2003 Berkshire Hathaway Annual Meeting (Full Version)

50m read

·Nov 11, 2024

[Applause] We promise not to sing Good Morning, and we're delighted to have you all here. One of the things that makes it fun to run Berkshire is that we see real shareholders. We probably have a larger proportion of our shares held by individuals and not by institutions than virtually any large company in America, and that's the way we like it. We love it when you come and we get to see you. You buy our products. You know, there are still a few things left downstairs so feel free to leave anytime during the meeting when Charlie's talking to go down and make a few purchases.

Now we're going to do as we always do. First of all, I'd like to give very special thanks to Andy Hayward. Andy, would you stand up, if you will please? Andy is the man that, there he is. [Applause] [Music] Andy does those cartoons, he recruits Walter Cronkite and Bill Gates, and he gets Charlie and me to do recordings. It's just wonderful, the production he's put on. For those of you, last year I mentioned a program that's on public broadcasting called Liberty Kids. It's running consecutively, I think 40 episodes. It tells the story really of the founding of the country, and it's a marvelous, marvelous way to learn history. I've watched a number of the sessions myself, and it kind of comes back to me from my early days, grade school and high school. He's done, I think, the parents of America and the country a real service in producing this. I will predict that 100 years from now, people will be watching Liberty's Kids, so I really salute Andy Hayward, and be sure to catch it on public broadcasting. Andy, thanks for a wonderful [Applause] production.

Now we're going to follow our usual procedure of leisurely proceeding through the formal part of the business in three or four minutes. Then I will have a few comments actually on our business and a couple of acquisitions. Then we will spend the rest of the day until 3:30 with a break for lunch, to answer any questions you have. We have microphones in various zones, and we will proceed around and try to get every subject that's on your mind. Fire away, and I'll answer the easy ones, and Charlie will answer the tough ones.

Now we will go through the formal part of the business. They've written a little script for me, and I will go through this. The meeting will now come to order. I should introduce Charlie over here—not that he needs an introduction, but Charlie. [Applause] Charlie and I have been partners of one sort or another since 1959. We both grew up a good bit here in Omaha, but we didn't know each other at the time. We both worked at the same grocery store. We had a similar experience. We found that neither one of us liked hard work. If you go down to the Western Heritage Museum, they just opened an exhibit of that grocery store. It's a permanent exhibit, and naturally, I love that. Charlie worked there a few years before I did in the past, but we didn't actually meet until I was 28 or 29 and Charlie was a few years older, as he still is. We have worked together now for, in one way or another, for 44 years. We've never had an argument. We disagree sometimes on things. You have to learn to calibrate Charlie's answers. When I ask him whether he likes something, if he says no, that means we put all our money in it. I mean, that is a huge... if he says, that's the dumbest idea I've ever heard, that's a more moderate investment that we make, and then you have to calibrate his answers. But once you learn to.

We have our directors with us, and I'll introduce them. If you'll stand, please, as I call your name, and then it will be hard to do, but you can withhold your applause till they're all standing. Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase, Ronald L. Olsen, and Walter Scott Jr., in addition to Charlie. Those are the directors of Berkshire [Applause] Hathaway. As we mentioned in the annual report, we will be adding some directors who meet the four tests that I laid out in the report. We'll be adding some of those probably within the next year whenever we're required to do so. We will be doing it, and we will have people who have a lot of their own money on the line, just like you do in Berkshire, and they will prosper or suffer in relation to how Berkshire does and not in relation to their director's fees or other things. They will be selected for business savvy, which they will have. They will be selected for interest in the company, which is almost guaranteed by their holdings. They will be selected by their shareholder orientation, which again I think their holdings will produce, and we will have those people on board probably by our next meeting.

Also with us today are partners in the firm of Deloitte and Touché, our auditors. They are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire. I might say that almost any question would be appropriate. Mr. Forest Crutter is Secretary of Berkshire. He will make a written record of the proceedings. Ms. Becky Amic 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 this 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 to all shareholders of record on March 5, 2003, being the record date for this meeting, there were 1,309,423 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting. There were 6,763,493 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, 171,967 Class A shares and 5,228,875 Class B shares are represented at this meeting by proxies returned through Thursday evening, May 1. Thank you. That number represents a quorum, and we will therefore directly proceed with the meeting.

The 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 approved. Do I hear a second? Motion has been moved and seconded. Are there any comments or questions? We will vote on this motion by voice vote. All those in favor say aye. Opposed, you can signify by saying no. The motion is carried. The first item of business at the meeting is to elect directors. If a shareholder is 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 we may distribute them.

I now recognize Mr. Walter Scott to place a motion before the meeting with respect to the election of directors. I move that Warren E. Buffett, Charles T. Munger, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase, Ronald L. Olsen, and Walter Scott Jr. be elected as directors. Sounds good to me. It has been moved and seconded that Warren E. Buffett, Charles T. Munger, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase, Ronald L. Olsen, and Walter Scott Jr. be elected as directors. Are there any other nominations? Is there any discussion? The 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 with the proxies. Please also submit to the inspector of elections a ballot on the election of directors voting the proxies in accordance with the instructions they have received. Ms. Amic, when you're ready, you may give your report.

My report is ready. The ballots of the proxy holders, in response to proxies that were received through last Thursday evening, cast not less than 158,800. 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. Amic. Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase, Charles T. Munger, Ronald L. Olsen, and Walter Scott Jr. have been elected as directors.

The next item of business is a proposal put forth by Berkshire shareholder Christopher J. Freed, the owner of two Class B shares. Mr. Freed's motion is set forth in the proxy statement and provides that the shareholders request the company allow Class B shareholders who own at least seven registered shares of Class B stock to become eligible to participate in the shareholder designated contributions program. The directors have recommended that the shareholders vote against this proposal. We will now open the floor to recognize Mr. Freed or his designated representative to present his proposal.

Thank you, Mr. Buffett. Good morning, my fellow shareholders. My name is Chris Freed, and I am here to present a shareholder proposal. This proposal is designed to extend the shareholder designated contribution program to include Class B shareholders. Let me first start off by saying in our shareholder owner manual, there is a statement that I like to quote at this time. Although our form is corporate, our attitude is partnership. Charlie Munger and I think of our shareholders as owner-partners and of ourselves as managing partners. We do not view the company itself as the ultimate owner of our business assets, but instead view the company as a conduit through which our shareholders own the assets.

With that in mind, I present the following proposal for a vote. This proposal would extend the shareholder contribution program to Class B shareholders who own at least seven registered shares of Class B stock. Under my proposal, each Class B stock would be allocated one-thirtieth the value of Class A donation rate. Currently, the Class A rate is $18, which translates to 60 cents per Class B share. The required minimum of seven registered shares results in no less than $420 being donated by a Class B shareholder. This figure is important for when inflation is taken into account, the donation rate will be on par with the original 1981 donation level when the shareholder designated program was initiated.

I do understand that there are certain perks involved with owning a Class A share. However, those perks should only be limited to voting rights and the ability to convert Class A shares to Class B shares. Therefore, I believe that it is appropriate to extend the shareholder designated program to Class B shareholders. If Berkshire has a way to truly follow what it preaches about this firm being a partnership among all of its shareholders, then Class B shareholders must have the right to at least have the option to take part in the shareholder designated contribution program. Thus, I ask my fellow Berkshire Hathaway shareholders to vote affirmatively on this matter. Thank you for your time.

Thank you, Mr. Freed. You're absolutely right that Charlie and I do regard our shareholders as partners, and we have ever since we really started. In fact, Berkshire, in a sense, evolved out of a couple of partnerships. Charlie had a partnership, I had a partnership; we made an investment in certain things, and a lot of our original partners are still with us as shareholders. The partnership—our partnerships have—and when we set forth or when we issued the Class B shares some years ago, we set forth the relative terms of the partners. And the Class A and the Class B are quite similar in economic terms, but they're not identical.

At the time we issued those shares to a new group of partners, Class B partners, we explained quite clearly, I believe, exactly what differences there were. There was a difference in voting rights, there was a difference in that Class A could be converted to B but not the reverse, and there was a different in the shareholder designated contribution program. Ever since we issued those shares, I don't know, maybe six or seven years ago, we, in effect, have had a compact with both the A and B shareholders that we would treat the two classes in a way consistent with what was explained at the time of issuance. So if we were to change the conversion ratio or the shareholder designated contribution program, we would, in effect, be changing a deal that was made, and that has been recognized as having been made ever since the B shares were issued.

People have bought the A shares in preference to B because of certain reasons; people have bought the B shares for other reasons, but they have relied on the fact that we would abide by what we said we would do at the time we issued those shares. We'll not take anything away from the B, we'll not take anything away from the A, we'll run things just as they are. And in the future, you know, I happen to have my Holdings concentrated in A shares, but the A will never get any advantage over the B except for the ones we laid out at the time of issuance of the B. And it would actually be unfair to A shareholders, and particularly to A shareholders who bought since the B was issued, to tell them that the economic relationship between the A and B was being changed, even though only in a slight way to the benefit of the B and the detriment of the A. We wouldn't do that in either direction, so that's why we recommended to vote against it.

Charlie, do you want to add anything? Well, not only is all of that true, but the cost of getting down to all the would be a very inefficient process. Yeah, well, of course, that's the reason back when we issued the B. I mean, we anticipated that, so it just seemed like something that would offer very little value to the B at a significant cost to the company, and therefore we spelled it out quite clearly, I believe, in the original prospectus, and it's been spelled out in every annual report subsequently. So it's the deal, and the deal is not is also that we never change things to benefit the A in any way over the B except as originally explained in the original perspectives and subsequently in all the annual reports.

Is there a second to Mr. Freed's motion? What do we do if we don't get a second, Charlie? It dies, okay. I guess it just dies. But there's nothing inappropriate about bringing something like that up. I mean, I understand exactly what you're thinking about, but I think you have to think of fairness to both classes. Moving right along, figuring out where we are, I guess we're moving along to adjournment of the meeting. After that, we will have the questions we talked about and also tell you a little bit about the business since the annual report came out. Walter Scott, do you have a motion to put before the meeting? Do we have a second? The motion to adjourn has been made and seconded. We will vote by voice. Is there any discussion? If not, all in favor, say aye. All opposed, say no. The meeting is adjourned. [Applause]

Now I’d like to bring you up to date on a couple of things, and then we will proceed with questions. We have eight microphones placed around the auditorium here and we will proceed regularly around and just keep going around and around. Mark, do we have any microphones in the music hall or not? I’m not sure. Maybe Mark could come up and inform me whether there’s a crowd in the music hall or not. There are two microphones in the music hall, nine and ten. Nine and ten are in the music hall, and are there quite a few people there? It’s full? Oh, okay. We haven’t put microphones out on the sidewalks yet, but we’ll get to that someday.

We’ve contracted to make two acquisitions this year. You just read about one, perhaps in this morning's paper; it went on tape at 7:45 yesterday morning central time. That involved the contract to buy McLane from the Walmart company. McLane is a very large wholesaler to all kinds of institutions, convenience stores, Quick Serve restaurants, the Wal-Mart operation itself, theaters, and restaurants, and this year we’ll probably do something like $22 billion of business. So it’s a very substantial enterprise with distribution centers around the country, with much in the way of transportation equipment. Walmart had owned McLane since about, I believe, 1990. It grew substantially while they owned it. It’s been run by a terrific manager who’s here with us today, Grady Roser. Grady took the business from $3 billion to $22 billion or thereabouts. Walmart, for very good reasons, wants to specialize in what they do extremely well and, through Goldman Sachs and Company, we were approached by them a little while back about the possibilities of buying the business.

It really makes sense for both sides because Walmart knows what to do with the capital extremely well in their own business and has lots of opportunities, and this was something of a sideline to them. On the other hand, their ownership of McLane resulted in certain people that would be logical customers of McLane not wanting to do business because they didn’t want to do business with a competitor. We plan to see all those people very soon and explain to them that’s no longer the case and they can sleep well at night doing business with us and not worry about benefiting their competitor at Walmart. So this deal, a representative of Walmart came up last Thursday to Omaha, a week ago this past Thursday, a CFO, and we made a deal in maybe an hour or two and shook hands, and when you shake hands with Walmart, you have a deal.

So the time remaining until yesterday morning, a contract was put together, and it must go through the Hart Scott Rodino process to be cleared, but there’s obviously no conflict so we fully expect that in just a few weeks McLane will become part of Berkshire. It serves presently about 36,000 of the 125,000 or so convenience stores. If you take the 50 largest convenience store chains in the country, it does 58% of the business with those companies, sells each convenience store an average of perhaps $300,000 or slightly more of product a year, which those convenience stores then resell to the consumer. It also serves about 18,000 quick-service restaurants, primarily those operated by Yum Brands: the Taco Bell and Pizza Hut and Kentucky Fried Chicken group, and it will have opportunities to serve many more as we go along.

So we're delighted. If any of you get a chance to see Grady, or better yet, if any of you own a convenience store, step forward and we’ll be glad to give you our card. It's really, you know, Walmart knows that we will be a good owner. They know we’ll be good for the people that work at McLane. They know our check will clear; we won't make a proposition and then run into problems later on. It’s just an ideal way to do business, and we’re delighted to add McLane to the Berkshire group of companies.

It’s a very narrow margin business, obviously. I mean, when you get up to $22 billion of sales and you’ve got Hershey and Mars and people like that on one side and you’ve got buyers like 7-Eleven and Walmart on the other side, they’re not going to leave a lot in between, but you have to perform a valuable service for them in order to earn, you know, say, one cent on the dollar pre-tax. But McLane knows how to do it. It's a very efficient operation and it will continue to deliver value to both their vendors and their customers.

The other acquisition that is in the works is Clayton Homes. Clayton is the class of the manufactured home industry, and the acquisition came about in kind of an interesting way. Every year for the last five years, a group of about 40 finance students from the University of Tennessee in Knoxville would come up to Omaha and they would have a lot of fun in Omaha. They go to the Omaha Steakhouse, and then in the afternoon they’d come to Kiewit Plaza and the 40 students or so with their professor, Al Oxer, would have a session with me; we’d just have a classroom session for a couple of hours—wonderful group of students. Generally, at the end of the session, they would give me a football or a basketball; they’ve got a great women’s basketball team at the University of Tennessee; and so we’d have a good time together.

As a matter of fact, a year ago when they came up, Bill Gates by chance was in town, so I presented him as a substitute teacher, which is a post he always wanted, and the students got quite a surprise. This year, when they came, 40 or so students, we had a good session together, a couple of hours at Kiewit Plaza, and when they got through, they gave me a book, and it was the autobiography of Jim Clayton who started and ran Clayton Homes and built it into a huge success. He'd written a nice inscription inside, and I mentioned to the students and the professor that I was an admirer of Clayton. I’ve followed the manufactured home industry in other ways, not always so successfully, and I’d seen what Clayton had done.

So I said I looked forward to reading the book, which I did, and then I called Kevin Clayton, Jim Clayton’s son, and Kevin is the CEO of the company, and I told him how I’d enjoyed his dad’s book, and I said we still had a little money left in Omaha, and if they ever decided to do anything, you know, we would be interested, and I suggested at what price we might be interested, and a phone call or two later, a couple of phone calls, we made a deal. I had not been to Knoxville. You know I’ve checked out a few manufactured homes; I suggested to my family a repo; but that deal came about in that manner, and that’s the way things tend to happen at Berkshire.

You know, the phone rings, or we pick up the phone in this particular case, and the manufactured home industry got into significant trouble—very significant trouble—because credit terms went crazy on credit four or five years ago. When you go crazy on credit, you suffer in a very big way. That’s what happened in that industry. Some of you may have read about it; they ended up holding or servicing, I should say, the $20 billion worth of manufactured home credit, and they got in big trouble for that for other reasons.

Also, Oakwood, where we owned some junk bonds, went into bankruptcy. They’re a big operation in the country, most of—the couple of the other biggest players in the industry are losing significant money. Manufactured home manufacturers have lost the ability to securitize the receivables they get when they sell these homes, and so the industry has been in the tank. This year, there were maybe 160,000 new manufactured homes sold, but there were also about 990,000 repos that came back, and that depresses the market enormously.

And like I say, financing sources have dried up. A lot of people that lent money have left the field. So for Clayton, as strong as they are, particularly with a financial backer like Berkshire—20% or so of all the new single-family homes are manufactured homes in this country. I mean, you can put you in one for about $30 a square foot, and if you compare that to a site-built home, it’s quite a deal. I mean, I was amazed. They have 2,500-square-foot homes, two stories. I mean, it’s changed a lot over the last 30 or 40 years, and we’ve got an operation that even the competitors would admit is clearly the class of the field.

But even for Clayton, financing was getting more difficult. I mean, the lending community got burned very badly in manufactured homes, and people have sworn off them from the lending standpoint. Clayton did securitize an issue in February of this year, but they had to keep more of the bottom layers of the securitization themselves. So it’s a good marriage and it’s one where we will be useful to them, and we should do very well together in the future.

The first quarter, I'll just, I don't have final figures yet, and we’ll put this what I say today we’ll put it on the website so everyone has the information before the opening on Monday. But the economy, as you know, has been quite sluggish. It’s really been sluggish for a very long time. It’s interesting, I wrote in a letter that’s also on the website right after September 11th, I put something up there and I said that we were in a—we had been in a recession, which was not something that was generally acknowledged at that time, and I thought would be longer and deeper than most people anticipated.

And what has happened is that really since late 2000, housing and autos have done quite well, but the rest of the economy has just been plain sluggish, and it continues. And during that time, we’ve dropped the federal funds rate dramatically down to 1.25 percent. Charlie and I weren’t, probably would not have predicted that we might ever see that in our lifetime, and maybe it’ll even go lower. And we’re running a huge budget deficit now. But business continues to be sluggish.

So our non-insurance businesses generally did not do great in the first quarter. Our insurance businesses did extraordinarily well, and we will show when the first quarter report is published, we will show an underwriting profit of about $290 million pre-tax, which is after about $140 million of charges for retroactive insurance acquisition costs on that, which I’m sure many of you that don’t love accounting— all I can tell you is that it’s a charge that many companies don’t bear but that we willingly bear because it gives us benefits.

But our $290 million is after that charge. Our float grew by probably at least $1.3 billion, so we’re up to $42.5 billion or so of float, and people—that means people are letting us use that money. And as I mentioned, as I said in the first quarter, did it not only cost us nothing to use the money, but in effect people paid us to use the money, which we would like them to continue to do. I don’t see our float growing much from this point. Charlie said last time that it was impossible for it to grow, but it probably would. I don’t know whether he’ll change his opinion on that, but I think I really think our insurance businesses are in exceptionally good shape.

We have some of the best insurance businesses in the world. Geico's premium volume was up a little over 16% in the first quarter. In April, it was up just right at 17%. It had a roughly 6% underwriting profit in the first quarter, thanks to an incredible job by Joe Brandon. And Tad Montress has turned the corner in a big, big way and showed an underwriting profit in the first quarter. G.O. made so much money, I don’t want to even tell you about it. Some of our primary operations—yeah, you should give him a hand. I mean that [Applause].

When you get Charlie to clap, you know he's made us a lot of money, particularly us—Liability and National Indemnity primary operations, and our home state company—they’re all doing remarkably well. And you never know what’s going to happen in insurance. I mean, there could be an 8.0 earthquake in California or Tokyo, or there could be one in New Madrid, Missouri, as there was a couple hundred years ago, and it could happen tomorrow. There could be huge hurricanes this summer, whatever.

But I can’t imagine having a much better group of companies or managers than we have, and they're all working well now. For a while, Genry was a drag, but that's not true now, and I think we have an excellent chance of having very low cost and perhaps even no cost or negative cost of float over the next five years or so, or really as far as the eye can see. Now, that doesn’t mean it won’t fluctuate around, but if you average it out, I think we will have our float at a very cheap price, and it’s, you know, as Martha would say, having $42.5 billion for nothing is a good thing.

Now with that, I think we’ve covered the first quarter was a good quarter overall; it’s the best operating earnings we’ve ever had. Now we’ve got more capital now than we’ve ever had. But nevertheless, it will be a good quarter, and I would estimate—I think it’s fair to say, Mark, that from operating earnings we will have something like $1.7 billion. We had some securities gains too, but I don’t count those because they can do anything from quarter to quarter. We don’t pay any attention to the timing of those.

But we—from a straight operating standpoint, $1.7 billion or so after tax. Am I safe with that number, Mark? Okay. What can he say? We don’t change numbers at Berkshire, I promise you that. There are a lot of companies that do, but we’re fewer now than did a few years ago. So we’re going to get the questions. Charlie, do you have anything added about acquisitions or operations, or anything else you’d care to say?

Well, I hate to be an optimist, but does he ever? We have really added a lot of wonderful businesses to Berkshire in the last few years; it’s been some delightful businesses. That’s all you’re going to get out of them. [Applause] Folks, okay, we’re going to start around, and we’ve added to microphones to the music hall, and let’s start with Zone One, which is over on my right, and do we have the first question?

Good morning. I’m George Brumley from Durham, North Carolina. My first question is related to Executive Jet. It’s been almost five years since the acquisition of Executive Jet, a purchase in a much different economic and geopolitical environment. What business metrics do you use to measure success in an industry with as much flux as this one? And what has changed in those metrics since the time of acquisition? What are the prospects for Europe, and have those prospects changed? While none of the competitors approach Executive Jet in terms of scale and scope, what impact are they having on the competitive environment? And lastly, would you please explain the long-term aspect of the business model as many of the jets age out of the program?

Okay, okay, George. I got through college answering fewer questions than that, but George’s uncle was best man at my wedding, so he gets all he wants. The Net Jets, as you will see in the first quarter, had a significant loss. A large portion of that loss was caused by the write-down of planes because they—the used planes have been, well they call them in the trade, they call them pre-owned planes; I call them used planes. They do the same thing in manufactured homes, so they call them pre-owned homes instead of used homes.

But in any event, putting aside the euphemisms, the used plane market, well, the business aircraft market is very soft. The used plane market has far more planes for sale than say three or four or five years ago. That’s going to affect the production of new planes; it already has, and it affects pricing in used planes. We have bought back planes from people leaving the programs, which we do and will continue to do, but we have bought during a declining market. Some of those we’ve had write-downs in connection with those planes, and you will see in our first quarter report.

I believe that’s probably the only operation we have that’s losing money. We have—we’ve,—it’s a popular product; it’s a growing business, it’s going to be a very big business, in my opinion, over the years. We see it every day. I mean, we ride a lot of business, and customers are joining us. There are three main competitors. I think it’s fair to say that they’re losing significant money from operations, forgetting about any markdowns they might have on their inventories.

Our market share—we get figures from the FAA as to registrations and as to people that are selling their planes, and our share of market, which was always the largest, has gone up dramatically in the last couple of years. It’s gone up to roughly 75% in terms of value of planes. We’re talking 75% of the four-company market. It’s gone up even higher than that in terms of net planes—in other words, new planes sold less planes coming back. But the pricing we are receiving does not—in the U.S. it would be absent this one write-down, it would be very modestly profitable, and in Europe, we are—we have lost and we are losing significant amounts of money.

Business jets in Europe, the total is about—one I’m talking about ours, I’m talking about all about roughly. One-tenth the number is in the United States, even though the population is similar. So we have grown from a small base quite rapidly over there. Nobody else will be taking us on. It’s part of a service that will be part of a very big business worldwide in my view over the years. I don’t think anybody else can come in after us.

So I think it’s integral to our operation. Half the—roughly half the miles flying in Europe arise from American owners, and that will just do nothing but get bigger over the years because the number of owners—every month our number of owners grows significantly. We have people here from Markey who have essentially—they become a customer of ours, and then they resell cards for 25 hours, and they’ve added 40 or 50 customers a month in recent months.

So it’s a popular service. It will be a much bigger business. I think there will be a shake-out at some point and maybe fairly soon. You can look at the Rathon prospectus and or the Rathon 10-K and you will find some interesting information about their operation, and you can—it’s not hard to figure out what’s going on. I don’t know the answer as to when the shake-out will occur, but I can assure you that we will not be one of the shook.

Charlie, do you want to comment on it? No, he’ll comment on the profitable operations; he gives me the one on the long-term business model. The basis is that basically we believe that perhaps ten times the number of people that are now flying with us will be flying with us some years in the future. That having the best service, the best record, and the best policies for safety and security will leave us very dominant in the field, and that people will pay an appropriate price for the service. We see all kinds of evidence of that, but we do not see a profit this year in my view at NetJets.

Let’s go to number two. Good morning, I’m Mark Ranov from Melbourne, Australia. I had two related questions for you gentlemen. Basically both related to float. Float, as you indicated, is a very large part of our asset base. Assuming our policyholders continue to renew with us and we keep control of our combined ratio, can we count the float as pseudo-equity when calculating the intrinsic value of Berkshire? The related question was, can we not expect the float to keep growing at say 10% per annum for the next five to ten years, given that we’re still really a minority player in this segment?

Thank you. Well, I wish it would grow at 10% or so, at least if it were profitable, which I do have a belief that’s likely to be. Our float is $42.5 billion on March 31st, roughly. I think the entire float of the American property casualty industry could be something in the roughly in the area of $500 billion, so we may be some figure like 8% or a little bit more, maybe even 9% somewhere in that range of the total P-C float in the United States. Now it’s true we have a little outside the country too, but the big part of the world P-C market is in the United States.

When we started out in 1967, I think maybe we had $10 million of float. So to go from $10 million to $42 billion frankly surprises me, but it also—it’s going to be much harder to grow at significant percentage rates in the future, and our goal—we’d love the idea of growing but, what we really want is cost-free float. I mean that is the goal. Growth is not at the top of the list at all. I hold our managers responsible not for delivering more float; I hold them responsible for delivering profitable float, and that is key in our mind all the time.

If it comes along, we love it, but we will find out whether it comes along or not. The first part of your question if indeed the $42.2 billion can be obtained at no cost or even better yet at a profit, its utility to us is like equity. Now, you couldn’t realize it upon liquidation or necessarily, or you wouldn’t realize it on sale, that would depend, so I’m not telling you how to count it. In terms of intrinsic value, you have to make that decision, but it has the utility to us of $42.5 billion of funds derived from equity without issuing common shares. And that’s one of the reasons we’ve always been so enthused about it—now for what, 35 or 36 years it’s a great business for us.

And every now and then we get off the track. You know we got off the track in the early 80s; we had a problem or two in the mid-70s and we had a problem with GenRe for a few years. So there’s nothing automatic about it, and I will say this, I think for most companies in the P-C business, the P-C business is not a great business; it’s a commodity business to too big a degree. So I do not think most companies in the P-C business will get float at an attractive cost. We have to be an exception, but we have some exceptional companies and some exceptional managers, and I truly believe that we will obtain our float at considerably less cost than the industry, and that that is the goal.

Geico, if it would continue to grow at 16% for example this year, that adds a billion of premium volume. Well that doesn’t generate as much float at Geico as it generates at GenRe, but it generates float. So Geico’s float will grow, I would bet my life on that. But certain of our other transactions are more opportunistic in nature and that float could even shrink, and if the float shrinks, you know that is—that’s fine with me as long as we produce underwriting profits.

We’ll go wherever it goes. Charlie, let’s go to number three. Good morning, gentlemen. My name is Hugh Stevenson. I’m a shareholder from Atlanta. You had indicated in the past that you did not think that the volatility-based or Black-Scholes models for options pricing was correct. Would you share with us how you would evaluate those options as you use them in the business or see them in the marketplace? And also, if you would update us on your thoughts on the Asbestos Tort situation given recent developments on the National Settlement Trust, etc.

Yeah, we—Charlie and I have thought about options all our lives. I mean my guess is Charlie was thinking about that in grade school. You know, you have to understand you don’t have to understand Black-Scholes at all, but you have to understand the utility, and in a general sense the value of options, and you have to understand the cost of issuing options, which is a very unpopular subject in certain quarters. Any option has value. I bought a house in 1958 for $31,500. Let’s assume the seller of that house had said to me, I’d like an option on it good in perpetuity at $200,000. Well, that wouldn’t have seemed like it cost me much if I’d given it to them, but an option has value.

That's why some people, who are kind of slick in business matters, sometimes get options for very little or for nothing. I’m not talking about stock options; I’m just talking about an option to purchase anything. They get options for far less than really a market value would be. Black-Scholes is an attempt to measure the market value of options, and it cranks in certain variables, but the most important variable that cranks in that might be subject to the case where if you had different views you could make some money; but it’s based upon the past volatility of the asset involved, and past volatilities are not the best judge of value.

I mean if you looked at a five-year option at Berkshire stock, at various times Berkshire stock has had a fairly low beta. They call it; beta is a measure that people in academia always like to give Greek names to things that are fairly simple and so they have sort of a priesthood. You know, it’s like priests talking in Latin or something. I mean it kind of cows the layity. You’d have a beta; what Charlie would say is that last year is that for longer-term options in particular, Black-Scholes can give some silly results. I mean it misprices things, but it’s a mechanical system, and any mechanical system in securities markets is going to misprice things from time to time. We made one large commitment that basically had somebody on the other side of it but using Black-Scholes and using market prices took the other side of it, and we made $120 million last year, and we love the idea of other people using mechanistic formulas to price things because they may be right 99 times out of 100, but we don’t have to play those 99 times; we just play the one time when we have a differing view.

Charlie, do you want to comment on it? No, he’ll comment on the profitable operations; he gives me the one on the long-term business model. The long-term business model is that basically we believe that, you know, perhaps 10 times the number of people that are now flying with us will be flying with us some years in the future. That having the best service, the best record, and the best policies for safety and security will leave us very dominant in the field, and that people will pay an appropriate price for the service. We see all kinds of evidence of that, but we do not see a profit this year in my view at NetJets.

Let’s go to number four. Good morning, I’m Mark Ranov from Melbourne, Australia. I had two related questions for you gentlemen, basically both related to float. Float, as you indicated, is a very large part of our asset base. Assuming our policyholders continue to renew with us and we keep control of our combined ratio, can we count the float as pseudo-equity when calculating the intrinsic value of Berkshire? The related question was, can we not expect the float to keep growing at say 10% per annum for the next 5 to 10 years, given that we are still really a minority player in this segment?

And every now and then we get off the track. You know we got off the track in the early 80s; we had a problem or two in the mid-70s, and we had a problem with GenRe for a few years. So there’s nothing automatic about it, and I will say this, I think for most companies in the P-C business, the P-C business is not a great business; it’s a commodity business to too big a degree. So I do not think most companies in the P-C business will get float at an attractive cost. We have to be an exception, but we have some exceptional companies and some exceptional managers, and I truly believe that we will obtain our float at considerably less cost than the industry, and that that is the goal.

Geico, if it would continue to grow at 16% for example this year, that adds a billion of premium volume. Well that doesn’t generate as much float at Geico as it generates at GenRe, but it generates float. So Geico’s float will grow, I would bet my life on that. But certain of our other transactions are more opportunistic in nature, and that float could even shrink, and if the float shrinks, you know that is—that’s fine with me as long as we produce underwriting profits.

Yeah, we—Charlie and I have thought about options all our lives. I mean my guess is Charlie was thinking about that in grade school. You know, and I mean you have to understand you don’t have to understand Black-Scholes at all, but you have to understand the utility, and in a general sense the value of options, and you have to understand the cost of issuing options, which is a very unpopular subject in certain quarters. Any option has value. I bought a house in 1958 for $31,500. Let’s assume the seller of that house had said to me, I’d like an option on it good in perpetuity at $200,000. Well, that wouldn’t have seemed like it cost me much if I’d given it to them, but an option has value.

That's why some people, who are kind of slick in business matters, sometimes get options for very little or for nothing. I’m not talking about stock options; I’m just talking about an option to purchase anything. They get options for far less than really a market value would be. Black-Scholes is an attempt to measure the market value of options and it cranks in certain variables, but the most important variable that cranks in that might be subject to the case where if you had different views you could make some money, but it’s based upon the past volatility of the asset involved, and past volatilities are not the best judge of value.

I mean if you looked at a five-year option at Berkshire stock at various times, Berkshire stock has had a fairly low beta. They call it; beta is a measure that people in academia always like to give Greek names to things that are fairly simple and so they have sort of a priesthood. You know, it’s like priests talking in Latin or something. I mean it kind of cows the layity. You’d have a beta; what Charlie would say is that last year is that for longer-term options in particular, Black-Scholes can give some silly results. I mean it misprices things, but it’s a mechanical system, and any mechanical system in securities markets is going to misprice things from time to time.

We made one large commitment that basically had somebody on the other side of it but using Black-Scholes and using market prices took the other side of it, and we made $120 million last year, and we love the idea of other people using mechanistic formulas to price things because they may be right 99 times out of 100, but we don’t have to play those 99 times; we just play the one time when we have a differing view.

Let’s go to number four. Good morning, I’m Mark Ranov from Melbourne, Australia. I had two related questions for you gentlemen. Basically both related to float. Float, as you indicated, is a very large part of our asset base. Assuming our policyholders continue to renew with us and we keep control of our combined ratio, can we count the float as pseudo-equity when calculating the intrinsic value of Berkshire? The related question was, can we not expect the float to keep growing at say 10% per annum for the next 5 to 10 years, given that we are still really a minority player in this segment?

When we started out in 1967, I think maybe we had $10 million of float. So to go from $10 million to $42 billion frankly surprises me, but it also—it’s going to be much harder to grow at significant percentage rates in the future, and our goal—we’d love the idea of growing, but what we really want is cost-free float. I mean that is the goal. Growth is not at the top of the list at all. I hold our managers responsible not for delivering more float; I hold them responsible for delivering profitable float, and that is key in our mind all the time.

Yeah, we—Charlie and I have thought about options all our lives. I mean my guess is Charlie was thinking about that in grade school. You know, if you have to understand, you don’t have to understand Black-Scholes at all, but you have to understand the utility and in a general sense the value of options, and you have to understand the cost of issuing options, which is a very unpopular subject in certain quarters. Any option has value.

I bought a house in 1958 for $31,500. Let’s assume the seller of that house had said to me, I’d like an option on it good in perpetuity at $200,000. Well, that wouldn’t have seemed like it cost me much if I’d given it to them, but an option has value. That’s why some people, who are kind of slick in business matters, sometimes get options for very little or for nothing. I’m not talking about stock options; I’m just talking about an option to purchase anything. They get options for far less than really a market value would be. Black-Scholes is an attempt to measure the market value of options, and it cranks in certain variables, but the most important variable that cranks in that might be subject to the case where if you had different views, you could make some money, but it’s based upon the past volatility of the asset involved, and past volatilities are not the best judge of value.

Black-Scholes is an attempt to measure the market value of options, and it cranks in certain variables, but the most important variable that cranks in that might be subject to the case where if you had different views you could make some money, but it’s based upon the past volatility of the asset involved, and past volatilities are not the best judge of value. I mean if you looked at a five-year option at Berkshire stock, at various times Berkshire stock has had a fairly low beta. They call it; beta is a measure that people in academia always like to give Greek names to things that are fairly simple, and so they have sort of a priesthood. You know, it’s like priests talking in Latin or something. I mean it kind of cows the layity. You’d have a beta; what Charlie would say is that last year is that for longer-term options in particular, Black-Scholes can give some silly results. I mean it misprices things, but it’s a mechanical system, and any mechanical system in securities markets is going to misprice things from time to time.

We see all kinds of evidence of that, but we do not see a profit this year in my view at NetJets. Let’s go to number four. Good morning, I’m Mark Ranov from Melbourne, Australia. I had two related questions for you gentlemen. Basically both related to float. Float, as you indicated, is a very large part of our asset base. Assuming our policyholders continue to renew with us and we keep control of our combined ratio, can we count the float as pseudo-equity when calculating the intrinsic value of Berkshire? The related question was, can we not expect the float to keep growing at say 10% per annum for the next 5 to 10 years, given that we are still really a minority player in this segment?

When we started out in 1967, I think maybe we had $10 million of float. So to go from $10 million to $42 billion frankly surprises me, but it also—it’s going to be much harder to grow at significant percentage rates in the future, and our goal—we’d love the idea of growing, but what we really want is cost-free float. I mean that is the goal. Growth is not at the top of the list at all. I hold our managers responsible not for delivering more float; I hold them responsible for delivering profitable float, and that is key in our mind all the time.

And every now and then we get off the track. You know we got off the track in the early 80s; we had a problem or two in the mid-70s and we had a problem with GenRe for a few years. So there’s nothing automatic about it, and I will say this. I think for most companies in the P-C business, the P-C business is not a great business; it’s a commodity business to too big a degree. So I do not think most companies in the P-C business will get float at an attractive cost. We have to be an exception, but we have some exceptional companies and some exceptional managers, and I truly believe that we will obtain our float at considerably less cost than the industry, and that that is the goal.

Geico, if it would continue to grow at 16% for example this year, that adds a billion of premium volume. Well that doesn’t generate as much float at Geico as it generates at GenRe, but it generates float. So Geico’s float will grow. I would bet my life on that. But certain of our other transactions are more opportunistic in nature and that float could even shrink, and if the float shrinks, you know that is—that’s fine with me as long as we produce underwriting profits.

Black-Scholes is an attempt to measure the market value of options, and it cranks in certain variables, but the most important variable that cranks in that might be subject to the case where if you had different views you could make some money, but it’s based upon the past volatility of the asset involved, and past volatilities are not the best judge of value. I mean if you looked at a five-year option at Berkshire stock, at various times Berkshire stock has had a fairly low beta. They call it; beta is a measure that people in academia always like to give Greek names to things that are fairly simple and so they have sort of a priesthood. You know, it’s like priests talking in Latin or something. I mean it kind of cows the layity. You’d have a beta; what Charlie would say is that last year is that for longer-term options in particular, Black-Scholes can give some silly results. I mean it misprices things, but it’s a mechanical system, and any mechanical system in securities markets is going to misprice things from time to time.

Geico, if it would continue to grow at 16% for example this year, that adds a billion of premium volume. Well that doesn’t generate as much float at Geico as it generates at GenRe, but it generates float. So Geico’s float will grow, I would bet my life on that. But certain of our other transactions are more opportunistic in nature, and that float could even shrink, and if the float shrinks, you know that is—that’s

2003 Berkshire Hathaway Annual Meeting (Full Version)

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