2002 Berkshire Hathaway Annual Meeting (Full Version)

Here but a seconder or anybody would like to speak that motion might now work their way over to the microphone in zone one. Could we have a spotlight on where there it is? And that way when we get to that point of the program, if anybody that would like to speak to the motion that was in the proxy statement, if you'll work your way over to the microphone there then we'll be ready at the time. You can be ready at the time when it'll be appropriate to talk about it and so we'll get there in just a minute.

And if you'll all wander over there that are interested, also with us today are partners in the firm of Deloitte and Touche, our auditors. They are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire. Mr. Forrest Crutter, secretary of Berkshire, he will make a written record of the proceedings. Ms. Becky Ameck has been appointed inspector of elections at this meeting. She will certify to the count of votes cast in the election for directors. The named proxy holders for the meeting are Walter Scott Jr. and Mark D. Hamburg.

We will conduct the business of the meeting and then adjourn the formal meeting. After that, we will entertain questions that you might have. Does the secretary have a report of the number of Berkshire shares outstanding entitled to vote and represented at the meeting? Yes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent by first-class mail to all shareholders of record on March 6, 2002, being the record date for this meeting, there were one million three hundred and twenty-three thousand seven hundred seven shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting. And six million two hundred ninety thousand four hundred and fifteen shares of Class B Berkshire Hathaway common stock outstanding, with each share entitled to one two hundredth of one vote on motions considered at the meeting. Of that number, one million one hundred and three thousand four hundred and fifty-five Class A shares and five million two hundred sixty thousand two hundred thirty-one Class B shares are represented at this meeting by proxies returned through Thursday evening, May 2. Thank you. That number represents a quorum, and we will therefore directly proceed with the meeting.

First order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott 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 and the minutes be approved. Do I hear a second? Motion has been moved and seconded. Are there any comments or questions? Three-second pause.

We will vote on this motion by voice vote. All those in favor say aye. Opposed? The motion's carried.

First item of business of this meeting is to elect directors. The shareholders present who wishes to withdraw a proxy previously sent in and vote in person on the election of directors, he or she may do so. Also, if any shareholder that is 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. With those persons desiring ballots, please identify themselves so that we may distribute these.

I now recognize Mr. Walter Scott to place a motion before the meeting with respect to election of directors.

I'll move that Warren E. Buffett, Charles T. Munger, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase, Ronald L. Olson, and Walter Scott Jr. be elected as directors. Is there a second? Been moved and seconded that Warren E. Buffett, Charles T. Munger, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase, Ronald Olson, and Walter Scott Jr. be elected as directors. Sounds like a hell of a slate to me.

Are there any other nominations? Is there any discussion? Nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the election of directors and allow the ballots to be delivered to the inspector of elections. The proxy holders please also submit the inspector of elections a ballot on the election of directors voting the proxies in accordance with the instructions they have received.

I will have to say at this point, deviating from my script that in the spirit of disclosure which now permeates the corporate world, I have a tally here from yesterday as to the number of votes each director has received. I won't give the affirmative votes, but the total basically negative votes is a withhold vote. Charlie and I and Howie came in last by a significant margin. Susie did the best; she only had a thousand votes against her but Charlie and I had sixteen thousand votes against us. I really suspect that Susie voted against us so that she could lead the ticket, but who knows?

Becky, when you're ready, you may give your report.

My report is ready. The ballot of the proxy holders in response to proxies that were received through last Thursday evening cast not less than one million one hundred thirty-nine thousand six hundred seventy-two votes for each nominee. That number far exceeds a majority of the number of total votes related to all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes, including the additional votes to be cast by the proxy holders in response to proxies delivered at this meeting, as well as any cast in person at this meeting will be given to the secretary to be placed with the minutes of this meeting.

Thank you, Ms. Amick. Warren E. Buffett, Susan D. Buffett, Howard G. Buffett, Malcolm G. Chase, Charles T. Munger, Ronald Olson, and Walter Scott Jr. have been elected as directors. Next. [Applause]

The next item of business is a proposal put forth by a Berkshire shareholder, Gloria J. Patrick, the owner of two Class B shares. Ms. Patrick's motion is set forth in the proxy statement and provides that the shareholder requests the company to refrain from making charitable contributions. The directors recommended that the shareholders vote against this proposal.

We will now open the floor to recognize Ms. Patrick or her designee to present her proposal, and I believe we have Mr. Mosher in at the microphone in area one to speak to make the proposal and speak to it. Would you go ahead please, sir?

Thank you, Chairman Buffett. I apologize if this is a little loud. I was told I would have to really project, but I think you can hear me up there on the stage. I hope you can hear me up in the rafters.

My name is Stephen Mosher. I'm the chairman of the Population Research Institute, a non-profit organization dedicated to making the case for people as the ultimate resource, the one resource that we as investors cannot do without, and debunking the hype about overpopulation, what the New York Times has called, and I quote, “one of the myths of the 20th century.” Of course, we're now living in the 21st century.

I've written about the coming depopulation—that's right, I said depopulation—in the Wall Street Journal and other publications. I say all this to explain why Gloria Patrick, a Berkshire Hathaway shareholder, has asked me to present for action at this meeting the following proposal. And I do have one other qualification: I have nine children.

Now when people gasp at this, I remind them that my children will be paying their social security one day. Of course, if you invest in Berkshire Hathaway stock, you won't need social security.

I will present the proposal and then with the chairman's indulgence, spend a couple of minutes explaining why it's necessary. Here is the resolution: Whereas charitable contributions should serve to enhance shareholder value, whereas the company has given money to groups involved in controversial activities like population control and abortion, whereas our company is dependent on people to buy the products and services of the various companies we own, whereas our company is being boycotted by Life Decisions International and investment related groups like Pro Vita Advisors because of these contributions, resolved that shareholders request the company to refrain from making charitable contributions.

Let me take these very quickly point by point. You all know shareholder money is entrusted to the board of directors to be invested in a prudent manner for the shareholders. I think you will all agree, as the resolution states, that charitable contributions should serve to enhance shareholder value. Indeed this is already Berkshire Hathaway policy with regard to its operating subsidiaries.

As Chairman Buffett explained in his chairman's letter of last year, quote, "We trust our managers to make gifts in a manner that delivers commensurate tangible or intangible benefits to the operations they manage. We did not invest money in this company so it could be given to someone else's favorite charity."

I think you will also likewise agree that activities like population control and abortion are controversial. In fact, some of the charitable money has been given to Planned Parenthood, a group that is responsible for almost 200,000 abortions a year in the United States and countless more through its population control programs worldwide.

Now we believe abortion is the taking of a human life, but even if you disagree on this fundamental point, you must concur that these ongoing boycotts of Berkshire Hathaway company products are not a good thing.

Next, it should be self-evident that Berkshire Hathaway, like the economy as a whole, is dependent upon people. It is people who produce the products and services of the various companies we own, and it is people who buy them. Now you may think that there is a super abundance of people in the world and that we will never run short, but this is not true.

Half of the countries of the world, including countries in Latin America, Africa, and Asia, now have birth rates below replacement. Europe and Japan are literally dying, filling more coffins than cradles each year. Dying populations may shrink the economic pie. We already see this happening in Japan and some European countries. How much of Japan's continuing economic malaise can be directly traced to a lack of young people to power the economy?

Dying populations may also make economic development nearly impossible. Russia is having trouble finding its speed economically. Why? Because of its ongoing demographic collapse, losing a million people a year. These problems will spread to many more countries in the near future.

Charitable contributions to simple-minded population control programs in which governments impose restrictions on childbearing are not in Berkshire Hathaway's interest. Such programs are not investing in humanity's future; they are compromising humanity's future and putting a roadblock in the way of future economic growth.

There is no global share buyback in store for those who fund population control programs because such programs will rob the world of future consumers and producers and threaten to shrink the economic pie.

Let me give you a concrete example of what I mean. Berkshire Hathaway owns Dairy Queen. Now there are 103 Dairy Queens in Thailand, but Thailand, due to a massive population control campaign, now has a birth rate that is below replacement and falling. This means that its cohorts of young children are shrinking. There will be fewer and fewer families in the years to come, and its population will eventually fall.

Now you may think Thailand has too many children, but is it possible for there to be too many children for Dairy Queen? According to Dairy Queen, the Dairy Queen concept especially appeals to "young families," but there will be fewer young families in Thailand's future and Dairy Queen's future because of population control.

So I urge you to vote yes on this resolution: Let it be resolved that this company refrain from making charitable contributions.

One final point: should you, on the other hand, vote to continue the current practice of making charitable contributions based on shareholder designations, I would urge you all to designate 501(c)(3)s like the Population Research Institute, which are attempting to help the poor become the agents of their own development, and not simply try to reduce their number through population control.

Thank you, Mr. Chairman, for this opportunity to speak. Thank you.

Do we have a uh do we have a second of the motion? Okay we at and is there any further discussion? Any is there anyone there at the microphone that would like to talk about it anymore?

Okay if there's no further discussion, we'll have Miss Amick report on the votes cast on that. If anybody wishes to cast a vote in person they can raise their hand and submit that but we'll have a preliminary report from Miss Hammock.

My report is ready. The ballot of the proxy holders in response to the proxies that were received through last Thursday evening casts 28,452 votes for the motion and 1,014,353 votes against the motion. As the number of votes against the motion exceeds a majority of the number of votes related to all Class A and Class B shares outstanding, the motion has failed.

The certification required by Delaware law of the precise count of the votes will be given to the secretary to be placed with the minutes of this meeting. Thank you, Miss Amick. The proposal fails. After adjournment of the business meeting, I will respond to questions that you may have that relate to the businesses of Berkshire but do not call for any action at this meeting.

Does anyone have any further business to come before this meeting before we adjourn? If not, I recognize Mr. Walter Scott to place a motion before the meeting.

I move that this meeting be adjourned. There a second? Motion to adjourn has been made and second. We will vote by voice. Is there any discussion? If not, all in favor say aye. Opposed, say no. The meeting's adjourned.

Thank you. Now before we get on to the questions, and when we get to the questions we will move through various zones sequentially, there are just a few special guests that I would like to recognize and, and because of the crowd I've not had an opportunity to make sure all of these special guests are here, but we will find out here shortly.

The first guest, and I hope very much he's here, he made it. He was planning to be here. It was, um, let’s see, 40... 48 years ago this July or so, about June I got a letter from Ben Graham who had been pestering for a job for about three years and getting no place. And Ben said, “next time you're in New York, come in and talk to me.”

So I was there about 10 hours later. I didn't have a net jets plane then, so it took a little longer and I went in to see Ben and he offered me a job, and I took it on the spot. I didn't ask what the salary was or anything else. And a month or two later, the family joined me. My daughter was already born and Susie was pregnant with Howie, and we moved back there and I went to work for Graham Newman Corp.

And one of my three bosses, I had three bosses that, Ben Graham, Jerry Newman and Mickey Newman, and Mickey was exactly 10 years older than I was at that time, and he's exactly 10 years older now. Mickey was a major factor in a hugely successful... uh, he ran the place, a company that was not quite that successful yet in 1954 when I back went back there, the Philadelphian Redding Coal and Iron Company, it was as it was called then.

And after I'd been there maybe a year, Mickey was in charge of Philadelphia and Redding and a fellow named Jack Goldfarb came into the office. And I really didn't know what was going on, I had a good bit of my net worth in Philadelphia Redding, so I was interested. But Jack Goldfarb and Mickey were behind closed doors largely, but when they emerged, the Philadelphian Redding Company which was controlled by Graham Newman had bought Union Underwear, which was the manufacturer of Fruit of the Loom product under a license at that time.

And as I told in the annual report, it was a very, very attractive buy and Mickey made a number of good buys. And when Mickey and I have talked and seen each other over the years, some not a lot, but we would see each other. And when Fruit of the Loom entered bankruptcy a few years ago, Mickey called me and said, "What are you going to do about it? You should do something."

And he was very helpful, particularly helpful in introducing me to John Holland, who runs Fruit of the Loom and is a tremendous asset to the company, and Mickey gave me lots of insights on that, and when I got discouraged with the bankruptcy procedure, and it is discouraging to try and buy a company out of bankruptcy, Mickey would gently prod me along.

And so I believe today we have with us Mickey Newman and his son, who I last saw when he was a little red-headed kid. Bill and Mickey and Bill, if you're here, if you'd stand up, it'd be great. Now let's see if they made... there they are. Let's have a spotlight on them. I can't see very well from here whether Bill's still red-headed, but Mickey is 81, believe it or not. You won't believe it if you meet him, and he's been a tremendous help and a great friend over the years, and he accomplished much for us in the past year.

I don't think we would have Fruit of the Loom if it hadn't been for Mickey, particularly nudging me along as we went through the process. I also hope we have today with us, and I again didn't get a chance to see them before the meeting, but Ralph and Lucy Shea here. Ralph and Lucy, were they able to make it or not? Yeah, there they are.

Ralph is in the Berkshire Hathaway Hall of Fame, I mean this is like being at Cooperstown, you know, and introducing Bob Gibson or Sandy Koufax and then Ralph uh for a great many years added tremendous value to Berkshire at Scott and Fetzer. We wouldn't be able to buy some of the things like Fruit of the Loom if it hadn't been for the profits developed under Ralph's management at Scott Fetzer. So I’m delighted that he and Lucy can join us.

I believe, and I hope we have Larry and Dolores Brandon? Are they here? Could be? There they are, let’s have a spotlight on them. Dolores is also known as Dutchy, but we call her Saint Dutchy at Berkshire headquarters because she gave birth some years ago to Joe Brandon, and Joe has been doing a fabulous job for us at General Re. He took over early in September. It's really going to be our number one asset.

There's been a lot happened since those days in September when Joe took over. I think you're going to see some terrific results throughout our insurance business, but particularly at General Re. I wrote Dutchy a letter, and I said, you know, it’s terrific what you've done for us, but you know, I was a little like the farmer that went into the hen house and I pulled out an ostrich egg and said to the hens, you know I don't like to complain, but this is just a sample of what the competition's doing.

Well I berated her a little bit for not having twins because if she just had a twin for Joe, I mean there's no, we'd own the world. But she tells me that she wrote me back and said she really done her best, I mean she had seven children, five of whom are in the insurance business, and she has 19 grandchildren. So we have people out on the road trying to sign up these grandchildren now, and if you get a chance, you know tell her her productive years are not over.

Finally, we have with us today the fellow who put together that terrific cartoon. Anybody that can even takes on the job of making me look like James Bond is a very brave person. And Andy Hayward has a company called Deak Entertainment, which is a leading producer of children's programming. When you turn on the television on Saturday morning, you will be seeing his output, and Andy puts this product together.

He sends people to Omaha, he does it all. It’s his script, it’s his production, he does it on his own time, on his own nickel. It’s his contribution to the Berkshire meeting, and I mean it’s absolutely fabulous. And I have to tell you that this fall Andy is going to have a series of 40 episodes that are called, I think it’s called “Liberties Kids." It will be on public broadcasting at 4:30 five days a week, and it’s really the story of America. It’s told, Charlie will like this, Charlie doesn’t know about this, it will be told through the eyes of three young apprentices in Ben Franklin's print shop, and it will view the evolving of the American democracy and the constitution and all with Andy's creative characters.

But it will use the voices of various other people, and I'm flattered. I get to be James Madison in this. And we have Sylvester Stallone, we have Billy Crystal, we have Whoopi Goldberg, and Charlie will be crushed to find, I think it's Walter Cronkite who is going to be Ben Franklin. I mean that I think Charlie held out for too much money or something in this, but it's going to be a fabulous series; I mean I am looking forward to this. It'll run all this year starting in the fall and we'll run again the following year and it will be a great, great piece for American children and American adults.

I plan on watching it myself, and it will just be the story of how this country came about through the eyes of these three young apprentices of Ben Franklin. So Andy is here with his son Michael, and if Andy and Michael would stand up I’d like to give him a hand myself. Andy, where are you? They're here someplace.

We've got a lot of other special guests, but they're up here in our manager sections. You saw them up on the screen, they’re the people that make this place work. We have a larger and better cast this year than we've had even in the past and it'll grow in the future. This is a company of managers and you know we confess to how little we do around headquarters, as you saw in the movie and we now have I think... I'm not sure of the exact number whether we had the... it's 130,000 now or something like that, people working all over the world in all kinds of occupations.

And I think they get a sense when they come here that they're working for real people on this side too; I mean they get to see people who are actual owners. So we have some institutional owners, but we have 350,000 individual owners now, and I think I believe it's correct to say that our stock turns over... there’s less turnover in the shares of Berkshire than any other company of major size in the country, which means in effect we have more what I would call real owners—people who want to be in partnership with the kind of managers we have.

And Charlie and I are very proud of them, and we're going to get to the questions in just one second. I thought I would give you a little update on particularly the insurance aspects of the first quarter because insurance cost us a lot of money last year. It's our main business; it's always going to be our main business; it's a very, very big business and it's going to get bigger.

And there were some special events of last year and there were some mistakes of our own that made it a bad year for insurance. Last year our float cost us almost 13 percent, and that's a lot to pay for money. It’s not our record; we had a period in the 80s when we ran into even more difficulties. But I think there’s been—well I know there's been—there's been a change in the market; there’s been a change to a degree in the culture at a very important unit, and I think that barring some really mega catastrophe—and we’ll talk about those later possibilities—that we're doing pretty well.

And if we could have the first chart tonight? The first chart, which I can't see myself here, but I think it will be the insurance underwriting results for the first quarter, and you will see that two good things happened in the first quarter. One is our float increased by 1.8 billion dollars. That's a lot of money to take in net. I don't think there's any company probably in the world that had a gain in float that was even close to that, and we actually achieved that with a small underwriting profit.

So the float not only cost us nothing in the first quarter but we had a gain of 1.8 in it, and all units contributed to that. And our goal is to obtain more and more float at minimal or no cost. And there have been a number of years in the past when we've run an underwriting profit, which means that the use of that money is essentially free, or even better than free, and we've had one very bad year and a couple of so-so years before that, but I think our cost of float over the next few years, unless you get into an extraordinary catastrophe, I think it should be pretty satisfactory.

Now you’ll notice there’s a note down at the bottom that’s slightly technical, but it's an important enough item in Berkshire and in understanding our cost of float, but I thought I'd just devote a minute to it. If you find this uninteresting you can live a happy life without understanding what I'm about to explain next. You may even lead a happier life if you don't understand it as I look at the people that understand it and don't understand it.

I'm not sure which group is happier but when we write... we write a good bit, and have written a good bit, I should say, of retroactive insurance. Now in retroactive insurance, a company may come to us that’s merging with another company and they want to put a cap on their liabilities or define them better from past dissidents. So they may come to us and say we want you to pick up all the losses that are going to be paid from things that happen prior to, say, 1990, and we think that we owe a billion dollars that have yet to be paid in losses from that period, but we want to protect ourselves up to, say, 2 billion or some number like that.

So they write us a check and we take over—this is called retroactive insurance. We take over their losses from the past for a specific period and for a specific amount, and when we do that, the accounting it's not accounting you run into every day. We've explained it in the past, but it creates a charge which will occur over time in the future and as you can see in the first quarter the 20 million of underwriting profit we made was after a total of 112 million for the amortization of this charge that is set up.

So if a company comes in and says, for example, we want you to protect us up to a billion and a half for losses that occurred in the past and we'll give you a billion dollars for it, we will debit cash for a billion dollars and we'll debit this deferred charge for a half a billion and we'll set up a liability for a billion and a half.

And that 500 million we set up as a deferred charge we amortize over a period of time as we expect to pay the claims. Now there would be a lot of room for judgment; there is a lot of room for judgment in terms of how fast we amortize that. We try to be conservative; we make an estimate of when we will pay those claims and how much we will pay, and we try to amortize it over a reasonable period.

I've got another slide that shows how those amortization charges will work over time, and we're going to put these slides on the internet because we feel that our shareholders should understand the impact of these charges that will come against underwriting profits in the year 2002.

We will have a 400 million plus charge for this; it's built into the figures now and if we do 20 billion of premium volume, that's about a 2% charge. So to have our float be cost free we have to make 400 plus million on underwriting elsewhere in order to offset that. And as you can see, we did that in the first quarter and we'll find out whether we do it for the full year.

It's a pure... not many companies do this kind of business and it's a big item with us so I really want all the shareholders to understand it and for that reason we'll put it on the internet.

I should emphasize that in all of these contracts we cap our liability. So a lot of these contracts apply to liabilities that primarily or not primarily but in a significant way and often primarily arise from asbestos. But when you read about asbestos claims accelerating and all that, the numbers are capped in our case, so we really don't care whether we pay it on an asbestos claim or whether we pay it on an old auto liability claim or whatever the question is.

It's whether we've been correct in estimating the speed at which we will pay, and in some cases we may pay even less than our maximum amount. So anyway, that's available for those of you who previously were unhappy not understanding this and now we're thrilled to know how it all works.

The final item which is a little easier to understand is we talked in the annual report about how we expected growth to resume at GEICO. And I've put up again, I can't see with it up there but I assume that we have the GEICO policies in force figure and the increase by Charlie hasn't seen these as a matter of fact.

So I'll give him the slides, and as you can see, growth—not at the rates of a couple of years ago but quite a turnaround from last year—growth has resumed at GEICO in a reasonable way. We figure each policyholder of a preferred nature is worth a thousand dollars to us at least, and so if we had forty thousand policyholders in a month we created in our view forty million dollars of value.

And of course we have the earnings and the float and so on that goes with it. As you'll notice on the first slide, GEICO operated a significant underwriting profit in the first quarter, so all of its float was free and its float has continued to grow.

We are... you saw one of our little squirrel ads there which I liked. We are getting... we are not getting a whole lot more inquiries than a year ago, but we're closing a significantly higher percentage of those that call, so our growth has been picking up because our closure rate has increased quite substantially.

And our retention rate of old policyholders also is increasing month by month, so we've got two trends that are quite favorable in terms of adding business. And the third one of adding more inquiries is something that we are working on and we are delighted to spend a lot of money on it if we can figure out a way to spend it intelligently.

But the increase in the retention ratio, the increase in the closure ratio is resulting in very decent growth at GEICO and it's growth in all of our categories—in the preferred class, in the standard class, and the non-standard class of business; whereas last year, the latter two fell.

That's enough about the formal presentation now we're going to go into the various zones. I promised a young shareholder in zone one that he would get to ask the first question and that we're ready for zone one.

Hello Mr. Buffett and Mr. Munger, my name is David Kleinrodc from Lincolnshire, Illinois. Thank you for letting me ask the first question. I wanted to say I am sorry for the loss of your friend Mrs. Graham last year. My question is you have said that your favorite time to own a stock is forever, yet you sold McDonald’s and Disney after not owning them for long. How do you decide when to hold forever and when to sell? And also, are you and Mr. Munger wearing Fruit of the Looms?

Charlie, I think I better answer the question. I can answer unequivocally: I am wearing Fruit of the Loom, and I’m not sure whether Charlie wears underwear. Do you? I haven’t bought any new underwear in a long time. Therefore, I'm inappropriately attired. He's waiting for a discount; don’t let him kid you.

Well, the answer is it’s a very good question about selling. I mean, it’s not our natural inclination to sell, and on the other hand—and we have held the Washington Post stock since 1973. I've never sold a share of Berkshire having bought the first shares in 1962. And we've held Coke stock since 1988, we’ve held Gillette stocks since 1989, held American Express stock since 1991.

We had actually previously been American Express one in the 60s. And Disney, so there are companies we’re familiar with. We generally sell, but we would sell if we needed money for something else.

But that has not been the problem the last 10 or 15 years. Forty years ago my sales were all because I found something that I liked even better. I hated to sell what I sold but I also didn’t want to borrow money. So I would reluctantly sell something that I thought was terribly cheap to buy something that was even cheaper.

Those were the times when I had more ideas than money. Now I've got more money than ideas and that’s a different equation. So now we sell really when we think that we’ve when we’ve reevaluated the economic characteristics of the business. In other words, if you take—don’t want to name names, but you take a stock we’ve sold of some sort, we probably had one view of the long-term competitive advantage of the company at the time we bought it and we may have modified that.

That doesn’t mean we think that the company is going into some disastrous period or anything remotely like that. We think McDonald’s has a fine future; we think Disney has a fine future, and there are others. But we probably don’t think that their competitive advantage is as strong as we might have thought when we initially made the decision.

That may mean that we were wrong when we made the decision originally; it may mean that we’re wrong now and that their strengths are every bit as what they were before. But for one reason or another we think that the strengths may have been eroded to some degree.

An obvious case on that would be the newspaper industry generally, for example. I mean in 1970, Charlie and I were looking at the newspaper business we felt it was about as impregnable a franchise as could be found. We still think it’s quite a business, but we do not think the franchise in 2002 is the same as it was in 1970.

We do not think the franchise of a network television station in 2002 is the same as it was in 1965. And those beliefs change quite gradually, and who knows whether they’re precise, you know, whether they’re right even, but that is the reason in general that we sell now.

If we got into some terribly cheap market we might sell some things that we thought were cheap to buy something even cheaper after we bought lots and lots of equities, but that’s not the occasion right now. Charlie, nothing to add?

He’s been practicing for weeks. Okay, let's go to zone two. I'm John Bailey from Boston, Massachusetts, and I hope I'm not asking you to repeat your insurance presentation, but I have a question about the growth of our float. There’s an increasingly popular piece of analysis out there where people project the growth of the float for a large number of years into the future in order to determine the value of our business here, but I wanted to ask more fundamentally, the existing float that we have runs off annually at a pretty considerable rate.

In order to maintain that we have to replace it through our operations, and then going the next step to achieve the growth we have to more than replace it. So I wanted to ask you to address the characteristics of the maybe the non-GEICO insurance businesses that should give us the confidence to expect large amounts of replacement and growth of float at reasonable costs going forward.

Yeah, in a sense float is somewhat similar to being in the oil business. I mean, you know, you're... Every day some goes out as you pay claims, and the question is do you find more oil than you produce that day? It’s very relevant; it’s a good question too. You know, what is the permanence of the float? What is the cost to float? What's the likelihood of it growing? Could it actually run off?

As you saw up on the slide we have 37 billion dollars plus in float. I think we have more float in our property casualty business. A little bit of that float is in General Re's life and health business, but very small. So basically you're looking at property casualty float when you look at that 37 billion.

I believe that’s more than any company has in the United States, and it’s possible—I haven’t checked Swiss Re in Munich—but it’s even possible it’s larger than anybody in the world.

Now if you go to 30th and Harney Street here in Omaha, you’ll see National Indemnity—it’s the same building that was there when we bought the company in 1967 from Jack Ringwald, when it had maybe 12 million of float, and I had no idea that that 12 million or whatever the number was would turn into 37 billion.

Sometimes I can't really quite figure out how it happened, but in any event it did and it... We don’t want people focusing on growth in our insurance business. I mean we want them focusing on intelligent growth when we can do it at GEICO or whatever it may be. But I think it’s suicide from a business standpoint to tell a bunch of insurance managers to go out and grow a lot so you can say, "Well, with that lack of push from the home office, you know, how is that 37.5 billion going to grow?" And I would say just as I would have said to you for the last, you know, 30 odd years, I don’t know, but I think that—well I can tell you this, that our float would have less natural runoff than the float from just about any company in the world.

I mean we have a longer duration to our float because it arises from these retroactive contracts and from reinsurance long-tail reinsurance and that sort of thing, so our float has less natural erosion than just about any that I know of in the world.

But it erodes! It is a long-lived oil field, but it—we’re pumping it every day. If I had to bet my life on whether the float would be higher or lower three years from now or five years now, I would certainly bet it would be higher. And it has turned out over the decades, it’s grown at a very significant rate. But I don’t want to push anybody to do it.

It grew at a billion eight hundred million dollars the first quarter. Now there are a few special transactions in that but we seem to attract special transactions and there's nothing more important to Berkshire than to have that float at least be maintained, but I would say grow. And I think it will grow. I think to have it be obtained at low cost, because that float did us no good last year at all.

That float lost us a lot of money in the year 2001 because it cost us I think 12.8 percent. And we didn’t have a way to make money with 12.8 percent money! We will make a lot of money if we can obtain the float at no cost as we did in the first quarter.

The answer to your question is that without knowing any specifics—without being able to promise you any specifics—you know, I think the float is more likely to grow than to erode. I said last year at this meeting that there were, you know, that the flow of the American property casualty business was 300 and some billion, and I thought we were sneaking up on ten percent of it.

I was corrected later; Ron Ferguson pointed out to me that he sent me the figures. The flow of the American property casualty business is well over 400 billion. But even at that, you know, we are eight or nine percent, or some figure like that, of the float of the whole country. And obviously we can't grow at the same percentage rate starting from that kind of a pace as we could when we started back in 1967, but I still think we can grow it.

Charlie?

Yeah, I think the questioner realizes that growing float at a good clip with very low cost is extremely difficult.

It is; it's almost impossible. We intend to do it anyway. [Applause]

Of the two variables though, the most important thing to do is to focus on getting it at very low cost. If we get 37 billion dollars at no cost or very low cost, then if we don’t do, we don't make money, well shame on us.

The troops have delivered and then it’s up to Charlie and me to figure out ways to use that money. So the important thing is the cost of the float, not the size of the float. Although obviously we would like it to grow.

One, we will do what we can to make sure that happens. Area three, good morning.

My name is Hugh Stevenson. I’m a shareholder from Atlanta. My question is on asbestos liability toward cases. It seems like this is growing to be a bigger and bigger problem, including more and more companies, including a number of companies in the Dow Jones 30 industrials. What do you see for Berkshire as the risks and opportunities in the operating insurance businesses? And if you two were in charge of writing or structuring a settlement for the whole problem, how would you do it?

Okay, I'm going to let Charlie tackle most of that because he's... he's, uh, we've both done a lot of thinking on it. I think Charlie's thinking is that I know it's better and it may even be more extensive.

Asbestos, as I mentioned in some of these retroactive contracts, is a big part of the liability, but it really doesn’t make any difference unless much more dependent on the speed of payment than the amount of payment. We are capped on all those types of contracts, so there's a figure in the annual report about aggregate asbestos and environmental liability, but that number may look quite big compared to some other insurance companies but most of that there's a limit on.

And it’s a good thing because asbestos continues to explode. It’s just, we talked about it last year at this meeting and I said no matter how bad you thought it was, it was going to be worse, and it had been worse and it will be worse.

And you make a very good point when you bring up the fact that many companies that are thought to be, or have been thought to have been insulated from the asbestos litigation have now been dragged in one way or another, and that won't stop either.

Ironically, it’s not impossible that that asbestos litigation actually produces some opportunities for Berkshire in terms of buying companies out of bankruptcy, free of their asbestos liabilities. We did that although it occurred much earlier in the case, but we bought Johns Manville, which was the, my memory was the first major company, really big company—to go into bankruptcy and be forced there by asbestos liability.

That happened back in the early 80s, and that subsequently they were cleansed of their liability by, in effect, giving a very high percentage of the company and its debt to the plaintiffs, and their lawyers I might add.

And when we came along a year ago, I mean that was all past history, but we probably wouldn't own the Johns Manville company if it hadn't been for some asbestos litigation that started 20 years ago or more, and we may see actually more companies that end up in Berkshire that have been forced into bankruptcy through asbestos.

But it is a cancer on the American corporate world and it’s one that’s growing, and I think I'll let Charlie talk about it.

Well, the asbestos liability situation in the country has morphed into a very disadvantageous situation where there’s an enormous amount of fraud and the wrong people are getting money and there’re vast profits for people who are arranging the fraud, and so it isn't a good situation.

There's also real liability to people who have serious injuries and some of those people are being deprived because the meritless claims are taking so much of the money that there isn't adequate money in many cases for the people who’ve had the worst injuries.

The Supreme Court has practically invited Congress to please step in and create a solution, but deterred by the plaintiff's contingency fee bar, Congress has refused to do anything. This is not a good situation and any of you who can do anything about it, I would encourage you to do so.

What do you think it'll look like in five years, Charlie?

I would be surprised if there were a constructive solution. I think we'll have more of them, as we have now. It’s huge too; I mean, you, there are companies that some of you may own stock in that have huge potential liabilities.

They didn't think they had those liabilities; even maybe a few years ago, but they’re finding ways to drag in almost anyone. And you know it’s a concern when we buy businesses because we are a deep pocket and a smaller company may not have been worthy of people investing lots of hours on a speculative idea that they could create some kind of connection with, you know, the ABC company and hundreds of thousands of people that are claimed to be sick but it gets more interesting if Berkshire's involved.

So it’s a real problem for corporate America and they have not been able, in effect, to come up with a solution. There was a solution, as I remember, and the Supreme Court didn't allow it, isn’t that right Charlie?

That's right.

Yeah, we will be very careful both in our insurance operations but just as importantly in our acquisitions and all that in terms of avoiding unnecessary exposure to asbestos liability.

I'm not terrified at all about our insurance operation in terms of what's there from the past. I’m not saying that I know with any precision what the amounts will be, but that is not at the top of my list.

But essentially you will have a plaintiff’s bar that, going beyond asbestos, will try to turn any kind of human adversity into a claim against somebody that's got a lot of money, and that's going on with mold.

I mean you may have seen Ed McMahon is suing his insurer for 20 million dollars for the mold in his house. I just wish I could get some of that mold.

You probably haven't. Yeah, I hope you're referring to the house.

Okay, area four. Good morning, my name is Ted Friedman. I'm from Cincinnati, Ohio. You said in a 1996 annual report that most investors will find that the best way to own common stocks is in an index fund that charges minimal fees. Two questions: First, there are a lot of different index funds that hold different baskets of stocks. What criteria would you use or recommend to select an appropriate index fund?

Second, the price to earnings ratio of the S&P 500 is significantly higher than its historical average. What benchmark should an investor use in purchasing this index?

Yeah, I would say that in terms of the index fund, I would just take a very broad index. I would take the S&P 500 as long as I wasn't putting all my money in at one time. If I were going to put money into an index fund in relatively equal amounts over a 20 or 30-year period, I would pick that. I would pick a fund, and I know Vanguard has very low costs—I'm sure there are a whole bunch of others that do; I just haven't looked at the field.

But I would be very careful about the costs involved because all they're doing for you is buying that index. I think that the people who buy those index funds, on average, will get better results than the people that buy funds that have higher costs attached to them because it’s just a matter of math.

If you have a very high percentage of funds being institutionally managed and a great many institutions charge a lot of money for doing it and others charge a little, they're going to get very similar gross results but different net results.

And I recommend to all of you reading John Bogle's written a couple of books in the last five years and I can’t give you the titles but they’re very good books and anybody investing in funds should read those books before investing or if you’ve already invested, you still should read the books and it's all you need to know really about fund investing.

So I would pick a broad index, but I wouldn't toss a chunk in at any one time. I would do it over a period of time because the very nature of index funds is that you are saying I think America's business is going to do well over—or reasonably well—over a long period of time but I don't know enough to pick the winners and I don't know enough to pick the winning times.

There’s nothing wrong with that. I don't know enough to pick the winning times. Occasionally I think I know enough to pick a winner, but not very often. And I certainly can't pick winners by going down through the whole list and saying this is a winner and this isn't and so on.

So the important thing to do, if you have an overall feeling that businesses are a reasonable place to have your money over a long period of time, is to invest over a long period of time and not make any bet implicitly by putting a big chunk in at a given time as to the... creating a big question of what happens with that.

As for criteria as to when you should or shouldn't, I don't think there are any great criteria on that. I don't think price earnings ratio determines things. I don't think price book ratios, price sales ratios—I don't think any. There's no single metric I can give you or that anyone else can give you in my view that will tell you this is a great time to buy stocks or not buy stocks or anything of that sort.

It just isn't that easy. That's why you go to an index fund and that's why you buy over a period of time. It isn't that easy; you can't get it by reading a magazine; you can't get it by watching television; you'd love to have something that said, you know, I mean that, you know, if PEs are 12 or below or some number you’re buying; if they're 25 or above, you sell. It just doesn't work that way.

It’s a more complex business than that; it couldn’t be that easy when you think about it.

So if you are buying an index fund, you are protecting yourself against the fact that you don’t know the answers to those questions. But do you think you can do well over time without knowing the answers to those questions as long as you consciously recognize that fact?

And you know, I would—as long as it's a sensible index fund, I would go ahead and tell you, I would probably use the S&P 500 because I think if you start getting beyond that, you start thinking you should be in small caps this time and large caps that time or this foreign side, and as soon as you do that, you know, you’re in a game you don’t know, you know, you’re not equipped to play in.

In all candor, that would be my recommendation. Charlie?

I think his second worry is that common stocks could become so high-priced that if you bought index funds you wouldn't expect to do very well.

I didn't think I'd live long enough to think that was likely to happen, but now I think that may happen.

But probably what you're saying there is that they could get to a level—and they'd have to be at a sustained level like that for a long time. It could be there and stay there for a long time in which case you might make three or four percent. But would there be anything way better than that around under those circumstances?

Anyway, in past the peanut brittle place. Well, in Japan where something like this happened the return from owning a nice index over the last 13 years or so is negative.

Can something as horrible as that happen here? I mean is it conceivable?

I think the answer is yes. But the option in Japan of course is, though, is to have deposits in a bank or own Japanese bonds at somewhere between zero and one or one and a half percent.

So if rates on everything get very low, which means stocks sell very high, then it just means that you live in a different world than existed 20 or 30 years ago when generally capital got paid.

I must say that we have very good packaging.

Normally he does this in a less formal manner, but he's on his good behavior today.

We're protecting the integrity of the peanut brittle. That is true! The package—the nature of anything with butter in it, you know, is that it starts going downhill from the moment you make it and therefore this packaging has to be extraordinary in order to meet the quality standards that Charlie and I insist on.

Okay, we'll go to zone five.

Mr. Buffett and Mr. Munger, my name is Thomas Comey. I'm 12 years old. I live in Kenfield, California. This is my fifth annual meeting. I know you lost a lot of money as a result of 9/11, but I would like to know how 9/11 changed your life and your investment strategy.

Well, I think in the sense of changing the life, it's a good question, and it made everybody, I think, in the country aware. I mean we've, you know, we've gone through world wars and all of that and essentially felt quite protected within these borders, and I have been quite worried about, Charlie can attest to, you know, the possibility particularly on a of some kind of nuclear device in this country bites. Probably more likely by terrorists than by some some uh, at least declared act of war by another state.

And 9/11 made everybody realize that that as humans have not progressed particularly in terms of how they behave with each other over the years, they have progressed enormously in their ability to inflict damage on those that they hate for one reason or another.

And that has increased. You know for a long time in the world, if you didn't like somebody the most you could do was throw a rock at them, and that went on for millennia. And then it moved into what you might characterize ironically as more advanced states, and in the last 50 years it’s increased exponentially.

And so now, people who are megalomaniacs or psychotics or religious fanatics or whatever, and who hate others in some unreasonable way, now have means at their disposal to inflict a whole lot more damage, incredibly more damage than they had not too many decades ago.

And 9/11 brought that home to everybody—something they probably understood subconsciously and didn't think about very often to something they thought about much more intentionally, and it's become more real to them.

It hasn't really changed my view about—I mean in the sense that I've you know, there are millions and millions and millions of people in the world that hate us, and most of them can't do anything about it, but a few have always tried to do something about it. And now the instruments they can use and the most extreme, in a sense being the human bombs that have appeared in the Middle East, but the there’s more ability to—enormously more ability for the deranged to inflict harm and to do harm.

And that's a reality. In terms of the business aspects of it, the question obviously the area at Berkshire that it affects most significantly by miles is insurance, and prior to 9/11, even though we recognized that there could be huge monetary damages that flowed from the activities of what I would call deranged people, we hadn't really written the contracts in such a way as to either get paid for taking that risk or to exclude the risk.

In other words, we were throwing it in for nothing. We had excluded risk for war. I mean we knew that. I mean we’ve seen what happened in England in the 40s and so we had taken account of something that that that some of us have seen with our own eyes, but we didn't take account of something that we knew was possible but we just hadn't seen.

And that's, you know, that's the human condition to some degree. Since September 11th, everybody in the insurance business recognizes that they've had exposures that they weren't charging for, and they either had to exclude those exposures or they had to charge for them.

The first thing we had to do, of course, is we had lots of policies on the books that left us exposed to this and most those policies ran for a year starting at different points. Those have run off to a great degree, but they're not entirely run off. The other thing we did was on new policies we have sold a fair amount, quite a quite a large amount of terrorism insurance that excludes what we call NCB nuclear chemical and biological, as well as fire following nuclear.

And we can take a fair amount of exposure to that sort of terrorism, because it doesn't it won't aggregate it. It aggregated at the Twin Towers in a way that world trade center in a way that just about was about as extreme as you could get for non-NCB type activities. I mean that was a huge amount of damage done without nuclear, chemical, or biological.

But we can have tens of billions of dollars with NCB excluded throughout a greater New York area or something, but we can't: we can’t have hundreds of billions exposure that would be exposed, say, to nuclear activities because they're a three coordinated could cause damage that would destroy the insurance industry, and if we had coverage on that, it would destroy us as well.

So we take a little, we take a few risks that involve nuclear, chemical or biological, but generally speaking the terrorism insurance that we're writing—and we've written a fair amount of it—excludes those particular risks.

You could say, you know, take biological, how could that be something significant from an insurance standpoint? Well, many people don't realize that the world trade center loss was, by a huge margin, the largest workers compensation loss in history. You think of it as property damage but in the end close to 3,000 people died who were working at the time they died and therefore covered by workers compensation.

If the same thing had happened at Yankee Stadium while they were all watching a baseball game or some other place, they wouldn't have been covered by workers compensation, so it was happenstance to some degree.

But that became the largest workers compensation loss in history by a huge margin. Now if you were trying to cause huge damage in this country and you could figure out something that in the way of a biological agent and there are people working on this that could be injected into the ventilation systems or whatever of large plants, large office buildings, you could create workers compensation losses that would just totally boggle your mind.

And anybody that was working on such a thing, you have to expect they would, if they thought they had perfected it, would try to do something close to simultaneously in areas where there would be thousands and thousands of people working.

And it could make the world trade center loss look like nothing.

So we have to be basically vigilant in how much risk we let aggregate in something of that sort.

We've... People have always been vigilant about how many houses they'll insure along a shoreline or that they, in terms of physical risk, you know, they don't want too many homes or factories on the San Andreas fault or something of the sort because they recognize that as having aggregation possibilities.

But now you have to think about things that man may plan in the way of catastrophes that will have aggregation possibilities, and that is something that's pretty much been introduced into the insurance world's thinking since September 11th.

And I can tell you we think a lot about it. It’s—I mean the social consequences are far worse than insurance, but we have to think about how we pay our claims because if we ever do anything really foolish and in danger take an aggregation that would cause us to lose the net worth of Berkshire, we would not only not be able to pay the claims of the people in that disaster, but there are other people that suffered injuries 15 years ago, paraplegics and all that, that we're making payments to for the rest of their lifetime, and we wouldn't be able to make those payments and we're not going to run our business that way.

Charlie?

To the extent that September 11th has caused us to be less weak foolish and sloppy, as we plainly were, in facing some plain reality, it's a plus.

We regret, of course, what happened, but we should not regret at all that we now face reality with more intelligence.

This inconvenience that we all have, this tightening of immigration procedures, etc. should have been done years ago.

The most important thing in investments is not having a high IQ, thank God.

I mean, the important thing is realism and discipline, and you don't need to be extraordinarily bright to do well in investments if you're realistic and disciplined.

And the same thing applies in insurance underwriting. It is not some arcane science that, you know, that the ability to which to do successfully is given only to a few or which requires the ability to do mathematics.

You have to have a very little—have very little to do with it.

Understanding of probabilities and all that kind of gut understanding that's important but it does not require the ability to manipulate figures.

It does not really—you can do it without calculus; you can really do it with a good understanding of arithmetic and an inherent sense of probabilities.

And as Charlie says, to the extent that I think we’ve always—from the investment standpoint, you know, if we’ve had any distinguishing characteristics, it would be that in terms of realism and discipline and generally that means defining what you don’t know in insurance underwriting—it’s the same thing.

You have to have—you have to be realistic about what you can understand and what you can’t understand and therefore what you can insure and what you can’t insure, and you have to be disciplined about turning down all kinds of offerings where you’re not getting paid appropriately.

And September 11th grew those lessons and probably redefined getting it paid appropriately in certain cases.

Area six.

Hello, my name is Everett Fury. I'm from Atlanta. I wanted to ask you to comment on the relative P/E multiples of bank stocks versus the S&P. They seem to be at, you know, 30, 35 to 50-year relative lows to the S&P, and I was wondering if that's a result of the market's perception of the forward growth rates of banks or if the market has perceived that there's a change in risk there.

Ask about the performance of what group compared to the S&P.

Well, and what was your assertion about the performance historically?

Well, the relative multiple of bank stocks versus the S&P back in the 40s, 40s, 50s, 60s, they commonly traded at, say, one times an S&P multiple, and now they're maybe half that.

Well, Harry Keith used to have a lot of figures on this, and I don’t really think about a bottom.

I mean the appropriate multiple for a business relative to the S&P will depend on what you expect that business to achieve in terms of returns on equity and incremental returns on incremental equity versus that S&P.

I mean you’ve got if you’ve got two different types of businesses, and we'll say the S&P earns Exxon equity and can deploy an additional amount of capital at Y, and then you compare that with any other business, and that’s how you determine which one is cheaper.

I would not characterize all banks as the same.

I mean we have in this room John Fourlanes who runs the Bank of Granite in North Carolina and they've earned two percent on assets without taking any real risks for decades and it’s a tremendous record.

And then you have other banks that have been run by people that took them right into the ground.

I mean whether it was First Pennsylvania going back 30 years ago, I think it was John Bunning, and they—they're not a homogeneous group.

We own a couple of... stock and a couple of banks. We own stock in MT, the bank that's exhibiting downstairs today.

We own stock in Wells Fargo, and we think those institutions are somewhat different than other businesses.

So I don't think there’s a... it goes back to that earlier question, people always want a formula.

I mean they go to the Intelligent Investor and they think, you know, somewhere they're going to give me a little formula and then I can plug this in and then I’ll make lots of money.

And it really doesn’t work that way.

What you're trying to do is look at all the cash a business will produce between now and Judgment Day and discount it back at a rate that’s appropriate and then buying a lot cheaper than that.

And whether the money comes from a bank, whether it comes from an Internet company, or whether it comes from a brick company, the money all spends the same.

Now the question is what are the economic characteristics of the Internet company or the bank or the brick company that tell you how much cash they’re going to generate over long periods in the future, and I would come to very different answers, you know, on MT Bank versus some other bank.

So I wouldn’t want to have a single metric like relative P/E that I went by.

I think that banks have sold a good many banks are sold at very reasonable prices. We bought all of a bank in 1969; we bought a bank in Rockford, Illinois.

Charlie and I went and looked at—we must have looked at half a dozen banks in that two to three year period.

Absolutely! Yeah, we trudged around and we found some very oddball banks that we liked, and they were characterized by very little risk on the asset side and very cheap money on the deposit side and even Charlie and I can understand that.

And low prices, incidentally, too.

And then they passed the Bank Holding Company Act in 1969 and they killed off our chances to do anything further in buying banks.

So we look at banks; we will own bank stocks from time to time in the future.

We’ll probably buy stock in other banks. We've also seen all kinds of banks ruined.

I think it was, um, what was the fellow, M.A. Shapiro, who came up with the statement he said, "There are more banks than bankers," and if you think about that a bit, you’ll see what I mean.

There have been a lot of people that have run banks in a very injudicious manner, but that’s made for opportunities for other people.

They're... A lot of banks have disappeared over time.

I mean up in Buffalo where Bob Wilmers runs MT, there were some other very prestigious institutions that that went right down the tubes and a lot of that happened in the early 90s or late 80s, so I wouldn't look for a single metric like relative P/Es to determine what it's like to invest money.

That you really want to look for things you understand and where you think you can see out for a good many years in a general way as to the cash that can be generated from a business.

And then if you can buy it at a cheap enough price compared to that cash, it doesn’t make any difference what the name of it attached to the cash is.

Charlie?

Yeah, I think the questioner is maybe even asking the wrong people that question.

I would argue that Warren and I have failed to properly diagnose banking.

I think we underestimated the general good results that would happen because we were so afraid of what non-bankers might do when they were in charge of banks.

There are a number of banks that over the last five or six years on tangible net worth, the number of them have earned over 20 percent on equity.

You would think that would be difficult for an industry to do dealing in a commodity, like money, and of course the bankers will argue it’s not a commodity, but it has a lot of commodity like characteristics.

And you would think those kind of returns in a world of six percent long-term interest rates and much lower, you’d think that would be very hard to sustain.

Well, you would have thought it wouldn’t have occurred; you’d think it’d be hard to sustain. We’ve been wrong in the sense that banks have earned a lot more money on tangible equity than Charlie and I would have thought possible.

Now I think, to some extent they’ve done it because they’ve stretched out equity much further than was the case 20 or 30 years ago.

I mean they operate with more dollars working per dollar of equity than and then people thought was prudent 30 or 40 years ago.

But however they’ve done it, they’ve earned a number of banks have earned very high returns on equity in recent years.

And if you earn high enough returns on equity, and you can keep employing more of that equity at the same rate, that’s also difficult to do, you know, the world compounds very fast.

You know, banking as a whole has earned at rates that are well beyond on tangible equity, you know well beyond, I think, what much more glamorous businesses have earned in recent years.

Then Charlie, do you have any further thoughts on that?

Boy, I say again we didn’t diagnose it as it actually turned out and even worse than that we haven’t changed.

Even worse than that we won’t! [Laughter]

Area seven. Good good morning, gentlemen. My name is Hugh Stevenson. I'm a shareholder from Atlanta. My question is on asbestos liability toward cases. It seems like this is growing to be a bigger and bigger problem, including more and more companies— including a number of companies in the Dow Jones 30 industrials. What do you see for Berkshire as the risks and opportunities in the operating insurance businesses?

And if you two were in charge of writing or structuring a settlement for the whole problem, how would you do it?

Okay, I'm going to let Charlie tackle most of that because he’s, he’s uh, we’ve both done a lot of thinking on it. I think Charlie’s thinking is, and I know it’s better and it may even be more extensive.

Asbestos, as I mentioned in some of these retroactive contracts, is a big part of the liability, but it really doesn’t make any difference unless, much more dependent on the speed of payment than the amount of payment. We are capped on all those types of contracts so there’s a figure in the annual report about aggregate asbestos and environmental liability but that number may look quite big compared to some other insurance companies but most of that there’s a limit on.

And it’s a good thing because asbestos continues to explode it’s just... we talked about it last year at this meeting and I said no matter how bad you thought it was, it was going to be worse and it, it had been worse and it will be worse.

And you make a very good point when you bring up the fact that many companies that are thought to be or have been thought to have been insulated from the asbestos litigation have now been dragged in one way or another and that won’t stop either.

Ironically, it’s not impossible that that asbestos litigation actually produces some opportunities for Berkshire in terms of buying companies out of bankruptcy free of their asbestos liabilities.

We did that although it occurred much earlier in the case. But we bought Johns Manville, which was the, my memory was the first major company, really big company, to go into bankruptcy and be forced there by asbestos liability.

That happened back in the early 80s and that subsequently they were cleansed of their liability by in effect giving a very high percentage of the company and its debt to the plaintiffs and their lawyers I might add.

And when we came along a year ago... I mean that was all past history, but we probably wouldn’t own the Johns Manville company if it hadn’t been for some asbestos litigation that started 20 years ago or more and we may see actually more companies that end up in Berkshire that have been forced into bankruptcy through asbestos.

But it is a... It’s really a cancer on the American corporate world.

And it’s one that’s growing, and I think I’ll let Charlie talk about it.

Well, the asbestos liability situation in the country has morphed into a very disadvantageous situation where there’s an enormous amount of fraud and the wrong people are getting money and there’s vast profits for people who are arranging the fraud and so it isn’t a good situation.

There’s also real liability to people who have serious injuries and some of those people are being deprived because the meritless claims are taking so much of the money that there isn’t adequate money in many cases for the people who’ve had the worst injuries.

The Supreme Court has practically invited Congress to please step in and create a solution but deterred by the plaintiff's contingency fee bar, Congress has refused to do anything.

This is not a good situation and any of you who can do anything about it I would encourage you to do so.

What do you think it’ll look like in five years Charlie?

I would be surprised if there were a constructive solution.

I think we'll have more of them as we have now. It’s huge too, I mean you there are companies that some of you may own stock in that have huge potential liabilities.

They didn’t think they had those liabilities even maybe a few years ago but they’re finding ways to drag in almost anyone.

And you know it’s a concern when we buy businesses because we are a deep pocket and a smaller company may not have been worth it.

People investing lots of hours on a speculative idea that they could create some kind of a connection with, you know, the ABC company and hundreds of thousands of people that are claimed to be sick but it gets more interesting if Berkshire is involved.

So it’s a real problem for corporate America and they have not been able in effect to come up with a solution.

There was a solution as I remember and the Supreme Court didn’t allow it, isn’t that right Charlie?

That’s right.

Yeah. We will be very careful both in our insurance operations but just as importantly in our acquisitions and all that in terms of avoiding unnecessary exposure to asbestos liability.

I’m not terrified at all about our insurance operation in terms of what's there from the past. I’m not saying that I know with any precision what the amounts will be but that is not at the top of my list.

But essentially you will have a plaintiff’s bar that going beyond asbestos will try to turn any kind of human adversity into a claim against somebody that’s got a lot of money.

And that’s going on with mold.

I mean you may have seen Ed McMahon is suing his insurer for 20 million dollars for the mold in his house. I just wish I could get some of that mold.

I hope you’re referring to the house.

Okay, area four.

Good morning, my name is Ted Friedman. I’m from Cincinnati, Ohio. You said in a 1996 annual report that most investors will find that the best way to own common stocks is in an index fund that charges minimal fees.

Two questions: First, there are a lot of different index funds that hold different baskets of stocks. What criteria would you use or recommend to select an appropriate index fund?

Second, the price to earnings ratio of the S&P 500 is significantly higher than its historical average. What benchmark should an investor use in purchasing this index?

Yeah, I would say that in terms of the index fund, I would just take a very broad index.

I would take the S&P 500 as long as I wasn’t putting all my money in at one time.

If I were going to put money into an index fund in relatively equal amounts over a 20 or 30-year period, I would pick that.

I would pick a fund and I know Vanguard has very low costs. I’m sure there are a whole bunch of others that do; I just haven’t looked at the field.

But I would be very careful about the costs involved because all they’re doing for you is buying that index.

I think that the people who buy those index funds, on average, will get better results than the people that buy funds that have higher costs attached to them because it’s just a matter of math.

If you have a very high percentage of funds being institutionally managed and a great many institutions charge a lot of money for doing it and others charge a little, they're going to get very similar gross results but different net results.

And I recommend to all of you reading John Bogle's written a couple of books in the last five years and I can’t give you the titles but they’re very good books and anybody investing in funds should read those books before investing or if you’ve already invested, you still should read the books and it’s all you need to know really about fund investing.

So I would pick a broad index but I wouldn’t toss a chunk in at any one time. I would do it over a period of time because the very nature of index funds is that you are saying I think America’s business is going to do well over or reasonably well over a long period of time but I don’t know enough to pick the winners and I don’t know enough to pick the winning times.

There’s nothing wrong with that. I don’t know enough to pick the winning times. Occasionally I think I know enough to pick a winner, but not very often.

And I certainly can’t pick winners by going down through the whole list and saying this is a winner and this isn’t.

And so the important thing to do if you have an overall feeling that businesses are a reasonable place to have your money over a long period of time is to invest over a