2008 Berkshire Hathaway Annual Meeting (Full Version)
[Music] Folks, this just in! It appears that Warren Buffett has struck a deal to trade jobs with daytime soap opera diva Susan Lucci. Buffett has reportedly negotiated a permanent spot on the cast of All My Children. Apparently, Ms. Lucci is en route to Omaha as the new CEO of Berkshire.
[Applause]
Where could he be?
[Applause]
Do you mean Warren?
Charlie: He's been detained at the TV studio.
Susan Lucci: Hi Charlie, I'm Susan Lucci. Oh, haven't you heard about the deal between Warren and me? He's going to be a big star at All My Children, and I'm going to be taking over Berkshire Hathaway.
Charlie: Well, you've certainly got some important qualities that Warren lacks.
Susan Lucci: Well, thank you, Charlie. And you can relax now, you dear man. You just make yourself at home because I'll take it from here.
Charlie: Thank you. I've been wanting to talk to our shareholders for quite some time now. There are some changes I really think we need to make around here. The first thing we need to look at is our dividend policy. I have never heard of anything so cheap and so unfair to our wonderful shareholders. We need to change it.
Charlie: Sounds good to me.
Susan Lucci: And second, we need to look at giving guidance on earnings, and we need to do that every single week.
Charlie: Sounds good to me.
Susan Lucci: And third, we need to pay our directors more than 900 a year.
[Applause]
[Laughter]
[Applause]
One minute.
[Applause]
Hi Warren! Warren, I thought you were at the All My Children studio.
Warren Buffett: What's that talk about dividends that I hear?
Susan Lucci: Oh, nothing important, Warren. You just concentrate on your role on the show.
Warren Buffett: Susan, my show is Berkshire Hathaway, and my role is to run it.
Susan Lucci: Warren, you can't do that!
Warren Buffett: I just did!
Susan Lucci: All My Children can't do without you, and I can't do without Berkshire.
Oh, Lauren!
[Applause]
So you mean the deal is off?
Warren Buffett: The deal is off. I really want to thank you. You've brought me to my senses. You can go back to All My Children; I'll stay here at Berkshire. But I am so grateful to you, Susan, that I want you to go out to Berkshire. I'll have Charlie merge around the Borsheims, and I want you to pick out anything you would like and charge it to Charlie.
Susan Lucci: Oh, Warren, you are a darling!
[Applause]
[Music]
[Applause]
Okay, Charlie, let's get this show on the road!
The she spent more time with him than she did with me, but we're going to follow the usual procedure. The business meeting will start at 3:15, but between now and then, with a break for lunch, we're going to answer your questions. We don't screen them ahead of time, as you know. Based on who gets lined up at the microphone first, we'll go around from sections to sections and then go to the overflow rooms. My understanding is that our best estimate is that we have about 31,000 people here today.
[Music]
[Applause]
Somewhere I have a map here. Mark, do we have that?
Pardon me, can't hear a thing up here! But in any event, on the yellow pad, okay, we'll just mark them off as we go along.
I would like, before we start, I heard Ron Olson laughing there. I think he made it, I'm glad to hear it! Let me introduce our directors. I really wasn't sure whether to go through with this part of the show after they showed that rousing applause for things like dividends and raising their man. But we have up here, we have Charlie Munger on my left. He's the one that can hear; I can see we work together for that reason. And if the rest of you will just stand as I give your name, and if you’ll hold your applause to the end, or even longer if you would like. I will introduce them at Howard Buffett, Susan Decker, Bill Gates, David Gottsman, Charlotte Geyman, Don Keough, Tom Murphy, Ron Olson, and Walter Scott— the best directors in America!
[Applause]
[Music]
Charlie and I will take a break at noon because we will probably by that time finished all of the things we have up here to eat, and we'll need to have lunch. I'd appreciate it if you would limit your questions to one question, and that means not embodying a three-parter or four-part or something like that. There's no need to make a long introductory statement because we'll get more questions answered that way, and we want to cover as many people as we can.
So with that, we'll go right over to post number one and start in with the first question.
Rajesh Vora: A very good morning to Mr. Buffett and Mr. Munger. My name is Rajesh Vora from Bombay, India. I have been learning a lot from many letters of yours. It's been a great insight into investment philosophy that I haven't learned from anywhere else. Great job! That's on the mind side, but on the hard side, what touches me the most is what you have achieved all these years is through 100% honesty, and I salute to that. Thanks!
Now my question...
Warren Buffett: My question is on what key steps would you recommend to correct the mindset of typical investors like me, which is what you narrate as lemmings, like the crowd mindset?
Charlie: What would we recommend?
Warren Buffett: We got the question being repeated here about the mindset of an investor. He wants you to advise him as to how he can become less like a lemming.
Charlie: Well, since you repeated the question, I’m going to let you give the first answer to that, Charlie, until he eats about a thousand calories he wants to invest less like a lemming.
Charlie: Oh, I understand that. I was giving you the first shot at it, but I don't...
Warren Buffett: I will tell you what changed my own life on investing. I started investing when I was 11. I first started reading about it; I believe in reading everything in sight, and I first started reading about it when I was probably six or seven years old. But for about eight years, I wandered around with technical analysis and doing all kinds of things, and then I read a book called The Intelligent Investor. I did that when I was 19, down at the University of Nebraska, and I would say that if you absorb the lessons of The Intelligent Investor, mainly—and I wrote a foreword and I recommended particularly Chapters 8 and 20—that you will not behave like a lemming, and you may do very well compared to the lemmings.
We have here in the bookworm copies of The Intelligent Investor, and I think it's as great a book now as I did when I read it early, I guess in 1950. You will never—you can't get a bad result if you follow the lessons of Ben Graham taught in that book. I should mention that there’s a book out there also that I did not know would be completed by this time.
My cousin Bill Buffett has written a book about our grandfather's grocery store called Foods You Will Enjoy, and Bill will be out there; he's signing books. I just got my first copy a couple days ago, read—I enjoyed it a lot. Charlie worked at the same grocery store.
Charlie: How many years ago?
Warren Buffett: Probably a good 70 years ago in Charlie's case. Neither one of us was very good, but my grandfather—you don't want to pay much attention to his advice on stocks; he wrote a lot of letters, and he was very negative on the stock market and big on hard work at the grocery store, so we quit listening to them. Instead, read The Intelligent Investor. That’s the book that gave me the philosophy that has taken me now for a lot of years. And there's three big lessons in there which relate to your attitude toward stocks generally, which is that you think of them as parts of a business, and your attitude toward the market, which is that you use it to serve you and not to instruct you, and then the idea of a margin of safety, of always leaving some extra room in things.
But the people in this room, I think, have learned that important first lesson. I mean, I think most people that own Berkshire do not see themselves as owning something with a little ticker symbol or something that may have a favorable or unfavorable earning surprise or something of the sort, but they rather think of themselves as owning a group of those businesses that are out there in the other room, and that's the way to look at it. That's the way to look at stocks. You'll never be a lemming if you do that.
Let's go to number two.
George Issels: Good morning, Warren. Good morning, Charlie. My name is George Issels from Cologne, Germany. My question: How is the operational integration of Cologne Re progressing?
Warren Buffett: Thank you very much! Cologne Re, for those of you who are not familiar with it, is a 95% owned subsidiary of General Re, of which Berkshire Hathaway owns 100%. Cologne Re, I believe, is the oldest reinsurance company in the world, and it's done a magnificent job for us as a part of the first generation and then at Berkshire Hathaway. We have a process in place that will before too long result in us owning 100% of Cologne.
One difference then, there won't be any difference in operation; it runs magnificently the way it's being run. But up until this point, they have run their own investment portfolio; that portfolio and the equity portfolio of Geico are the only two that I don't run. But when we own 100% of Cologne, then I will take the responsibility for Cologne's investment portfolio at all—otherwise it would be hard to improve on the operation of the management of Cologne.
So there will be—you will not see any other changes; except we will consolidate in 100% of the earnings of Cologne rather than 95%.
Area 3.
Sam Rainer: Good morning, Mr. Buffett! Mr. Munger, my name is Sam Rainer from Fort Lee, New Jersey, and my question concerns your comment this week about the recession and the stock market going up so significantly in April. Can you expand on where the market's going from here?
Warren Buffett: Well, I could expand, but I couldn’t answer. Charlie and I haven't the faintest idea where the stock market is going to go next week, next month, or next year. We never talk about it. You know, it never comes up. Our directors will tell you that they've never been to a directors' meeting where the subject of the direction of the stock market has been discussed. We are not in that business.
We don't know how to be in that business. Obviously, if we could guess successfully a high percentage of the time where the stock market was going to go, we would do nothing but play the S&P futures market, where there wouldn't be any reason to look at businesses and stocks.
So it's just not our game. We don't think what we see when we look at the stock market as we face thousands and thousands and thousands of companies priced every day, and we ignore 99.9% of what we see. Although we run our eyes over them, every now and then we see something that looks like it's attractively priced to us as a business. Forget about the word stock.
So when we buy a stock, we would be happy with that stock if they told us the market was going to close for a couple of years. We look to the business. It's exactly the same way as if you were going to buy a farm a few miles here outside of Omaha. You would not get a price on it every day, and you wouldn't ask whether the yield was a little above expectation this year, down a little bit.
You'd look at what the farm was going to produce over time. You'd look at the expected yields, you'd look at expected prices, the cost, taxes, the cost of fertilizers, and you'd evaluate the intelligence of your purchase based on what the farm produced relative to your purchase price. Quotes would have nothing to do with it.
That's exactly the way we look at stocks. We look at them as businesses. We make judgments about what the futures of those businesses will be. If we're right about those judgments, the stocks will take care of themselves.
Charlie: Nothing, Dad. He's been practicing for weeks!
Let's go to Area 4.
Chandra Chavla: Good morning, Mr. Buffett and Mr. Munger. My name is Chandra Chavla, and I am from Seattle, Washington. Berkshire Hathaway has some of the best managers in the world, and I am very bad at hiring good managers. Some of the decisions I made, which were without any phone calls from Jamie Lee Curtis, I look back and I see you know what was I thinking?
What can you advise on how, in one hour, you can assess the capability of a person to be a good manager?
Warren Buffett: Well, you have to understand that we cheat. We buy businesses with good managers. So if you give me a hundred MBAs and I have these classes come out all the time, alma, I've had about 30 schools this year, and usually there are 75 or 100 men and women in the classes.
I could take those hundred and spend a few hours and rank them from number one to one hundred in terms of their future achievements as managers; you know, then I could pick them. You know, it would be impossible for me.
But what we do is we buy businesses with great managers in place. We've seen those people perform for many cases decades; we've seen a record, and they come with the business. Now our job is not so much to select great managers because we do have this proven record that they come with. Our job is to retain them.
Many of the managers, the majority of the managers that work at Berkshire, are independently wealthy. We hand them checks—sometimes in the billions, often in the hundreds of millions—so they do not have a monetary reason to work in many cases.
So our job—we are dependent on them. Incidentally, I mean, we have 19 or so people at headquarters, and we have 250,000 working for Berkshire around the world, and we can't run their businesses. Our job is to make sure that they have the same enthusiasm, excitement, and passion for their job after the stock certificate changes hands than they had before.
Now that requires some judgment on our part as to whether these people love the business or love the money. They all like money, but many of them—well, our managers in particular—they love their businesses. I mean they've worked at them; they're a work of art to them, and they've been in the family sometimes as many as four generations.
So we have to see the passion in their eyes, and if we see that, then we have to behave in a way that that passion remains. Can't be done by contract; we don’t have contracts; that won't—that doesn't work. But we can try to create an environment, and Berkshire frankly is the ideal environment.
It's even an ideal environment because of events like this. Our managers feel appreciated, and they are appreciated. They're not just appreciated by me and Charlie; they're appreciated by you.
[Music]
So I can't be of enormous help in if you're looking at a group of MBAs. You know, it's not easy. I mean, they know—they sort of learn by that point in life how to fool you in terms of what answers you want to hear and all of that sort of thing.
I would look for the person with passion for the job. I mean the person that is always doing more than this. Sure you look for people that are good communicators and all that sort of thing, but I like my way better. It's a lot easier just to take somebody that's been batting 400 in baseball and say, I think I’ll stick him in the lineup.
And the nice thing about our game is that you know in baseball, unless you're Nolan Ryan or somebody, you have to hang up things at 40 or thereabouts. But in our game, they go on and on and on.
I mean I use as an example we had a famous Mrs. B from the furniture mart, and she worked for us till she was 103, and then she left and she died the next year. And that is a lesson to our managers that Charlie...
Charlie: Well, that was very useful advice. It reminds me very much of the late Howard Amundson, and a young and starving business student once asked him for advice as to how to get ahead, and Howard said, "Well, I always keep a few million dollars lying around in case some good opportunity suddenly turns up."
Well, let's go to number five.
Joe Hudson: Good morning, I'm Joe Hudson, a shareholder from Culver, Indiana. Could you please comment on how you use stock options when trying to enter or exit a position in a public company?
Warren Buffett: Yeah, we've—I think there's one time we sold a put on Coca-Cola with the idea that if it got exercised, we were very happy to own more Coca-Cola. It didn't get exercised; we would have been better off if we just bought the stock. Usually, if you want to buy or sell a stock, you should buy or sell the stock, and using an option technique to buy a call on a stock instead of buying the stock outright, with the idea that you get it a little cheaper that way, means that about four times out of five you'll be right, and the fifth time the stock will have moved, and you'll have missed, you know, the transaction you wanted to have.
And so we virtually have never used options as a way to enter a position or exit a position, and I would doubt very much that we do. We've sold these long-term equity put options that are described in the press release yesterday and were described in the annual report, but that's a different sort of thing. If we want to buy something, we'll just start buying it, and if we want to get out of it, we'll start selling it. Then we won't get involved in any fancy techniques.
Charlie: Well, if I remember right, you wrote a letter when the public authorities were deciding whether we should have option exchanges for stocks, and Warren was all alone at that time, and he wrote a letter saying that he didn't think it would do any good at all for the country to throw out the margin rules and in this fashion. I've always thought that Warren was totally right.
Warren Buffett: Yeah, it's very interesting to me when I talk to these MBA students. One of them from the University of Chicago, the very first question I got a few years ago, he says, what are we being taught that's wrong? I love questions like that; I have to plan them in the future.
The amount of time spent at business schools—maybe it's a little less now—but teaching things like option pricing and that sort of thing, it's totally nonsense. I mean, you need two courses in a business school: one is how to value a business from the standpoint of investment in a business, and how to think about stock market fluctuations.
But the idea that you would spend all of this time with formulas, but the problem of course is that the instructors know the formulas and you don't when they come, and so they've got something to fill a time explaining to you. And, you know, it is no fun if you—if you were teaching biblical studies, you know, and you could read three or four of the most important religious terms forward and backward in five different languages, you would hate to tell somebody that it all comes down to the Ten Commandments.
I mean, any damn fool can do that. So, there's a great desire of the priesthood in finance to want to teach the things that they know and you don't know and that they spent a long time learning and maybe require a fair amount of mathematics, and it really has nothing to do with investment success.
Investment success depends on buying into the right businesses at the right price, and you have to know how to value businesses, and you have to have an attitude that divorces you from being influenced by the market. You want the market there not to influence you; you want it there to serve you, and that requires a mindset which goes back to an earlier question, and it's a mindset that's described quite well in Chapter 8 of The Intelligent Investor.
Let's go to number six.
Irene: Hi, I'm Irene from Bonn, Germany. Both of you are very generous persons. What is your joy of giving and what are the potential pitfalls when donating money?
Warren Buffett: The joys of giving and the pitfalls of donating money? I know personally I've never given up anything in my life that made a difference in my life. I mean there are people that will go to church this Sunday and they will drop money in a collection plate, and it will make the difference about where they take their family or whether they take their family in terms of what they eat, whether they go to a movie, or whether they get an extra present at Christmas, whatever it may be.
I mean they are giving some money that makes a difference in their lives; I've never given a penny that way, and I never will. I mean I get to do everything I want to do in life, but because I've lived a long time, which gives you an enormous advantage in terms of accumulating money, and most of the things I want in life don't come from the expenditure of money so it accumulates.
And basically, I'm giving away excess. I'm not giving away anything from necessity, so I really, you know, I think what I'm doing is useful with the money, but I don't think it's on par at all with the actions of somebody that's giving money that really makes a difference in how they or their children live. Those are really charitable people.
I think my sister Doris is here; she's given away money that made a difference in her life. She gives away time too; she gives away eight or ten hours a day in terms of actually looking into the real needs of people and giving them things beyond the money, giving them help and advice and somebody to talk to.
And, you know, that is real giving, and I admire her for it. I'm not emulating her. I mean she is in the retail business of giving; I like wholesale much better. In terms of the pitfalls, you know, you can make mistakes in any area, but you should give to the things that you personally have an interest in and believe in, and that can be anything.
I'm not going to prioritize what should be done with gifts that something you're involved in, something you want to give your time to as well as money, but beyond that I'll let Charlie carry on.
Charlie: Regarding pitfalls, I would predict that if you have an extreme political ideology, whether the left or the right, you're very likely to make a lot of dumb charitable gifts. If you hang around Charlie like I do, you get the sunny side of life. I mean we ought to have that like the sunny side of the street.
Let's go to number seven.
Akash Vijay: Good morning! My name is Akash Vijay and I'm from India. I worship Mr. Buffett for his philanthropy, and I do hope to serve the Gates Foundation someday. My question to Mr. Buffett is: what's your level of involvement when one of your companies is faced with an ethical dilemma?
For example, have sweatshops in Central America? So what do you do to ensure that you don't fall into the same trap?
Warren Buffett: Well, we let our managers run their businesses, and we've got some terrific managers not only in terms of ability, but I would say that what we have seen of the ethical standards of our managers has been extraordinary over the years. That doesn't mean there aren't slip-ups here or there, but taken as a group over decades, I think that I'm very happy in effect turning over the keys, not only to the financial performance of the business, but in terms of how they behave.
And I would say that I think you're quite wrong in terms of fruit of the loom operations; they are conducted in absolutely terrific standards. John Holland's here; I'd be glad to have you meet with him later.
But we're proud of our business and how they operate. We do not give them elaborate guidelines; I write them a letter every two years, roughly, and I ask them to send me a letter telling them who they think should be the successor if anything happened to them that night. I keep those letters around. Fortunately, they don't come into play very often.
But I also tell them we've got all the money we need. It's nice to have more money, but we're not going to lack for money at Berkshire Hathaway. We don't have a shredder reputation more than we need, and we never want to trade away reputation for money.
So we give them that same message that was given in the movie in terms of the Solomon situation, which is that not only do they behave in a way that conforms with the laws, but that they behave in a way where if a story were written by an unfriendly but intelligent reporter the next morning in their local paper, they would have no problem with their neighbors, their family reading it.
And we run that in the movie every year just because we like the managers to keep getting that message all of the time. There is no pressure from Berkshire's corporate office to report dollars of earnings in any quarter. They don't give me budget, so they don't—there’s no feeling that they have to come through with given numbers or I'll be embarrassed in public in terms of publishing earnings or anything else; we have no incentives to cause people to do anything that would go against their conscience, play games, or cut corners, or anything of the sort.
And overall, I think it's worked pretty well. It isn't perfect; you can't have 250,000 people in the city without having something going on at some point, and we do have 250,000 people working.
But I’m not unhappy with our batting average.
Charlie: Yeah, and of course Fruit of the Loom does have foreign plants, and we have no rule against that at all. We’ve got quite a few foreign plants now. We don’t favor foreign plants; we just do whatever makes sense under the circumstances.
Yeah, we had a shoe business I've written about in Maine, and we have wonderful, wonderful workers there. They were more productive than workers around the country, around the world, but the United States was producing, 20 years ago, roughly a billion pairs of shoes a year, and we were a nation of Imelda Marcos's—I mean, it was wild—and, you know, Brockton, Massachusetts, and you name the towns revolved around the shoe business as did a town called Dexter, Maine.
We bought that business, and we tried to compete. We had a good brand name; we had great workmanship, and we found out that it just plain wouldn't work against competing against shoes produced in China. So now of its over a billion pairs of shoes a year using this country, basically they all come from outside the borders.
And you're going to see that in factories in China, factories in Central America. They do not have exactly the norms that we have in this country. And you know, that's going to be the situation.
You know, we are not going to tell the world how to run their business in any great way. We obviously have some standards that have to be met, but they are not exactly the situation you're going to find in the United States.
Number eight.
Mike McGowan: Hi, I'm Mike McGowan. I'm from Pasadena, California. I'm a shareholder in both Berkshire and Westco. I run a website called Financial Foghorn.com, and I write about precious metals and things. I've asked you questions in the past about silver, and I didn't really get them answered, so I thought I'd ask about a different commodity this time.
I was raising the price of tungsten, and I think about your comment last year about buying Iscar. Will commodity price increases in things like tungsten affect the profitability of Iscar, and would that be the reason you're locating a plant in China to build machine tools?
Warren Buffett: Yeah, the reason the plant was built in China was to serve the Chinese market, which is large and growing. We opened in Dalian late last fall. It's nicer to be closer to the raw material, but it really had nothing to do with changes in the price of tungsten.
Generally speaking, if you're creating a higher value-added product as Iscar is doing from a raw material, there may be three months, six months of adjustment to changes in raw material prices. And obviously, with some commodities, if it gets high enough, you get into substitutes.
But there isn't going to be any substitute for tungsten in the cutting tools, and there won't be some... you know, we've tried some substitutes for crude oil in terms of gasoline or heating oil, but then the substitutes like natural gas go up in price too.
So I think largely in our businesses, raw materials get passed through. Now we’re having a tough time, for example, in the carpet business in passing through the cost increases that we experience in oil-based raw materials.
But we would be having trouble—the carpet business would be having trouble regardless now because of the slowdown in residential housing; it does make it tougher.
But over a period of time, our businesses are going to reflect raw material costs. You know this candy here, I have this fudge which I can hardly wait to get into. You know it's going to reflect sugar and cocoa and things like that over time.
And if you're running an airline, it's going to reflect the cost of fuel, so you can have little squeezes here and there, but it's not a big deal, and it certainly isn't the reason that we went to China to locate the Iscar facility.
That facility, incidentally, this car—we have a number of people here from Iscar and families in some cases that had very high expectations for that when we bought it. It succeeded in every way; it succeeded in terms of financial performance; has exceeded in terms of the human relations we’ve developed with the people. I mean it was—I told you it was a terrific acquisition a few years ago; it’s been a dream acquisition, and I know Charlie wants to add to that.
[Applause]
Charlie: Yeah, I would say that the short answer is that while we don't like inflation because it's bad for our country and our civilization, that we will probably make more money over time because there is inflation.
Go to number nine.
Mark Rabanov: My question is, Berkshire has bought a lot of shares over the last 12 months in listed companies. Do you expect the return on these investments to be between 7 and 10 percent per annum over many years, which is, I would say, well below what Berkshire has achieved in the past?
Warren Buffett: The answer to that is yes. We would be very happy if we could buy common stocks where our expectation over a long period of pre-tax, from a combination of dividends and capital gains, we'd be very happy if we thought it was going to be 10 percent, and we would probably settle for a little less than that.
And there's no question, absolutely no question, that returns from owning Berkshire will be less in the future than they have been in the past. There's no question that we will not do as well with the common stocks at Berkshire that we own in the future as we have over the last really 40 years or thereabouts.
We operate now in a universe of marketable stocks that we are talking about companies with market caps of at least 10 billion in most cases, to have a meaningful impact on Berkshire, we are talking much bigger than that, maybe 50 billion and up. Well, that universe is not as profitable a universe to operate in as if you have the entire universe of thousands and thousands of companies.
So if we just take an example, if we find a company with a market cap of 10 billion, and we can buy five percent of it, and usually that's about what we could buy without disturbing things, we can have a 500 million dollar investment, let's say it doubles over a period of time, that's 500 million, you pay a 35 tax, you have 325 million, that's less than two-tenths of one percent in terms of Berkshire performance.
So our universe has shrunk enormously, and we will not do as well in that universe—remotely as well—as we would if we were operating in a much wider universe and could do all kinds of things.
We've found little things to do from time to time where we've made some money—I may refer to them a little later, a couple of things, and they're nice, but they don't move the needle very much at Berkshire.
So anyone that expects us to come close to replicating the past should sell their stock. I mean, because it isn't going to happen. And, you know, I think we're going to get decent results over time, but we're not going to get indecent results, and in this field, we prefer indecent, but we're not going to get them.
Charlie: I think you can take Warren's promises to the bank. We are very happy making money at a rate in the future that is way less than the rate at which we made money in the past, and I suggest that you adopt the same attitude.
Warren Buffett: Well, I wouldn't condemn him to that. I think if you're working with small amounts of money, I've talked to...
Charlie Munger: Oh yeah, and then you may have very something very much better to do with your money than to buy Berkshire.
Warren Buffett: You know, we still think Berkshire is an attractive investment over a long period of time. We think that it stacks up reasonably well with other very large companies. We don't think it's the most attractive investment in the world in terms of what you can find if you're willing to go through those thousands of possibilities, which is what Charlie and I used to do many years ago.
It's not feasible for us to do it now, and it wouldn't have any impact on Berkshire. What we really like at Berkshire is buying good-sized to very large first-class businesses with first-class management and just sitting there because the nice thing about that is you don't have to go from flower to flower; you can just sit there and watch them produce more and more every year and give you capital, and you can buy more businesses.
That's a nice formula. It's a formula that will work, I think for us; it won't produce returns like the past.
Number 10.
Chukchu Killman: And I come here from the Klamath River, and I come here with a heavy heart. And I know this is a pretty light-hearted event, but I came here last year with a heavy heart too, and I fasted for ten days driving over here to speak with you.
You know, we really were disrespected last year, you know, because one of your subsidiaries, Pacificorp, is has dams on the Klamath River that are creating toxic algae blooms along with multiple other things I won't go into it too far, but I just come here today with a principal agreement between you and I that you will sit down at the table and help us figure this out. Help us make Pacificorp accountable.
And being that I'm an indigenous American and you're a guest in my home as a European American that you would do that in front of all your shareholders today in good faith that you care, you know, as a philanthropist, and you care about, you know, helping, you know, third world countries, you know, fight poverty, disease when you're create, helping create it right here in the United States.
Warren Buffett: So you may not—you may not that last year, we read the order from the under which we acquired Pacificorp and actually as you may know, I'm prohibited from actually making decisions in that in the area of Pacificorp. That was part of the decision; that was part of the public utility commission ruling.
Dave Sokol here, who can speak to that. I think the first dam was built in 1907, and we bought Pacificorp a couple of years ago, but David, if Dave could go to a microphone, I think he could address the issues that you've brought up.
I don't think we meant in any way to be disrespectful last year, those of you who were here last year. We may have a difference of opinion on this, and incidentally, there are strong differences of opinion, as I understand it, in your area about what should be done, and well, I think I should have Dave make the explanation on them.
Dave: Somebody want to put a spotlight on him?
Warren Buffett: Thanks, Warren.
As you stated, first it would be inappropriate for Mr. Buffett to respond in any detail on this issue because as part of the acquisition in 2006 of Pacificorp, he specifically agreed in writing not to interfere with any decisions of our regulated assets within Pacificorp.
So having said that, these four dams that we operate on the Klamath River were built over the last 100 years. There are a whole series of issues in the Federal Energy Regulatory Commission re-licensing process as to what should occur. These decisions through that regulatory process have been ongoing for eight years, and they won't culminate for probably another six.
Having said that, there are 28 various parties from federal, state, and local agencies, Native Americans, fishery folks, local landowners that are party to a discussion as to what should or should not happen with these assets. And I left out the irrigators of those 28 parties other than Pacificorp. There are at least four different directions in which people think this process should go.
From our perspective, we will be pleased to find a resolution when the 28 parties agree as to how that resolution should go forward, how it would be funded, etc.
Fundamentally, it's up to the Federal Energy Regulatory Commission, state and federal regulators, in addition to them, and then our specific regulators in each of the six states that Pacificorp operates in. So if public policy moves in the direction of dam removal, fish ladders, or maintaining the existing status quo, that would be the process in which we would go forward.
We are working constructively with each of the various parties. We've met numerous times with each of the four tribes, and it's a complicated situation and one that hopefully over time a cooperative resolution can be met.
[Music]
[Applause]
Area 11 please.
Good morning, I'm Dinesh Takariya from Walnut Creek, California. Well, we learned something from a comic movie, but could you please expand on how do you maintain your good mental and physical health?
Warren Buffett: Well, you start with a balanced diet. Some wrinkly, some see, some Coke.
Charlie Munger: Oh, basically, if Charlie and I can't have a decent mental attitude, who can? I mean, we get to do what we love doing every day; we do it with people that are not only cheerful about it and like us, but they do their jobs extraordinarily. They like their jobs too.
We're forced to do virtually nothing we don't want to have a trainer that comes three times a week; she may—I think she's probably here, and she may think I'm a little begrudging in that particular activity, but that's only 45 minutes three times a week. The rest of the time, I am doing almost—well, I'm doing whatever I love every day by day by day by day.
And I do it, you know, in air-conditioned offices, and with all kinds of help, it—I mean how could you be sour about life, you know, being blessed in so many ways? And then the amazing thing is that when Charlie's 84, I'm 77, and we've slowed down, I'm sure, in a lot of ways, but we pretend we haven't, and it doesn't seem to bother us. We get along fine—great partners, great managers, you know, great families.
There's just no reason to look at any minuses in life and to focus on—to focus on that would be crazy. So, you know, we really do count our blessings because they've been many, and they continue to come forth, and we'll enjoy it as long as we can.
There's not much more to it than that.
Charlie: Well, I wish we were poster boys for the benefits of running marathons and maintaining a very slim post bodily state and so forth, but as nearly as I can tell, neither of us pays much attention to any health habits or dietary rules, and seems to have worked pretty well so far.
I don't think we can recommend it to everybody, but I for one don't plan to change.
[Applause]
Really from the moment we get up to when we go to bed at night, we get to do all kinds of things. Associating with wonderful people is, you know, is about as good as it gets. And, you know, we live—we're biased, obviously—but we think we live in the best country in the world and have all kinds of good things.
I mean just imagine, we could have stayed in my grandfather's grocery store, and it would have been hell!
[Laughter]
By the way, this relates to the subject of corporate compensation, you're in a job for which you would pay to have, if that were the only way to get it, and you're supposed to be an exemplar for other people.
There's a lot to be said for not paying yourself very well; he points that out to me regularly.
Well, if you think about it, you know the idea that CEO compensation represents a market system and that you have to pay some guy a 10 million dollar retention bonus or something to stay around at a job that you know he's been fighting to keep and stacking the board and everything, so they keep him around, and all—I mean it's—I don't know of a CEO in America, I'm sure there are a few, but I don't know of any that wouldn't gladly do the job at half the price or a quarter of the price.
And I've seen some that have left jobs paying them figures, and nobody's offered them anything, you know, a year later, two years later.
I wonder where that wonderful market system is that's supposed to have all these bidders for their services. It's really sort of ridiculous.
[Applause]
Let's go on to 12.
Hi, I'm Richard Rantrop from Bonn, Germany. At the moment, I attend high school and would like your wisdom on how to approach the question of what to do with the rest of my life.
So, we prefer things a little more difficult than that. If you've got to say so, Mr. Buffett, Mr. Munger, if you were about to start all over again, what profession would you choose and why?
Warren Buffett: Well, I would choose what I do because, hey, I have fun at it; I'm reasonably good at it. You know, I meet a lot of interesting people through it—no heavy lifting; you know, it fits me. But that’s not advice for you. I mean, you have to find out what really—what's your passion in life, you know?
It's a terrible mistake to kind of sleepwalk through your life because, unless Shirley MacLaine's right, you know, it's the only one you're going to have.
So, I was like—I was very lucky in that I found my passion early. I mean that's not easy; you know, that takes some luck. It just so happened my dad was in a business at a very small office, and he had a bunch of books down there. And I would go down there on Saturday or after school; I would start reading those books.
And I think that before Playboy actually existed. And so, you know, that was just plain lucky. You know, if you had been a minister, I'm not so sure I would have gotten quite as enthused about visiting the office that's the way to—and I can't prescribe that for you.
But I can tell you that if you're going through the motions in life, you're doing something. Now if you—you know, obviously if you need the job, you haven't—you can't—you can't make a change, and your kids have to eat and all of that, you deal with realities like that.
But when you're in a position to make choices, you know, I always tell the kids that come to visit me, I tell them go to work for an organization you admire or an individual you admire.
That means many of them become self-employed, but the idea—you know, you can't get a bad result. I went to work for Ben Graham when I was 24. I only worked for him for less than two years, but I jumped out of bed every day in the morning. I was excited about what I was going to do. I was learning things; I was with a man I admired.
I never asked my salary when I took that job. I moved to New York City and found out what my salary was when I got the check.
So just be sure you—and be sure and get the right spouse; that's enormously important.
Charlie: you know, Charlie says the problem you know is that we talk about the fellow that spent 20 years looking for the perfect woman, and then he found her, and unfortunately she was looking for the perfect man.
So you may have a problem in that person, but it's enormously important who you marry. I mean, it's a huge, huge, huge decision.
And you know if you're lucky in a couple of things like that you're going to have a happy life, and then you're going to behave better as you go along. I mean it's a lot easier to behave well when things are going your way and you're enjoying your work, and you like the—you’re thinking about things every day that—they're the kind of things you'd like to think about.
And Charlie has a lot better advice than I have on that.
Go to it.
Charlie: Of course, you'll do better if you develop a passion for something in which you have a considerable aptitude.
I think if Warren had gone into the ballet, nobody would have ever heard of him.
Warren Buffett: Well, I think they'd have heard of me just in a different way, Charlie.
Well, we're going to go now to 13, which is in an adjacent ballroom. We have multiple overflow rooms, which is how we're handling the 31,000.
The grand ballroom is the only one we've got a microphone in, so let's go to number 13.
Nancy Ankowitz: I'm from New York City, and I teach at New York University. Mr. Buffett, I'd love to get your advice on something that's a little off the investing path, but that taps into your business experience and wisdom.
I'm writing a book to help people of a more introverted nature get the recognition they deserve. What advice would you give to the quieter half of the population to help them raise their visibility in their careers?
Warren Buffett: Well, that's a very good question, and I sort of faced that at one time. I was absolutely throughout high school and college terrified of public speaking. I would have—I avoided any classes signing up for them that would require it; I would get physically ill if it even thought about having to do it, let alone doing it.
And I took a Dale—well, I first of all, I signed up—I went down to Dale Carnegie, of course, when I was at Columbia, and signed up for it, gave him a check for a hundred dollars, went back to my room and can't—a stop payment on the check.
This is a real man of courage you're looking at up here. And then I came out to Omaha, and I saw a similar ad. I was at the Rome Hotel for you old-timers in Omaha on 16th street, and I went down there, and this time I took a hundred dollars in cash and gave it to Wally Keenan, who many of you may know. He died some years ago.
First time I'd met him, and I took that course. And when I finished that course, I went right out of the University of Omaha and volunteered to start teaching, knowing that I had to get up in front of people.
I think the ability to communicate both in writing and orally is of enormous importance, and it’s under-taught in most graduate business schools, and they wouldn't find an instructor to do it because it would sort of be beneath them to do something so supposedly simple.
But if you can communicate well, you have an enormous advantage. And to you who are talking to these groups of introverted people, and believe me, I was in certain ways quite introverted, it's important to get out there and do it while you're young.
If you waited until your 50s, it's probably too late. But if you do it while you're young, just force yourself into situations where you have to develop those abilities.
I think the best way to do that is to get in with a whole bunch of other people who are having equal problems because then you find you're not alone, and you don't feel quite as silly. And, of course, that's what they did at the Dale Carnegie course. I mean, we would get up in front of 30 other people who could hardly give their own name.
And after a while, we found out we could actually pronounce our own name in front of a group, and we would stand on tables and do all kinds of silly things just to get outside of ourselves.
And you may have thought by this point you might think I went too far in my particular case, but that's another problem. But you're doing something very worthwhile if you're helping introverted people get outside of themselves, and working with them in groups where they see other people have the same problem, and they don't feel quite as silly themselves, I think you're doing a lot for some human beings when you help them do that.
Charlie: Yeah, it's a real pleasure to have an educator come who is working to do something simple and important instead of something foolish and unimportant.
I hope he's not going to name names!
Okay, let's go back to number one.
Hi, Mr. Buffett! My name is Regina Chicasola, and I'm the Klamath River Keeper. I came here today with many of the other people from the Klamath that came here, and I thank you for having us, and I thank the shareholders for being a lot nicer to us this year than they were last year.
So my question is: I'm sure you're familiar with the severe pollution issues in the Klamath River, such as the toxic algae problem that is 4,000 times allowable recreation levels and that the fish are also now toxic due to the Klamath dams.
I was wondering if you were familiar with the finances behind the Klamath dams. Many economic studies have shown that removing the Klamath dams would be up to hundreds of millions of dollars cheaper than re-licensing them. So my question is what would you do if Pacificorp decided to keep these dams even though it would mean that your shareholders would lose money in the long run and that Pacificorp's ratepayers would also be losing money?
Warren Buffett: Well, I think the question about the ratepayers will be addressed by the public utility commissions. I mean, it is their job to represent the citizens of Oregon and weigh a number of different considerations. For example, clean energy.
Do you want to replace hydro energy with of what you're talking about with coal, which emits carbons into the atmosphere? There are enormous trade-offs anytime the government gets involved in eminent domain; we have that with wind farms, for example, in Iowa.
There are some people that are unhappy with us using the land for wind farms, but on the other hand, you get clean energy that way, and there are trade-offs involved in government policy.
You get into that with a question of eminent domain and all of that sort of thing, but I think I'm going to let Dave talk to the other questions more technical questions you get into.
But I would say overall you have people with widely different interests. Obviously, a big interest is the cost of electricity, and to some extent, every public utility commission that makes a decision on gas versus coal versus wind versus solar is making a decision based partly on the economics to their ratepayers, partly on their feelings about what is best for society.
And those commissions are appointed state by state to make those decisions. Now, in addition, in this case, we have the FERC, as it's called, the Federal Energy Regulatory Commission, that will also have to rule on it. They will listen to everybody; they'll listen to you; they'll listen to the 28 others that Dave mentioned.
In the end, we will do exactly what they say. I mean, as a public utility, if they tell us to put up—not put up coal, we will not put up coal; if they tell us to put up wind, assuming that there's a place where there is wind, we will put up wind.
We follow the dictates of the regulatory bodies that tell us what to do, and in the end, they give us a fair return on the assets employed, and we will get that return whatever the assets may be. If they tell us to put in coal assets, we'll get a return on that, so from our standpoint on the standpoint of profitability, it's neutral.
From the standpoint of society weighing all these different things, that's a decision society will make, but Dave, let's want to talk to the algae question.
Sure, Warren. First, it's important that the Karam tribe did do a study and found bioaccumulation of microcystin or blue-green algae in the perch and the freshwater mussels in the Klamath River.
What's important to understand about that, and by the way, we disseminated that report immediately to state and federal health agencies because they should know about it. Microcystin is not unique to the Klamath River.
There are 27 other lakes in the state of Oregon that have blue-green algae in 70 different countries, every province in Canada, and in 27 of the U.S. states, have lakes that have blue-green algae.
It is created from lakes that have a high abundance of nutrients and naturally forming algae, and at the head of the Klamath River is a lake known as Upper Klamath Lake, which is actually a Bureau of Reclamation reservoir.
It's a shallow, large reservoir that is known as being hyper-eutrophic, which means great abundance of algae and various nutrients. Those nutrients then flow down the river and do pass through or, in cases, get backed up by the four reservoirs down below the Bureau of Reclamation Link Dam.
The important issue is those things are in fact taken into account by the Federal Energy Regulatory Commission. They issued their Environmental Impact Statement last November which endorsed various fish passage methods on the dams but do not call for removal of the dams; but again, those are decisions that all the state and federal agencies and the various involved parties will either have to come to an agreement with or let them run their course through the FERC process.
Thank you!
Number two.
Hi, my name is Henry Pattner. I’m hailing from Singapore. Most recently, in one of your older letters, your older partnership letters in 1964, you introduced a fourth investment method called "generals relatively undervalued."
In your description, you say we have recently begun to implement a technique which gives promise of very substantially reducing the risk from an overall change in valuation standards. We buy something at 12 times earnings when comparables or poorer quality companies sell it 20 times earnings, but then a major value revaluation takes place so that the latter only sell it 10 times. Is this technique pair trading?
And if so, how did you think about and calculate the ratio of longs to shorts?
Warren Buffett: Yeah, I didn’t remember we started as early as 64, but certainly in the 60s we did some of what, in a very general way, would be called pair trading now, which is a technique that's used by a number of hedge funds and perhaps others that go along one security and short another.
And often they try to keep them in the same industry or something; they say that British Petroleum is relatively attractive compared to Chevron or vice versa, so they long one and short the other.
And actually that technique was employed first by Ben Graham in the mid-1920s when he had a hedge fund. Oftentimes I read articles all the time that credit A.W. Jones with originating the hedge fund concept in the late ’40s, but Ben Graham had one in the mid-1920s, and he actually engaged in pair trading.
He found out it worked modestly well because he was right about four times out of five, but the time he was wrong tended to kill him on the other four.
We shorted out the general market for about five years in partnership to a degree we borrowed stocks directly from some major universities.
I think we were probably quite early in that; we went to Columbia and Harvard and Chicago and different places and actually arranged for direct borrowing. They weren't—it wasn't as easy to facilitate in those days as it is now, and so we would take their portfolios and we would just say give us any of the stocks you want on where, and then we'll return them to you after a while. We’ll pay you a little fee.
And then we went long things that we thought were attractive—we did not go short things that we thought were unattractive. We just shorted out the market generally.
It was always kind of interesting to me when I would visit the treasure of Columbia or something like that, and I'd say, you know, we would like to borrow your stocks to short. And, you know, he thought his stocks were pretty good at that point, and he'd say, well, which ones do you want?
I said, just give me any of them! You know I'm happy to short your whole damn portfolio.
I needed the Dale Carnegie course to get me through that kind of thing.
You know, we didn't have any specific ratios in mind. We were always limited by the number of institutions that would give us the stocks to short, so it was not a big deal, but we probably made some extra money out in the '60s.
It's not something that would fit what we do these days at all, and generally speaking, I think if you've got some very good ideas on businesses that are undervalued, it's really unnecessary to do any shorting out of the market.
For those of you who are in the field, I mean there's a kind of a popular proposal money managers always have some popular proposal that’s being sold to the to the potential investors, and now there's something called 130/30 where you're long 130 percent, long-short 30 percent.
That stuff's all basically a bunch of stuff just to try and sell you the idea of the day. It doesn't really have any great statistical merit. But the fish bite, as Charlie says.
Charlie can elaborate on that.
Yeah, we made our money by being long some wonderful businesses; we didn't make it by a long-short strategy.
Number three.
Dear Mr. Buffett, dear Mr. Munger, my name is Oliver Krautscheid from Frankfurt in Germany. The subprime crisis has led to inconsistent pricing in capital markets. Credits are trading at large discounts, and at the same time, the equities do not reflect this. My question is when will this be over and how do you take advantage of market dislocations?
Warren Buffett: Well, when there are market dislocations, there are always ways to take advantage of it, but we'll leave for you the joy of searching for those.
But there have been some really important dislocations, and I brought along just for your amusement a few figures on something that we've done recently, but it doesn't have any big significance for Berkshire.
I mean, Berkshire will make some extra money out of this; it doesn't take any time to think about. But it does illustrate just how dramatic the changes were, and the ones I brought along relate to the tax-exempt money market funds.
There were 330 billion of these—that's a lot of money. 330 billion. And they relied on repricing of really almost all cases first-grade municipal bonds every seven days. They had these auctions, and it was all set up very elaborately so that people could have their money more or less, in their minds, instantly available in something that was tax exempt, and they were marketed extensively.
And I brought along, for example, here's one that related to the—they were backed by various municipal issues. This happens to be one by the L.A. County Museum of Art. Just pull that out, and on January 24th, it was marketed at three-point-five percent. January 31st, four-point-zero; February 7th, three-point-five; February 14th, eight percent.
Now how can a tax-exempt bond of short-term nature be selling at a three-and-a-half percent rate one week, and one week later, on Valentine's Day, be at eight percent, and one week after that be at ten percent?
It's now back to four-point-two. Now those are huge dislocations in markets—that's crazy. It'd be one thing to be some little obscure item, but this happened with billions and billions and billions of dollars of securities.
It even happened—we got these bid sheets every day, and this happens to be a big sheet I think from Citigroup, and they were repricing these every seven days.
And what you would find on these, you'll see there's lots of issues involved. The same issue would appear on several different pages because it would represent some different auction, although handled by the same broker at the same time.
On one page, you would find an issue we would bid at 11.3 percent, and on one page, we bought them at 11.3 percent; on another page the same issue, we bid at 11.3 percent, and somebody else bid six percent.
So you had the same issue with the same broker at the same time being sold at 11.3 percent and six percent. Those are markets of extreme dislocation, and you find those occasionally.
You found that after the Long-Term Capital Management crisis in 1998, and you found the equivalent of it in the stock market in 1974 and so on, and those are great times to make unusual amounts of money.
And if you—there are certain things we can't figure out; I see in the Wall Street Journal advertisements these days of auctions taking place in some esoteric mortgage securities. If you had enough time, you could probably figure out some of those that were very mispriced.
We don't fool around with that. We just don't have the time.
We were able to do four—we have about four billion in this right now. When we get all through, we'll have made some extra money for a couple of months. It won't be significant in relation to Berkshire's size, but it's something that's very easy to do.
You may be able to find, by working very, very hard on some smaller issues, you might be able to find in this mess in mortgages—and it's gone beyond subprime; it's gone into all days, and it’s gone into option arms and that sort of thing.
You may—there very well could be some great opportunities out there that Charlie and I will no longer spot because we just can't be looking at that many things.
Charlie: Yeah, what is interesting is that how brief these opportunities to take advantage of dislocations frequently are. Some idiot hedge fund bought unlimited municipal bonds at, you know, incredible margins—I think they bought 20 times more municipal bonds than they could afford with their own money, borrowing all the rest—and when those things were dumped on margin calls, municipal bonds suddenly got mispriced in America.
But this location was very brief, so you—but very extreme. You've been very extreme.
And so if you can't think fast and act resolutely, it does you no good.
You're like a man standing by a stream trying to spear a fish, and the fish just comes by once a week or once a month or once every ten years, and you've got to be there to throw that spear fast before the fish swims on.
It's a pretty demanding business if you do it right, but there have been times—I mean that in the junk bond market, there was a three- or four-month period in 2002 where some really incredible things happened, and they happened on a large scale.
So, yeah, it happens about twice a century—yeah, which means he and I have only had four or five times when we could do it.
Let's go to number four.
Srinivas Kanediwal: I am from Fort Lauderdale, Florida. I read all your letters and annual reports multiple times, and every time I get a different insight, so thanks for doing it!
My question is about converting the successful small businesses into large enterprises. I have a good and successful small business for the last few years; I'm unable to grow it to the next level, and it seems like there are some components I'm missing, so I wanted to take your advice on it.
Warren Buffett: Well, Berkshire was a small business at one time. I mean, it just takes time. I mean, it's the nature of compound interest, and you can't build it in one day or one week.
So Charlie and I have, you know, we've never tried to do some master stroke; convert Berkshire into something four times as large. People have done that sometimes in business, but we've sort of felt that if we kept doing what we understood and did it consistently and had fun while we were doing it, that it would be something quite large at some point.
But there's nothing magic. It would be nice to attract a whole bunch of money into some great idea and have, you know, multiply it many-fold in a few weeks or something of the sort, but that has really not been our approach.
We've done in a general way—we've done the same thing now; we do little variations of it, but we keep doing the same thing for years, and we'll keep doing it.
You know, we will have more businesses a few years from now than we have now, and we'll have all of the ones we have presently; most of them will do better, some won't, and we will have added something, and that's an automatic formula for getting ahead.
But it's not an automatic formula for galloping ahead. And we don't really feel—we're not unhappy because we're not galloping. We're not happy if we're not moving at all.
But, you know, we've got 76 or so, in most cases, pretty darn wonderful businesses, and like I say, we'll have more as we go along.
So it's a very simple formula. Gypsy Rose Lee said once she said, "I have everything I had five years ago; it's all that it's two inches lower."
Well, we want to have five years from now a whole bunch of businesses we had before that are two inches higher plus some more businesses and that's the formula.
Charlie: Yeah, you've got to remember that it's the nature of things that most small businesses will never be big businesses. It's also in the nature of things that most small big businesses eventually fall into mediocrity or worse, so it's a tough game out there.
In addition, the players of the game all have to die, and that is those are just the rules of the game, and you have to get used to it.
We've only created from scratch one small business that became a huge business that I can think of, and that's the reinsurance department.
And there, Warren and Ajit and others have created a great and valuable business out of air; but can you think of anything else large that we've done in all these decades?
Warren Buffett: No, no we’ve only done it once.
Charlie: So we're a one-trick pony?
Warren Buffett: Yeah, we were lucky on that one too!
And instantly without Ajit, we wouldn't have done it at all.
So, right.
Wait, isn't that we did it; Ajit did it; we just sat there cheering!
Somebody asked us once what was the best investment we ever made, and I answered the fee we paid to the executive recruiter to find Ajit.
[Applause]
And that connection, I'd like to give you a little report.
We went into the municipal bond insurance business a few months ago, and actually we did it through Ajit, and he got our companies up licensed and running, and in the first quarter of 2008, I don't have the figures for all the other people, but our premium volume came to over 400 million dollars.
And I think now that that was overwhelmingly written in the secondary market, but I think our premium volume was not only larger than any other municipal bond insurer in the United States, I wouldn't be surprised if it's as large as all of the rest of them combined.
And this was from a standing start that Ajit accomplished this, and I have here a list of what, 300—and this is at the end of the quarter, 278, I believe it is, transactions now.
That's all done out of an office with 29 or 30 people who are doing a lot of other things too.
I mean it's a remarkable, remarkable place; one of the interesting things about this is that almost all of this business, although not all of the premium volume, all of almost all of this business came from people who came to us with municipal bonds, asking us to insure them.
In every case, with the exception of two or three, they already had insurance from the other bond insurance, most of whom were rated AAA.
So they were paying us a fee which was higher to write insurance, which would only be paid not only if the municipality didn’t pay, but the original bond insured didn’t pay.
So they—we were writing business at an average rate of two and a fraction percent for the quarter, and the original insurer had charged perhaps an average of one percent, and they had to pay, and in fact, the only way we're going to pay is if they went broke.
So it tells you something about the meaning of AAA in the reinsurance, in the bond insurance field.
In the first quarter of 2008, Ajit has done a remarkable job in this arena, and Berkshire wrote a couple of primary policies for the Detroit Sewer District and the Detroit Water District that each about 370 or 380 million, and people have found our insured bonds trading in the secondary market at a more attractive yield to the issuer.
In other words, at lower yields than from any other bond insurer, so this whole company has been built just in a matter of a couple of months by Ajit and his small office in Connecticut; it's pretty remarkable and I congratulate him for it.
[Music]
Let’s go to area five please.
Hello my name is Stuart K. and I'm from New York City. I wanted to know if you could not talk with management, could not read an annual report, and did not know the stock price of a company, but were only allowed to look at the financial statements of a company, what metric would you look at to help you determine whether you should buy a company?
Warren Buffett: Well, what we're doing in investment and what everybody is doing in investment is they're laying out money now to get more money back later on.
Now let's leave the market aspect of the asset out. I mean when you buy a farm, you really aren't thinking about what the market on it's going to be tomorrow or next week or next month; you're thinking about how many bushels of beans per acre can you get or corn per acre, and what the price is likely to be?
You're looking to the asset itself, and in this case you lay out...the first question you'd have to make is do I understand enough about this business so that the financial statements will tell me the information that's useful to me in making a judgment about what the future financial statements are going to look like?
And in many cases, the answer would be no. Probably in a great majority of the cases it would be no.
But I've actually bought stocks the way you're describing many times, and they were in businesses that I thought I understood where if I knew enough about the financial past, it would tell me enough about the financial future that I could buy.
Now, I couldn't say the stock was worth X or 105% of X or 95% of X, but if I could buy it at 40% of X, I would feel that I had this margin of safety that Graham would talk about, and I could make a decision. Most times I wouldn't be able to make it; I wouldn't know if you hand me a bunch of financial statements; you don’t tell me what the business is; there’s no way I can make a judgment as to what's going to happen.
It could have been a hula hoop business; it could have been a pet rock business; you know, on the other hand, it could have been Microsoft early on.
So unless I know the nature of the business, the financial statements aren't going to tell me much. Now, if I know the nature of the businesses business and I see the financial statements, you know, if I see the financial statements on Wrigley, I know something about the business.
Now, I have to know something about the product before I can make that judgment. But I’ve bought lots and lots of securities; sharing the majority of the securities Charlie and I bought, we have never met the management and never talked to them, but we have primarily worked off financial statements, our general understanding of business, and some specific understanding of the industry and the business we're buying.
Charlie: Yeah, I think there's one metric that catches a lot of people; we tend to prefer the business which drowns in cash. It just makes so much money.
The main one of the main principles of owning it is you have all this cash coming in. There are other businesses, like the construction equipment business of my old friend John Anderson. He used to say about his business you work hard all year, and at the end of the year there's your profit sitting in the yard; there was never any cash, just more used construction equipment.
We tend to hate businesses like that. It's a lot easier to understand a business mailing you a check every month, but that's what an apartment house is.
If you want to, you can probably value an apartment property pretty well if you know anything about the city in which it's in, and if you have the financial statements, you can make a reasonable guess as to what the future earnings are likely to be.
But that's because it is a business that gives you cash. Now, you can—there could be surprises in that arena as well, but I’ve bought a lot of things off financial statements. There are a lot of things that I wouldn't buy, you know, if I knew that—actually, there's a lot of business I wouldn't buy if I thought the management was the most wonderful in the world because they were in the wrong business.
It really doesn't make much difference.
Number six.
Good morning! My name is Mike Pomentier, fisheries supervisor for Carter Fisheries. Mr. Buffett, you grew up and still live in the banks of the Missouri River. I too live on a river called the Klamath. My family has lived there since a time immemorial. In 2002, 68,000 fish died at the mouth of the Klamath River due to disease and bad water quality. These fish are also my relations.
If another company polluted your river and killed all the fish and made the river unswimmable and unfishable, how would you approach this problem? Thank you.
Warren Buffett: Well, I think society would as a whole should approach that problem by looking at at the net benefits from whatever is taking place in that situation.
And what the cost of electricity would be and the what the farmer's situation would be if you went to a different form of water distribution in an area—there are a lot of competing ideas and desires in a large society, and it's up to government basically to sort out those when we're shorting it out.
Right now, we're building coal plants in the country; we're building gas plants; we're doing various things. People are coming to different conclusions about what kind of trade-offs they want to make.
And generally, those are being made at the state level, although you could have a national energy policy that would override individual states' decisions. We're responsible—we're responsive to national policy on that; we're responsive to local policy; the Oregon Public Utility Commission, I'm sure, is aware of exactly what you've discussed, and they have to consider that.
But they have to consider a lot of other things in determining what is the best way to generate the electricity required for the citizens of Oregon. And, Dave, would you want