2017 Berkshire Hathaway Annual Meeting (Full Version)

51m read

·Nov 11, 2024

Thank you, and good morning. Duh, that's Charlie; I'm Warren. You can tell us apart because, uh, he can hear and I can see. That's why we, uh, work together so well. We usually have our specialty.

Uh, I'd like to welcome you to, uh, we got a lot of out-of-towners here, and I'd like to welcome you to Omaha. It's a terrific, it's a terrific city. And Charlie, Charlie's lived in California now for about 70 years, but he's still got a lot of Omaha. Both of us were born within two miles of this, uh, building that you're in.

And Charlie, as he mentioned in his description of his amorous triumphs in high school, Charlie, uh, graduated from Central High, which is about one mile from here. It's a public school. My dad, my first wife, my three children, and two of my grandchildren have all graduated from the same school. In fact, my grandchildren say they've had the same teachers that my dad, my— but, uh, oh, it's a great city. I hope you get to see a lot of it while you're here.

Uh, and in just a minute we will start a question period—hopefully a question and answer period—uh, that will last till about noon, and then we'll take a break for an hour, so we'll reconvene at one, and then we'll continue with the question and answer period until 3:30. And then we'll break for 15 minutes or so, and then we'll convene the annual meeting of Berkshire, which I would... We have three propositions that people wish to speak on, so that could last perhaps as long as an hour.

Before we start, uh, I'd like to make a couple of introductions, uh, the first being, uh, Carrie Silva, who's been with us about seven years. And can we have a light on Carrie? I think she—Carrie, you're there? Terry, stand up. Carrie, come on. Carrie puts on this whole program. She came with us about seven years ago, and a few years ago I said, "Why don't you just put on the annual meeting for me?" And she handles it all.

She has two young children and, uh, she has dozens and dozens and dozens of exhibitors that she works with. And as you can imagine, with all of what we put on and all of the numbers of you that come—the hotels and the airlines and the rental cars and everything—uh, she does it as if, you know, she could do that and be juggling three balls at the same time. She's amazing. And I want to thank her for putting on this program for us.

I also, uh, would like to, uh, welcome and have you welcome our directors. They will be voted on later, uh, so I'll do this alphabetically. They're here in the front row, and if we could just have the spotlight drop on them as they're introduced, and alphabetically there's Howard Buffett, Steve Burke, [Music], Sue Decker, Bill Gates, Sandy Gottisman, Charlotte Geyman. We have Charlie Munger next to me, Tom Murphy, Ron Olson, Walter Scott, and Merrell Whitmer.

One more introduction I'm going to make, but I'll save that for just a minute. And, uh, our earnings report was put out yesterday. Uh, as we regularly explain, the realized investment gains or losses in any period really mean nothing. I mean, they, uh, we could take a lot of gains if we wanted to. We could take a lot of losses if we wanted to. But we don't really think about the timing of what we do at all except in relation to the intrinsic value of what we're buying or selling.

We are not—we do not make earnings forecasts, and we have—on March 31st we have over $90 billion of net unrealized gains, so if we wanted to report almost any number you can think of and count capital gains as part of the earnings, uh, we could do it. So in the first quarter, and I would say that we have a very, very, very slight preference this year—if everything else were equal.

Uh, well, it's true in any year, but it's a little more so this year—we would rather take losses than gains because, uh, of the tax effect. If two securities were equally valued, and there's probably just one touch more of emphasis on that this year because we, uh, we are taxed on gains of 35, which means we also get the benefit, the tax benefit, of 35 of any losses we take.

And I would say that there's some chance of that rate being lower, meaning that losses would have less tax value to us after this year than they would have this—after this year than this year. Uh, that is not a big deal, but it would be a very slight preference, and it may get to be more of a factor in deferring any gains and perhaps accelerating any losses as the year gets closer to December 31st.

Assuming—and I'm making no predictions about it—but assuming that there were to be a tax act that had the effect of reducing earnings. So in the first quarter, uh, insurance underwriting was the swing factor, and then the—there's a lot more about this in our 10-Q, which you can look up on the internet, and you really—if you're seriously interested in evaluating our earnings or our businesses, you should go to the, uh, 10-Q because the summary report, as we point out every quarter, does not really get to the main—a number of the main points of valuation.

I would just mention two factors in conjunction with the insurance situation which I love. Uh, in the first four months—not the first three months, but the first four months, Geico's had a net gain of 700,000 policyholders, and that's the highest number I can remember. There may have been a figure larger than that somewhere in the past. I did not go back and look at them all, but last year I believe that figure was like 300,000.

And this has been a wonderful period for us at Geico because several of our major competitors have decided, and they publicly stated this, that one of them just reiterated that the other day, although they now change their policy. But they intentionally cut back on new business because new business, uh, carries with it a significant, uh, loss in the first year.

There's just costs of acquiring new business, plus the loss ratio—strangely enough, on first-year business, tends to run almost ten points higher than on renewal business. And so not only do you have acquisition costs, but you actually have a higher loss ratio. So when you write a lot of new business, you're going to lose money on that portion of the business that year, and we wrote a lot of new business.

And at least two of our competitors announced that they were lightening up for a while on new business because they did not want to pay the penalty of the first-year loss. And, of course, that's made to order for us, so we just—we just put our foot to the floor and try to write as much good business as we can, and there are costs to that.

A second factor—well, it's not a factor in the P&L, but, uh, an important event in the first quarter is that we increased our float. And on the slide, I believe, it shows it year over year—$16 billion, $14 billion of that came in the first quarter this year. So we had a $14 billion increase in float, and for some years I've been telling you it's gonna be hard to increase the float at all, and I still will tell you the same thing, but it's nice to have $14 billion or more, which is one reason—if you look at our 10-Q, you will see that our cash and cash equivalents, including treasury bills, now has come to well over $90 billion.

So I think I feel very good about the first quarter, even though our operating earnings were down a little bit. One quarter means nothing; I mean, over time, what really counts is whether we're building the value of the businesses that we own, and I'm always interested in the controlling the value of the businesses that we own. And I'm always interested in the current figures, but I'm always dreaming about the future figures.

There's one more person I would like to introduce to you today, and I'm quite sure he's here. I haven't seen him, but I understood he was— I understood he was coming. Uh, I believe that he's made it today, and that is Jack Bogle, who I talked about in the annual report. Jack Bogle has probably done more for the American—who I talked about in the annual report. Jack Bogle has probably done more for the American investor than any man in the country.

Jack, could you stand up? There he is, Jack Bogle. Many years ago, he wasn't the only one that was talking about an index fund, but it wouldn't have happened without him. I mean, Paul Samuelson talked about it; Ben Graham even talked about it. But, uh, the truth is it was not in the interest of invest—of the investment industry, of Wall Street. It was not in their interest, actually, to have the development of an index fund other than the index fund because it brought down fees dramatically.

And as we've talked about some in the reports and other people have commented, index funds overall have delivered for shareholders a result that has been better than Wall Street professionals as a whole. And part of the reason for that is that they brought down the costs very significantly.

So when Jack started, uh, very few people, certainly Wall Street, did not applaud him, and he was the subject of some derision, and a lot of attacks. And now, uh, we're talking trillions when we get into index funds, and we're talking a few basis points when we talk about investment fees in the case of index funds, but still hundreds of basis points when we talk about fees elsewhere. And I estimate that Jack, at a minimum, has saved left in the pockets of investors without hurting them overall in terms of performance at all, gross performance, he's put tens and tens and tens of billions into their pockets.

And those numbers are going to be hundreds and hundreds of billions over time. So it's Jack's 88th birthday on Monday, so I just say happy birthday, Jack, and thank you on behalf of American investors. And, Jack, I've got great news for you: you're going to be 88 on Monday, and in only two years you'll be eligible for an executive position at Berkshire, so hang in there, buddy.

Okay, we've got a panel of expert journalists on this side, an expert analyst on that side, and expert shareholders in the middle, and we're going to rotate. Uh, starting with the analysts, some—where here, I have—I think we have a—here we go. And we will do this through the afternoon. After we—if we get through 54 questions, which would be six for each journalistic—six for each analyst and 18 more for the audience, then we will go strictly to the audience.

Uh, I don't think I've got any information as to what the situation is on overflow rooms, uh, but, uh, we'll go to at least one of them. But let's start off with, uh, Carol Loomis, Fortune Magazine, the longest-serving employee in the history of Time Inc., I believe, was 60 years. And Carol, go to it.

Um, thank you. Um, thank you from all of us journalists up here. Um, I know that there are many, many people out there who have sent us questions that aren't going to get answered, and I just want to say that it's very hard to get a question answered. The one thing I can suggest is to follow Warren's thought, uh, in the annual report that he wants everybody to go away from this meeting more educated about Berkshire than they were when they came.

And one way you can do that is keep your questions quite directly Berkshire-related or relating to the annual letter. Even then it will be hard to get your question answered, as the three of us only requested answers. As the three of us only have 18 questions in total, uh, but I encourage you to think in the virtual related direction when you're submitting a question next year.

Now my first question, uh, it's about Wells Fargo, which is Berkshire's largest equity holding, $28 billion at the end of the year. And this question comes from a shareholder who did not wish to be identified: in the wake of the sales practices scandal that last year engulfed Wells Fargo, the company's independent directors commissioned an investigation and hired a large law firm to assist in carrying it out. The findings of the investigation, which were harsh, have been released in what is called the Wells Fargo sales practices report. You can find it on the internet. It concludes that a major part of the company's problem was that, and I quote, "Wells Fargo's decentralized corporate structure gave too much autonomy to the community bank's senior leadership," end of quote.

Mr. Buffett, how do you satisfy yourself that Berkshire isn't subject to the same risk with its highly decentralized structure and the very substantial autonomy given to senior leadership of the operating company?

Yeah, it's true that we at Berkshire probably operate on us—we certainly operate on a more decentralized plan than any company of remotely our size. And we count very heavily on principles of behavior rather than loads of rules. It's one reason at every annual meeting you see that Solomon, uh, description, and it's why I write very few communiques to our managers. But I sent them one once every two years, and it basically says that we've got all the money we need—we'd like to have more but we're—it's not a necessity—but we don't have one ounce of reputation more than we need and that our reputation at Berkshire is in their hands.

And Charlie and I believe that if you establish the right sort of culture, and that culture to some extent self-selects who you obtain as directors and as managers, that you will get better results that way in terms of behavior than if you have a thousand-page guidebook. You're gonna have problems regardless.

We have 367,000, I believe, employees now. If you have a town with 367,000 households, which is about what the Omaha metropolitan area is, people are doing something wrong as we talk here today—there's no question about it. And the real question is whether the managers at—are in a better—are worrying and thinking about finding and correcting any bad behavior and whether, if they fail in that, whether the message gets to Omaha and whether we do something about it.

At Wells Fargo, you know, there were three very significant mistakes, but there was one that dwarfs all of the others. You're gonna have incentive systems at any business, almost any business. There's nothing wrong with incentive systems, but you've gotta be very careful what you incentivize, and if so you better have a system for recognizing it clearly.

At Wells Fargo, there was an incentive system built around the idea of cross-selling and number of services per customer. And the company, in every quarterly investor presentation, highlighted how many services per customer. So it was the focus of the organization, a major focus, and undoubtedly people got paid and graded and promoted based on that number—at least partly based on that number.

Well, it turned out that that was incentivizing the wrong kind of behavior. We've made similar mistakes. I mean any company is going to make some mistakes in designing a system but it's a mistake and you're going to find out about it at some point. And I'll get to how we find out about it.

But the biggest mistake was—and I don't know obviously don't know the facts as to how the information just got passed up the line at Wells Fargo, but at some point, if there's a major problem the CEO will get wind of it—and that is, at that moment, that's the key to everything, because the CEO has to act. That Solomon situation that you saw happened because on April I think 28th, the CEO of Solomon, the president of Solomon, the general counsel of Solomon sat in a room and they had described to them by a fellow named John Meriweather some bad practice—terrible practice—that was being conducted by a fellow named Paul Mosher who worked for him.

And Paul Mosher was flim-flamming the United States Treasury, which is a very dumb thing to do. And he was doing it partly out of spite because they didn't—he didn't like the Treasury and they didn't like him, so he put in phony bids for US treasuries and all that. So on April 28th, roughly, the CEO and all these people knew that they had something that had gone very wrong, and they had to report it to the Federal Reserve Board in New York—the Federal Reserve Bank of New York—and the CEO, John Goodfriend, said he would do it, and then he didn't do it.

And he undoubtedly put it off just because it was an unpleasant thing to do, and then on May 15th, another treasury auction was held and Paul Mosher put in a bunch of phony bids again, and at this point it's all over because the top management had no one ahead of time, and now a guy that was a pyromaniac had gone out and lit another fire, and he'd lit it after they'd been warned that he was a pyromaniac essentially, and it all went downhill from there— it had to stop.

When the CEO learns about it and then they made a third mistake actually but again it pales in comparison to the second mistake, they made a third mistake when they totally underestimated the impact of what they had done once it became uncovered, because they—there was a penalty of $185 million and in the banking business people get fined billions and billions of dollars for mortgage practices and all kinds of things the total fines against the big banks—I don't know whether totals $30 or $40 billion or whatever the number may be. So they measured the seriousness of the problem by the dimensions of the fine and they thought $185 million fine signaled a less offensive practice than something involved $2 billion, and they were totally wrong on that.

But the main problem was they didn't act when they learned about it. It was bad enough having a bad system, but they didn't act. At Berkshire, uh, we have—the main source of information for me about anything that's being done wrong at a subsidiary is the hotline. Now, we get 4,000 or so hotline reports or that coming and we get communications on the hotline perhaps 4,000 times, uh, here, and most of them are frivolous. You know, the guy next to me has bad breath or something like that, I mean it's a—but—but there are a few serious ones, and, uh, the head of our internal audit, Becky Hammock, uh, looks at all those people that a lot of them come in anonymous, probably most of them, uh, and some of them she refers back to the companies, probably most of them—and but anything that looks serious, you know, I will hear about, and that has led to action, uh, but we'll put them more than once, uh, and we spent real money investigating some of those.

We put special investigators sometimes on them, and like I say, it has uncovered certain practices that we would not, uh, at all condone at the parent company. I think it's a good system. I don't think it's perfect. I don't know what—I'm sure they've got an internal audit at Wells Fargo, and I'm sure they've got a hotline, and I don't know the facts, but I would just have to bet that a lot of communications came in on that and I don't know what their system was for getting them to the right person and I don't know who did what at any given time but that was—it was a huge, huge, huge error if they were getting, uh, and I'm sure they were getting some communications and they ignored them or they just sent them back down to somebody down below.

Uh, Charlie, you followed what—what are your thoughts on it? Well, put me down as skeptical when some law firm thinks they know how to fix something like this. If you're in a business where you have a whole lot of people under incentives likely to cause a lot of misbehavior, of course you need a big compliance department. Every big wire house stock brokerage firm has a huge compliance department. And if we had one, we would have a big compliance department too, wouldn't we, Warren? Absolutely! Absolutely! But it doesn't mean that everybody should try and solve their problems with more and more compliance. I think we've had less trouble over the years by being more careful in whom we pick to have power and having a culture of trust.

I think we have less trouble, not more. But we will have trouble from time to time, of course. We'll be blindsided someday. Charlie says an ounce of prevention—he says when Ben Franklin, whom he worships, uh, said an ounce of prevention is worth a pound of cure. He understood—he understated it. An ounce of prevention is worth more than a pound of cure, and I would say a pound of cure, promptly applied, is worth a ton of cure that's delayed, and problems don't go away.

John Goodfriend said that the problem originally was, he called it a traffic ticket... He told the troops there at Solomon it was a traffic ticket; you know it almost brought down a business. Uh, some other CEO that they described the problem that he had encountered as a footfall, you know, and it resulted in incredible damage to the institution. And so it—you've got to act promptly. And frankly, I don't know any better system than hotlines and anonymous letters. To me, I get anonymous letters and I've gotten—I’ve gotten three or four of them probably in the last six or seven years that have resulted in major changes, and very very occasionally they're signed.

You almost always are anonymous but it wouldn't make any difference because there will be no retribution against anybody, obviously, if they call our attention to something that's going wrong. But I will tell you as we sit here, somebody is—quite a few people are probably doing something wrong at Berkshire. And usually it's very limited. I mean it may be stealing small amounts of money or something like that. But when it gets to some sales practice like was taking place at Wells Fargo, you can see the kind of damage it would do.

Uh, we will now shift over to the analysts, and, uh, Johnnie Brent... Hi Warren, hi Charlie, thanks for having me. You've addressed the risk of driverless cars to Geico's business but it strikes me that driverless trucks could narrow the cost advantage of railroads even if the number of crew members in a locomotive eventually declines from two to zero. Is autonomous technology more of an opportunity or more of a threat for the Burlington Northern?

Oh, I would say that the driverless trucks are a lot more of a threat than an opportunity to the Burlington Northern. And, uh, I would say that if driverless cars became pervasive, it would only be because they were safer, and that would mean that the overall economic cost of, of, uh, auto-related losses had gone down. And that would drive down the premium income of GEICO.

So I would say both of those—autonomous vehicles, uh, widespread, uh, would hurt us if they went to, if they spread to trucks. Uh, and they would—they would hurt our auto insurance business. I think my personal view is that they will—they'll certainly come—I think they may be a long way off—but it'll depend, it'll probably frankly depend on, on experience in the first, uh, early months of the, uh, of the introduction and test situations.

And if, if, uh, if they make the world safer, uh, it's going to be a very good thing, but it won't be a good thing for auto insurers. And similarly, if they learn how to move trucks more safely, there's a tendency to be driver shortages in the truck business now; it obviously, uh improves their position vis-a-vis the railroads.

Charlie? Well, I think that's perfectly, perfectly clear. Finally approval all these years. Okay, station one, the shareholder. Hi, hi Warren and Charlie. My name is Brian Martin, and I'm from Springfield, Illinois. And HBO documentary becoming Warren Buffett, you had a great analogy comparing investing to hitting a baseball and knowing your sweet spot. Ted Williams knew his sweet spot was a pitch right down the middle.

When both of you look at potential investments, what attributes make a company a pitch in your sweet spot that you'll take a swing at and invest in? Well, I, I'm not sure I can define it in exactly the terms you would like, but the—we sort of know it when we see it. And it would tend to be a business that for one reason or another we can look out five or 10 or 20 years and decide that the competitive advantage that it had at the present would last over that period, and it would have a trusted manager, that would not only fit into the Berkshire culture, but that was eager to join the Berkshire culture.

And then it would be a matter of price, but the main—you know, when we buy a business essentially we're laying out a lot of money now based on what we think that business will deliver over time. And the higher the certainty with which we make that prediction, the better we feel about it. You can go back to the first one—the first outstanding business we bought—but it was it was kind of a watershed event, which was a relatively small company, See's Candy.

And the question when we looked at See's Candy in 1972 was, would people still want to be both eating and giving away that candy in preference to other candies? And it wouldn't be a question of people buying candy for the low bid, and we had a manager we liked very much, and we bought a business that was paid $25 million for it, net of cash, and it was earning about $4 million pretax then; we must be getting close to 2 billion dollars or something like that pretax that we've taken out of it. But it was only because we felt that people would not be buying necessarily a lower price candy.

I mean, it does not work very well if you go to your wife or your girlfriend on Valentine's Day and say, "You know, here's a box of candy, honey; I took the low bid." You know, it loses a little of it as you go through that speech. And we made a judgment about See's Candy that it would be special and probably not—not in the year 2017, but we certainly thought it would be special in 1982 and 1992. Unfortunately, we were right on it, and we're looking for more See's Candies—that are only a lot bigger.

Charlie? Yeah, but it's also true that we were young and ignorant then, and now we're older and wiser. Yes, that's true too. And the truth of the matter is that it would have been very wise to buy See's Candy at a slightly higher price, and if they'd asked it, we wouldn't have done it. So we've gotten a lot of credit for being smarter than we were. Yeah, and to be more accurate, it would have been $5 million more; I wouldn't have bought it; Charlie would have been willing to buy it. So fortunately that we didn't get to the point where we had to make that decision that way, but he would have pushed forward when I probably would have faded.

It's a good thing that the guy came around. Actually, the seller was the grandson of a Mississippi, wasn't he, Charlie? Larry C., uh, son. Am I correct? Or Larry C.'s brother? But he was not interested in the business, and he was, he was interested in more interested in girls and grapes, actually. And he almost changed his mind; he did change his mind about selling, and I wasn't there, but Rick Aaron told me that Charlie went in and gave an hour talk on the merits of girls and grapes over having a candy company. This is true, folks.

And the fellow sold to us, so that I pulled Charlie out in emergencies like that. He's—we were very lucky that early habit of buying horrible businesses because they were really cheap—it gave us a lot of experience trying to fix unfixable businesses as they headed downward toward doom. And that early experience was so horrible fixing the unfixable that we were very good at avoiding it thereafter. So I would argue that our early stupidity helped us. Yeah, we learned we could not make a silk purse out of a sow's ear.

So we learned we went around looking for shields, but you have to try it for a long time and fail and have your nose rubbed in it to really understand it. Okay, Becky? Okay, quick. This question comes from a shareholder named Mark Blackley in Tulsa, Oklahoma, who says there has been more news than usual in some of Berkshire's core stock holdings—Wells Fargo and the incentive and new account scandal—American Express losing the Costco relationship and playing catch-up in the premium card space, United Airlines and customer service issues, Coca-Cola, and slowing soda consumption.

How much time is spent reviewing Berkshire stock holdings, and is it safe to assume if Berkshire continues to hold these stocks that the thesis remains intact? Well, we spend a lot of time thinking; those are very large holdings. If you add up American Express, Coca-Cola, and Wells Fargo, I mean you're getting up, you know, well into the high tens of billions of dollars, and those are businesses we like very much.

They're different characteristics; in the case of, you mentioned United Airlines, we actually are the largest holder of all four of the large—we're the largest holder of the four largest airlines. And that is much more of an industry thought. But all businesses have problems, and some of them have some very big pluses. I personally, you mentioned American Express; if you read American Express's first quarter report and talk about their platinum card, the platinum card is doing very well.

Um, the gains around the world, you know, I think there were 17 percent or something like that in buildings in the UK and 15—it is original currency or the local currency in Japan, Mexican; very good in the United States. Uh, there's competition in all these businesses. If we thought we did not buy American Express or Wells Fargo or United Airlines, but Coca-Cola with the idea that they would never have problems or never have competition, what we did buy—why we did buy them is we thought they had very, very strong hands, and we liked the financial policies in the cases—many of them we like their positions.

We bought a lot of businesses, and we do look to see where we think they have durable competitive advantages. And we recognize that if you've got a very good business, you're going to have plenty of competitors who are going to try and take it away from you. And then you make a judgment as to the ability of your particular company and product and management to ward off competitors. They won't go away, but we think—I'm not going to get into the specific names on it, but those companies generally are very well positioned.

I've likened—essentially, if you've got a wonderful business—even if there's a small one like See's Candy—you basically have an economic castle, and in capitalism, people are going to try and take away that castle from you, so you want to moat around it protecting it in various ways that can protect it, and then you want a knight in the castle that's pretty darn good at warding off marauders. But they're going to be marauders, and they'll never go away, and, uh, if you look at the—I think Coca-Cola was 1886; American Express was 18, I don't know, 51 or 52—uh, starting out with an express business—uh, Wells Fargo with, I don't know what year they were started.

Incidentally, American Express was started by Wells in Fargo as well, uh, so these companies had lots of challenges, and they'll have more challenges than the companies we own have had challenges. Our insurance business has had challenges, but, you know, we started with National Indemnity, an $8 million purchase in 1968. Fortunately, we've had people like Tony Nicely at Geico, and we've been with G.J., who's added tens of billions of value, and we've got some smaller companies that you probably don't even know about but really have done a terrific job for us.

So they'll always be competition in insurance, but they'll always be—there'll always be things to do that a really intelligent management with a decent distribution system, various things going for them can do to ward off the marauders.

So, I—the specific question, how much time has been reviewing the holdings? I would say that I do it every day, and sure Charlie does it every day.

Charlie? Well, I don't think I got anything to add to that. Either we'll cut a salary if he doesn't participate here!

Okay, Jay Galbraith, this question is on Berkshire's retroactive reinsurance deal with AIG, which was the largest ever of its kind. Based on AIG's track record of reserve deficiencies and the opportunity for Berkshire to invest afloat, what is your level of confidence that this contract covering up to $20 billion of AIG's reserves in return for $10 billion of premiums will ultimately be profitable for Berkshire?

Well at the time we do every deal, I think it's smart, and then sometimes I find out otherwise as we go along. The deal, as Jay knows but might be unfamiliar to many people, is that AIG transferred to us the liability for, uh, 80 percent of $25 billion, in excess of $25 billion. In other words, they had to pay the first $25 billion and then on the next $25 billion we had to pay 80 percent of what they paid up to a limit of $20 billion, 80 percent of $25, and we got paid $10.2 billion for that.

And we had—and this applies to their losses in many classes of business written or earned before December 31, 2015. So AJ Jane, who has made a lot more money for Berkshire than I have, but he evaluates that sort of transaction. We talk about it a fair amount ourselves. I just find it interesting. I particularly find the $10.2 billion they're going to give us interesting.

And we come to the conclusion that we think we'll do well by getting $10.2 billion today with a maximum payout of $20 billion over some—in depth, I mean, between now and judgment day on this large piece of business. AIG had very good reasons for doing this, because their reserves had been under criticism, and this essentially probably—that should have been I think put to bed the question error of whether they were under reserved on that business.

And we get the $10.2 billion—and the question is how fast we pay out the money and how much money we pay out—and G does 99 percent of the thinking on that, and I do one percent—and we project out what we think will happen. And we know whatever our projection is that it will be wrong, but we try to be conservative.

And we've done a fair amount of these deals, and this is the largest—the second largest was—a creature that was formed out of Lloyd's of London some years ago, uh, and we've been wrong on one transaction that involved something over a billion premium—I mean clearly wrong, and there are a couple of others that that may or may not work out depending on what you assume we have earned on the funds. But they're okay. They're—you know, but they probably didn't come out as well as we thought they would, though.

But overall, what fits into the formula for making this an attractive deal is we have to assume we'll find uses of the money, but the money will be with us quite a while, and I think our calculations are on the conservative side. They're not the identical calculations that AIG makes.

I mean, we come up with our own estimate of payouts and all of that, and I think actually I think it was quite a good transaction from AIG's standpoint because, uh, they did take $20 billion of potential losses off for $10.2 billion, and I think they satisfied the investing community that there were quite unlikely to have adverse development in the period prior to 2015 that was not accounted for by this transaction.

Charlie? Well, I think it's intrinsically a dangerous kind of activity, but that's one of its attractions. Uh, I don't think there are any two people in the world that are better at this kind of transaction than us, you and Warren, and nobody else has had the experience we've had. Just get more, get me in a lot more of those businesses, and I'll let, I'll accept a little extra worry. There's one thing I should mention that we actually were the only insurance operation in the world who would write that sort of a contract, and that where it would be satisfactory to the other party.

I mean when somebody hands you $10.2 billion and says, "I'm counting on you to pay $20 billion back, even if it's 50 years from now on the last dollar," there are very few people that they want to add $10.2 billion to. And then, uh, so it's a—there's limited people on the other side. I mean there's not that many people with remotely that kind of size deal—the REQUIS the good expression. He means one.

Okay, we'll go to station two. Hello Mr. Buffett, Mr. Munger, uh, your career of thousands of negotiations and business dealings, could you describe for the crowd which one sticks out in your mind as your favorite or otherwise noteworthy?

Well, I don't think I've got a favorite, but the one that probably did the most good as a learning experience was See's Candy. It's just the power of the brand. Uh, the unending flow of ever-increasing money with no work sounds nice, and it was. And I'm not sure about the Coca-Cola—if we hadn't bought the C's, I think that a life properly lived is just learn, learn, learn all the time, and I think Berkshire's gained enormously from these investment decisions by learning through a long, long period.

Every time you appoint a new person that's never had a big capital allocation experience, it's like rolling the dice, and I think we're way better off having done it so long. And, but the decisions blend, and the one feature that comes through is the continuous learning. If we had not kept learning, you wouldn't even be here. You'd be alive probably, but not here. You know, there's nothing like the pain of being in a lousy business to make you appreciate a good one. Well, there's nothing like getting into a really good one; that's a very pleasant experience, and it's a learning experience.

I have a friend who says the first rule of fishing is to fish where the fish are, and the second rule of fishing is to never forget the first rule, and we've gotten good at fishing where the fish are. Yeah, that's only metaphorically. Yeah, I went to fish, but Charlie, there's too many other boats in the damn water. But the fish are still there.

Yeah, we bought a department store in Baltimore in 1966, and there's really nothing like being in the experience of trying to decide whether you're going to put a new store in an area that hasn't really developed enough to support it but your competitor may move there first. And then you have the decision of whether to jump in, and if you jump in, that kind of spoils, and now you got two stores where even one store isn't quite justified.

Uh, how to play those games, those business games, is—you learn a lot by trying, and what you really learn is which ones to avoid. I mean, if you just stay out of a bunch of terrible businesses, you're off to a very great start as well, because we've tried them all. But you can really learn because the experience is a lot like eating cockle burgers, and it really gets your attention. Well, we won't expand on that.

Okay, Andrew Ross Sorkin. Good morning, Warren. This question comes from a longtime shareholder who I should tell you approached me last night in the lobby of the Hilton Hotel with this question. Warren, for years you stayed away from technology companies, saying they were too hard to predict and didn't have moats. Then you seem to change your view about technology when you invested in IBM and again when you recently invested in Apple.

But then on Friday, you said IBM had not met your expectations and sold a third of our stake. Do you view IBM and Apple differently? And what have you learned about investing in technology companies?

Well, I do view them very differently, but you know, obviously, when I bought the IBM—started buying it six years ago, I thought it would do better in the six years that have elapsed than, uh, it has. And, uh, Apple I—I regard them as being quite different business in terms of the—in terms of sort of analyzing moats around it and consumer behavior and all that sort of thing.

It's obviously a, uh, a product with all kinds of tech built into it, but in terms of laying out what their prospective customers will do in the future as opposed to, say, on IBM's customers, it's a different sort of analysis. That doesn't mean it's correct, and we'll find out over time, but they are two different types of decisions, and— and I was wrong on the first one, and we'll find out whether I'm right or wrong on this on the second.

But I don't—I do not regard them as apples, and I'm not saying apples and oranges, but it's somewhat in between on that.

Charlie? Well, we avoided the tech stocks because we felt we had no advantage there and other people did. And I think that's a good idea, not to play where the other people are better. But, you know, if you ask me in retrospect what was our worst mistake in the tech field, I think we were smart enough to figure out Google. Those ads worked so much better in the early days than anything else, so I would say that we failed you there, and we were smart enough to do it and didn't do it. We do that all the time, too.

Yeah, we were their customer very early on with Geico, for example, and we saw—I don't—these figures are way out of date, but as I remember, you know, we were paying him $10 or $11 a click or something like that, and anytime you're paying somebody $10 or $11 every time somebody just punches a little thing where you've got no cost at all, you know, that's a good business unless somebody's going to take it away from you.

And so we were close-up, seeing the impact of that, and incidentally, if any of you don't have anything to do in your hotel rooms tonight, just keep punching Progressive or something. Don't really do that; the thought just happened across my mind. But, you know, that is—you know, you've never seen a business—almost never seen a business like it where—and I think for LASIK surgery and things like that, I think that figures were, you know, $60 or $70 a click with no incremental, no cost.

And I knew the guys—I mean they actually designed their prospectus; they came to see me a little bit after the original one when they went public, a little bit after Berkshire, even until like I had plenty of ways to ask questions or anything to short educate myself—but I blew it—and, uh, we blew Walmart too, when it was a total cinch. We were smart enough to figure that out, and we didn't.

Yeah, figuring out execution is what counts. Anyway, well, and I could be making two mistakes on IBM. I mean the, you know, it's harder to predict in my view the winners in various items or how much price competition will enter in to something like cloud services and all that. I will—I made a statement the other day, which it's really remarkable, and I was asked, Charlie, whether he could think of a situation like it where one person has built an extraordinary economic machine in two really pretty different industries, you know, almost simultaneously as has happened from a standing start at zero, from the standing start is here with other competitors, with lots of capital and everything else to do it in retailing and to do it with the cloud like Jeff Bezos has done.

I mean, I mean people like the Melons invested in a lot of different industries and all that, but he has been in effect the CEO simultaneously of two businesses starting from scratch, uh, that if you know Andy Grove used to use at Intel, used to say, you know, think about if you had a silver bullet and you could shoot it and get rid of one of your competitors, who would it be? Well, I think that both in the cloud and in retail there are a lot of people that would aim that silver bullet at Jeff, and he's done a—it's a different sort of game.

But he's, you know, the Washington Post, he's played that hand as well as anybody I think possibly could, so it's a remarkable business achievement where he's been involved actually in the execution, not just bankrolling it, uh, of two businesses that are probably as feared by their competitors as any you can find.

Charlie, you can have further thoughts? Well, we're sort of like the Melons, old-fashioned people who've done all right, and Jeff Bezos is a different species and we missed it entirely. Incidentally, we never owned a share of Amazon.

Okay, Greg Warren, Warren my question relates to some recent stock purchases as well. Unlike the railroads, which benefit from colossal barriers to entry due to their established, practically impossible to replicate networks of rail and rights-of-way, the airline industry seems to have few if any advantages. Even with the consolidation we've seen during the past 15 years, the barriers to entry are few, and the exit barriers are high.

The industry also suffers from low switching costs and intense pricing competition and is heavily exposed to fuel costs, with rising fuel prices being difficult to pass on and declining fuel prices leading to more price competition. Compare this with rail customers who have few choices and thus wield limited buying power, and where fuel charges allow the industry to mitigate fuel price fluctuations.

While you've noticed several times since the airline stock purchase were announced that the two industries are quite different and that comparisons should not be made to Berkshire's move into railroad. Could you walk us through what convinced you that the airlines were different enough this time around for Berkshire to invest close to $10 billion in the four major airlines? Because it would seem to me that UPS, which you have a small stake in, in FedEx, both of which have wider economic moats built on more identifiable and durable competitive advantages, would be a better option for long-term investors.

Yeah, the decision in respect to airlines had no connection with our being involved in the railroad business. I mean you can—you can classify them and are being involved in the railroad business. I mean, you can—you can classify them and, you know, maybe in no more connection than the fact we own Geico, or, you know, or, uh, any other business.

You couldn't pick a tougher industry, you know, ever since since Orville went up, and I said, you know that anybody really been thinking about investors, they should have had Wilda shoot him down and save everybody a lot of money for 100 years. You can go to the internet and type in airlines and bankrupt, and you'll see that something like 100 airlines in that general range, you know, gone bankrupt in the last few decades in it and actually Charlie and I were directors for some time of US Air, and people write about how we had a terrible experience at US—it was one of the dumbest things I've ever done and there's a lot—we made a fair amount of money out of it.

Yeah, and we made a lot of money out of it; it's undeserved, but we made a lot of money out of it because there was one little brief period when people got all enthused about US Air, and after we left as directors and after we sold our position, US Air managed to go bankrupt twice in the subsequent period. I mean, you've named all of the—not all of them, but you've named a number of factors that just make for terrible economics, and I will tell you that if the capacity, you know, it's a fiercely competitive industry.

The question is whether it's a suicidally competitive industry, which it used to be. I mean when you get virtually every one of the major carriers and dozens and dozens and dozens of minor carriers going bankrupt, you know, it ought to come upon you finally that maybe you're in the wrong industry. It has been operating for some time now at 80 percent or better of capacity-being available seat miles, and you can see what deliveries are going to be and that sort of thing.

So if you make—I think it's fair to say that they will operate at higher degrees of capacity over the next five or ten years than the historical rates which caused all of them to go broke. Now, the question is whether even when they're doing it at the 80s, they will do suicidal things in terms of pricing—remains to be seen. They actually, at present, are earning quite, quite high returns on invested capital, I think higher than either FedEx or UPS if you actually check that out.

But that doesn't mean tomorrow morning, you know, if you're running one of those airlines and the other guy cuts his prices, you cut your prices, and as you say, there's more flexibility, one future when fuel goes down, to bring down prices than there is to raise prices when when that one prices go up. So the industry, you know, it is no cinch that the industry will have some more pricing sensibility in the next ten years than they had in the last hundred years.

But the conditions have improved for that. They've got more labor stability than they had before because they're basically all gonna—they've been through bankruptcy, and they're all going to sort of have an industry pattern of bargaining. It looks to me like they're gonna have a shortage of pilots to some degree, but it's not like buying See's Candy.

Charlie? Well, I think that generalizes perfectly clear. Finally approval all these years. Okay, station one, the shareholder. Hi, hi Warren and Charlie. My name is Brian Martin, and I'm from Springfield, Illinois, and HBO documentary becoming Warren Buffett. You had a great analogy comparing investing to hitting a baseball and knowing your sweet spot. Ted Williams knew his sweet spot was a pitch right down the middle. When both of you look at potential investments, what attributes make a company a pitch in your sweet spot that you'll take a swing at and invest in?

Well, I'm not sure I can define it in exactly the terms you would like, but the—we sort of know it when we see it. And it would tend to be a business that for one reason or another we can look out five or ten or 20 years and decide that the competitive advantage that it had at the present would last over that period, and it would have a trusted manager, that would not only fit into the Berkshire culture but that was eager to join the Berkshire culture.

Yeah, but it's also true that we were young and ignorant then, and now we're older and wiser. Yes, that's true too. And the truth of the matter is that it would have been very wise to buy See's Candy at a slightly higher price, and if they'd asked it, we wouldn't have done it. So we've gotten a lot of credit for being smarter than we were.

Yeah, and to be more accurate, it would have been $5 million more; I wouldn't have bought it; Charlie would have been willing to buy it. So fortunately that we didn't get to the point where we had to make that decision that way, but he would have pushed forward when I probably would have faded.

And he almost changed his mind; he did change his mind about selling, and I wasn't there, but Rick Aaron told me that Charlie went in and gave an hour talk on the merits of girls and grapes over having a candy company. This is true, folks. And the fellow sold to us, so that I pulled Charlie out in emergencies like that.

He's—we were very lucky that early habit of buying horrible businesses because they were really cheap—it gave us a lot of experience trying to fix unfixable businesses as they headed downward toward doom. And that early experience was so horrible fixing the unfixable that we were very good at avoiding it thereafter. So I would argue that our early stupidity helped us.

Yeah, we learned we could not make a silk purse out of a sow's ear. So we learned we went around looking for steel but you have to try it for a long time and fail and have your nose rubbed in it to really understand it.

Okay, Becky? Okay, quick. This question comes from a shareholder named Mark Blackley in Tulsa, Oklahoma, who says there has been more news than usual in some of Berkshire's core stock holdings—Wells Fargo and the incentive and new account scandal—American Express losing the Costco relationship and playing catch-up in the premium card space, United Airlines and customer service issues, Coca-Cola, and slowing soda consumption.

They're different characteristics; in the case of— you mentioned United Airlines—we actually are the largest holder of all four of the large—we're the largest holder of the four largest airlines. And that is much more of an industry thought. But all businesses have problems, and some of them have some very big pluses. I personally, you mentioned American Express; if you read American Express's first quarter report and talk about their platinum card, the platinum card is doing very well.

The gains around the world, you know, I think there were 17 percent or something like that in buildings in the UK and 15—it is original currency or the local currency you know from Japan, Mexico; very good in the United States. There's competition in all these businesses. If we thought we did not buy American Express or Wells Fargo or United Airlines, but Coca-Cola with the idea that they would never have problems or never have competition, what we did buy—why we did buy them is we thought they had very that is very, very strong hands, and we liked the financial policies in the cases—many of them; we like their positions.

We bought a lot of businesses, and we do look to see where we think they have durable competitive advantages, and we recognize that if you've got a very good business, you're going to have plenty of competitors who are going to try and take it away from you. And then you make a judgment as to the ability of your particular company and product and management to ward off competitors. They won't go away, but we think—I'm not gonna get into the specific names on it, but those companies generally are very well positioned.

If you look at the I think Coca-Cola was 1886; American Express was 18, I don't know, 51 or 52—starting out with an express business, Wells Fargo with—I don’t know what year they were started. Incidentally, American Express was started by Wells in Fargo as well, so these companies had lots of challenges, and they'll have more challenges than the companies we own have had challenges. Our insurance business has had challenges, but, you know, we started with National Indemnity, an $8 million purchase in 1968.

Fortunately, we've had people like Tony Nicely at Geico, and we've been with G.J., who’s added tens of billions of value, and we've got some smaller companies that you probably don't even know about but really have done a terrific job for us. So there'll always be competition in insurance, but they'll always be-there'll always be things to do that a really intelligent management with a decent distribution system, various things going for them can do to ward off the marauders.

So, I—the specific question, how much time has been reviewing the holdings? I would say that I do it every day, and sure Charlie does it every day.

Charlie? Well, I don't think I got anything to add to that. Either we'll cut a salary if he doesn't participate here!

Well at the time we do every deal, I think it's smart, and then sometimes I find out otherwise as we go along. The deal, as Jay knows but might be unfamiliar to many people, is that AIG transferred to us the liability for, uh, 80 percent of $25 billion, in excess of $25 billion. In other words, they had to pay the first $25 billion, and then on the next $25 billion we had to pay 80 percent of what they paid up to a limit of $20 billion—80 percent of $25, and we got paid $10.2 billion for that.

And we get the $10.2 billion—and the question is how fast we pay out the money, and how much money we pay out—and G does 99 percent of the thinking on that, and I do one percent—and we project out what we think will happen. And we know whatever our projection is that it will be wrong, but we try to be conservative.

And we've done a fair amount of these deals, and this is the largest—the second largest was a creature that was formed out of Lloyd's of London some years ago, and we've been wrong on one transaction that involved something over a billion premium. I mean clearly wrong, and there are a couple of others that may or may not work out depending on what you assume we have earned on the funds. But they're okay. They're—you know, but they probably didn't come out as well as we thought they would, though.

Charlie? Well, I think it's intrinsically a dangerous kind of activity, and—but that's one of its attractions. Uh, I don't think there are any two people in the world that are better at this kind of transaction than us. You and Warren, and nobody else has had the experience we've had. Just get me in a lot more of those businesses, and I'll let—I’ll accept a little extra worry.

There's one thing I should mention that we actually were the only insurance operation in the world who would write that sort of a contract and that where it would be satisfactory to the other party. I mean when somebody hands you $10.2 billion and says, "I'm counting on you to pay $20 billion back, even if it's 50 years from now on the last dollar," there are very few people that they want to add $10.2 billion to. And then, uh, so it's a—there's limited people on the other side.

I mean, there's not that many people with remotely that kind of size deal—the REQUIS the good expression. He means one.

Yeah, that's only metaphorically. Yeah, I went to fish, but Charlie, there's too many other boats in the damn water. But the fish are still there.

Yeah, we bought a department store in Baltimore in 1966, and there's really nothing like being in the experience of trying to decide whether you're going to put a new store in an area that hasn't really developed enough to support it, but your competitor may move there first. And then you have the decision of whether to jump in—and if you jump in, that kind of spoils—and now you got two stores where even one store isn't quite justified.

Uh, how to play those games—those business games is—you learn a lot by trying—and what you really learn is which ones to avoid. I mean, if you just stay out of a bunch of terrible businesses, you're off to a very great start as well, because we've tried them all. But you can really learn because the experience is a lot like eating cockle burgers, and it really gets your attention. Well, we won't expand on that.

But then on Friday, you said IBM had not met your expectations and sold a third of our stake. Do you view IBM and Apple differently? And what have you learned about investing in technology companies?

It's obviously a, uh, a product with all kinds of tech built into it, but in terms of laying out what their prospective customers will do in the future as opposed to say on IBM's customers, it's a different sort of analysis. That doesn't mean it's correct, and we'll find out over time, but they are two different types of decisions, and— and I was wrong on the first one, and we'll find out whether I'm right or wrong on this on the second.

But I don't—I do not regard them as apples—and I'm not saying apples and oranges, but it's somewhat in between on that.

We do that all the time too.

Okay, Greg Warren, Warren, my question relates to some recent stock purchases as well. Unlike the railroads, which benefit from colossal barriers to entry due to their established, practically impossible to replicate networks of rail and rights-of-way, the airline industry seems to have few if any advantages. Even with the consolidation we've seen during the past 15 years, the barriers to entry are few, and the exit barriers are high.

Charlie? Well, I think that generalizes perfectly clear. Finally approval all these years. Okay, station one, the shareholder. Hi, hi Warren and Charlie. My name is Brian Martin and I'm from Springfield, Illinois, and HBO documentary becoming Warren Buffett. You had a great analogy comparing investing to hitting a baseball and knowing your sweet spot. Ted Williams knew his sweet spot was a pitch right down the middle. When both of you look at potential investments, what attributes make a company a pitch in your sweet spot that you'll take a swing at and invest in?

Well, I’m not sure I can define it in exactly the terms you would like, but the—we sort of know it when we see it. And it would tend to be a business that for one reason or another we can look out five or ten or 20 years and decide that the competitive advantage that it had at the present would last over that period, and it would have a trusted manager that would not only fit into the Berkshire culture but that was eager to join the Berkshire culture.

2017 Berkshire Hathaway Annual Meeting (Full Version)

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