things that they’re restricted on, in terms of things—for example, if we own a chunk of American Express and under the bank holding company law, we would not be allowed to buy another share.
So there’s a couple things like that—restrictions they have—but otherwise, they have no restrictions on what they buy. They bought things I wouldn’t buy. You know I buy things I wouldn’t buy; that’s part of the investment process.
I do not tell them how much to diversify. They can put it all in one stock if they want to. They can put it in 50 stocks, although that’s not my style. They are managing money, and when I managed money, you know, I wanted to be a free agent. If people wanted to give me the money, they could make the decision where they wanted to give me the money, but once they gave me the money and I had the responsibility for managing it, I wanted free reign to do what I wanted, and I did not want to be held responsible for things with my hands tied.
That's exactly the position we have with Todd and Ted.
Now it takes a lot of—it’s an unusual person that we will give that kind of responsibility to. That’s not something that Charlie and I would do lightly at all, but we thought they deserved the trust when we hired them, and we believe that more than ever after watching them in action for a time.
Charlie, what can I say in addition to that?
Okay, Cliff, thank you. I wanted to ask a follow-up question about Snapshot and at Progressive. I realize that Geico's first quarter numbers are very good—things are going very well at the company—but Progressive is claiming that the data is profound that they’re getting from Snapshot, that they can give their best drivers 30% rate cuts, and those customers are still their most profitable customers.
We have a lot of Geico policyholders here today. I’m sure they are very good drivers. Why shouldn’t they go try Snapshot and try to save 30% or more? Why isn’t Geico investing in what I think appears to be a credible underwriting tool and potential threat?
Yeah, well that still is the case, and Snapshot, as it’s attracted a fair amount of attention, and there are other companies doing that—it's an arrangement essentially to tie, or, well, the term Snapshot perhaps says it. I mean, to get a picture of how people really do drive. Insurance underwriting is an attempt to figure out the likely propensity, based on a number of variables, of a person having an accident.
Now, you know, in life insurance, it’s very obvious that somebody 100 years old, if you don’t know anything else about them, is more likely to die in the next year than somebody that’s 20.
When you get into auto insurance, figuring out who’s likely to have an accident involves assessing a number of variables, and different companies go at it different ways. Clearly on statistics, if you’re a 16-year-old male, you’re more likely to have an accident than I am.
Now that isn’t because I’m a better driver; it’s because the 16-year-old is probably driving about 10 times as much, and he’s trying to impress the girl sitting next to him, and that doesn’t work with me anymore, so I’ve given it up.
But we ask a number of questions, and our attempt, as much as possible, is to figure out the propensity of any given applicant or the possibility that they will have actions, and there are a number of variables that are quite useful in predicting.
And Progressive is focusing on this Snapshot arrangement, and we’ll see how they do. I would say that our ability to sell insurance at a price that’s considerably lower than most of our competitors, evidenced by the fact that when people call us, they shift to us, and at the same time earn a significant underwriting profit indicates that our selection process is working quite well.
I mean, if your selection process is wrong—if you treat a 16-year-old male and give him the same rate that you give a 40-year-old that’s driving their car three or four thousand miles a year, you know, you’re going to get terrible underwriting results. So our systems, our underwriting criteria have been developed over many decades. We have a huge number of policyholders so that it becomes very credible these different underwriting cells, and everybody