2019 Berkshire Hathaway Annual Meeting (Full Version)
Thank you. Good morning and welcome to Berkshire Hathaway. For those of you who have come from out of state, welcome to Omaha! The city is delighted to have you here for this event. For those of you who came from outside of the country, welcome to the United States!
So we've got people here from all over the world. We've got some overflow rooms that are taking care of people. We will just have a few preliminaries and then we will move right into the Q&A period. We'll break about noon for about an hour. We'll come back and do more Q&A until about 3:30, then we'll adjourn for a few minutes and then they will conduct the meeting.
I understand that in the room adjacent that Charlie has been conducting a little insurgency campaign. I don't know whether you've seen these, but these are the buttons that are available for those of you who keep asking questions about succession. Charlie wants to answer that question by getting your vote today. So it says this one says "Maturity. Experience. Why accept second best? Vote for Charlie." However, I have appointed the monitors who have collected the votes, so I feel very secure.
The first thing I'd like to do, Charlie, is my partner of 60 years, Director, and Vice Chairman, and we make the big decisions jointly. It's just that we haven't had any big decisions, so we haven't. We're keeping him available for the next big one.
Now, at the formal meeting today, we will elect 14 directors, and you're looking at two of them. I'd like to introduce the 12 that will be on the ballot at 3:45, and I'm going to proceed alphabetically. If they'll stand, if you would withhold your applause because some of them get sensitive if certain people get more applause than others. If you withhold it until I'm finished, then you can applaud or not, as you see fit.
Having looked at these directors, we'll start on my left. Greg Abel, who's both a chairman and a director. Greg? Yeah, oh there we are. Right, okay. And going along alphabetically: Howard Buffett, Steve Burke, Sue Decker, Bill Gates, Sandy Gottisman, Charlotte Gyman, Ajit Jain who is also a vice chairman, Tom Murphy, Ron Olson, Walter Scott, and Merrill Whitmer. Now you can applaud! [Applause]
Now this morning, we posted on our website the quarterly of the 10-Q that's required to be filed with the SEC. We published it at seven o'clock, Central Time, and we also published an accompanying press release. These figures, as usual, require some explanation. As we've mentioned in the annual report, the new relevant GAP rule, generally accepted accounting principles, require that we mark our securities to market and then report any unrealized gains in our earnings. You can see I've warned you about the distortions from this sort of thing.
The first quarter of 2019 actually was much like the first quarter of 2018, and I hope very much that newspapers do not read headlines saying that we made 21.6 billion in the first quarter this year against the loss of last year. These bottom line figures are going to be totally capricious.
What I worry about is that not everybody studied accounting in school, or they can be very smart people, but that doesn't mean they've spent any real time on accounting and I regard these bottom line figures, particularly if they're emphasized in the press, as potentially being harmful to our shareholders and really not being helpful. So I encourage you now, and I encourage all the presidents here, to focus on what we call our operating earnings, which were up a bit, and forget about the capital gains or losses in any given period.
Now they're enormously important over time. We've had substantial capital gains in the future. We have substantial unrealized capital gains at the present time. We expect to have more capital gains in the future. They are an important part of Berkshire, but they have absolutely no predictive value or analytical value on a quarterly basis or an annual basis. I just hope that nobody gets misled in some quarter when stocks are down, and people said Berkshire loses money or something. That's hard.
It's really a shame that the rules got changed in that way, but we will report, but we will also explain and we will do our best to have the press understand the importance of focusing on operating earnings. We do not attract shareholders who think that there's some enormous gain because, in the first quarter, the stock market was up.
There is one other footnote to these figures that I should point out. It's already been picked up by the wires from our seven o'clock filing. We report on Kraft Heinz, of which we own about 27 or so. We report on what they call the equity method.
Now most stocks, when you get dividends, that goes into our earnings account, and their undistributed earnings don't affect us. They affect us in a real way, but they don't affect us in an accounting way. We are part of a control group at Kraft Heinz, so instead of reporting dividends, we report what they call equity earnings.
Kraft Heinz has not filed their 10-K for the 2018 year with the SEC, and therefore they have not released the first quarter of 2019 earnings. Normally we would include our percentage share of those earnings, and we've done that every quarter up till this quarter, but because we do not have those figures, we've just not included anything. We received 40 cents, 130 million dollars of dividends in the first quarter from our shares, but that reduces our carrying basis, and it's not reflected in the earnings.
So that's an unusual item, which we have mentioned specifically and pointed out in our press release, as well as included in our own, but there is nothing in here, plus or minus, for Kraft Heinz earnings this year whereas there was last year, and when we have the figures, obviously, we will report them.
I think... oh yes, I want to mention to you the Kiewit company which has been a landlord since 1962, 57 years has owned the building in which Berkshire is headquartered. Kiewit company is moving their headquarters and in the process will be doing something with the building, and they very very generously, as they always have been, they came and said, “What kind of a lease would you like since we’re leaving?” And we've always sort of worked these things out as we've gone along, and Bruce Grubkaku runs Kiewit, said, “You just sort of name your terms and what you'd like.”
So no matter what happens with the building, you're all set. So I was about to sign a ten-year lease for the present space, but Charlie said, “Ten years might be long enough for me,” but he said he would like me to sign one for 20 years considering it. So we are entering a 20-year lease and I confess to you that we now occupy one full floor, as we have for decades, and the new lease provides for two floors.
So I just want you to know that your management is loosening up just a little bit, and whether or not we fill them is another question, but we will have that, and I would like to say to Omaha that I think the fact that Berkshire has signed up for 20 years is very good news for the city over time! [Applause]
Okay, and now I would like to tell you something about the people that make all of this possible. This is totally... this is a homegrown operation. We started with a few people meeting in the lunchroom at National Indemnity many years ago, and I think we will probably set another record for attendance today. Yesterday afternoon, 16,200 people came in five hours, and that broke the previous record by a couple thousand. On Tuesday the Nebraska Furniture Mart did 9.3 million dollars worth of business, and if any of you are in the retail business, you'll know that that's a yearly volume for some furniture stores and here in Omaha, the 50th largest mart in the country, maybe even a little less, 9.3 billion I think probably exceeds anything any home furnishing stores ever done in one day.
And we have people pitching and we have all the people virtually, all of the people from the home office, some of them, you know, they'll take on any task. We have a bunch of people from National Indemnity, for example, that come over, and they've been some of the monitors around. But, and in terms of the exhibit hall, more than 600 people from our various subsidiaries give up a weekend, come to Omaha, work very hard. Tomorrow, 4 or 4:30, they... I should say today at 4 or 4:30, they will start packing up things and heading back home.
And they come in and I saw them all yesterday, and they were a bunch of very, very happy smiling faces, and they don't, you know, they work hard all year, and then they come in and help us out on this meeting. And then finally, if we could get a spotlight, I think Melissa Shapiro is someplace here. She runs the whole show. I mean, but we listen, where are you? [Applause]
Melissa's name was Melissa Shapiro before she got married; then she married a guy named Shapiro. So now she's Melissa Shapiro Shapiro. But she can handle that sort of thing; she handles everything, and never totally unflappable, totally organized. Everything gets done; everybody likes you when they get through. So I... it's marvelous to get a chance to work with people like this. I think it's a special quality at Berkshire.
And I think other people would hire some group to put on the meeting, and they’d be very professional and all of that, but I don't think you can buy the enthusiasm and energy and help-the-next-guy feeling that you've seen out on that exhibition floor. And you'll see as you meet people here at the hall and as you meet the people around Omaha, they're very, very happy that you're here.
And with that, I would like to start on the questions. We’ll do it just as we've done it in recent years. We’ll start with the press group. They've received emails from a great many people; perhaps they can tell you how many and select the questions they think would be most useful to the Berkshire shareholders. Yahoo is webcasting this that they've done for several years now. They've done a terrific job for us. So this meeting is going out both in English and in Mandarin.
And I hope our results translate well. Sometimes we have trouble with English but we're going to start in with Carol Loomis, my friend of 50 years, but you'll never know it by the question she's going to ask me.
I'm going to start one very briefly. This is for the benefit of people who send us questions. Next year, there are kind of two things that you get wrong a lot of time; you can't send two-part questions or three-part, etc. We need a one-part question and the other thing is that the question really needs to have some relevance to Berkshire.
Because Warren said when he started it that his hope was that shareholders would come out of the questions with a further education about the company. So keep those in mind for next year. Many people, a number of people wrote me about repurchases of stock, and that's the question I picked for my first one.
The question, this particular question comes from Ward Cookie, who lives in Belgium, and who was still emailing me this morning in reference to the first quarter report. He asked, “My question concerns your repurchase of Berkshire shares in the third quarter of last year. You spent almost 1 billion buying Berkshire B stock at an average price of 207, but then you got to a period between December 26 and April 11 when the stock languished for almost four months under 207.
And yet you purchased what I think of as a very limited amount of stock, even as you were sitting on an enormous pile of 112 billion. My question is why you did not repurchase a lot more stock, unless of course there was for a time an acquisition of say 80 billion to 90 billion on your radar?”
Yeah, the question whether we had a hundred billion or 200 billion would not make a difference or 50 billion would not make a difference in our approach to repurchase of shares. We purchased shares. We formulated, we used to have a policy of tying it to book value, but that really became obsolete.
The real thing is to buy stock, repurchase shares only when you think you're doing it at a price where the remaining shareholders are worth more than the moment after you've repurchased it than they were the moment before. It’s very much like if you were running a partnership and you had three partners in it and the business was worth 3 million, and one of the partners came and said, “I’d like you to buy back my share of the partnership for a billion.”
I started out with millions; I’ll stay with millions for 1.1 million, and we’d say forget it. And if he said 1 million, we’d probably say forget it unless... and if he said if he said 900,000, we’d take it because at that point the remaining business would be worth 2 million won and we’d have two owners, and our interest in value would have gone from a million to a million and fifty thousand.
So it's very simple arithmetic. Most companies adopt repurchase programs and they just say, “We’re going to spend so much.” That’s like saying, “You know, we’re going to buy XYZ stock and we’re going to spend so much,” or “We’re going to buy a company. We’re going to spend whatever it takes.”
We will buy stock when we think it is selling below a conservative estimate of its intrinsic value. Now, the intrinsic value is not a specific point; it's probably a range in my mind that might have a band maybe of 10 percent. Charlie would have a band in his mind and it would probably be 10 and ours would not be identical but they'd be very close. Sometimes he might figure a bit higher than I do, a bit lower, but we want to be sure when we repurchase shares that those people who have not sold shares are better off than they were before we purchased them.
And it’s very simple. In the first quarter of the year, they'll find we've bought something over a billion dollars worth of stock and that's nothing like my ambitions, but what that means is that we feel that we're okay buying it, but we don't salivate over buying it.
We think that the shares we repurchased in the first quarter leave the shareholders better off than if we hadn't bought it, but we don't think the difference is dramatic. You could easily see periods where we would spend very substantial sums if we thought the stock was selling at say 25 or 30 percent less than it was worth and we didn't have something else that was even better. But we have no ambition in any given quarter to spend a dime unless we think you’re going to be better off for us having done so.
Charlie?
Well, I predict that we’ll get a little more liberal in repurchasing shares. I was going to give you equal time but then...
Okay.
John Brandt: Hi Warren and Charlie, thanks for having me as always. Every major North American railroad other than Burlington Northern has adopted at least some aspects of precision scheduled railroading, generally to good effect to their bottom line.
Some believe the point-to-point schedule service and minimal in-transit switching is good for both returns on capital and customer service. Others believe precision railroading has done little for on-time performance and its rigidity has jeopardized the compact that railroads have had with both regulators and customers. Do you and current BNSF Management believe that it's now a good idea for BNSF to adopt precision railroading's playbook or do you agree with its critics?
Yeah, precision railroading is this is labeled was probably invented by a fellow named Hunter Harrison. I think maybe he was at the Illinois Central Railroad at the time. There’s a book that came out about Hunter who died maybe a year ago or thereabouts, and it describes his procedure toward railroading. It’s an interesting read if you’re interested in railroading.
He took that to Canadian National CN. There are six big railroads in North America and he took that to CN and he was very successful and actually Bill Gates is probably the largest holder of CN so it, and he’s I think he’s done very well with that stock.
And then later Canadian Pacific was the subject of the activist and when they as they proceeded they got Hunter to join them and brought in an associate Keith Real who and they instituted a somewhat similar program. Now the same thing has happened at CSX and all of those companies dramatically improved their profit margins and they had varying degrees of difficulty with customer service in the implementing of it.
But I would say that we watch very carefully. Union Pacific is doing a somewhat modified version, but we are not above copying anything that is successful. And I think there’s been a good deal that’s been learned by watching these four railroads and we will, if we think we can serve our customers well and get more efficient in the process, we will adopt whatever we observe.
But we don’t have to do it today or tomorrow, but we do have to find something that gets at least equal and hopefully better customer satisfaction and that makes our railroad more efficient and there’s been a growing evidence that from the actions of these other four railroads there’s been growing evidence that that we can learn something from what they do.
Charlie?
Well, I doubt that anybody is very interested in unprecision in railroading.
Well, Johnny, has Charlie answered your question?
Yes, thank you.
Okay, station number one from the shareholder group up on my far right.
Good morning, my name is Bill Moyer and I'm from Vashon Island, Washington. I'm part of a team called the Solutionary Rail Project. Interestingly, only 3.5 percent of the value of freight in the U.S. moves on trains.
Berkshire Hathaway is incredibly well positioned with its investments in the Northern and Southern Transcon through BNSF to grab far more of that freight traffic off of the roads and get diesel out of our communities as well as harness transmission corridors for your Berkshire renewable energy assets, for which you're obviously very proud.
Would you consider meeting with us to consider a proposal for utilizing your assets and leveraging a public-private partnership to electrify your railroads and open those corridors for renewable energy future?
You know, we’ve examined a lot of things in terms of LNG. I mean, obviously we want to become more energy efficient as well as just generally efficient. And I'm not sure about the value of freight you mentioned three and a half percent, I believe, I’m not sure what figure you're using as the denominator there because if you look at, if you look at the movement of traffic by ton miles, rails are around 40 percent of the U.S.
We're not talking local deliveries or all kinds of things like that, but they're 40 roughly by rail and BNSF moves more ton miles than any other entity. We move 15 plus of all the ton miles moved in the United States. But if you take trucking, for example, on intermodal freight, we're extremely competitive on the longer hauls.
But the shorter the haul, the more likely it is that the flexibility of freight, where a truck can go any place and we have rails, so the equation changes depending on distance haul and other factors, but distance always is a huge factor. We can move a ton mile with 500. We can move 500 plus ton miles of freight for one gallon of diesel, and that is far more efficient than trucks.
So the long haul traffic and heavy traffic is going to go to the rails, and we try to improve our part of the equation on that all the time. But if you're going to transport something 10 or 20 or 30 miles between a shipper and a receiver, you're not going to move that by rail. So we look at things all the time, and I can assure you Carl Ice is in, he's probably here now, and he'll be in the other room and running the railroad.
You're free to talk to him, but I don't see any breakthrough like you're talking about. I do see us getting more efficient year by year, and obviously if driverless trucks become part of the equation, that moves things toward trucking, but on long-haul heavy stuff, and there's a lot of it, you're looking at a railroad that carries more than any other mode of transportation, and BNSF is the leader.
Charlie?
Well, over the long term, our questioner is on the side of the angels. Sooner or later we'll have it more like electrified. I think Greg will decide when it happens.
Yeah, but we're all working on the technology, and we're considerably more efficient than 10, 20, 30 years ago. If you look at the numbers, but it wasn't one interesting figure I think right after World War II when the country probably had about 140 million people against our 330 million now, so we had 40 percent of the population, we had over a million and a half people employed in the railroad industry.
Now there's less than 200,000, and we're carrying a whole lot more freight now. There's obviously there's some change in passengers, but the efficiency of the railroads compared to and the safety compared to what it was even immediately after World War II has improved dramatically.
Charlie, anymore?
No.
Okay, Becky, this is a question that comes from Mike Hebel. He says, "The Star Performers Investment Club has 30 partners, all of whom are active or retired San Francisco police officers. Several of our members have worked in the fraud detail and have often commented after the year's long fraudulent behavior of Wells Fargo employees should have warranted jail sentences for several dozen, yet Wells just pays civil penalties and changes management. As proud shareholders of Berkshire, we cannot understand Mr. Buffett's relative silence compared to his vigorous public pronouncement many years ago on Solomon's misbehavior. Why so quiet?"
Yeah, I would say this. [Applause]
Probably well as I see it, although, you know, I have been no read no reports internally or anything like that, but it looks to me like Wells made some big mistakes in what they incentivized, and this Charlie says incentive, there’s nothing like incentives. But they can incentivize the wrong behavior, and I've seen that a lot of places. That clearly existed at Wells.
The interesting thing is to the extent that they set up fake accounts--a couple million of them that had no balance in them that could not possibly have been profitable to Wells--so you can incentivize some crazy things. The problem is, I’m sure, is that, and I don't really have any insider information at all, but when you find a problem, you have to do something about it. And I think that's where they probably made a mistake at Wells Fargo.
They made it to Solomon. I mean, John Goodfriend would never have played around with the government; he was the CEO of Solomon in 1991. He never would have done what the bond trader did that played around with the rules that the federal government had about government bond bidding.
When he heard about it, he didn't immediately notify the Federal Reserve. He heard about it in late April, and May 15, the government bond auction came along, and Paul Mosher did the same thing he'd done before and gamed the auction, and at this point John Goodfriend, you know, the destiny of Solomon was straight downhill from that point forward because essentially he heard about a pyromaniac and needed to let him keep the box of matches.
At Wells, my other understanding there was an article in the Los Angeles Times maybe a couple of years before the whole thing was exposed, and you know somebody ignored that article. And Charlie has beaten me over the years at Berkshire because we have 390,000 employees and I will guarantee you that some of them are doing things that are wrong right now.
There’s no way to have a city of 390,000 people and not need a policeman or a court system, and some people don’t follow the rules. You can incentivize the wrong behavior. You've got to do something about it when it happens; Wells has become, you know, exhibit one in recent years.
But go back a few years, you can almost go down, there’s quite a list of banks where people behaved badly and where they -- I would not say-- I don’t know the specifics at Wells but I’ve actually written in the annual report that they talk about moral hazard. If they allow people that the shareholders of Wells that paid a price, the shareholders of Citicorp paid a price, the shareholders of Goldman Sachs, the shareholders of Bank of America, they paid billions and billions of dollars, and they didn’t commit the acts and of course nobody did.
There were no jail sentences and that was infuriating, but the lesson that was taught was not that the government bailed, because the government got its money back, but the shareholders of the various banks paid many, many billions of dollars. And I don’t have any advice for anybody running a business except when you find out something is leading to bad results or bad behavior, if you’re in the top job, you’ve got to take action fast and that’s why we have hotlines.
That’s why we get when we get certain anonymous letters, we turn them over to the audit committee or to outside investigators, and we will have--I will guarantee you that we will have some people do things that are wrong at Berkshire in the next year, five years, ten years, and fifty years. You cannot have 390,000 people and it’s the one thing that always worries me about my job but because I’ve got to hear about those things, and I’ve got to do something about them when I do hear about him.
Charlie?
Well, I don't think people ought to go to jail for honest errors of judgment. It's bad enough to lose your job. I don’t think that any of those top officers was deliberately malevolent in any way. I just think we’re talking about honest errors in judgment.
I don't think Tim Sloan even committed honest errors of misjudgment; I just think he was an accidental casualty that didn’t deserve the trouble. Yeah, I wish Tim will stem Sloan was still there.
Yeah, there's no evidence that he did a thing, but he stepped up to take a job that he was going to get the piñata basically for all kinds of investigations and rightfully well should be checked out on everything they do, all banks should. I mean they get a government guarantee and they receive trillions of dollars in deposits, and they do that because the Fed basically because of the FDIC, and if they abuse that, they should pay a price.
If anybody does anything like a Paul Mosher did, for example of Solomon, they ought to go to jail. Paul Mosher only went to jail for four months, but if you're breaking laws, you should be prosecuted on it. If you do a lot of dumb things, I wish they wouldn't go away, that the CEOs wouldn't go away so rich under those circumstances, but people will do dumb things.
I actually proposed, I think I may have been on one of the annual reports even, I proposed that if a bank gets to where it needs government assistance, that basically the responsible CEO should lose his net worth and his spouse’s net worth if he doesn't want the job under those circumstances.
And I think that the directors, I think they should come after the directors for the last five years; I think I proposed of all of everything they've received. But it’s the shareholders who pay. I mean if we own nine percent of Wells, whatever this is cost, nine percent of it is being borne by us.
It's very hard to tie it directly. One thing you should know incidentally, though, is that the FDIC, which I think started January 1, 1934, it was a New Deal proposal. The FDIC has not cost the United States government a penny; it now has about a hundred billion dollars in it, and that money has all been put in there by the banks.
And that's covered all the losses of the hundreds and hundreds of hundreds of financial institutions. And I think the impression is that the government guarantees save the banks, but the government money did not save the banks; the banks' money as an industry has not only has paid every loss but they've accumulated an extra 100 billion and that’s the reason the FDIC assessments now are going back down.
They had them at a high level, and they had a higher level for the very big banks. So when you hear all the talk about the political talk about the banks, they had not caused the federal government. They did a lot of actions that took place that should not have taken place, and there are a lot fewer now, I think, than there were in the period leading up to 2008-09 but some banks will make big mistakes in the future.
Charlie?
I've got nothing to add.
Okay, Jay Gelb from Barclays. Barclays just had a proxy contest of sorts in there that's very important. I also have a question on Berkshire Hathaway on share buybacks.
Warren, in a recent Financial Times article, your quote is saying that the time may come when the company buys back as much as 100 billion dollars of its shares, which equates to around 20 to 20 percent of Berkshire’s current market cap.
How did you arrive at that 100 billion figure and over what timeframe would you expect this to occur?
Yeah, I probably arrived at that 100 billion dollar figure in about three seconds when I got asked the question, and it was a nice round figure and we could do it and we would like to do it if the stock was... we've got the money to buy in 100 billion dollars' worth of stock.
And bear in mind, if we were buying in 100 billion stock, it probably would be that the company wasn't selling at 500 billion, so they might buy well over 20. We will spend a lot of money. We've been involved in companies where the number of shares has been reduced 70 or 80 percent over time.
And we like the idea of buying shares at a discount, we do feel if shareholders... if we're going to be repurchasing shares from shareholders who are partners and we think it's cheap, we ought to be very sure that they have the facts available to evaluate what they own.
I mean, just as if we had a partnership, it would not be good if there were three partners and two of them decided that they would sort of freeze out the third, maybe in terms of giving them material information that they knew that that third party didn’t know.
So it's very important that our disclosure be the same sort of disclosure that I would give to my sisters who were the imaginary... they’re not imaginary, but they're the shareholders to whom I address the annual report every year because I do feel that if you're going to sell your stock, you should have the same information that's important that's available to me and to Charlie.
But we will, if our stock gets cheap relative to intrinsic value, we would not hesitate. We wouldn't be able to buy that much in a very short period of time, in all likelihood, but we would certainly be willing to spend 100 billion dollars.
Charlie, I think when it gets really obvious, we'll be very good at it.
Let me get that straight. What'd you say?
When it gets really obvious, we'll be very good at it.
Yeah, I was hoping that's what you said.
Yeah, we will be good at it, but we don’t have any trouble being decisively; we don’t do it... we don't say yes very often, but if something... something obvious... I mean, if Jay, if you and I are partners and our business is worth a million dollars and you say you'll sell your half to me for 300,000, you'll have your 300,000 very quickly.
Okay, station two.
Good morning, my name is Patrick Donahue from Eden Prairie, Minnesota and I'm with my ten-year-old daughter Brooke Donahue. Hi, Warren. Hi Charlie.
Brooke is a proud graduate of Creighton University and I need to say a personal thank you for coming over the years to share your insights. It's been a tradition since I graduated in 1999 to come to the annual meeting and thank you for a lifetime of memories.
Thank you! [Applause]
Brooke is a proud Berkshire shareholder and read the letter and had some questions regarding investments that have been made in the past, and she had made some interesting comments about what she thought was a lot of fun.
So our question for both of you is, outside of Berkshire Hathaway, what is the most interesting or fun personal investment you have ever made?
Well, they're always more fun when you make a lot of money off of them.
Well, I bought one time, I bought one share of stock in the Atlante Corp. That's spelled A-T-L-A-N-T and Atlante had 98 shares outstanding. I bought one, and not what you call a liquid security. And Atlante happened to be the word Delta spelled backwards.
And a hundred guys in St. Louis had each chipped in 50 or 100 or something to form a duck club in Louisiana and they bought some land down there. Two guys didn't come up with their obligation. There were 100 of them. Two of them defaulted on their obligation to come up with $100.
So there were 98 shares out, and they went down to Louisiana, and they shot some ducks. But apparently somebody shot fired a few shots into the ground and oil spurted out. And those Delta Duck Club shares, and I think the Delta Field is still producing my buttstocking it 40 years ago for $29,200 a share, and it was producing a lot.
And they sold it. If they kept it, that stock might have been worth two or three million dollars a share, but they sold out to another oil company. But that was certainly the most interesting thing.
Actually, I didn't have any cash at the time, and I went down and borrowed the money, and I bought it for my wife. I borrowed the money, and the loan offer said, “Would you like to borrow some money to buy a shotgun as well?”
Charlie, tell them about the one you missed.
Well, I have two investments that come to mind. When I was young and poor, I spent a thousand dollars buying an oil royalty that paid me a hundred thousand a year for a great many years. But I only did that once in a lifetime. On a later occasion, I bought a few shares of Bellridge Oil, which went up 30 times rather quickly.
But I turned down five times as much as I bought it; it was the dumbest decision of my whole life. So if any of you have any dumb decisions, look up here and feel good about yourselves.
I could add a few, but...
And Warren and Charlie, this is a question actually we got a handful of questions on this topic, this is probably the best formulation of it.
Warren, you have been a long-time outspoken Democrat. With all the talk about socialism versus capitalism taking place among Democratic presidential candidates, do you anticipate an impact on Berkshire in the form of more regulations, higher corporate taxes, or even calls for breakups among the many companies we own if they were to win?
And how do you think about your own politics as a fiduciary of our company and at the same time as someone who has said that simply being a business leader doesn’t mean you’ve put your citizenship in a blind trust?
I have said that you do not put your citizenship in a blind trust, but you also don't speak on behalf of your company. You speak as a citizen if you speak, and therefore you have to be careful about when you do speak because it's going to be assumed you're speaking on behalf of your company.
Berkshire Hathaway, certainly in 54 years, has never and will never make a contribution to a presidential candidate. I don’t think we’ve made a contribution to any political candidate, but I don’t want to say for 54 years that we don’t do it now.
We operate in several regulated industries, and our railroad and our utility as a practical matter, they have to have a presence in Washington norms and in the state legislatures in which they operate, so they have... we have some... I don’t know how many political action committees, which existed when we bought it, we bought the companies as subsidiaries, and I think that unquestionably they make some contributions just to achieve the same access as their competitors.
The trucking industry is going to lobby; I’m sure the railroad industry is going to lobby. But the general rule is that people do not pursue their own political interests with your money.
We’ve had one or two managers over the years, for example, that would do some fundraising where they were fundraising from people who were suppliers to them or something of the sort, and if I ever find out about it, that ends promptly.
But my position at Berkshire is not to be used to further my own political beliefs, but my own political beliefs can be expressed as a person, not as a representative of Berkshire.
When the campaign is important, I don't try to minimize it, but it’s no secret that in the last election, for example, I raised money. I won’t give money to PACs. I accidentally did it one time. I didn’t know it was a PAC, but I don’t do it.
I’ve raised substantial sums. I don’t like the way money is used in politics. I’ve written op-ed pieces for the New York Times in the past on the influence of money in politics.
I spent time with John McCain many years ago before McCain-Feingold and on ways to try to limit it, but the world has developed in a different way.
On your question about the... I will just say I'm a card-carrying capitalist, but I believe we wouldn’t be sitting here except for the market system and the rule of law and some things that are embodied in this country.
So you don’t have to worry about me changing in that manner but I also think that capitalism does involve regulation and involves taking care of people who are left behind, particularly when the country gets enormously prosperous.
But beyond that, I have no Berkshire podium for pushing anything.
Charlie?
Well, I think we're all in favor of some kind of government social safety net in a country as prosperous as ours.
What a lot of us don’t like is the vast stupidity with which parts of that social safety net are managed by the government.
It'd be much better if we could do it but more wisely. But I also think that might be better if we did it more liberally.
One of the reasons we're involved in this effort along with JP Morgan and Amazon, Jamie Dimon and Jeff Bezos on the medical question is we do have as much money going... 3.3 or 3.4 trillion, we have as much money going to medical care as we have funding the federal government.
It's gone from 5 to 17 or 18 while actually the amount going to the federal government has stayed about the same as 17. So we hope there are some major private improv major improvements from the private sector because I generally think the private sector does a better job than the public sector in most things.
But I also think that if the private sector doesn’t do something, you’ll get a different sort of answer.
And I think I like to think that the private sector can come up with a better answer than the public sector in that respect.
But I will probably it depends on who’s nominated. I’ve voted, I’ve voted for plenty of Republicans over the years.
I ran for delegate to the Republican National Convention in 1960. But we are not... I don't think the country will go into socialism in 2020, 2040, or 2016.
Okay, Greg?
Warren, my first question, not surprisingly, is on share purchases. Stock buybacks in the open market are a function of both willing buyers and sellers, with Berkshire having two shares of classes.
You should have more flexibility when buying back stock but given the liquidity difference that exists between two share classes, with an average of 313 class A shares exchanging hands daily the past five years, equivalents are around 77 million dollars a day, and an average of 3.7 million class B shares doing the same, equivalent to around 622 million.
Berkshire is likely to have more opportunities buying back class B shares than class A, which is exactly what we saw during the back half of last year in the first quarter of 2019.
While it might be more ideal for Berkshire to buy back class A shares allowing you to retire shares with far greater voting rights, given that there’s relatively little arbitrage between the two share classes and the number of class B shares increases every year as you gift your class A shares to the Bill and Melinda Gates Foundation and your children’s foundations, can we assume that you're likely to be a far greater repurchaser of class B shares going forward, especially given your recent comments to the Financial Times about preferring to have loyal individuals on your shareholder list, which a price tag of 328 thousand dollars of class A shares seems to engender?
Yeah, we will when we're repurchasing shares. If we're purchasing substantial amount, we’re going to spend a lot more on the class B than the class A just because the trading volume is considerably higher.
We may from time to time, but, you got offered a couple blocks in history going back in history from the Yoshi off state, and then, and when we had a transaction exchanging our Washington Post stock for both a television station and shares held by the Washington Post, so we may see some blocks of people.
But there’s no question if we if we are able to spend 25, 50 or 100 billion dollars in repurchasing shares. More of the money is almost certainly going to be spent on the B than the A; there’s no master plan on that other than to buy aggressively when we like the price and, as I say, the trading volume in the B is just a lot higher than the A in dollar amounts.
Charlie?
I don't think we care much which class we buy.
Yeah, we would like we really want the stock ideally, if we could do it, if we were small once a year we’d have a price and, you know, we’d do it like a private company and it would be a fair price and people would want to get out could get out.
And if other people want to buy their interest, fine. And if they didn’t and we thought the price was fair, we’d have the company repurchase it.
We can’t do that, but that's... we don’t want the stock to be either significantly underpriced or significantly overpriced, and we're probably unique on the overpriced part of it. But we don’t want it... I do not want the stock selling at twice what it’s worth because I’m going to disappoint people, you know. I mean we can’t make it... there’s no magic formula to make a stock worth what it’s selling for if it sells for way too much, we don’t, from a commercial standpoint if it’s selling very cheap, we have to like it and we repurchase it, but ideally, we would hope the stock would sell in the range that that more or less is its intrinsic value business value.
We have no desire to hype it in any way and we have no desire to depress it so we can repurchase it cheap but that the nature of markets is that things get overpriced and they get underpriced and we will if it’s underpriced, we’ll take advantage of it.
Okay, Station Three.
Hello Charlie Munger and Warren Buffett, my idols. I’m Terry from Shanghai George P. Fund, which aimed to catch the best investment opportunities in that era. So my question is, as we all know, 5G is coming and it is said that the mode of all industries will be challenged in the 5G era, so what is the core competence that we should master if actually has a way wants to catch the best investment opportunities in this era? Thank you!
Well, there’s no core compliments at the very top of Berkshire. But we... the subsidiaries that will be involved in developments relating to 5G or any one of all kinds of things that are going to happen in this world, you know, the utility of LNG at that in the railroad or all those kinds of questions. We have people in those businesses that know a lot more about them than we do and this is it. We count on our managers to anticipate what is coming in their business and then sometimes they talk to us about it.
But we do not run that from a central, on a centralized basis, and Charlie, do you want to have anything to add to that?
You know, I think about 5G, I don’t know. But you probably know a lot about that.
No, I know very little about 5G, but I do know a little about China and we have bought things in China and my guess is we’ll buy more. But I mean we basically want to have a group of managers, and we do have a group of managers who are on top of their businesses.
I mean you saw something that showed BNSF and Berkshire Hathaway Energy and Lubrizol all there that those people know their businesses; they know what changes they’re likely to be ahead. Sometimes they find things that they cooperate on between their businesses, but we don’t try to run those from headquarters.
That may mean that may have certain weaknesses at certain times. I think net, it’s been a terrific benefit for Berkshire, but our managers to a great degree own their businesses, and we want them to feel a sense of ownership. We don’t want to be lost in some massive conglomerate and nobody, where they get directions from this group which is a subgroup of that group.
And I could tell you a few horror stories from companies we bought when they tell us about their experience under such an operation, so we, the world is going to change in dramatic ways. Just think how much it’s changed in the 54 years that we’ve had Berkshire.
And some of those changes hurt us; they hurt us in textiles, shoes, the emergency department store business, hurt us in the trading stamp business. These were the founding businesses of this operation, but we do adjust and we've got a group of very good businesses. We’ve got some that will be actually destroyed by what happens in this world. But that's, you know, I still am the card-carrying capitalist and I believe that that’s a good thing.
But you have to make changes. We had 80 percent of the people working on farms in 1800, and if there hadn’t been a lot of changes and you needed 80 percent of the people in the country producing the food and cotton we needed, we would have a whole different society.
So we welcome change, and we certainly want to have managers that can anticipate and adapt to it. But sometimes we’ll be wrong and those businesses will wither and die, and we’d better use the money someplace else.
All right, okay. Carol, this question comes from Vincent James of Munich, Germany.
There has been a lot written about the recent impairment charge at Kraft Heinz. You were quoted as stating that you recognize that Berkshire overpaid for Kraft Heinz. Clearly, major retail chains are being more aggressive than developing house brands.
In addition, Amazon has announced intentions to launch grocery outlets, meaning that, as Mr. Bezos has often stated, your margin is my opportunity. The more fundamental question related to Kraft Heinz may be whether the advantages of the large brands and zero-based budgeting that 3G has applied are appropriate and defensible at all and consumer for foods.
In other words, will traditional consumer good brands in general and Kraft Heinz in particular have any moat in their future? My question is to what extent do the changing dynamics in the consumer food market change your view on the long-term potential for Kraft Heinz?
Yeah, I actually, what I said was we paid too much for Heinz. I meant the Kraft, I'm sorry, the Heinz. The part of the transaction when we originally owned about half of Heinz, we paid an appropriate price there and we actually did well. We had some preferred redeemed and so on.
We paid too much money for Kraft, to some extent our own actions had driven up the prices. Now Kraft Heinz, the profits of that business, six billion, we’ll say very very very roughly, I'm not projecting about, I'm not making forecasts, but six billion pre-tax on seven billion of tangible assets is a wonderful business.
But you can pay too much for a wonderful business. We bought C's candy and we made a great purchase as it turned out, and we could have paid more, but there’s some price at which we could have bought even C's candy, and it wouldn't have worked.
So the business does not know how much you paid for it. I mean, it’s going to earn based on its fundamentals and we paid too much for the Kraft side of Kraft Heinz.
Additionally, the profitability has basically been improved in those operations over the way they were operating before, but you're quite correct that Amazon itself has become a brand.
Kirkland at Costco is a 39 billion dollar brand now, all of Kraft Heinz does 26 billion dollars, and it’s been around for... on the hindsight, it's been around for 150 years. It's been advertised billions and billions of dollars in terms of their products and it goes with tens of thousands of outlets.
And here somebody like Costco establishes a brand called Kirkland and it’s doing 39 billion more than virtually any food company, and that brand moves from product to product, which is terrific. If a brand travels, I mean Coca-Cola moves it from Coke to Cherry Coke and Coke Zero and so on.
But to have a brand that can really move and Kirkland does more business than Coca-Cola does and Kirkland operates through 775 or so stores they call them warehouses at Costco, and Coca-Cola is through millions of distribution outlets.
So brands, the retailer and the brands have always struggled as to who gets the upper hand in moving a product to the consumers, and there’s no question in my mind that the position of the retailer relative to the brands, which varies enormously around the world, in different countries you’ve had 35 percent even maybe 40 percent be private label brands and soft drinks and it’s never gotten anywhere close to that in the United States.
So it varies a lot, but basically retailers, certain retailers, retail systems have gained some power, particularly in the case of Amazon and Walmart and their reaction to it, and Costco and Aldi and some others I can name has gained in power relative to brands. Kraft Heinz is still doing very well operationally, but we paid too much.
We paid 50 billion, you know, it would have been a different business. It'd still be earning the same amount. You can turn any investment into a bad deal by paying too much. What you can't do is turn any investment into a good deal by paying little, which is sort of how I started out in this world, but the idea of buying the cigar butts that only got that are declining or poor businesses for a bargain price is not something that we try to do anymore.
We try to buy good businesses at a decent price, and we made a mistake on the Kraft part of Kraft Heinz.
Charlie, well it's not a tragedy that out of two transactions, one worked wonderfully and the other didn't work so well, that happens; reduction... it costs you know there can always be mistakes made when you’re rearranging, reorganizing them to do more business with them with the same number of people.
And we like buying businesses that are efficient to start with, but the management, the operations of Kraft Heinz have been improved under the present management overall, but we paid a very high price in terms of Kraft. We didn't... we paid appropriate price in terms of Heinz.
Jonathan, internet-based furniture retailers like Wayfair appear willing to stomach large current losses acquiring customers in the hope of converting them to loyal online shoppers.
I've been wondering what this disruptive competition might do to our earnings from home furnishing retail operations like Nebraska Furniture Mart. If we have to transition to more of an online model, might we have to spend more heavily to keep shoppers without a corresponding increase in sales?
The sharp decline in first quarter earnings from home furnishings suggests perhaps some widening impact from intensifying competition.
Do you believe Wayfair's customers first, profits later model is unsustainable, or do you think our furniture earnings will likely be permanently lower than they were in the past?
I think the jury’s still out on that whether the operations which have grown very rapidly in size but still are incurring losses, how they will do over time.
It is true that in the present market partly because of some successes like most dramatically Amazon in the past that investors are willing to look at losses as long as sales are increasing and hope that there will be better days ahead.
We do a quite significant percentage of our sales online in the furniture operation; that might surprise you, we do the highest percentage in Omaha and what's interesting is that we... I won’t give you the exact numbers, but it’s large.
We do a significant dollar volume but of a very significant portion of that volume, people come to the store to pick up. So that they order something from us online but they don’t mind—they don’t seem to mind at all—and they don’t have to do it, but they get a pickup at the store.
So you know you learn what customers like just like people learn in fast food. You know that people would buy a lot of food but going through a drive-in that they don’t want to stop and go into the place.
We learn about customer behavior as it unfolds but we did do... now on Tuesday we did 9.2 million or 9.3 million of profitable volume at the Nebraska Furniture Mart, and I think that company had paid in capital of 2500 and I don’t think anything has been added since.
So it's working so far. The first quarter... it’s interesting—the first quarter was weak at all four of our furniture operations but there’s certain other parts of the economy… well, this home building generally.
It’s considerably below what you would have expected considering the recovery we have had from the 2008 time period. I mean if you look at single-family home construction, the model has shifted more to people living in apartment rentals.
I think it’s gone from 69 and a fraction percent; it got down to 63, it’s bounced up a little bit, but people are just not building or moving to houses as rapidly as I would have guessed they would have based on figures prior to 2008 and nine considering the recovery we’ve had and considering the fact that money is so cheap.
And that has some effect on our furniture stores that I think we've got a very, very good furniture operation, not only the Nebraska Furniture Mart but other furniture operations, and we will see whether the models work over the long run, but I think, you know, they have a reasonable chance.
Some things people—we're learning that people will buy some things that they've always gone to the mall or to a retail outlet to buy, that they will do it online, and others don’t work so well.
Charlie?
I think that we’ll do better than most furniture retailers; I think that's a certainty!
Overall, we've got some good operations there, but we don't want to become a showroom for the online operations and have people come and look around the place and then order someplace else.
So we have to have the right prices and we’re good at that at the Furniture Mart.
Station 4.
Warren and Charlie, my name is Brent Muyo. I'm from Winnipeg, Canada. First, thank you for devoting so much time and energy to education. I'm a better investor because of your efforts, but more importantly, I’m a better partner, friend, son, brother, and soon to be first-time father.
There's nothing more important than these relationships and my life is better because you're willing to pass on your experience and wisdom.
My path into finance was unconventional. I worked as an engineer for 12 years while two years ago I began a career in finance, working for the Civil Service Superannuation Board, a 7 billion dollar public pension fund in Winnipeg.
I work on intuitive alternative investments, which include infrastructure, private equity, and private credit. I go to work every day knowing that I'm there to benefit the hardworking current and future beneficiaries of the fund.
Like most asset classes, alternative purchase multiples have increased. More of these assets are funded with oral money, and the terms and covenants on this debt are essentially non-existent.
With this in mind and knowing the constraints of illiquid closed-end funds, please give me your thoughts on private alternative investments, the relevancy and public pension funds, and your view on long-term return expectations.
Yeah, if you had leveraged up investments in just common stocks, and you figured a way so that you would have staying power if there were any market dip, I mean, you’d obviously obtain extraordinary returns.
I pointed out in my investing lifetime, you know, an index fund would do 11; imagine how you’d have done if you’d leveraged that up, 50—whatever the prevailing rates were over time.
So a leveraged investment in a business is going to be an unleveraged investment in a good business a good bit of the time.
But as you point out, the covenants to protect debt holders has really deteriorated in the business. And of course, you’ve been in an up market for businesses, and you've got a period of low interest rates, so it’s been a very good time for it.
My personal opinion is if you take unleveraged returns against unleveraged common stocks, I do not think what is being purchased today and marketed today would work well.
But if you can borrow money, I think my assets that will yield 7 or 8 percent and you can borrow enough money at 4 or 5 percent and you don’t have any covenants to meet, you’re going to have some bankruptcies, but you’re going to also have better results in many cases.
It’s not something that interests us at all; we are not going to leverage up Berkshire. If we leveraged up Berkshire, we’d have made a whole lot more money obviously over the years, but both Charlie and I probably have seen some more high-IQ people—really extraordinarily IQ people—destroyed by leverage.
We saw Long-Term Capital Management where we had people who could do in their sleep math that we couldn’t do, at least I couldn’t do, working full-time at it during the day.
And I mean really, really smart people, working with their own money and with years and years of experience on what they were doing, and you know, it all turned to pumpkins and mice in 1998.
And actually, it was a source of national concern just a few hundred people, and then we saw some of those same people after that happened to them once go out and do the same thing again.
So it—I would not get excited about so-called alternative investments. There are all kinds of different figures, but there may be, there’s probably at least a trillion dollars committed to buying—effectively buying businesses.
And if you figure they’re gonna leverage them, you know, two-for-one on that, you may have three trillion of buying power trying to buy businesses in a well, the U.S. market may be something over 30 trillion now.
But there’s all kinds of businesses that aren’t for sale on that thing, so they supply supply-demand situation for buying businesses privately and leveraging them up has changed dramatically from what it was 10 or 20 years ago, and I’m sure it doesn’t happen with your Winnipeg operation, but we have seen a number of proposals from private equity funds where the returns are really not calculated in a manner that... well they’re not calculated in a manner that I would regard as honest and uh, so I—it's not something if I were running a pension fund I would be very careful about what was being offered to me.
If you have a choice in Wall Street between being a great analyst or being a great salesperson, the salesperson is the way to make it. If you can raise 10 billion dollars in a fund and you get a one and a half percent fee and you lock people up for 10 years, you know, you and your children and your grandchildren will never have to do a thing if you are the dumbest investor in the world.
But Charlie?
Well, I think what we’re doing will work more safely than what he’s doing, and I wish him well.
Yeah, Brent, you sound, actually, you sound like a guy that I would hope would be working for a public pension fund, because frankly most of the most of the institutional funds, you know, well we had this terrible right here in Omaha, and you can get a story of what happened with our Omaha Public Schools retirement fund, and they were doing fine until the manager started going in a different direction.
And the trustees here, perfectly decent people, and the manager had done okay to that point and it became... they were smarter in Winnipeg than they are here.
Yeah, well that was pretty bad here, it's not a fair fight actually when I'm usually when a bunch of public officials are listening to people who are motivated to who really just get paid for raising the money, everything else is gravy after that.
But you know, if you run a fund and you get even 1 percent, you know, of a billion, you're getting 10 million dollars a year coming in, and if you've got the money locked up for a long time, it’s a very one-sided deal.
And I told the story of asking the guy one time in the past, how in the world can you—why in the world can you ask for 2 and 20 when you really haven’t got any kind of evidence that you are going to do better with the money than you do in the next fund?
And he said, “Well, that’s because I can’t get 3 and 30.”
What I don’t like about a lot of the pension fund investment is I think they like it because they don’t have to market down as much as it should be in the middle of the panics.
I think that's a silly reason to buy something because you’re given leniency in marking it down.
And when you commit the money in the case of private equity, often, you, they don’t take the money but you pay a fee on the money that you’ve committed, and of course you really have to have that money to come up with at any time.
And of course that makes their return look better if you sit there for a long time in treasury bills, which you have to hold because they can call you up and demand the money, and they don’t count that—they counted in terms of getting a fee on it but they don’t count it in terms of what the so-called internal rate of return is.
It’s not as good as it looks and I really do think that when you have a group sitting as a state pension fund, where all they’re doing is lying a little bit to make the money come in, it’s very hard!
Yeah, and when you talk about these big salaries and the way compensation systems work, if you're insiders or you work at a fund and you’re suddenly getting everybody's screaming for returns. It distorts things!
And I think it will play out; it’s not a good model for the long run.
Becky, this question comes from Ken Scarbeck in Indianapolis. He says, “With the full understanding that Warren had no input on the Amazon purchase and that, relative to Berkshire, it's likely a small stake, the investment still caught me off guard. I'm wondering if I should begin to think differently about Berkshire looking out, say, 20 years.
Might we be seeing a shift in investment philosophy away from value investing principles that the current management has practiced for 70 years? Amazon is a great company, yet it would seem its heady shares ten years into a bull market appear to conflict with being fearful when others are greedy.
Considering this and other recent investments like Stoneco, should we be preparing for a change in the price versus value decisions that built Berkshire?”
It’s interesting that the term value investing came up because I can assure you that both managers who—and one of them bought some Amazon stock in the last quarter, which will get reported in another week or ten days—he is a value investor.
The idea that value is somehow connected to book value or low price-earnings ratios or anything—as Charlie has said, all investing is value investing! I mean, you’re putting out some money now to get more later on, and you’re making a calculation as to the probabilities of getting that money and when you’ll get it and what interest rates will be in between.
All the same calculation goes into it whether you’re buying some bank at seventy percent of book value or you’re buying Amazon at some very high multiple of reported earnings.
Amazon—the people making the decision on Amazon are absolutely much value investors as I was when I was looking around for all these things selling below working capital years ago.
So that has not changed. The two people that—one of whom made the investment in Amazon—they are looking at many hundreds of securities, and they can look at more than I can because they’re managing less money, and their universe possible universes is greater, but they are looking for things that they feel they understand what will be developed by that business between now and judgment day in cash.
And it’s not—sales current sales can make some difference, current profit margins can make some difference, tangible assets, excess cash, excess debt, all of those things go into making a calculation as to whether they should buy A versus B versus C.
And they are very smart; they are totally committed to Berkshire and they’re very good human beings on top of it. So I don’t second guess them on anything; Charlie doesn’t second guess me and in sixty years he’s never second guessed me on an investment.
And the considerations are identical when you buy Amazon versus some, say, bank stock that looks cheap statistically against book value or earnings or something of the sort. In the end, it all goes back to Aesop—who in 600 B.C. said, you know, that a bird in the hand is worth two in the bush.
And when we buy Amazon, we try and figure out whether or no the fellow that bought it tries to figure out whether there are three or four or five in the bush and how long it’ll take to get to the bush, how certain he is that he’s going to get to the bush, and then who else is going to come and try to take the bush away and all of that sort of thing.
And we do the same thing and it really, really, despite a lot of equations you’ll learn in business school, the basic equation is that of Aesop, and your success in investing depends on how well you were able to figure out how certain that bush is, how far away it is and what the worst case is instead of two birds being there, only one being there, and the possibilities of four or five or ten or twenty being there.
And that will guide me, that will guide my successors in investment management at Berkshire, and I think they'll be right more often than they're wrong.
Charlie?
Well, I know Warren and I are a little older than some people.
Yeah, near everybody.
And we’re not the most flexible probably in the whole world.
And of course, if something as extreme as this internet development happens and you don’t catch it, why, other people are going to blow by you.
And I don’t mind not having caught Amazon early; the guy is kind of a miracle worker; it’s very peculiar.
I give myself a pass on that, but I feel like ours is asked for not identifying Google better. I think Warren feels the same way.
Yeah, we screwed up; he’s saying we blew it, and we did have some insights into that because we were using them at Geico, and we were seeing the results produced, and we saw that we were paying ten dollars a click or whatever it might have been for something that had a marginal cost of them of exactly zero, and we saw it was working for us.
So we can see in our own operations how well that Google advertising was working, and we just sat there sucking our thumbs.
So we’re ashamed; we atone; we’re trying to atone!
Maybe Apple was atonement!
When he says sucking your thumbs, I’m just glad he didn’t use some other example!
Okay, Jay, this question is on Berkshire's intrinsic value.
Warren, in your most recent annual letter, you discussed a methodology to estimate Berkshire's intrinsic value. However, a major component of Berkshire's value that many investors find challenging to estimate is that of the company's vast and unique insurance business.
Could you discuss how you value the company's insurance unit based on information Berkshire provides, especially since GAP book value is not disclosed of the insurance unit?
Well, our insurance business gives us a float; that's other people's money, which we're temporarily holding but which gets regenerated all the time, so it's a practical matter; it has a very, very long life, and it's probably a little more likely to grow than shrink.
So we have 124 billion dollars that people have given us, and it’s somewhat like having a bank that just consists of one guy, and people come in and deposit 124 billion and promise not to withdraw it forever.
And we've got a very good insurance business. It's taken a very long time to develop, a very long time. In fact, I think we probably have the best property-casualty operation, all things considered, in the world than I know of any size, so it's worth a lot of money.
It's probably—we think it's worth more to us, and we particularly think it's worth more while lodged inside Berkshire.
We'd have a very, very high value on that. I don't want to give you an exact number because I don't know the exact number, and any number I would have given you in the past would have turned out to be wrong on the low side.
We have managed to earn money on money that is given to us for nothing and have decided earnings from underwriting and then have these large earnings from investing, and it's an integral part of Berkshire.
There's a certain irony to insurance that most people don't think about, but if you really are prepared and you have a diversified property-casualty insurance business, a lot of property business in it, if you're really prepared to pay your claims under any circumstances that come along in the next hundred years, you have to have so much capital in the business that it's not a very good business.
And if you really think about a worst-case situation, the reinsurance that's insurance you buy from other people is an insurance company to protect you against extreme losses among other things; that reinsurance probably could be likely not good at all.
So even though you think you're laying off part of the risk, if you really take the worst-case example, as you're not laying off, you may well not be laying off the risk, and if you keep the capital required to protect against that worst-case example, you'll have so much capital in the business that isn't worthwhile.
Berkshire is really the ideal form for writing the business because we have this massive amount of assets that are in many cases are largely uncorrelated with natural disasters, and we can use that.
We can use the money in a more efficient way than most insurance companies.
It's interesting the three—in the last 30 years, the three largest reinsurance companies—and I’m counting Lloyd’s as one company, although it isn’t. It’s a group of brokers assembled under one location, but people think of Lloyd's as a massive reinsurance market, which it is technically not one entity.
But if you take the three largest companies, and they’re all in fine shape now, I've been first-class operations, but all three of them came close to extinction sometime in the last 30 years, reasonably close.
And we didn't really have any truly extraordinary natural catastrophes. The worst we had was Katrina, whatever it was 2006 or thereabouts, and we didn't have any worst-case situation.
All three of those companies, which everybody looks at, is totally good on the asset side if you’re sure recoverable from them, two out of the three actually made some deals with us to help them in some way.
And they're all in fine shape now, but it's not a good business if you keep your, as a standalone insurer, if you keep enough capital to really be sure you can pay anything that comes along under any kind of conditions.
Berkshire can do that, and it can use the money in ways it likes to use, so it's a very valuable asset.
I don't want to give you a number on it, but we would not sell it.
We certainly wouldn't want to sell it for its float value and if that float is negative shown on the balance sheet as a liability.
So it's extraordinary and it's taken a long time to build. It’d be very, very, very hard for anybody to—I don’t think they could build anything like it. It just takes so long, and we continue to plow new ground.
If you went in the next room, you would have seen something called 3, which is our movement toward small and medium business owners for commercial insurance, and it’s an online operation, and it will take all kinds.
We just started up in four states, but we’ll, you know, ten or twenty years from now, that will be a significant asset of Berkshire just like Geico has grown from doing a fraction billion a premium to, you know who knows, but well into the mid 30 billion just with Tony Nicely.
When I said in the annual report that Tony Nicely, who’s here today—Warren, is there anybody in the world who has a big casualty insurance business that you’d trade our business for theirs?
We really have taken a long time and it’s taken some tremendous people and Tony Nicely has created more than 50 billion dollars a value for Berkshire.
[Applause]
It’s pretty much what you’d expect. It’s such an easy business taking in money now in cash and just keeping the books and giving a little of it back.
There’s a lot of stupidity gets into it, and if you’re not way better than average at it, you’re going to lose money in the end. It’s a mediocre business for most people, and it’s good at Berkshire only because we’re a lot better at it.
If we ever stop being a lot better at it, it wouldn’t be safe for us either.
And the G. Jane has done a similar thing; he’s done it in a variety of ways within the insurance business but I would not want to undo—if somebody had to give me more than 50 billion dollars to undo everything he has produced for Berkshire...
And he walked into my office on a Saturday in the mid-1980s. He’d never been in the insurance business before, and I don’t think there’s anybody in the insurance world that doesn’t wish that he’d walked into their office instead of ours at Berkshire.
It’s been extraordinary. It’s truly been extraordinary. But we have Tom Nerney; we have Tim Kennedy; we have MedPro.
Tom Nurny at U.S. Liability; we have Guard Insurance. We only bought that a few years ago, and that’s a terrific operation based in Wilkes-Barre, Pennsylvania.
You would expect to find a great insurance operation in Wilkes-Barre. But we’ve got a great insurance operation right here in Omaha, about two miles from here, and it was bought by us in 1967 and it changed Berkshire. We built on that base.
We've really got a great insurance business, and I won’t give you a number, but it’s probably a bigger number than you’ve got in your head for—and it’s worth more within Berkshire than it would be worth as an independent operation.
Somebody can say, “Well, this little gem, if it was put out there, would sell at a higher multiple” or something sort of.
It works much better as being part of a whole, where we had two tiny operations doing tiny insurance operations many, many, many years ago and they met, they both went broke.
They were never—the underwriting was bad, but we paid all the claims! We did not walk away; we paid every dime of claims, and nobody worries about doing any kind of financial transaction with Berkshire.
And you know today on Saturday about nine in the morning, we got a phone call, and people made a deal the next day, committing that we’re here to pay out ten billion come hell or high water, no outs for, you know, material adverse change or anything like that.
And people know we’ll be there with ten billion, and they know in the insurance business when we write a policy that they can’t come be payable during the worst catastrophe in history or maybe payable 50 years from now.
They know Berkshire will pay, and that’s why we’ve got 124 billion dollars of