2011 Berkshire Hathaway Annual Meeting (Full Version)

51m read

·Nov 11, 2024

Good morning, I'm Warren. He's Shirley. I can see he can hear, that's why we work together. Have trouble remembering each other's names from time to time. We're going to—uh, I'm going to introduce the directors. We're going to give you some information on the first quarter earnings. We're going to talk briefly about the David Sokol Lubrizol situation, and then we're going to open it up for your questions. Anything that relates to the Lubrizol matter is going to be transcribed and will be put up on the website, the Berkshire Hathaway website, just as promptly as we can. Maybe this evening, this afternoon, maybe tomorrow morning, but very promptly because we want to be sure that all shareholders here get to read every word of what has been said here about the matter.

First thing I'd like to do is introduce the directors, and if they stand and remain standing, you can withhold your applause as they stand, but you can go crazy at the end—or you can continue to withhold your applause. That will be your call. Charlie and I are up here and we don't like to stand up too often, so we'll skip our standing. The Howard Buffett, Stephen Burke, Susan Decker, Bill Gates, Sandy Gottisman, Charlotte Guyman, Don Keo, Tom Murphy, Ron Olson, and Walter Scott. [Applause]

Now we have a few slides that deal with the first quarter earnings. I think Mark Hamburg would like me to emphasize that these are preliminary. This is about as early as we ever have a meeting in relation to the quarter. Normally, it's always the first Saturday in May, so they had to work a little harder than usual to get these numbers together. I would tell you as background that basically pretty much all of our businesses, with the exception of those that are related to residential housing, are getting better. You can almost see it with most of them quarter by quarter.

We have a wide diversity of businesses. We have more than 70 companies we list, but then Marmon itself has over 100 businesses, so we are a cross-section of not only the American economy but to some extent we see a fair amount about what's going on internationally too. In the first quarter, as has been the case really since the fall of 2009, both our non-residential construction businesses—except for those non-residential construction businesses, our other businesses have generally gotten better quarter by quarter, and there was no exception to that in the first quarter.

What was very different in the first quarter was that we had probably the second-worst quarter for the insurance industry in terms of catastrophes around the globe. Normally, the third quarter of the year is the worst period because that's when hurricanes tend to hit the U.S., with most of them, about 50 of them occurring in September and then sort of forming a normal curve on either side of September. So the third quarter usually is the record quarter, and the third quarter was the record quarter back at the time of Katrina.

But in the first quarter of this year, we had some major catastrophes in the Pacific Asian areas, and that hit the reinsurance industry particularly hard. No one knows at this point, it's a wild guess, but probably those catastrophes cost the reinsurance industry on the order of $50 billion, and we usually participate to the extent of three to five percent.

First of all, I'll give you our overall earnings the way we normally present them, and if we'll put the first slide up, you can see that our insurance underwriting suffered an after-tax loss of $821 million. Now when I wrote the annual report, I postulated normal earning power of Berkshire at about $17 billion pre-tax and about $12 billion after tax assuming break-even on insurance underwriting. Our insurance underwriting has done better than break-even. In fact, it's made quite a bit of money for eight consecutive years. But I would say with the start of these catastrophes in the first quarter, or the catastrophe experience we had in the first quarter, I would say that it's unlikely that we would have an underwriting profit for 2011.

If it was remarkably catastrophe-free from this point forward, including hurricanes in the United States, it's conceivable we would break even or make a tiny profit, but that's an improbable assumption. So I think for the first time in nine years, we will likely have an insurance underwriting loss this year. I think our record may very well be quite a bit better than certainly most other reinsurers, and it does not change my expectation that over time our insurance underwriting should at least break even.

If you have followed what I've written in the annual reports, if insurance breaks even, we get the free use of float, and the use of float has been enormously valuable in the past, and I would expect it to be in the future. If you look at the other lines, insurance investment income's down a little. That will go down more because our Goldman Sachs preferred was called in April, our General Electric preferred is almost certain to be called in October, so we've lost—and we had called a note from Swiss Re that was paying us 12% and came to something over $360 million a year when the Swiss franc went above par. So we have lost or are losing at least three very high yield investments which we cannot replace with cash, and that does not count the $5.5 billion that we were going to receive in April from our Goldman Sachs preferred. So that money is earning virtually nothing now, and I would not expect that to be part of the long-term picture either.

So there would be, you know, just a few percent on that would be many, many hundreds of millions of dollars. So I think over time our insurance investment income even though it will dip throughout this year, I would expect that if we have a similar level of investments to actually grow from the level we show here. We had the full ownership of BNSF in the quarter this year. We only had it, I think, from February 12th last year. So that, in a significant way, accounts for the gain in that next line of railroad utilities and energy.

But the BNSF also had a significant gain in earnings, and the railroad business looks to me like it will have a very good year this year—not just our railroad but all railroads. The competitive advantage of railroads is becoming more and more evident almost by the day, particularly as fuel prices increase. In the remaining lines, we also had gains in most of our businesses. So overall, we got hit very hard in the insurance business.

If we'll move to slide two, we list the three major catastrophes that occurred, which in aggregate we estimate we have a total loss of $1 billion 673 pre-tax, and that figure, as with all estimates, early estimates about major catastrophes is subject to a lot of change. Nobody knows what the insured losses will be from the Japanese earthquake, but this is our best estimate.

Now you'll notice that over 40% of the underwriting loss comes from a contract we have with Swiss Re, where we get 20% of their business. That contract is in the fourth of its five years; they have indicated that they will not be interested in renewing it. I just wish they told us that a few months ago. But we've enjoyed the relationship with Swiss Re. It's just that we enjoy it some quarters more than others.

Incidentally, we've added a little something into their estimate because, on balance, we feel that most catastrophe losses develop upward. It's sort of the nature of the business. But that, incidentally—the tornadoes in April—just at Geico, we expect and all we're talking about is automobiles here, cars, because we don't insure the homeowners. We act as an agent in placing insurance for people, but we do not take the insurance risk. We estimate that 25,000 cars will get automobile claims. That's a lot of automobiles when you think about it.

You know, our market share is about 9%, although it varies by state. But it's been an extraordinary tornado season, as you know. That does not hit—I do not believe that that hits the reinsurance business particularly hard because there are multiple events, but no one event is anything like, say, the New Zealand earthquake. The New Zealand earthquake estimated at $12 billion of insured damage.

Charlie, how many people are in New Zealand?
Oh, I didn't—we didn't practice these things as well as would become evident here. I’d guess a little more than that—
Four? Five?
Five million people.

So that's 1/60th of the population, we'll say, of the United States. And if you take $12 billion and multiply it by 60, you come up with $720 billion, which is ten times Katrina in terms of the impact on a place like that. So there's been some really extraordinary earthquakes, and yeah, as I say, the worst part of the season is generally speaking for reinsurers yet to come. So this may be a year that the reinsurers will remember, although they might prefer to forget it.

There's some good news on the insurance front. On the next slide, I show the growth in policies at Geico month by month this year versus last year. Now, if you'll remember in the annual report, I gave an explanation, in talking about goodwill value, about how the goodwill of Geico is carried on our books at about $1 billion. And no matter how successful the business becomes, that goodwill value has never increased on the books. But it does grow, and as I put in the annual report, I estimate its value currently, using the same sort of yardstick we used when we purchased the second half of the company back in 1995.

I estimate that value is growing maybe to $14 billion. I mean every policyholder at Geico on average has a value to us, the way I calculated, of something on the order of $1,500. And when we added 318,000—and as of yesterday it was up to 381,000 when we added that—we added something approaching $500 million to the goodwill value. That does not count the earnings from underwriting, which were substantial for Geico. That does not count the investment income from the float; it does not count the investment income from the net worth we have attributed to it. That is added goodwill value—the same sort of goodwill value that a Coca-Cola has or a Mars has or any company like that.

People think of it differently when they think of most consumer products, but a policyholder to Berkshire at Geico has very significant value. There's a very significant percentage that have been there for ten years or more, and it's something that we do not realize on our balance sheet or income account, but it's an asset that's every bit as real as the numbers that we do put on the balance sheet. So there's good news at Geico. We are gaining market share every day. As a matter of fact, if you think about it, we have some people in the adjacent room that will be glad to sell you Geico policies, and if only 66 of you sign up, that's a goodwill value of about $100,000. So it will take care of some of the expenses of this meeting—not that I care whether you do it or not.

Now there's one more item I want to go through on the earnings picture just because it—and it's been selling at, say, 80 percent of X for quite a while. Nobody knows exactly what quite a while means, and I'm sure they phrase it differently in the accounting textbooks, but anyway, if it sells there for quite a while, you're supposed to mark it down to that new valuation and have that markdown go through your income account, through your profit and loss account. Now we mark it down in any event for the balance sheet, and the balance sheet is what gives you the number for book value and is our reference point, but only when it meets this "other than temporary" thing does the markdown actually get run through the profit and loss account.

Now, on March 31st, as a show, and I believe on the next slide, we owned some Wells Fargo stock, which had a cost of about $8 billion, and the market value was $11.3 billion. But some of the Wells Fargo stock we bought had been bought at higher prices than the March 31st figure, whereas, as you can see, a lot of the stock, which had a gain in at $3.7 billion, had been bought at lower prices.

Well, under the rules, we were required to mark down the stock we bought at a higher price by $337 million, whereas we ignored in the income account the $3.7 billion of gain. Now, interestingly enough, there's two ways you can account for securities, as I understand it, both fully meeting GAAP accounting requirements. If we had used the average cost method, we would not have had to mark down, but we used what they call the "specific identification method."

Now the specific identification method is actually useful to us from a tax standpoint because it means whenever we sell a security, we can pick up the highest priced security and attribute the sale to that. So it actually saves us money or the time to use of money to get into specific identification, but we could just as easily use the average cost method and then we would not have a write down like we have, and that's why I emphasize that the fact that you should ignore gains or losses and securities or derivatives on a quarterly basis or even an annual basis. The important thing is what the operating earnings of our businesses are doing and what the gain and book value generally has been, and then on top of that, you have to make your own estimate of what intrinsic value is, which would include things like the value that has been developed in Geico.

I apologize for taking you through the accounting lessons, but the headlines often just say what the final net income is as if that's the all-important figure, and sometimes it's the all-deceptive figure. I mean, it really bears—if you include gains and losses, it bears really no connection to the reality of whether a quarter has been satisfactory from our standpoint, but it does get a lot of attention in the press, and that's why we spend perhaps an inordinate amount of time trying to explain what really takes place in our financials.

Now I think we're going to get to the questions and answers here in just a second. We'll alternate between the press group on my right and 13 stations that microphones have been placed. I think a dozen of them in this room and maybe one in one of the overflow rooms. I'd like to just comment for a few minutes, and this will be transcribed and up on the internet at our webpage. I'd like to comment for just a few minutes, and I'd like to ask Charlie then to give his thoughts on the matter of David Sokol and the purchase of Lubrizol stock.

You saw in the movie a clip from the Solomon situation, and that occurred almost 20 years ago—20 years ago this August—and at the time that occurred—almost 20 years ago—be 20 years ago this August, and at the time, there was a Sunday. Charlie was there, and I was elected the chairman. That was about three o'clock in the afternoon or so, I think that on a Sunday at Solomon. I went down to address a press group, and almost the first, somewhere in the early questions, somebody sort of asked me, you know, what happened. Well, I had just gotten to Solomon fairly recently, so I didn't know too much about it. But the phrase that came out of my mind then, out of my mouth then—sometimes my mind and my mouth are coordinated—the phrase that came out of my mouth was that what had happened was inexplicable and inexcusable.

Now it's 20 years later, and looking back on Solomon, I still find what happened inexplicable and inexcusable. I will never understand exactly why some of the events that transpired did transpire. And to some extent, in looking at what happened a few months ago with Dave Sokol's failure to notify me at all that he'd had any kind of contact with Citigroup—in fact, he directed my attention to the fact that they represented Lubrizol and never said a word about any contact with them and then the purchases of the stock immediately prior to recommending Lubrizol to Berkshire—I think for reasons that are laid out in the audit committee report, which I urge you to read and which is on our website, I don't think there's any question about the inexcusable part that Dave violated in that he violated our insider trading rules and he violated the principles I laid out in a direct personal letter to all of our managers and which I've been doing for a long time.

So you can read the audit committee report about that. The inexplicable part is somewhat—well, it's inexplicable, but I'd like to talk about it a little bit because I will tell you what goes through my mind in respect to it. Certainly—well, one interesting point is that David, to my knowledge at least, made no attempt to disguise the fact that he was buying the stock. I mean, you read about insider trading cases, and people set up trusts in Luxembourg, or they use neighbors who know neighbors, or they use third cousins. I mean, they have various ways of trying to buy the stock so that when it's later that FINRA, the supervising organization, looks at the trading activity in the months prior to a deal, they do not see names that jump out at them as being associated with the deal.

To my knowledge, Dave did nothing like that, so he was leaving a total record as to his purchases. Now, I think at least usually—and maybe always—we are queried after any deal. We are asked who knew about it when, and we supply a list of whether it's people of the law firm or people that are in a secretarial position at our place or the law firm. We give them a list of everybody that might have known or did know about the deal prior to the public announcement, and I don't know whether they do that 100% of the time, but certainly it's my experience that you get that. And then a while later, you get a list of names of people that FINRA again has picked up as trading it, and they ask you whether any of those names ring a bell with you. So they're trying to put together whether anybody did any insider trading ahead of time.

So the odds that if you're trading in your own name and you're on that list of people who know of a deal ahead of time, the odds that it's not going to get picked up seem to me that they are very much against you. But to my knowledge, they did not disguise the trading, which, you know, that's somewhat inexplicable—that if he really felt he was engaging in insider trading and knew the penalties that could be attached to it, that he essentially did it right out in the open. A second fact, which is perhaps less puzzling, but Dave obviously has a net worth in very high numbers. He made, I think, close to $24 million. He earned it from Berkshire last year, and we got our money's worth, but he did get $24 million too. So I would say that there are plenty of activities in this world that are unsavory that are committed by people with lots of money. So I don't regard that as totally puzzling.

But I will give you one instance that does make it puzzling, makes it very puzzling to me. We bought MidAmerican at the end—Berkshire Hathaway bought MidAmerican at the end of 1999. Berkshire Hathaway bought about 80%. Walter Scott, who I just introduced, in his family was the second largest holder—I think something over 10 percent—and then two operating people, Dave Sokol, the senior one, owned or had options on a big piece, and Greg Abel, a terrific partner of Dave's, also out of peace and Walter Scott.

I've told this story privately a few times, but not I don't think I've done it publicly. Walter Scott came to me a year or two after we'd bought it, and Walter said, "I think we ought to have some special compensation arrangement for Dave and Greg if they perform in a really outstanding manner." And he said maybe he suggested something involving equity, and he saw me turn white. So he said, "Why don't you design one and let me know?" So I just scribbled something out on a yellow pad. It didn't take me five minutes, and we called it sort of in honor of Charlie, although he didn't know about it; we called it the Lollapalooza, and it provided for a very large cash payout, which I'll get to in a second, based on the five-year compounded gain in earnings.

And we were starting from a high base—in other words, this was not from any depressed level. And we set a figure that no other utility company in the United States was going to come close to. But if that figure were achieved, we were going to give $50 million to Dave and $25 million to Greg Abel. And I had Dave come to the office, and I said, "Here's what Walter and I are thinking and what do you think of this plan?" And it had these figures on per share that, like I say, move forward at 16% compounded per year.

And then I said, "Here's the payout." And he looked at it for just a very short period of time, and he said, "Warren, this is more than generous." But he said, "There's just one change you should make." And I said, "What's that?" And he said, "You should split it equally between me and Greg instead of being $50 million for me and $25 for Greg. It should be $37.5 a piece." So I witnessed—and Walter witnessed, and he talked to him about it—we witnessed Dave voluntarily, without any fanfare, no credit whatsoever, to his, in effect, junior partner.

And I thought that was rather extraordinary, and what really makes it extraordinary is that $3 million, you know, 10 or so years later would have led to the kind of troubles that it's led to. I find that is really the fact that I find inexplicable. And I think I'll probably—you know, it's 20 years after Solomon, if 20 years from now Charlie will be 107, and we won't mention what I'll be, but I think 20 years from now I will not understand what causes a man to voluntarily turn away $12.5 million to an associate without getting any credit for it in the world. And then, 10 or so years later, buy a significant amount of stock a week before he talked to me, and when he talked to me about Lubrizol was either the 14th or 15th. He says it was 14th. I have no reason to disagree with that. The only reason I couldn't say specifically was I had eight university groups, 760 students in on that Friday. That's the only thing that shows.

And I spent most of the day with them, and the 10-K and the 10-Q that got printed out on Saturday had that date on them, that the 15th. When I looked at Lubrizol for the first time, I might be interested in knowing—I’ve been looking up 10-Ks and 10-Qs for 20 or 30 years, but I don't know how to print them out. So fortunately Tracy Britt was in the office, and I said, "Tracy, would you print this damn thing out? I can't; I don't know how to do it yet." But that's why I don't know whether it was the 14th or the 15th, or the 10-Q says the 15th. But at that time when Dave called me on it, he said nothing about contact with Citigroup or anything of the sort. And he and I said I don't know anything really about the company. He said, "Well, take a look at it; you know, it might fit Berkshire." And I said, "Well, how come?" And he said, "Well," and he said, "I've owned it, and it's a good company; it's a Berkshire-type company."

And you know, I obviously made a big mistake by not saying, well, when did you buy it? But I think if somebody says, "I've owned the stock," you know, it sounds to me like they didn't buy it the previous week. So there we are with a situation which is sad for Berkshire, sad for Dave, still inexplicable in my mind. And we will undoubtedly get more questions on it; we'll be glad to answer them. Charlie, do you have any thoughts on this?

Well, I think it's generally a mistake to assume that rationality is going to be perfect even in very able people. We prove that pretty well regularly.
You have any explanation for the irrational?
Yeah, I think hubris contributes to it.

Well, we've gotten quite a bit out of them, folks. Okay, let's go to work. We'll start with Carol Loomis of Fortune magazine. I might as well—I should introduce our group here. Oh, we didn't go alphabetical this time. We've got Carol, then we've got Andrew Ross Sorkin of The New York Times, and we have Becky Quick of CNBC now. [Applause] In terms of my checkoff system, I'm still going to go to Becky. That's alphabetical, and so, Andrea, it didn't do you any good to try and move over there into the center spot. Carol, you're on.

"Good morning from all of us." And I will make the small preamble that I've made before. We've been getting questions for a couple of months, each of us on our email. Sometimes a question will be sent to all three of us, and sometimes they'll just send to one of us. Therefore, it becomes very hard to count how many we've had, but certainly it's in the many hundreds and probably up into a thousand, two thousand. And obviously, we aren't going to be able to ask every question. Every good question we have a lot of good questions, we won't be able to get to, but it's just that you had to pick and choose. And the other thing I should say is that whatever we do ask, Warren and Charlie have no idea of the questions. None. No hints. Sometimes we have no idea of the answer either. But go ahead. So I will begin.

I don't think that anybody will be surprised that it is a so-called question. And actually, this particular long-term shareholder believed, as Warren has believed, he says, "I do not see why you should have been expected to ask Sokol about his Lubrizol stock holdings when he said he owned the stock that wouldn't have been a natural question. But when you found out the details of his stock purchases a short time later, I do not understand your reaction. Surely you realized immediately that these facts were going to become known and that they were going to damage Berkshire's reputation, something you had said repeatedly you would be ruthless in protecting. Being ruthless probably would have meant you're firing Sokol on the spot, but you didn't do that. And then you put out a press release that many Berkshire shareholders that I have talked to found totally inadequate. You have always been very direct in stating things; you were not direct in that press release, except in praising David Sokol.

Otherwise, you stated some facts and behavior that you said you didn't believe was illegal, and then you ended the release leaving us. Now, maybe you thought somehow we were going to read between the lines without expressing any anger about what had happened. Why were you not incensed? If you were, why did you not express your anger? Why did you handle this matter in the inadequate way you did?"

Yeah, the—it wasn't really immediately thereafter. I learned on March 14th, which was the day we announced. And now bear in mind his first conversation when he said he owned the stock was January 14th. In between January 14th and March 14th, Dave gave no indication that he had any contact with Citigroup of any kind. And as we learned later, I mean, he went—they met in maybe October or something like that where and talked about possible acquisition candidates for Berkshire. But none of that he told me. At one point, he said Evercore and Citi represented Lubrizol—one of them represents the directors, and one of them represents the company—and then not a word about any contact.

On March 14th, when the deal was announced in the morning, I got a call from John Freund. John Truint is probably here today. John Freund works for Citi in Chicago, and he handles—he’s handled the great majority of our business and equities for decades. And I've got a direct line to him. I talked to him frequently, and he called and said, "Congratulations," and "Aren't you proud?" It was words to the effect, you can talk to John directly, although I've been told that the Citi lawyers have told them not to talk. But knowing the press, think out of them, that he's essentially—his words were that Citi's team had worked with Dave on this acquisition, and they were proud to be part of it, et cetera, et cetera.

And this was all news to me. So that set up some yellow lights at least. And the next day I had Mark Hamburg, our CFO, call Dave, and Dave readily gave him the information about what he had bought, the stock and how much. Mark also asked him what the participation of Citi had been in the reference to Berkshire's side of the transaction, and Dave said that while he called a fellow, he thought he called a fellow there to get their phone number, which turned out to be somewhat of an understatement.

Now during the period when we announced the deal on March 14th, Lubrizol is the one that needed to prepare a proxy statement. We were not issuing shares at Berkshire so there was no proxy statement, no nothing of this sort on our part. The Lubrizol legal team, Jones Day, went to work with the Lubrizol management to start preparing the proxy statement. We eagerly awaited to see the first draft of that because I was going to be leaving for Asia on Saturday, which I guess would be the 19th, and I wanted to see what Lubrizol had to say about this whole Citi matter or anything else.

The most interesting part of every proxy statement is something that says it's basically the history of the transaction, and it's the first thing I read on any deal because it gives you a blow-by-blow of what has taken place. And as Mark Hamburg can tell you, I kept urging them to get that to me before I took off for Asia. We got that the afternoon of Friday the 18th, and it had a fair amount of material in it about Dave's involvement with Citigroup.

Then at that point, I believe it was at that point our law firm got involved, Munger Tolls got involved in their input to the Lubrizol lawyers as to what we had seen that was different or what we had seen that they didn't know about that we could add. Ron Olson, the director of Berkshire and partner Munger Tolls, was on the trip to Asia, so we got on the plane on Saturday the 19th and traveled over the next week until the 26th, and we knew at that point that his partners at Munger Tolls were interviewing Dave, as maybe some other people too, but certainly Dave.

I believe that he was interviewed at least three times about both the stock purchases, the history of things with his relationship with Citigroup, and they were assembling this information. I don't have a Blackberry or whatever it may be, Rhonda, so he would get some information as we were over there, and he was getting some input. But we decided that when we got back, we would need to have a prompt meeting of the Berkshire board about this matter, and we would also learn what the full details, at least of what Bob Denham and maybe other attorneys at Munger Tolls learned from their interviews with Dave.

We got back on, I guess it would be Saturday the 26th, and on the 28th we were going to bring Charlie into it before calling a board meeting, but there would have been a board meeting that week. And then about the afternoon, a letter was delivered by Dave's assistant, which really came out of the blue. He said to me that he felt he was retiring on a high point, and he gave the reasons why he was retiring, which I laid out and so on.

I don't know whether the questioning the previous week had affected his attitude; he would say not. But in any event, we had that resignation. That resignation, as I believe may have been put in the audit committee report, may have saved us some money if we had fired him. The question would be whether it was with cause or not with cause, and we would have said it was with cause, but that might have well gotten litigated.

And a retirement did provide in effect the same non-level of severance payments that a with cause provided, so I drafted up a press release which has since been the subject of at least mild criticism. And I laid out the good things that Dave had done, which he had done for the company. He had done many good things, some extraordinary things, and then I laid out some actions which I said, based on what I knew then, did not seem to me to be unlawful.

Incidentally, I'd talk with both Charlie and Ron about that. Ron would have been more careful in that wording. I'm not sure Charlie would have been; I'll let him speak for himself on that. And we ran it by—I ran it up by Dave on Tuesday morning just to be sure the facts were accurate, and he said he objected very much to something that I put in, where I said that I thought that he was in effect had had his hopes dashed for succeeding me, and that was part of the reason. And he said that was absolutely not true, that he had no hopes ever of succeeding me, and basically he was telling me what was in his mind and I shouldn't be trying to second guess what it was in his mind. So I took that part out.

But he affirmed all of the other facts in that letter, and then I took it out—I sent it to him a second time to make sure that he was okay with the facts, and he said they were accurate. Now in there, it was included the fact that Dave had no indication that Lubrizol had any interest in an approach from Berkshire, and that at least according to the final Lubrizol proxy is not the case.

I have not talked to anybody except John Freund at the Citigroup, so I have no idea what took place with the investment bankers at Citigroup except for what I read in the Lubrizol proxy, but the Lubrizol proxy now says that Dave did know that Lubrizol had an interest on December 17th, but both in the two chances he had to review it and then when he went on CNBC on a Thursday and he talked for half an hour, he did not make any attempt to correct any of the facts in it.

Now on Wednesday when we put out the report, we had to have a board meeting first. It was news to the board. They got the release a little bit ahead of time, and then we had a board meeting. We also delivered—through our law firm, we phoned the head of the enforcement division of the Securities and Exchange Commission, and told them exactly the facts regarding the stock purchases and anything else that they might have cared to know.

So I think we acted in that case very, very promptly to make sure the Securities and Exchange Commission and the top of the enforcement division were well versed on what had taken place to our knowledge up to that point. So from our standpoint, my standpoint, Dave minimum chances for lawsuits about compensation to him, and we had turned over some very damning evidence, in my view, to both the public and to the SEC.

What I think bothers people is that there wasn't some big sense of outrage or something in the release, and you know, I plead guilty to that. This fellow had done a lot of good things for us over 10 or 11 years, and I felt that if I'm laying out a whole bunch of facts that are going to create lots of problems for him for years to come, that I also list his side of the equation in terms of what he'd done for Berkshire.

And as I said a little bit earlier, you know, one thing I didn't even lay out was this extraordinary act where, in effect, he turned over $12.5 million to a fellow employee. So that's the history of my thinking on it. Charlie, do you want to add anything?

Yes, well I think we can concede that that press release was not the cleverest press release in the history of the world. The facts were complicated, and we didn't foresee appropriately the natural reaction, but I would argue that you don't want to make important decisions in anger. You want to display as much ruthlessness as your duty requires, and you do not want to add one single iota because you're angry.

So Tom Murphy, one of our best directors, always told the people at Campbell's—you can always tell a man to go to hell tomorrow if it's such a good idea. So the anger part of it—and I don't think it was wrong to remember the man's virtues as well as his error.

I might add, as an aside, Charlie and I have worked together for 52 years, and we have disagreed on a lot of things. We've never had an argument, that you know, I need Tom Murphy's advice to remind myself of it a lot of times on other things, but which hardly—it’s never even been necessary.

I long before I met Murph. Okay, let's go to area one, Mary Broderick, Berkeley, California. Good morning, Mr. Buffett. Good morning, Mr. Munger, and a big thank you. You probably aren't aware of this, but you've been my personal financial and investment advisors for years. I would like to know what you think the effect of the government ending the POMO program mid-July this year will have on the stock market and the economy in general.

The government ending the QE2 or permanent open market operation? Well, you're one acronym ahead of me. The—well it just, as we're discussing it now, it’s no secret what they're going to do. I mean it’s sort of the most advertised open market purchase in history, and probably in terms of defining the amount per month and when it comes to an end—and you know what the balance sheet will look like at the end of the Fed. So I don't think, you know, if something is that well known by all participants in a market, I think any effect of it has been discounted by this point in time.

I mean if you say you're going to increase tax rates in a year, we'll say, on corporations or decrease them or whatever it may be, and it's really done and locked in stone, the market doesn't wait until the date when the tax increases or decreases go through to build that into market prices. So I don't see any reason—there may be some other things that happen then, but I see no reason why simply having—that will cause any significant change in stock or bond markets at that time.

You know obviously a huge market force will be withdrawn. I mean you buy $600 billion worth of treasuries, and you know you probably leave a few traces along the way that you've done it, and it has been $100 billion or so a month, and that purchasing will not be in the market, but the government issuances of debt will still be at a level that are consistent with what they are now. So it will be a different market, but I think it's a different market that's already been anticipated.

Charlie, I have nothing to add. Becky, I’d like to ask a question that comes from Rahm Tarakhand from Sugarland, Texas. He says, "Good morning, Mr. Buffett and Mr. Munger. You have always put great emphasis on hiring and retaining managers that not only have exceptional talent but also adhere to the higher standards of corporate ethics and behavior. Recent events surrounding Mr. Sokol's actions have demonstrated that we were not very far from a situation where someone running Berkshire Hathaway had great talent but lacked the other quality that has made Berkshire the envy of the business world.

In some ways, we are relieved that these events happened while you were still at the helm, but coming back to the succession plan that you have in place, how can you ensure that there are no more Sokols in the lineup of exceptional managers that you have?"

Yeah, he made an assumption there about Sokol being the next in line, which I'm not sure was warranted, but certainly he was entitled to think that he was a candidate. That is one of the reasons that I think it's a good idea if my son, Howard Buffett, who would have no get paid nothing and have no activities in the company, be the chairman after I'm not around because you can make a mistake in selecting a CEO.

I mean it did—you know I think the odds of us making a mistake are very, very low. I certainly—the candidate that I think is the leading candidate now, I know I wouldn't—I would lay a lot of money on the fact that he is straight as an arrow, but mistakes can be made. You know the Bible says the meek shall inherit the earth, but the question is will they stay meek, you know? And the idea of having an independent chairman who would be voting a lot of stock—because even at my death, because of the concentration of a stock and so on, the executors would have a very significant block of stock and if some mistake were made, it would be easier to change.

If not only a very large block of stock were available to express an opinion but also if the chairmanship was not locked in with the CEO. It’s gotten less tough to change CEOs at companies where their moral or their intellectual qualities are found lacking, but it's still difficult. It’s particularly difficult if they turn out to be a mediocre CEO. If the person is really bad, you know people will rise up sometimes, and particularly if they have meetings without the CEO present. But it's not an easy job to displace a sitting CEO who also holds the chairman's position and controls the agenda and all of that, so I think an independent chairman, particularly one that represents a very large block of stock and has no designs himself on taking over the place is a safety measure for the possibility, however remote, that the wrong decision is made.

But I will tell you that the directors of Berkshire will be thinking every bit as much about the quality of the person as a human being as they will be thinking about their managerial skills because it's vital that you have somebody at Berkshire in my view that is running the place that really cares more about Berkshire than he does about himself in terms of advancement, and I think we have multiple candidates that fulfill that, and the idea of an independent chairmanship is part of the belt and suspenders.

Charlie?
Well, you know, your idea about the Buffett family as a President—the Rockefellers left the management of Standard Oil many, many decades ago, but they didn't intervene once, and that was to throw out what was it, the head of Standard Indiana, and it was on moral grounds. So that sort of thing can happen, and you have put another string in our bow.

Okay, we'll go to area two. Caroline Tall, Boston, Massachusetts. Mr. Buffett and Mr. Munger, if you were going to live another 50 years—and we sincerely hope you do—and could add one additional sector or asset class to your circle of competence, which sector would it be and why?

Well, that's a very good question, and I particularly like the preamble. Well, you would certainly pick a sector that's large because it isn't going to make any difference to Berkshire if we get to be experts on some tiny little industry or business. I would say that it would have to be—I'm not sure this isn't going to happen, but if I could really become an expert, and I mean really expert, knowing more than most almost anybody else about the subject in the tech field, you know, I think that would be terrific.

It isn't going to happen, but it's going to be a huge field. There are likely to be a few enormous winners, a lot of disappointments, so that the ability to pick the winners is far disproportionate to the ability to pick the winners, let's say, among major integrated oil companies, where those are all equated in price, and you know you're not going to have a big edge in trying to pick Chevron against Exxon against Continental, you know, and Occidental, you name it. But the degree of disparity and results among larger tech companies in the future is likely to be very, very dramatic, and if I had the skills where I could pick the winners there, I would do a lot better than if I had the skills to pick the winners in the major integrated oil field.

You probably will have better luck with Charlie on this one because he knows a lot more about a lot of industries than I do.
Charlie, what's your answer?
Well, it would either be tech or energy, and I think that we're the wrong people to develop the expertise. I think that if we're going to do it, it would have already happened.

Yeah, I do think we might identify somebody else who has abilities that we lack; it’s been very hard for us, but we're not going to tell you. But we've done a little better lately. It’s a good question.

Andrew, this question comes from a shareholder named Ralph Coutant, who asks, "In your press release, your original press release, you noted that Dave bought the idea of purchasing Lubrizol to me on either January 14th or 15th. Initially, you said I was unimpressed. You went on to note that on January 24th you sent another note to Dave indicating your ‘skepticism’ about making an offer for the company.

However, in a very short period of time after Dave's discussion with Lubrizol's CEO, you ‘quickly warmed to the idea.’ Please clarify what caused you to ‘warm’ to the idea so quickly if this didn't strike you as being a great business at first glance. What changed and what was David Sokol's role in convincing you?"

Yeah, it wasn't—it didn’t destroy. It struck me as a business I didn't know anything about initially. You know you're talking about petroleum additives. I never would understand the chemistry of it, but that's not necessarily vital. What is important is that I understand the economic dynamics of the country of the industry. Are there competitive moats? Is there ease of entry? All of that sort of thing. I did not have any understanding of that at all initially.

As a matter of fact, I suggested to Dave, I said, “Charlie's a lot smarter about oil than I am; why don’t you give him a call?” Because I didn’t—I just don’t know anything about that business. And I talked to Charlie a few days later, and I don’t remember whether I asked him whether David called or anything, but I mentioned it, and Charlie said, “I don’t understand it either.” So when I talked to Dave later, he had not talked. He had not gotten a hold of Charlie. I told him forget it; he’s as bad as I am.

What Dave passed along to me after having that dinner with James Hambrick, which I later confirmed in a lunch when James Hambrick came out here in February, was the same thing because I thought—and I still feel—I thought I got a good understanding of the industry dynamics and how the business had developed over time, what the role of oil companies was and would be in relation to a chemicals additive. The oil companies are the biggest customers; they sell base oil to a little resolve, but they buy the—they are the big customers, and they have gotten out of the business to quite a degree, although there are two of them left in it.

So this industry had consolidated over time. I looked at the question of ease of entry: you know, every time I look at a business—when we bought Sees Candy in 1972, I said to myself, “If I had $100 million and I want to go in and take on Sees Candy, could I do it?” And I came to the conclusion no, so we bought Sees Candy. If the answer had been yes, we wouldn’t have done it.

I asked myself that same question: can I start a soft drink company and take on Coca-Cola if I had $100 billion? You know, Richard Branson tried it some years ago in something called Virgin Cola. You know, the brand is supposed to be a promise. I'm not sure that that's exactly the promise you want to get if you buy a soft drink. But in any event, I felt, after my conversation with Dave, subject to a second conversation with James Hambrick, but covering the same ground, that it's not impossible at all for people to enter this business, but in terms of the service that and the relatively low cost of what Lubrizol brings to the party, and in terms of people trying to break into a market and take them on, it’s not a huge market; it’s probably only a $10 billion market overall.

I decided that there was a pretty good size motor on this, but they've got lots and lots of patents. But more than that, they have a connection with customers, they work with customers when new engines come along to develop the right kind of additive. So, I felt that I had an understanding—I didn't understand one thing more about chemistry than when I started—but I felt that I had an understanding of the economics of the business the same way I felt that when the Iscar people talked to me.

I mean, who would think that you could have, you know, take some tungsten out of the ground in China and put it into little carbide tools and that you could have some durable competitive advantage? But I decided Iscar had a durable competitive advantage after looking at it for a while.

That’s the conclusion I came to, the conclusion that Charlie as well. The Lubrizol positioned as the dominant or the number one company—not dominant, but the number one company in terms of market share—in that business is sustainable and that it's a very good business over time. It helps, you know, they're helping engines run longer and run smoother. You know, when metal is acting on metal that lubricants are important, and they're always going to be around, and I think Lubrizol will be the leading company for a very, very long time and that’s the conclusion I came to.

And I did not have a fix on that—nor did Charlie—prior to Dave relaying onto me what he had learned at that dinner, which, incidentally, Lubrizol had been telling the world. I mean, they made investor presentations and all that quite extensively over the years, I simply hadn't paid any real attention to it.

And when it was explained to me, I thought I understood it, and I still think I understand. I think Lubrizol will be a very, very good addition to Berkshire, and I saw James Hambrick just yesterday, and despite the turmoil around this, they are very enthused about becoming part of Berkshire. That they regard it as the ideal home. Charlie?

Yeah, you know, Iscar and Lubrizol to some extent are sisters under the skin. You've got very small markets that aren't really too attractive to anybody with any sense to enter and fanaticism in service.

So if you have any more like that, why, please give Warren a call. Okay, area three. This is Xiang Xiaochu from Ottawa, Ontario. Warren, Charlie, I admire you guys tremendously. I want to ask a question about the valuation of your company. You said price is what you pay and value is what you get in your letter to the shareholders this year. Each class A share owns about an investment of about $95,000, and each commands an earning of about $6,000.

So in my simplistic way of calculation, each year is worth $95,000 of investment plus the earnings discounted at 7 percent. That's another about $90,000, so it adds up to about $185,000. Is that correct? Does that mean the complexity of your empire is a value trap?

We give those figures because we think they're important—both the investments per share and the operating earnings per share, excluding the earnings that come from the investments and leaving out insurance underwriting profits or losses because we think that, worse, they'll break even. But they do bounce around from here to here. Those figures are pre-tax on the operating earnings, so I'm not sure whether you're applying your discount factor to pre-tax or after tax, but we think they're important, and I would expect, well, the operating earnings, you know, are almost certain to increase.

How much, you know, who knows, but that number is likely to go up. The investments are still about the same as at year-end, but they could go up or down based on whether we're able to buy more operating businesses. Our goal is to build both numbers to some extent, but our primary goal is to build the operating earnings figures. We never, if Charlie and I had to stick a number and envelop right now in front of us as to what we thought the intrinsic value of Berkshire was, well, neither one of us would stick a figure; we'd stick a range because it would be ridiculous to come up with a single specific number which encompasses not only the businesses we own but what we're going to do with the capital in the future.

But even our ranges would differ modestly and they might differ tomorrow in terms of how I would feel versus today but not dramatically at all. I would say this: I think I certainly—well, you've received signals once or twice when we said we would buy in our stock. We obviously thought that it was selling below the bottom of a conservative range of intrinsic value, and we did that once some years ago.

And by saying so, of course, the stock went up, and so we never got any stock bought, so there's sort of a self-defeating factor about taking the kind of approach to it that we do in terms of really telling people that the only reason we'll buy stock is because if we think it's cheap. That is not standard practice in corporate America at all.

In fact, corporate America to some extent buys in their stock more aggressively when it's high than when it's low, but they may have some equation in their mind that escapes my reasoning power. But the—we do not regard Berkshire as overpriced, and I would say that we had very, very, very recently a very, very large international company that might well have been interested in doing something with Berkshire, and it's a very, very nice company, but it's bigger than we can handle unless we would use a lot of stock, and we won't use the stock.

We just think our shareholders would come out behind. It would be a wonderful company and, you know, make a lot of headlines, but in the end, our shareholders would be poor because our stock is a currency, and unless it's fully valued, it's a big mistake to use it as a currency.

Now we used some in the Burlington deal, but we used a whole lot more cash and, in effect, we only used 30% for stock, and it was worth doing, but it was painful. And if Lubrizol wanted to do a deal involving stock, we would not have done it. I told James Hambrick that right off the bat.

So we had absolutely no interest in buying Lubrizol. We were perfectly willing to give close to $9 billion in cash, and in my view, we are getting our money's worth, but we would not have given a significant portion of it in Berkshire stock because we would be giving away part of the businesses that we already own, and we like Burlington, and we like Sea's Candy, and we like Iscar, and to give away a portion of those even to get another very good business would not make financial sense for our shareholders.

So you can draw your own deductions about our calculations of intrinsic value from that statement, Charlie. Well, he's obviously looking at the two right factors, and I think that we have not permanently lost the ability to do some interesting things eventually with our enormous wealth and cash and marketable securities.

We won't always be as inactive as we are now. Oh, we're not that active. Charlie, well, I don't know, you practically crawl out of your skin sometimes.

$9 billion is—you know, if we say normal earning power is $12 billion, that uses up a good portion of one year's quota, although we'd like to use more. I mean, there’s no question it’s true in investments; it's true in operating businesses where there is a real disadvantage to size, and we just hope that problem grows.

Now you’re talking, Becky. Aside from questions about Dave Sokol, the questions I've received most from shareholders have to do with dividends. And Dave Corneal, who is a shareholder who couldn't be here this weekend because he's at his daughter's wedding, writes in, "I know that Berkshire is a great allocator of capital, but as an owner of Berkshire stock and as I get closer to retirement, there will be a time when I will need income from my assets. Currently, Berkshire does not pay dividends, yet it loves collecting on dividends on its investments. It also generates extensive cash flow in which it could pay dividends if it chooses to.

Currently, the only real option to get income from your Berkshire investment is to sell a share or two of the stock. Is there a point in the future where Berkshire shareholders may expect a dividend payment or what conditions would be needed for Berkshire to consider paying a dividend?"

Yeah, we will pay dividends. As a matter of fact, that may be an argument that when we pay dividends, we should pay out almost 100% because it does mean that we have lost the ability to find ways to invest a dollar in a manner that creates more than a dollar of present value for the shareholders.

But let’s assume you had a savings account and the savings account paid 5% and you had your choice of taking $50 a year out or letting the $50 stay in, and somebody would pay you $1.20 of that savings account anytime you wanted to sell a piece of it. Now would you want to take the $5 out or would you rather let it accumulate and have the ability to sell it $1.20 or $1.30 or whatever it may be valued, and then sell off a little piece if they want the income or if they want to receive some cash?

The logic of it, I think, is unquestionable. The execution of it is a problem. I mean the question of whether we can keep investing dollars to create more than a dollar of present market value—you know, there's an end to that at some point. But so far, people, by leaving $100 billion at the end of the third quarter in the business, have $200 billion dollars that they can cash out for it anytime they wish.

So there will come a time, and you know, who knows how soon because the numbers are getting big, there will come a time when we do not think we can lay out, you know, $15 or $20 billion a year and get something that's immediately worth more than that for our shareholders. And like I say, when the time comes where a dollar is only buying us 90 cents of value, we'll quit spending the dollar and we'll give it to the shareholders. But I predict that today that if Berkshire declares a dividend, the stock will go down. I mean, it will—and it should go down because it's an admission, essentially, that a compounding machine has lost its ability to continue on that course.

Charlie? Well, there's nothing wrong with selling a little Berkshire stock to buy jewelry if you're in the right place. I would like to announce that my niece Cynthia visited Borsheims yesterday, around, I guess, around three o'clock, and she was there with her boyfriend, and he proposed, and they bought a ring. Congratulations. [Applause] Her mother did the same thing a few years ago, and you know, these things can become family traditions, so go out there, and who knows what will happen.

Okay, number five, Jeremy Pose, Newton, Massachusetts. Mr. Buffett and Mr. Munger, Berkshire Hathaway has had large investments in Wells Fargo and U.S. Bank. What are the revenue outlooks and business prospects for these two banks, given the backdrop of slow U.S. growth, an extended U.S. consumer, a tepid rebound in the U.S. housing market, with foreclosures and write-downs lessening but still at historically high levels, and the potential for greater than expected inflation or worse, possibly deflation similar to Japan? Thank you for your time and consideration.

Yeah, Wells Fargo and U.S. Bank Corp are both among the best large banks, if not the best, in the country, and they're different than what you think of in terms of some money center banks, but they're very large. Wells is four times as large as U.S. Bank. Banking as a whole, U.S. banking profitability will be considerably less in my view in the period ahead than it was, say, in the early part of this century, and one very important reason is that the leverage will be reduced, and that's probably a good thing for society.

It may be a bad thing for individual banks that could use leverage intelligently, but the trouble was that they all thought they could use leverage intelligently, and the actions of one or more that were unintelligent about it had consequences for everybody, which you can see if you view HBO on whatever it is, is it May 26th.

Then I would say that return on assets, even if return on assets were as good as it was some years ago, there will be less assets per dollar of common equity than before, which means return on common equity will be less. We still think that Wells Fargo and U.S. Bank are very good operations. We think they're very decent businesses. They're not as attractive as when leverage ratios could be higher.

In terms of the troubles in banking, I think you've seen by far the worst in the past, and loan losses have been trending downward now for several quarters, and I think expectations are that it will continue. And I think banking's a very fundamental business, but as John Stump said a few years ago at Wells Fargo, he said, "I don't know why we keep thinking of new ways to lose money when the old ones were working so well." You know, and banks periodically go crazy. It's always on the asset side.

I mean here you've got cheap money; you've got the federal government behind—although the federal government has never had to pay out anything on the FDIC. The FDIC has handled 3,800—since it was established on January 1, 1934, the FDIC has paid out probably, I don't know, 3,800, 3,900 by now institutions—250 of them or so in the last couple of years—and that has not cost the U.S. taxpayer a penny. I mean that has all come from FDIC assessments on other banks. It's been a mutual insurance company.

So the banking—if you keep out of trouble on the asset side, it's a very good business because you get your money so cheap. And you know, because of the implicit federal guarantee, and you do get to leverage up to a fair extent, and America's been a pretty good place to lend money. So I like our positions in there.

You will see that if you look at those totals, you'll see we've added to Wells Fargo and I think they're both—those companies are very well-run institutions, but they will not be able to earn—I don't know what the figures were, but I think they were up in 25% to 30% on tangible equity, and that's not going to get repeated in the future, and it shouldn't be.

Charlie? Well, yeah, we might add that MT Bank, which most people never talk about, is headed by a really sensible fellow and it's been a wonderful investment for us.

As a matter of fact, if you get the MT annual report, it's written by Bob Wilmers. The letter, the first part of it's about MT specifically, but the second part is about particularly the American financial economy, and I would really recommend you read that. Bob is a very smart guy, and he has a lot of good observations.

And frankly, the other one I'd recommend you read is Jamie Dimon's letter. J.P. Morgan is a tour de force in terms of describing the banking scene, the economic scene. He has some real insights in there about some very important subjects. We don't own that stock, but it's a letter that I think everybody could learn a lot from reading, as they could from reading Bob Wilmers' letter at MT.

And those people who like an element of morality in business, Wilmers sounds like an Old Testament prophet. I mean he really doesn't like it that all the really big banks are making so much money out of trading because he says you're really trying to outsmart your own customers, and he'd rather serve them in a culture of deserved trust in both directions.

It's hard to think he's totally wrong. He also expresses quite a dislike for the fact that a market system creates a reward system where money sort of disproportionately flows to people who work with money and that that tends to attract a disproportionate number of people that, you know, of lots of ability that he thinks might be at least some of them might be better deployed elsewhere. It's an interesting read; it's one of the best annual reports that's ever come out of banking.

Right out of what? Buffalo?

Okay, Andrew, this question comes from a shareholder named Ralph Coutant, who asks, "In your press release, your original press release, you noted that Dave bought the idea of purchasing Lubrizol to me on either January 14th or 15th. Initially, you said I was unimpressed. You went on to note that on January 24th, you sent another note to Dave indicating your skepticism about making an offer for the company."

However, in a very short period of time after Dave's discussion with Lubrizol's CEO, you quickly warmed to the idea. Please clarify what caused you to warm to the idea so quickly if this didn't strike you as being a great business at first glance. What changed and what was David Sokol's role in convincing you?

Yeah, it didn’t destroy—it struck me as a business I didn’t know anything about initially. You know, you're talking about petroleum additives. I never would understand the chemistry of it, but that's not necessarily vital. What is important is that I understand the economic dynamics of the country, of the industry. Are there competitive moats? Is there ease of entry? All that sort of thing. I did not have any understanding of that at all initially.

As a matter of fact, I suggested to Dave, I said, “Charlie’s a lot smarter about oil than I am; why don’t you give him a call?" Because I didn’t—I just don’t know anything about that business. I talked to Charlie a few days later, and I don’t remember whether I asked him whether David called or anything, but I mentioned it, and Charlie said, “I don’t understand it either.”

So when I talked to Dave later, he had not talked; he had not gotten a hold of Charlie. I told him forget it; he’s as bad as I am. What Dave passed along to me after having that dinner with James Hambrick—which I later confirmed in a lunch when James Hambrick came out here in February—was the same thing because I thought—and I still feel that. I thought I got a good understanding of the industry dynamics and how the business had developed over time, what the role of oil companies was and would be in relation to a chemicals additive.

The oil companies are the biggest customers; they sell base oil to a little resolve, but they buy the—they are the big customers, and they have gotten out of the business to quite a degree, although there are two of them left in it. So this industry had consolidated over time. I looked at the question of ease of entry: you know, every time I look at a business—when we bought Sees Candy in 1972, I said to myself, “If I had $100 million and I want to go in and take on Sees Candy, could I do it?” And I came to the conclusion no, so we bought Sees Candy. If the answer had been yes, we wouldn’t have done it.

So I asked myself that same question: can I start a soft drink company and take on Coca-Cola if I had $100 billion? You know, Richard Branson tried it some years ago in something called Virgin Cola. You know, the brand is supposed to be a promise. I'm not sure that that's exactly the promise you want to get if you buy a soft drink. But in any event, I felt, after my conversation with Dave, subject to a second conversation with James Hambrick, but covering the same ground, that it's not impossible at all for people to enter this business. But in terms of the service that and the relatively low cost of what Lubrizol brings to the party, and in terms of people trying to break into a market and take them on, it’s not a huge market; it’s probably only a $10 billion market overall.

I decided that there was a pretty good size motor on this, but they've got lots and lots of patents. But more than that, they have a connection with customers; they work with customers when new engines come along to develop the right kind of additive. So, I felt that I had an understanding—I didn't understand one thing more about chemistry than when I started—but I felt that I had an understanding of the economics of the business the same way I felt that when the Iscar people talked to me.

That’s the conclusion I came to, the conclusion that Charlie as well. The Lubrizol positioned as the dominant or the number one company—not dominant, but the number one company in terms of market share—in that business is sustainable and that it's a very good business over time. It helps, you know, they're helping engines run longer and run smoother. You know, when metal is acting on metal, that lubricants are important, and they're always going to be around, and I think Lubrizol will be the leading company for a very, very long time, and that's the conclusion I came to.

And I did not have a fix on that—nor did Charlie—prior to Dave relaying onto me what he had learned at that dinner, which, incidentally, Lubrizol had been telling the world. I mean they made investor presentations and all that, quite extensively, over the years. I simply hadn't paid any real attention to it.

But they do bounce around from here to here. Those figures are pre-tax on the operating earnings, so I'm not sure whether you're applying your discount factor to pre-tax or after tax, but we think they're important, and I would expect, well, the operating earnings, you know, are almost certain to increase.

We never, if Charlie and I had to stick a number and envelope right now in front of us as to what we thought the intrinsic value of Berkshire was, well, neither one of us would stick a figure; we'd stick a range because it would be ridiculous to come up with a single specific number which encompasses not only the businesses we own but what we're going to do with the capital in the future.

But even our ranges would differ modestly and they might differ tomorrow in terms of how I would feel versus today, but not dramatically at all. I would say this: I think I certainly—well, you've received signals once or twice when we said we would buy in our stock. We obviously thought that it was selling below the bottom of a conservative range of intrinsic value, and we did that once some years ago.

In fact, corporate America to some extent buys in their stock more aggressively when it's high than when it's low, but they may have some equation in their mind that escapes my reasoning power. But we do not regard Berkshire as overpriced, and I would say that we had very, very, very recently a very, very large international company that might well have been interested in doing something with Berkshire, and it's a very, very nice company, but it's bigger than we can handle unless we would use a lot of stock, and we won't use the stock.

So you can draw your own deductions about our calculations of intrinsic value from that statement, Charlie.

Well, he's obviously looking at the two right factors, and I think that we have not permanently lost the ability to do some interesting things eventually with our enormous wealth and cash and marketable securities. We won't always be as inactive as we are now.

Oh, we're not that active. Charlie, well, I don't know, you practically crawl out of your skin sometimes.

$9 billion is—you know, if we say normal earning power is $12 billion, that uses up a good portion of one year's quota, although we'd like to use more.

I mean, there’s no question that’s true in investments; it’s true in operating businesses where there is a real disadvantage to size, and we just hope that problem grows.

It also generates extensive cash flow in which it could pay dividends if it chooses to. The currently, the only real option to get income from your Berkshire investment is to sell a share or two of the stock. Is there a point in the future where Berkshire shareholders may expect a dividend payment or what conditions would be needed for Berkshire to consider paying a dividend?"

Yeah, we will

2011 Berkshire Hathaway Annual Meeting (Full Version)

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