1994 Berkshire Hathaway Annual Meeting (Full Version)

Put this over here, right? Am I live yet? Yeah. Morning. We were a little worried today because we, uh, we weren't sure from the reservations whether we could handle everybody. But it looks to me like there may be a couple seats left up there. But I think next year, we're going to have to find a different spot because it looks to me like we're up about 600 this year from last year. And to be on the safe side, we will seek out a larger spot.

Now, certain implications to that, because as some of the more experienced know, a few years ago we were holding this meeting at the Joslin Museum, which is a temple of culture, and we've now, of course, moved to an old vaudeville theater. The only place in town that can hold us next year, I think, is the Charmond Coliseum, where they have Keno and racetracks. We are sliding down the cultural chain, just as Charlie predicted years ago; he saw this coming.

Charlie, I have some rather distressing news to report. There are always a few people that vote against everyone on the slate for directors. There's maybe a dozen or so people that do that, and then there are others that single-shot it, and they pick out people to vote against. This will come as news to Charlie; I haven't told him yet, but he is the only one among our candidates for directors that received no negative votes this year. Holy, holy! No need to applaud; I'll tell you.

When you lose out the title of Miss Congeniality to Charlie, you know you're in trouble with it. Now, I'd like to tell you a little bit about how we'll run this. We will have the business meeting in a hurry with the cooperation of all of you, and then we will introduce our managers who are here. Then we will have a Q&A period. We will run that until 12 o'clock at which point we'll break. Then at 12:15, if the hardcore want to stick around, we will have another hour or so, until about 1, of questions. So you're free to leave, of course, any time.

I've pointed out in the past that it's much better form if you leave while Charlie is talking rather than when I'm talking. But feel free any time. If you're panicked and you're worried about being conspicuous by leaving, you will be able to leave it at noon. We will have buses out front that will take you to the hotels or the airport or to anywhere in town in which we have a commercial interest, and we encourage you to stay around on that basis.

Let's get the business of the meeting out of the way, then we get onto more interesting things. I will first introduce the Berkshire Hathaway directors that are present in addition to myself. First of all, there's Charlie, who is the Vice Chairman of Berkshire. If the rest of you will stand, we have Susan T. Buffett, Howard Buffett, Malcolm Chase III, and Walter Scott Jr. And that's it.

Also with us today are partners in the firm of Deloitte and Touche, our auditors, Mr. Ron Burgess and Mr. Craig Christensen. They are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire. Mr. Forrest Carter, Secretary of Berkshire, will make a written record of the proceedings. Mr. Robert M. Fitzsimmons has been appointed Inspector of Election at this meeting; he will certify to the count of votes cast in the election for directors. The name proxy holders for this meeting are Walter Scott Jr. and Mark D. Hamburg. Proxy cards have been returned through last Friday representing a million thirty-five thousand six hundred and eighty Berkshire shares to be voted by the proxy holders as indicated on the cards. That number of shares represents a quorum, and we will therefore directly proceed with the meeting.

We will conduct the business of the meeting and adjourn to the formal meeting, and then adjourn the formal meeting. After that, we will entertain questions that you might have in the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott Jr., who will place a motion before the meeting. I move that the reading of the minutes of the last meeting of the shareholders be dispensed with. Do I hear a second?

Motion has been moved and seconded. Are there any comments or questions? Hearing none, we will vote on the motion by voice vote. All those in favor, say aye. Opposed, say no. The motion's carried, and it's a vote.

Does the secretary have reported the number of Berkshire shares outstanding entitled to vote represented at the meeting? Yes, I do. As indicated in the proxy statement that accompanied the notice of this meeting sent by first-class mail to all shareholders of record on March 8, 1994, being the record date for this meeting, there were 1 million 177 thousand 750 shares of Berkshire common stock outstanding, with each share entitled to one vote on motions considered at the meeting. Of that number, 1 million 35 thousand 680 shares are represented at this meeting by proxies returned through last Friday. Thank you.

We will proceed to elect directors. If a shareholder is present who wishes to withdraw a proxy previously sent in and vote in person, he or she may do so. Also, if any shareholder present has not turned in a proxy and desires a ballot in order to vote in person, you may do so. If you wish to do this, please identify yourself to meeting officials in the aisles, who will furnish a ballot to you. Those persons desiring ballots, please identify themselves so that we may distribute them. Just raise your hand.

I now recognize Mr. Walter Scott Jr. to place a motion before the meeting with respect to the election of directors. I move that Warren Buffett, Susan Buffett, Howard Buffett, Malcolm Chase, Charles Munger, and Walter Scott be elected as directors. A second? It's been moved and seconded that Warren Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase III, Charles T. Munger, and Walter Scott Jr. be elected as directors. Are there any other nominations? Is there any discussion? Motion and nominations already be acted upon. Are there any shareholders voting in person? They should now mark their ballots and allow the ballots to be delivered to the inspector of elections. Seeing none, with the proxy holders, please all submit to the inspector of elections the ballot voting the proxies in accordance with the instructions they have received.

Mr. Fitzsimmons, when you're ready, you may give your report. My report is ready. The ballots of the proxy holders received through last Friday cast not less than a million thirty-five thousand four hundred and seven votes for each nominee. That number far exceeds the majority of the number of all shares outstanding, and a more precise count cannot change the results of the election. However, the certification required by Delaware law regarding the precise count of the votes, including the votes cast in person at this meeting, will be given to the secretary to be placed with the minutes of this meeting.

Thank you, Mr. Fitzsimmons. Warren Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase III, Charles T. Munger, and Walter Scott Jr. have been elected as directors. Does anyone have any further business to come before this meeting before we adjourn? If not, I recognize Mr. Waller Scott Jr. to place a motion before the meeting. I move the meeting be adjourned. If not, I recognize Mr. Walter Scott Jr. to place a motion before the meeting. I move the meeting be adjourned. Second?

Motion adjourned has been made in the second. We will vote by voice. Is there any discussion? If not, all in favor say aye. Opposed say no. The meeting's adjourned. It's democracy in middle America. Now, I'd like to introduce some of the people that make this place work to you. If you would hold your applause until the end because there are quite a number of our managers here. I'm not sure which ones for sure are here; some of them may be out attending the store as well.

But first of all, from the Nebraska Furniture Mart, are we Louis, Ron, and Irv Blumkin? I'm not sure who's here, but would you stand, please? Any of the Blumkins that are present? Okay, it looks like earbuds; I can't quite see it. Yeah. From Borsheims, Susan, Jock, here. Susan, there she is! Susan had a record day yesterday. She just [Applause]. Susan became CEO just a few months ago, and she's turning in records already. Keep it up!

And from Central States Indemnity, we have the Kaisers. I'm not sure which ones are here, but there's Bill Senior, Bill Jr., John, and Dick Kaiser stayed. Think I can see him. John Don Worster from National Indemnity, Rod Eldridge from the Home State Companies, Brad Kinsler from Cypress, our workers' comp company, Ajeet Jane, the big ticket writer in the east, and Mike Goldberg, who runs our real estate finance group, generally oversees the insurance group.

Mike Gary Heldman from Fetchheimers, Chuck Huggins from Seas, the Candy Man, Stan Lipsy from the Buffalo News. Chuck's been with us, incidentally, 20 odd years. Stan's been working with me for well over 25 years. Frank Rooney and Jim Isler from H.H. Brown. Dave Hillstrom from Precision Steel. Ralshay from Scott Fetzer. Peter Lunder, who was with our newest acquisition, Dexter Shoe, and Harold Alphon, his partner, couldn't be with us because his wife is ill.

Finally, the manager that's been with Charlie and me the longest, Harry Bottles from KNW. Is Harry here? There’s Harry! Yeah, Harry saved our bacon back in 1962 or so when in some mad moment, I went into the windmill business, and Harry got me out of it. That's our group of managers, and I appreciate it if you give them a hand.

I have one piece of good news about next year for you. In addition to moving to larger quarters, they're going to add nonstop air service from New York, Washington, and Los Angeles here in the next few months. Midwest Express, so I hope they do very well with it, and I hope that makes it easier for you to get into town.

And now in this for the next two hours and 15 minutes or so, we'll have a session where we will take questions. We have seven zones, three on the main floor. We'll go start over there with zone one and work across on the main floor. If you'll raise your hand, the person who's handling the mic will pass it to you, and we'll try not to repeat any individual in any one zone until everyone in that zone has had a chance to ask one question. So after you've been on once, let other people get a shot. When we move up to the loges, we have one person there, and in the case, we have three in the balcony, which is essentially full now, and we would appreciate it if you would leave your seat and go to the person with the mic. It'll be a little easier in both the loge and the balcony to handle it that way.

If you'll go a little ahead of time, that way, if there's a line of two or three, you can line up for questions in both the loge and the balcony. So whatever you care to ask, if you want an optimistic answer, you'll of course direct your question to Charlie; if you like a little more realism, you'll come to me. And let's start over in zone one.

Sometimes we can't see too well from up here, but, in fact, I can't even see the monitor right now, but I said, do we have one over there? If you'll identify yourself by name and your hometown, we'd appreciate it. My name is Michael Mullen from Omaha. Would you comment on the use of derivatives? I noticed Dell Computer stock was off two and a half points Friday with the loss and derivatives.

The question is about derivatives. We have in this room the author of the best thing you can read on that. There was an article in Fortune about a month ago or so by Carol Loomis on derivatives, and far and away is the best article that's been written. We also have some people in the room that do business in derivatives from Solomon. It's a very broad subject. As we said last year, I think someone asked what might be the big financial story of the 90s, and we said we obviously don't know, but if we had to pick a topic, that it could well be derivatives because they lend themselves to the use of unusual amounts of leverage, and they're sometimes not completely understood by the people involved.

Anytime you combine ignorance and borrowed money, you can get some pretty interesting consequences, particularly when the numbers get big, and you've seen that, of course, recently with a recent Procter & Gamble announcement. Now, I don't know the details of the P&G derivatives, but I understand at least that what started out as interest rate swaps ended up with P&G writing puts on large quantities of U.S. and I think one other country's bonds.

Any time you go from selling soap to writing puts on bonds, you've made a big jump. The ability to borrow enormous amounts of money, combined with the chance to get either very rich or very poor very quickly, has historically been a recipe for trouble at some point. Derivatives are not going to go away; they serve useful purposes and all that, but I'm just saying that it has that potential, and we've seen a little bit of that.

I can't think of anything that we've done that you think of anything we do that approaches derivatives? Surely directly? No, no, I may have to cut him off if he talks too long. Is there anything you would like to add to your already extensive remarks to him? No? Okay, in that case, we'll go to zone two. My name is Hugh Stevenson; I'm a shareholder from Atlanta. My question involves the company's investment in the stock of Cap Cities. It's been my understanding in the past that that was regarded as one of the four "quote unquote" permanent holdings of the company. I was a little bit confused by the disposition of one million shares. Could you clarify that? Was my previous understanding incorrect or has there been some change or is there a third possibility?

Well, we have classified the Washington Post Company and Cap Cities and GEICO and Coke in the category of permanent holdings. But in the case of three of those four, the Washington Post Company I don't know, maybe seven or eight years ago, GEICO some years back, and now Cap Cities, we have participated in tenders where the company has repurchased shares.

Now the first two, the Post and GEICO, we participated proportionally. That was not feasible and, incidentally, not as attractive tax-wise anymore. The 1968 tax act changed the desirability of proportional redemptions of shares from our standpoint. That point has been missed by a lot of journalists commenting on it. But it just so happens that the commentary that has been written has been obsolete in some cases by six or seven years.

But we did participate in the Cap Cities tender offer just as we did in the Post and GEICO. We still are by far the largest shareholder of Cap Cities. We think it's a superbly run operation in a business that looks a little tougher than it did 15 years ago but looks a little bit better than it did 15 months ago. Charlie, do you have anything on? No, he's thinking it over now, though.

Before zone three, good morning, my name is Howard Baskin. I'm from Kansas City, and I've got a theoretical value question for you. If you were to buy a business and you bought it at its intrinsic value, what's the minimum after-tax free cash flow yield you'd need to get? Well, your question is if we were buying all of a business and we were buying it at what we thought was intrinsic value, what was the minimum correct present earning power or what the present, the minimum discount rate of future streams?

No, what's the minimum current after-tax free cash flow yield we could conceivably buy a business? I don't think we would be likely to, but we could conceivably buy a business that had no current after-tax cash flow, but we would have to think it had a tremendous future. But that would not necessarily have to be the case. You can argue, for example, in buying stock at a time when it was losing significant money. We didn't expect it to continue to lose significant money, but if we think the present value of the future earning power is attractive enough compared to the purchase price, we would not be, we would not be overwhelmed by what the first year's figure would be.

Charlie, do you want to add to that? Yeah, we don't care what we report in the first year or two after buying anything. Well, I would say that in a world of seven percent long-term bond rates, we would certainly want to think we were discounting future after-tax streams of cash at at least a 10 percent rate, but that will depend on the certainty we feel about the business. The more certain we feel about a business, the closer we are willing to play it. We have to feel pretty certain about any business before we're even interested at all, but there are still degrees of certainty.

If we thought we were getting a stream of cash over the next 30 years that we felt extremely certain about, we would use a discount rate that would be somewhat less than if it was one where we thought we might get some surprises in five or ten years. The possibility existed. Nothing to add? Okay, zone four. More spins from Omaha, Nebraska. You've made comments on several locations about the intrinsic business value of the insurance operations, and in this year's report, you state that insurance business possesses an intrinsic value that exceeds book value by a large amount, larger in fact than is the case with any of Berkshire's other businesses. I was wondering if you would explain in greater detail why you believe that to be true.

Well, it's very hard to quantify, as we've said many times in the report, but I think that it's clear that even taking fairly pessimistic assumptions, that the excess of intrinsic value over carrying value is higher by some margin for the insurance business. I think that the table in the report that shows you what our cost of float has been over the years and also what the trend afloat has been over the years would, unless you thought that table had no validity for the future, I think that a table would tend to point you in the direction of saying the insurance business does have a very significant excess of intrinsic value over carrying value.

Very hard number to put something on, but you don't want to extrapolate that table out. I think that table shows that we started with maybe $20 million afloat and that we're up to something close to $3 billion afloat, and that that float has come to us at a cost that's extremely attractive on average over the years. Just to pick an example, last year when we actually had an underwriting profit, the value of that float was something over $200 million, and that figure was a lot bigger than it was 10 years ago or 20 years ago.

So that is a stream. Last year was unusually favorable, but that is a very significant stream of earnings, and it's one we feel we have reasonably good prospects in. So we feel very good about the insurance business—not the insurance business. Okay, zone five. My name is Jimmy Ridenmaker from Omaha. Is there any point at which your stock would rise to the point where you might split the stock? Surprise, surprise! I think I'll let Charlie answer that this year. He's so popular with the shareholders, so I can afford to let him take the tough questions.

I think the answer is no. [Applause] I think the idea of carving ownerships in an enterprise into little tiny twenty-dollar pieces is almost insane. It's quite inefficient to serve as a twenty-dollar account, and I don't see why there shouldn't be a minimum as a condition of joining some enterprise. Certainly, we'd all feel that way in a private enterprise.

Yeah, we would not carve it up into 20 units. It's interesting because every company finds a way to fill up its common shareholder list. You can start with the A's and work through the Z's, and you know every company in the New York Stock Exchange, one way or another, has attracted some constituency of shareholders. Frankly, we can't imagine a better constituency than is in this room.

We don't think we can improve on this group, and we've followed certain policies that we think attracted certain types of shareholders and actually pushed away others. And that is part of our eugenics program here at Berkshire. Just look around this room, and as you mingle with one another, this is a very outstanding group of people, and why would anybody want a different kind of a group?

Yeah, if we follow some policies that cause a whole bunch of people to buy Berkshire for the wrong reason, the only way they can buy it is to replace somebody in this room or in this larger metaphorical room of shareholders that we have. So someone in one of these seats gets up, and somebody else walks in. The question is do we have a better audience? I don't think so, so I think Charlie's said it very well.

Zone six, I'm Mr. Buffett. My name is Rob Naw. I'm from Omaha, Nebraska. My question is, given the recent announcement of Midwest Express and their nonstop jet service between the East and West Coast, will this cut down on your use of the indefensible, and will you use more commercial air travel? This is a question planted by Charlie, I think you should know. I take it to the drugstore at the moment, and I—no, I, it's just a question. When I start sleeping in it at the hanger, now nothing will cut back on the individual.

It's being painted right now, but I told them to make it last a long time. Charlie was pointing out the merits of other kinds of transportation last night at the meeting of our managers. He might want to repeat those here. Well, I just pointed out that the back of the plane arrived at the same time as the front of the plane invariably. He's an even more authority on buses, incidentally, if anybody. Zone seven, Mr. Buffett. My name is Alan Maxwell from Omaha. I've got two questions.

What is your next goal in life now that you're the richest man in the country? That's easiest, to be the oldest man in the country. Secondly, you talk about good management with corporations, and that you try and buy companies with good management. I feel that I have about as much chance of meeting good managers other than yourself as I do bringing Richard Nixon back to life. How do I, as an average investor, find out what good management is?

Well, I think you judge management by two yardsticks. One is how well they run the business, and I think you can learn a lot about that by reading about both what they've accomplished and what their competitors have accomplished and seeing how they have allocated capital over time. You have to have some understanding of the hand they were dealt when they themselves got a chance to play the hand, but if you understand something about the business they're in—and you can't understand it in every business—but you can find industries or companies that you can't understand.

Then you simply want to look at how well they have been doing in playing the hand essentially that's been dealt with them. Then, the second thing you want to figure out is how well they treat their owners. I think you can get a handle on that a lot of times. A lot of times you can't. I mean, there are many companies that obviously fall somewhere in that 20th to 80th percentile, and it's a little hard to pick out where they do fall.

But I think you can usually figure out it's not hard to figure out that say Bill Gates or Tom Murphy or Don Keough or people like that are really outstanding managers and hard to figure out who they're working for. And I could give you some cases on the other end of the spectrum too. It's interesting how often the ones that in my view are poor managers also turn out to be the ones that really don't think that much about the shareholders too. The two often go hand in hand.

But I think reading reports, reading competitors' reports, I think you'll get a fix on that. In some cases, you don't have to make 100 correct judgments in this business. There are 50 correct judgments. You only have to make a few, and that's all we try to do. Generally speaking, the conclusions I've come to about managers have really come about the same way you could make yours.

I mean they've come about by reading reports rather than any intimate personal knowledge or knowing them personally at all. So, you know, read the proxy statements, see what they think of, see how they treat themselves versus how they treat the shareholders, and look at what they have accomplished considering what the hand was that they were dealt when they took over compared to what is going on in the industry.

I think you can figure it out sometimes you don't have to figure it out. Very often Charlie, nothing to add? Okay, we're back to zone one. Hi there, my name is Liam from Palo Alto, California. In meeting Aji Jain, I've been very impressed over the years. I think I even met his parents once; they came from India. Please comment on your deepest impressions of his personality and managerial skills and also how you go about exactly keeping somebody with such fine skills within the fold.

You might go to Walt Disney someday and pull down 200 million. Well, if he gets offered 200 million, we may not compete too vigorously at that level. [Laughter] We basically try to run a business so that Charlie and I have two jobs. We have to identify and keep good managers interested after we've figured out who they are. That often is a little different here because I would say a majority of our managers are financially independent so that they don't go to work because they are worried about putting kids through school or putting food on the table.

So they have to have some reason to go to work aside from that. They have to be treated fairly in terms of compensation, but they also have to figure it's better than playing golf every day or whatever it may be. So that’s one of the jobs we have. We basically attack that the same way we look at what they do, the same way we look at what we do.

We've got a wonderful group of shareholders. Before I ran this, I had a partnership. I had a great group of partners, and essentially, I like to be left alone to do what I did. I like to be judged on the scorecard at the end of the year rather than on every stroke and not second guessed in a way that was inappropriate.

I like to have people who understood the environment in which I was operating, and so the important thing we do with managers generally is to find the 400 hitters and then not tell them how to swing, as I put in the report. The second thing we do is allocate capital, and aside from that, we play bridge. That's pretty much what happens at Berkshire.

So with any of the managers you might name here, we try to make it interesting and fun for them to run their business. We try to have a compensation arrangement that's appropriate for the kind of business they're in, and we have no company-wide compensation plan. We wouldn't dream of having some compensation expert consultant come in and screw it up.

We try to have some businesses that require a lot of capital, like the ones we're in, some require no capital, some are easy businesses where good profit margins are a cinch to come by, but we're really paying for the extra beyond that. Some are very tough businesses to make money in, and it would be crazy to have some huge framework that we tried to place everybody in that one size would fit all.

People generally are compensated in some manner that relates to how their business does as opposed to there's no reason to pay anybody based on how Berkshire does because no one has responsibility for Berkshire except for Charlie and me, and we try to make them responsible for their own units compensated based on how those units do. We try to understand the businesses they're in so we know what the difference between a good performance and a bad performance.

That's about how we work with people. We've had terrific luck over the years in retaining the managers that we wanted to retain and I think largely because particularly they sell us a business, that to a great extent, the next day they're running it just as they were the day before, and they're having as much fun running their business as I have running Berkshire. Charlie?

Well, I've got nothing to add, but I think it's that concept of treating the other fellow the way you'd like to be treated if the roles were reversed. It's so simple when you stop to think about it, but it's a rare evening when Aji and Warren are talking once on the phone. It's more than a business relationship; at least, it seems that way to me.

Yeah, well it is, and we like our relationships to be more than a business relationship. Charlie and I are very far—we basically, it's a luxury, but it's a luxury that we should try to nurture. We get to work with people we like, and it makes life a lot simpler. It probably helps on that goal of being the oldest living American too.

Yeah, and we tend to like people we admire. Yeah, who do we like that we don't admire, Charlie? Start naming names. Do these people have names? Zone two. My name is Peter Bevlin from Sweden. How do you perceive Guinness' long-term economics growth-wise?

The—this is that? Yeah. Would you repeat that fence? What was it? What firm? Growth-wise, Guinness. Oh, Guinness. I'm not as much of an expert on Guinness products as Charlie is. We proved that. [Laughter] You didn't hear me say that; he said I proved that.

I made the decision to buy Guinness, and Guinness is down somewhat; actually, the price in pounds is about the same, but the pound is at about a dollar forty-six or seven against an average of a dollar eighty-something. So we've had a significant exchange loss on that. The Guinness is, despite the name, you know, the main product, of course, is Scotch, and that's where most of the money is made. Oh, they make good money in brewing, but the distilling is the main business.

The usage of Scotch, particularly in this country, the trends have not been strong at all, but that was true when we bought it too. There are some countries around the world where it's grown, and there are certain countries where it's a huge prestige item. I mean, in certain parts of the Far East, the more you pay for Scotch, the better you think people think of you, which I don't understand completely, but I hope it continues.

But the Scotch, worldwide, Scotch consumption has not been anything to write home about. Guinness makes a lot of money in the business, but I would not—I don't see anything in the published history that would lead you to believe that the growth prospects in terms of physical volume are high for Scotch. The Guinness itself, the beer, actually has shown pretty good growth rates in some countries, actually from a very tiny base in the U.S. as well.

But they will have to do well in distilling or, I mean, that will govern the outcome of the Guinness. I think Guinness is well run, and it's a very important company in that business, but I wouldn't count on a lot of physical growth, Charlie. Any consumer insights? No? Zone three. Mr. Buffett, my name is Arthur Collis from Kenton, Massachusetts, and I'd like to know how you respond to the question that my associates ask me when they say that Berkshire Hathaway has been a good investment up to now, but if, God forbid, something happens to Mr. Warren Buffett—well, I'm glad you didn't say Charlie Munger.

Now, Berkshire will do—Berkshire will do just fine. We've got a wonderful group of businesses. I've told you the two things I do in life, and in terms of the managers we have, you'd have to come in and really want to mess it up, I would think, and we don't have anybody like that. In terms of succession plans at Berkshire, and then there's the question of allocation of capital.

You could do worse than just adding it to some of the positions that we already had. The ownership is, if I die tonight, the ownership structure does not change. You've got the same large block of stock that has every interest in having good successor management as I would. I mean, there would be no greater interest, and it is not a complicated business.

I mean, you ought to worry more if you own Microsoft about Bill Gates, I think, or something of the sort. But this place is—you know, we've got a group down here that are running these—you didn't see me out of Porsche selling any jewelry the other day. I mean, that's somebody else's job.

It is not very complicated. Incidentally, I think I'm in pretty good health. I mean, this stuff will do wonders for you if you'll just try it. Charlie, do you want to add anything? Is the—yeah, I think the prospects of Berkshire would be diminished, obviously diminished if Warren were to drop off tomorrow morning, but it would still be one hell of a company, and I think it would still do quite well.

I used to do legal work when I was young for Charlie Scurry. I heard him once say my business, which was movie theaters like this one, was off 25 last year, and last year was off 25 from the year before, and that was off 25 from the year before. And then he pounded the table and said, but it's still one hell of a business. It's not a formula we want to test.

No, no. [Laughter] It is one hell of a business, though, we've got here. I mean, if you saw what happened at Berkshire headquarters, you would not worry as much. There's very little going on there that contributes to things. We're riding out our peak of activity; this is it. Zone four. First of all, my name is Al Martin, and my wife Terry is here with me, and I appreciate the invitation to attend this meeting. I was a little bit dubious and quite excited at that game Saturday night. I didn't know which side was going to throw the game to the other one.

But I did find out at the end. The first question actually was somewhat answered but not fully. Has the board considered a reverse split? My experience has been that would you like to make that a motion? There was a motion for a reverse split. I would say a two-for-one, because if it were three or four for one, I might end up with no shares or fractional shares.

Anyway, my experience has been that all the stocks that have split have gone down in the next two or three months or the next two or three years, including one which you are drinking, which is a flat Coke. Also, I have observed Merck over the last several years to be hitting a low, which split three for one. So I think that the reasons for splitting stocks are to make it affordable. I found that every stock ever board was never affordable.

I found the reason I bought it was because I couldn't afford not to buy it. So that's a different philosophy, I guess. That's somewhat shared indirectly with the board's running of the stock. The second question, which has to do with hope it's as easy as the first question. [Laughter] Well, I didn't want to wait for an answer. The first question, for that reason, because it could be complicated and confusing and so forth.

The second question has to do with could the board consider looking into a commodity broker or a lawyer or both that could take action similar to Hillary. Hillary Clinton's, I think you know, making your net worth go up by a factor of five overnight is more than enticing. Some of us might even want to wait for ten months to get a hundred to one return on the money.

I hope it's 530 percent in one day. Charlie has never done that for us. I mean, it really caused me to reassess succession plans at Berkshire, and Hillary may be free in a few years. I hope you're applauding over coming to Berkshire, not being fair, but I'll leave that up there.

Okay, that was their second question—that was my second question. Of course, in my experience, it's been that most of us have thought through this situation, and I guess it's pretty speculative, but I've found out that the rules and laws that are made for trading are interpreted rather than enforced, and I think that applied to this particular case.

So let's go on to the third question, right? They're getting easier. This one is real easy. My wife was a collector of blue-chip stamps for many, many years, and she bought some stamps. What should she do with them? Well, that we can give you a definitive answer to that.

Charlie and I entered this trading stamp business to apply our wizardry to it in, what, 1969 or so? Certainly, but we were doing what then, about $110 million? No, it went up to $120. Okay, and then we arrived on the scene, and we're going to do what, about $400,000 this year? Yes.

That shows you what can be done when your management gets active. We have presided over a decline of 99.5. Yeah, but we're waiting for a bounce, and I would say this: the trading stamp businesses, those of you who followed all know it only works because of the float.

I mean, they're a very, very high percentage of the stamps in the 60s were cashed in. We have some years that we've got up to 99 percent, I believe. We sample the returns because they were given out in such quantity, but our advice to anyone who has stamps is to save them because they're going to be collector's items, and besides, if you bring them to us, we have to give you merchandise for them.

So tell her to keep—they'll do nothing but gain value over the years. Going back, incidentally, to your point on the split, I think most people think that the stock would sell for more money split. We wouldn't necessarily think that was advisable in the first place.

But we, in the second place, we don't think it would necessarily be true over a period of time. We think our stock is more likely to be rationally priced over time, following the present policies than if we were to split it in some major way. And we don't think the average price would necessarily be higher; we think that the volatility would probably be somewhat greater, and we see no way that volatility helps our shareholders as a group.

Zone five, I am Peg Gallagher from Omaha. Mr. Buffett, are you interested in influencing Mr. Greenspan at the Fed to stop raising interest rates? Well, I wouldn't have any influence with him. He was on the board of Cap City some years ago. I know him a bit, but I don't think anyone would have any influence with Mr. Greenspan on that point.

But I generally think that his actions have been quite sound during his period as Fed chief. I mean, it's part of the job of the Fed, as Mr. Martin said many years ago, is to take away the punch bowl at the party occasionally, and that’s a very difficult policy to quantify working with markets day by day.

Of course, it's always been the job of the Fed basically to lean against the wind, which of course means if the wind changes, you fall flat on your face, but that's another question. But I don't think what he has done has probably been somewhat appropriate. I think he's probably been surprised a little bit as to what has happened with long-term rates as he's nudged up short-term rates.

I think he was hoping—this is just a guess on my part—that the action sort of early in the cycle on the short-term rate front would might make people feel more confident about the longer-term rates, and therefore, that the yield curve would flatten some. I don't know that, and he may have been a little surprised on that, but it's not an easy job he has, so I would not second guess him myself.

Charlie, how do you feel about him? Fine. Greenspan is safe. Zone six, Mr. Buffett, I'm Lee Miller from St. Louis. There was an article in the April 18th Burns that attempted to calculate the value behind each Berkshire Hathaway share. I'm sure you have some views on that, and I'd be very interested in your perspective on that issue.

Yeah, yeah, there was an article about a week or so ago in Behrens. The same fellow wrote an article about four years ago reaching pretty much the same conclusion, and I hope he hasn't been short in between. But I would say this is not the way I would calculate the intrinsic value of Berkshire. But everyone in securities markets makes choices on that every day.

Somebody sells a few shares of Berkshire, and someone buys, and they're probably coming to differing opinions about valuation. I would say that I found it strange that apparently he forgot we were in the insurance business, but that's not total. It really doesn't make any difference. I mean, what we don't pay any attention to what people say about Coca-Cola stock or Gillette stock or any of those things.

I mean, on any given day, two million shares of Coca-Cola may trade. That's a lot of people selling, a lot of people buying it. If you talk to one person, you'd hear one thing and talk to another, it really, you really should not make decisions in securities based on what other people think. If you're doing that, you should, you should think about doing something else because it's public opinion, a poll will just—it will not get you rich on Wall Street.

So you really want to stick with businesses that you feel you can somehow evaluate yourself. And I don't think—I mean, Charlie and I, we don't read anything about what business is going, the economy is going to do, what the market's going to do, or what anybody—any time I see some articles says, you know, these analysts say this or that about some business, it just it doesn't mean anything to us.

You cannot—you cannot get rich with a weathervane. Zone seven, I'm Edward Barr from Lexington, Kentucky, and I'd like to ask, given the amount of capital in the banking industry, do you think that more banks should be buying back significant amounts of their stock like SunTrust versus just the token amounts that they’re buying back or just the authorized amounts?

And then also, related question and banking, are banks too focused on goodwill amortization when declining to buy other banks for cash, thereby using purchase accounting versus the normal practice in the industry of pooling accounting even when the stock they issue may be depressed or undervalued?

Well, the first question about the capital in the industry, you really have to look at that on a bank-by-bank basis, and there is a lot more repurchasing of shares by banks taking place. You mentioned SunTrust, but National City, they bought it back. I think maybe five percent of their stock in the first quarter.

There's much more repurchasing going on, and that's simply a judgment call by management as to the level of capital they need going forward and what level of capital enables them to earn the return on equity that they think is appropriate and whether they feel like paying for their own shares.

So I think you have to look at that on a case-by-case. We certainly like it. If we were to own a bank, our own shares in a bank, we would like the idea of the bank repurchasing its stock at a price that we thought was attractive. We would think they probably knew more about their own bank than some other bank they were going to buy.

If the numbers are right, it's an attractive way to use capital. Your second question about goodwill amortization and purchase accounting versus pooling, we care not at Berkshire; it absolutely makes no difference to us what accounting treatment we get on something. We are interested in the economics of a transaction.

Some businesses generally, most businesses perhaps prefer pooling because they don't like to take a goodwill amortization charge. We think our shareholders are smart enough, particularly if we make it clear to them the accounting consequences—we think they are smart enough to look through the economic reality of what Berkshire's businesses are all about.

I think some managements sell short their own ownership group by doing various kinds of financial acrobatics in order to have the charges come in a certain way rather than, as you point out, often they might be better off buying for cash rather than their own stock as currency. But they may prefer to use their own stock because they avoid goodwill charges.

We've written a few things on goodwill in the past and past annual reports that might get to that subject. We don't care what accounting—we sort of rewrite the accounting for any business that we're looking at because in our heads, we want to have, in effect, a standardized way of looking at businesses, and if one company goes through pooling transactions and another goes through purchase transactions, we're going to recast them in our own mind so that there's comparability.

Charlie? Yeah, the published accounting results are in accordance with standard convention, and they're a place to start economic analysis. The figures are frequently quite silly on a functional basis. I'm not criticizing accounting conventions except—yeah, but I think it's just a place to start thinking about economic reality. By their nature, they can't tie perfectly; they can't even tie very well to economic reality.

We regard it as a negative when we find management that's preoccupied with accounting considerations, but we find it so frequently that we can't afford to use it as a total exclusionary factor. It really surprises me how many managements focus on accounting and the time they spend on it. It's really unproductive, and if you find a management that doesn't care about the accounting but does explain to you in clear terms what's going on, I think you should regard that as a plus in owning a security.

Zone one, Mr. Buffett. My name is Bill Ackman; I'm from New York City, and my question relates to the appeal of Salomon Brothers as an investment. You talked earlier about leverage and the dangers of leverage. Salomon is a business which is levered 30 to one, which has very narrow margins and earns relatively modest return on equity.

In light of the amount of leverage that they use, what is the appeal of the business to you? We have here today the chief executive of Salomon Inc, the parent company, and also the chief executive of Salomon Brothers, the investment banking arm, and I would say one of the things we—Charlie and I feel extraordinarily good about are the two fellows that are running that operation. They did an exceptional job under extraordinarily difficult circumstances, as did John McFarland, who's also here today.

The three of them I mentioned, four people in the annual report, and Salomon wouldn't be here today without those three, and it wouldn't be the company in the future that it's going to be without them. They did an absolutely fabulous job. It's the sort of business that, as you point out, uses a lot of leverage.

It doesn't, in one way, it doesn't use as much as it looks like. In another way, it uses even more than it looks like. But the test will be whether they control that business in a way that that leverage does not prove dangerous and, secondly, what kind of returns on equity they earn while using it.

You certainly should expect to earn somewhat higher returns on equity when you are necessarily exposed to a small amount of systemic risk and significant amounts of borrowed money than you would in a business that's an extremely plain vanilla business. But I don't know whether you've met Bob and Derek, but I think you'd feel better about having a leverage in their hands than about any other hands you can imagine.

Charlie, why don't we have those three gentlemen stand up? Yeah, you ought to give them—everybody have done a job for Berkshire last year. I'll leave the applause for them. Where are they? There they are. I've mentioned this before, but it's worth mentioning again.

Derek took on the job of being the operating head of Salomon Brothers on August 18, 1991. He didn't know what he was getting into exactly. Three months later, we never had a conversation about compensation. He did not ask me for Berkshire or my guarantee for indemnification because he's walking into unknown legal problems.

We didn't know what we would finally uncover, and he worked incredible hours to keep that place together, which was not easy. Bob Denham, I called, I guess, on the 20th. I called him on a Friday. I got home on Saturday, the 24th of August. He was living a nice, pleasant, peaceful life in California and had a first-class law firm, good group of clients, wife had a good job there.

I told him I was in a mess and there wasn't any second choice. Three days later, he was back in New York, living in a small apartment in Battery City, handling the general counsel's job at Salomon. They found John McFarland that Sunday on the 18th. I think he was running a triathlon or something at a practice that Charlie and I follow, but they—and he was yanked from that and came down.

I think John lives over in New Jersey, but he holed up in the downtown athletic club, and it was his job to keep funding what was then a hundred and fifty billion dollar balance sheet during a period when people were right and left were cancelling. It's not because we weren't a good credit, but because they just didn't want to have anything to do with us for a while.

The World Bank and the Data Texas Pension Fund and CalPERS, all these people were shutting off funding at a time. Funding in a business, as a gentleman just indicated, is the lifeblood of an enterprise like Salomon. These three deserve an enormous hand, really, by the Salomon shareholders, but by this group in turn because we have an important investment.

So I thank them publicly. Zone two. I'm Kelly Ranson from San Antonio, Texas, and I wondered if you could comment on the Mutual Savings and Loan. There was just a footnote that the deposits had been assumed by a federal savings bank. And also, what about the annual report for Westco Financial that I know used to be in the annual report for Berkshire? I just wondered if you could comment on that, please.

The question is about—we would—our 80 percent-owned subsidiary, West Coast Financial, sold its ownership in Mutual Savings and Loan in Pasadena last year, and let Charlie comment on that. The second question is about the West Coast report, which is available to any Berkshire shareholder simply by writing to Westco. But we found that the stapling problems and other things made it a little difficult to keep adding that every year to the report. So now we just—we make it available to anyone in Berkshire who would like to have it.

But Charlie, you want to comment on the sale of Mutual? Yeah, the Savings and Loan business became very much more heavily regulated after the huge nationwide collection of scandal and insolvency and so on. Meanwhile, we had a very small savings and loan association. The combination of the new regulation and the fact that it was a very small part of our operation made us decide that we were better off without it.

That does happen from time to time at Berkshire. We do exit once in a while. And by the way, we would reserve the right to change our mind. I always liked Lord Keynes when he said that he got new facts or new insights; why he changed his mind. Then he’d say, “What do you do?” So we changed our mind. They started—they asked our directors at Mutual to start going to school on Saturday, didn't they, Charlie, or something?

I think that helped change our mind about Mutual. There’s a time to vote with your feet, and even your wallet. Zone three, can you speak to some of the economic characteristics of the shoe industry that allowed the business to be profitable and in your view attractive? I didn't hear that. Did you hear that, John? He wanted you to comment on the merits of the shoe industry.

Well, I think our feelings for the shoe industry are very clear from what's been happening in the last few years. We think it's a great business to be in as long as you're in with Frank Rooney and Jim Isler and Peter Lunder and Harold Alphon. Otherwise, it hasn't been too good. We have a couple of extraordinary shoe operations, but they're not extraordinary because we get our leather from different steers or anything of the sort.

We have two companies, really three now, that Lowell's been brought into, but that have truly extraordinary records. I think those same managements would have been enormous successes in any business they'd gone into but they are in the shoe business, and the companies earn unusual returns on equity. They earn unusual returns on sales. They've got terrific trade reputations.

I think that to the extent we can find ways to expand in the shoe business, while employing those managements, we'll be very excited about doing so. It isn't because we think that the shoe industry is any cinch, you know per se or anything of the sort. But we've got a lot of talent employed in the shoe business, and whenever we've got talent, we like to try and figure out a way to give them as big a domain as we can, and it's not inconceivable that we would expand the shoe business, perhaps even significantly over time.

Zone four. Yeah, thanks, Mr. Buffett. My name is Stuart Hartman from Sioux City. After the brevity of the last question from section four, I'll try to be extremely brief. Given the scrutiny that the tobacco business is going under right now, number one, what do you see as the business prospects for those huge cash cows? And at any point, would that be attractive to you, given their liability questions about the future?

The tobacco business? I probably know more about that than you do because it's fraught with questions that relate to societal attitudes. You can form an opinion on that just as well as I could, but I would not like to have a significant percentage of my net worth in the tobacco business myself. But they may have better futures than I envision.

I don't really think that I have special insights on that. Charlie? No, you have to come to a conclusion as to how society is going to want to treat and the present administration, for that matter. And the economics of the business may be fine, but that doesn't mean it has a great future.

Zone five, I'm Harriet Morton from Seattle, Washington. I'm wondering when you are considering an acquisition how you look at the usefulness of the product in looking at any business? Yes, yeah. Well, obviously, we look at what the market says is the utility, and the market has voted very heavily for Dexter Shoe, just to be an example. I don't know how many pairs of shoes they were turning out back in 1958 or thereabouts, but year after year, people have essentially voted for the utility of that product.

There are 750 million or so eight-ounce servings of one product or another from the Coca-Cola company consumed every day around the world, and there are those of us who think the utility is very high. I can't make it through the day without a few. But there are other people that might rate it differently. So we would judge that.

I don't think we would come to an independent decision that there was some great utility residing in some product that had been available to the public for a long time, but the public had not endorsed in any way, Charlie. Well, I think that's right, but I'd say every stop we're in a bunch of high utility products. I mean, nurses' shoes, work shoes, casual shoes.

We don't have a lot of Italian pumps. Don't rule it out, Charlie. We may be here next year defending those. So I just say, if you judge the existing portfolios indicating what the future is likely to be like, well, certainly a lot of essentials were sold out of Borsheims yesterday. Yes! [Laughter]

I hear my family clapping. Zone six, we have no question up here. Okay, zone seven. Good morning, Mr. Berkshire Buffett. I have a niece here who has a son named Berkshire. So, I'm Chris Blunt from Omaha. My first question is, in years past, we've had samples of various products. When are we going to have some Guinness?

Somewhat? Now, Guinness samples. My second question is, in light of the multiple disasters that have taken place in LA, has that had any impact on the caps for Berkshire on our super cat business? Yes, the LA earthquake, which is originally, I believe, the first estimate of insured damage was a billion five, which struck us as kind of ludicrous, but has now escalated the last official estimate—the one we use— that's a trigger in our policies, I think, is either 4.5 billion or 4.8 billion.

But it's going to be higher than that. Our losses are fairly minor. If it gets to eight billion of insured damage, that would trigger another policy or two. But I would say that the LA quake, which did considerably more damage, I think, than people would have anticipated from a 6.7 for various reasons having to do with how quakes operate—that quake is not going to turn out to be of any reels, and it's not the kind of super cat that a 15 or 20 billion dollar hurricane which hit Florida or Long Island or New England would be.

That's the kind of—we could lose or we could pay out six or seven hundred million dollars in sort of a worst-case super cat now. Our total premiums this year might be say 250 million or something in that area, so one super cat in the wrong place would produce, we'll say, a 400 million dollar thereabouts underwriting loss from that business. The LA quake is peanuts on that scale, but it wouldn't have taken a whole lot more in terms of numbers on the Richter scale if it happened to have an epicenter where it did, and of the type that it was relatively shallow that we could have had that sort of thing happen.

I think that the insurance industry has vastly underestimated, maybe—not maybe—not now, but up until a few years ago—the full potential of what a super cat could do. But hurricane Andrew and the LA quake may have been something of a wake-up call. They were far from a worst-case situation, a really big type five hurricane on Long Island would end up leaving a lot of very major insurance companies in significant trouble.

We define our losses essentially—700 million sounds like a lot of money. There's a lot of money, but there are limits on our policies that are not true of people that are just writing the basic homeowners or business. Those losses could go off the chart. There were certain companies in the LA quake that thought they had a probable maximum loss for California quakes, and the LA quake, which was far from the worst case you can imagine, turned out to far exceed those probable maximum losses.

So I think the industry has had, and may still have, its head in the sand a little bit in terms of what can happen, either in terms of a quake in California or more probably in terms of a hurricane along the East Coast. So far this year, we're in reasonable shape, but that doesn't mean much because by far the larger exposure is in hurricanes, and essentially 50 percent of the hurricanes hit in September, and I think it's about 15 percent would be in August, close to 15 percent in October.

So you have 80 roughly in those three months, and there's a little tail on both sides, but that's when you find out whether you've had a good or bad year in the super cat business. Basically, it's a business we like at the right rates because there are very few people who can afford to write it at the level that the underlying companies—the reinsured companies—need it, and we are in a position, if the rates are right, to do significant business. Charlie? Nothing to add. Zone one. Clayton Reilly from Jacksonville, Florida.

This is a little different than all the other questions, but what were the three best books you read last year outside of the investment field? Why don't even one will do? I'll give you—I’ll tout a book first that I've read, but that isn't available yet, but it will be in September. The woman who wrote it, I believe, is in the audience, and it's been Ben Graham's biography, which will be available in September by Janet Lowe. And I've read it, and I think those of you who are interested in investments for sure will enjoy it.

She's done a good job of capturing Ben. One of the books I enjoyed a lot was written also by a shareholder who's not here because he's being sworn in, I believe, today or tomorrow—maybe tomorrow—as head of the Voice of America, and that's Jeff Collins' book, which is on The People vs. Clarence Darrow. It's the story of the Clarence Darrow trial for essentially a jury bribery in Los Angeles back around 1912, when the McNamara brothers had bombed the LA Times.

It's a fascinating book; Jeff uncovered a lot of information that the previous biographies of Darrow didn't have. I think you'd enjoy that. Charlie? Again? Well, I very much enjoyed Connie Brooks' biography, Master of the Game, which was a biography of Steve Ross, who headed Warner and later was co-chairman of Time Warner.

Yeah, a little more than co-chairman. Yeah, and she's a very insightful writer, and it's a very interesting story. I am rereading a book I really like, which is Vandoorne's biography of Benjamin Franklin, which came out in 1952, and I had almost forgotten how good a book it was. And that's available in paperback everywhere.

We've never had anybody quite like Franklin in this country. Never again! He believed in compound interest too, incidentally as you may remember, but he set up those two little funds, one in Philadelphia, one in Boston right, to demonstrate the advantages of compound interest.

I think that's the part Charlie's reading. Zone two. Thank you for teaching me, teaching so much to all of us about business. My name is Mike DeSalle from New York City. You mentioned earlier that Berkshire's shoe business was great but that other shoe businesses were not so good. What are the uncertainties of the global brand leaders that the Berkshire seems to like? They like Coke and Gillette.

The global brand leaders in the shoe business being Nike and Reebok, what are their uncertainties in terms of long-term competitive advantage, business economics, consumer behavior, and the other risk factors that you mentioned in the annual report this year? Thank you. Well, you're really asking about the future prospects of Nike and Reebok?

Yeah, I don't know that much about those businesses. We do have one person in this audience at least who owns a lot of Reebok, but I'm not expressing a negative view in any way on that. I just—I don't understand their competitive position and the likelihood of permanence of their competitive position over a 10 or 20 year period as well as I think I understand the position of Brown and Dexter.

That doesn't mean I think that it's inferior. It doesn't mean that I think that we've got better businesses or anything. I think we've got very good businesses, but I'm not—I haven't done the work, and I'm not sure if I did the work I would understand them. I think they are harder to understand, frankly.

And to develop a fix on than our kinds, but they may be easier for other people who just have a better insight into that kind of business. Some businesses are a lot easier to understand than others, and Charlie and I don't like difficult problems. I mean, if something is hard to figure, you know, I mean, we'd rather multiply by three than by pi. I mean, it's just easier for us.

Charlie? Well, that is such an obvious point, and yet so many people think if they just hire somebody with the appropriate labels, they can do something very difficult. That is one of the most dangerous ideas a human being can have. All kinds of things just intrinsically create problems.

The other day I was dealing with a problem, and I said, this thing—it's a new building—and I said, this thing has three things I’ve learned to fear: an architect, a contractor, and a hill. If you go a life like that, I think you at least make fewer mistakes than people who think they can do anything by just hiring somebody with a label. Excuse me. You don't have to hire out your thinking.

If you keep it simple, you don't have to do— We've said this before, but you don't have to do exceptional things to get exceptional results, and some people think that if you jump over a seven-foot bar that the ribbon they pin on you is going to be worth more money than if you step over a one-foot bar.

It just isn't true in the investment world at all. You can do very ordinary things. I mean, what is complicated about this? But, you know, we're three billion dollars pre-tax better off than we were a few years ago because of it. There's nothing that I know about that product or its distribution system, its finances, or anything that really hundreds of thousands or millions of people aren't capable of that they don't already know—they just don't do anything about it.

Similarly, if you get into some complicated business, you can get a report that's a thousand pages thick, and you got PhDs working on it, but it doesn't mean anything. You know what you've got is a report, but you don't know it; you won't understand that business. What it's going to look like in 10 or 15 years, the big thing to do is avoid being wrong.

There's some things that are so intrinsically dangerous. Another of my heroes is Mark Twain, who looked at the promoters of his day, and he said, “A mine is a hole in the ground owned by a liar.” And that's the way I've come to look at projections. I mean, basically, I can remember one time, and I was offered two million dollars' worth of projections once in the course of buying a business, and the book was this thick, and for nothing.

And we were given it for nothing, and we wouldn't open it. You know, we would almost pay two million not to look at it. It's ridiculous. I do not understand why any buyer of a business looks at a bunch of projections put together by a seller or his agent.

I mean, it—you can almost say that it's naive to think that that has any utility whatsoever. We just are not interested. If we don't have some idea ourselves of what we think the future is, to sit there and listen to some other guy who's trying to sell us the business or get a commission on it tell us what the future is going to be.

It, like I said, it’s very naive. Zone four. Mr. Buffett, Mr. Munger, last year I’m Tim Medley from Jackson, Mississippi. Last year, the question was asked about your preference for purchasing entire businesses versus parts of public companies. You mentioned you prefer to buy private businesses because of the tax advantages and your attraction to the people in those businesses.

Are you finding today that there are better purchases within the private market versus in the public securities markets? Well, I would answer that no. We very seldom find something to buy on a negotiated basis for an entire business. We have certain size requirements. Big limiting factors have to be something we can understand. I mean, that eliminates 95 percent of the businesses, and we get—we don't pay attention to them. We get lots of proposals for things that are just totally outside the boundaries of what we've already said we're interested in.

We prefer to buy entire businesses or 80 percent or greater interest in businesses partly for the tax reasons you mentioned. And frankly, we like it better. It's the kind of business we would like to build if we had our absolute brothers on it. Counter to that is we can usually get more for our money in wonderful businesses in terms of buying little pieces of them in the market because the market is far more inefficient in pricing businesses than is in the negotiated market. You're not going to buy any bargains.

And I mean you shouldn't even approach the idea of buying a bargain in a negotiated purchase. You want to buy it from people who are going to run it for you. They want to buy it from people who are intelligent enough to price their business properly. And they are. I mean, that's the way things are.

The market does not do that. The market, in the stock market, you get a chance to buy businesses at foolish prices, and that is why we end up with a lot of money in marketable securities. If we absolutely had our choice, we would own a group of—we would own three times the number of businesses we own outright. We're unlikely to get that opportunity over time, but periodically we'll get the chance to find something that fits our tests, and in between, we will—when the market offers the right prices, we will buy more either businesses we already own pieces of or we'll buy one or two new ones.

Something's usually going on. There are tax advantages to owning all of them, but that's more than offset by the fact that you'll never get a chance to buy the co—you'll never get a chance to buy the whole Coca-Cola Company or the whole Gillette. Those are companies like that. The sensational businesses are just not available. Sometimes you get a chance to make a sensible purchase in the market of such businesses, Charlie? Well, I think that's exactly right.

If you stop to think about it, if 100 percent of a business is for sale, you've got the average corporate buyer is being run by people who have the mindset of people buying with somebody else's money, and we have the mindset of people buying with our own money. There's also a class of buyers for 100 percent of businesses who are basically able and shrewd financial promoters.

I'm talking about the leveraged buyout funds and so on, and those people tend to have the upside but not the downside in the private arrangements they've made with their investors, and naturally, they tend to be somewhat optimistic. So we have formidable competition when we try and buy 100 percent of businesses. Most managers are better off in terms of their personal equation if they're running something larger.

Now they're also better off if they're running something larger and more profitable, but the first condition alone will usually leave them better off. We're only better off if we're running something that's more profitable. We also like it if it's larger too, but our equation actually—our personal equation is actually different than a great many managers in that respect.

Even if that didn't operate, I think most managers psychically would enjoy running something larger. If you can pay for it with other people's money, I mean, that gets pretty attractive. You know, how much would you—let's just say you're a baseball fan—well, how much would you pay to own whatever your hometown, the Yankees?

You might pay more if you're writing a check on someone else's bank account than if you're writing it on your own. But knowing to happen, and in corporate America, animal spirits are there, and those are our competitors on buying entire businesses. In terms of buying securities, most managers don't even think about it.

It's very interesting to me because they'll say that they'll have somebody else manage their money in terms of a portfolio of securities. Well, all that is is a portfolio of businesses, and I'll say, “Well, why don't you pick out your own portfolio?” They'll say, “That's much too difficult.” And then some guy will come along with some business that they never heard of a week before and give him some figures and a few projections, and the guy thinks he knows enough to buy that business. That’s very puzzling to me sometimes.

Zone four, could you hold a little closer to you? I can't hear too well. It's hard to hear. Is the mic on there? It’s on. Ah, okay. I can hear that fine. Let's try it one more time. Dan Rader, San Mateo, California. This is a question for Mr. Munger.

In your most recent letter to shareholders in Westco's annual report, you calculated the intrinsic value of Westco at about $100 per share and compared that to the then-current market price of Westco of about $130 per share. In the same letter, you stated that it was unclear whether then-current market prices, Berkshire or Westco, presented a better value to prospective purchasers. In light of that, would you compare the intrinsic value of Berkshire to its current market price?

Well, the answer to that is no. Berkshire has never calculated intrinsic value per share and reported it to the shareholders. Westco never did before this year. We changed our mind at Westco because we really thought some of the buyers had gone a little crazy, and a lot of things were being said to prospective shareholders that, in our opinion, were unwise.

And we don't really like attracting—even though we've had nothing to do with it—we don't like attracting people in at high prices that may not be wise. So we departed from our long president, and we did, in the Wesco report, make an estimate of intrinsic value per share. But we're not changing the general policy— that was just a one-time quirk.

Well, also I think it's true that the West Coast intrinsic value per share can be estimated by anyone within a fairly close limits. It just isn't that complicated because there aren't a number of businesses there that have values different than carrying values, or where they're all footnoted in terms of numbers, so it’d be almost impossible to come up with numbers that are significantly different than the number Charlie put in there.

Berkshire has assets that, number one, of which would be the insurance business that's clear, have very significant excess values. But some one person might estimate those, maybe three times what somebody else would estimate them at. That’s less true of our other businesses, but it's still true in a way.

So Berkshire's range would be somewhat greater, and it's Charlie. We basically don't want to disappoint people. We also don't want to disappoint ourselves, but we have our own yardsticks for what we think is doable. We try to convey that as well as we can to the people who are partners in the business.

I think that we saw some things being published about Westco that simply would—what might have led to probably did lead to some expectations that simply weren't consonant with our own personal expectations, and that leaves us uncomfortable. Zone five, uh, hello, my name is Charles Pyle from Ann Arbor, Michigan.

I'd like to ask you to expound on your view of risk in the financial world, and I ask that against the background of what appear to be a number of inconsistencies between your view of risk and the conventional view of risk. I mentioned that in a recent article you pointed out an inconsistency in the use of beta as a measure of risk, which is a common standard.

And I mentioned that derivatives are dangerous, and yet you feel comfortable playing in derivatives through Solomon Brothers and betting on hurricanes is dangerous, and yet you feel comfortable playing with hurricanes through insurance companies. So it appears that you have some view of risk that's inconsistent with what would appear on the face of it to be the conventional view of risk.

Well, we do define risk as the possibility of harm or injury, and in that respect, we think it’s inextricably wound up in your time horizon for holding an asset. I mean, if your risk is that you're going to—if you intend to buy XYZ Corporation at 11:30 this morning and sell it out before the close today, I mean, that is in our view a very risky transaction because we think 50 percent of the time you're going to suffer some harm or injury.

If you have a time horizon on a business, we think the risk of buying something like Coca-Cola at the price we bought it at a few years ago is essentially close to nil in terms of our prospective holding period. But if you ask me the risk of buying Coca-Cola this morning and you're going to sell it tomorrow morning, I say that is a very risky transaction.

Now, as I pointed out in the annual report, it became very fashionable in the academic world, and then that spilled over into the financial markets to define risk in terms of volatility of which beta became a measure. That measure, that isn’t—that is no measure of risk. The risk in terms of our— in terms of our super cat business is not that we lose money in any given year.

We know we're going to lose money in some given day; that is for certain. We're extremely likely to lose money in a given year. Our time horizon of writing that business would be at least a decade, and we think the probability of losing money over a decade is low. So we feel that in terms of our horizon of investment that that is not a risky business, and it’s a whole lot less risky than writing something that's much more predictable.

Interestingly enough, using conventional measures of risk, something whose return varies from year to year between plus 20 percent and plus 80 percent is riskier, as defined, than something whose return is 5 percent a year every year. We just think the financial world has gone haywire in terms of measures of risk.

We look at what we do. We are perfectly willing to lose money on a given transaction. Arbitrage being an example, any given insurance policy being another example. We are perfectly willing to lose money on any given transaction. We are not willing to enter into transactions in which we think the probability of doing a number of mutually independent events of us but of a similar type has an expectancy of loss.

And we hope that we are entering into our transactions where our calculations