1995 Berkshire Hathaway Annual Meeting (Full Version)

Morning! I'm Warren Buffett, the chairman of Berkshire Hathaway, and, uh, on my left is, uh, Charlie Munger, the vice chairman of my partner. We'll try to get him to say a few words at some point in the proceedings. The format today is going to be just slightly different. We have one item to, uh, normally we breeze through the meeting pretty fast, and we'll do that, but we have one item of business on the preferred stock that I could tell cause some confusion with people, so, uh, I'll discuss that a little bit. If before the vote on that, anybody would like to, uh, talk about, uh, the preferred issue, we'll have any comments or questions at that time. Then we'll breeze through the rest of the meeting, and then we'll open it up, and I'll have one announcement to make then too. Then, uh, after that, we'll go for maybe close to noon, and, uh, feel free, earlier, anybody that, uh, would like to leave, uh, you're free to, obviously, at any time. Better form to do it while Charlie's talking, as I mentioned, and you'll have to be quick.

The, uh, but, but then we'll have a break a little before noon for a few minutes while a more orderly retreat can be conducted. We'll have buses outside to take you back to the hotels or to any of the commercial establishments that, uh, Berkshire's involved in. And then, and then, uh, because so many, we have people here, at least based on the tickets reserved from 49 of the 50 states, only Vermont is absent. But we have Alaska. Why, we have a delegation from every place. We have people from Australia, Israel, Sweden, France, UK—40-some from Canada. So, a lot of people have come a long way. So, Charlie and I will stick around. In fact, we'll eat our lunch right up here, and we will, uh, you don't want to—we don't want to watch what we eat. The, uh, but we'll stick around until perhaps as late as even three o'clock. But if the crowd gets below a couple of hundred, then we'll feel we can cut it off. But we do want to answer everyone's questions. You people are part owners of the company, and any question that relates to your ownership of Berkshire, we want to be able to give you a chance to ask, and it's tough because of the numbers of people here. I don't know how many are in the other room, but there are about 3,300, I believe, in this room. We want to get to all of you, so that will come after the meeting.

Now we've got a little business to take care of. The meeting will come to order, and I'll first introduce the directors of Berkshire in addition to myself. They're right down here, and if you'll stand up when I give your name, uh, Susan T. Buffett. [Applause] And Howard Buffett. These are names we found in the phone book, you can understand that. Malcolm Chase III. [Applause] And Walter Scott Jr. [Applause] Also with us today are partners in the firm of Deloitte & Touche, our auditors, Mr. Ron Burgess, and Mr. Craig Christensen. They are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire. Mr. Forrest Crudder is secretary of Berkshire; he will make a written record of the proceedings. Mr. Robert M. Fitzsimmons has been appointed inspector of elections at this meeting; he will certify to the account of votes cast in the election for directors. The named proxy holders for this meeting are Walter Scott Jr. and Mark Hamburg. Proxy cards have been returned through last Friday representing 998,258 Berkshire shares to be voted by the proxy holders as indicated on the cards. That number of shares represents a quorum, and we will therefore directly proceed with the meeting.

We will conduct the business of the meeting and then, during the formal meeting after that, we will entertain questions you might have. The first order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott Jr. to place a motion before the meeting. I move that the reading of the minutes of the last meeting of shareholders be dispensed with. Do I hear a second? It has been moved and seconded. Are there any comments or questions? We'll vote on any comments or questions. We vote on the motion by voice vote. All those in favor say aye. Opposed? The motion is carried. Secretary, I 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 7, 1995, being the record date for this meeting, there were 1,177,750 shares of Berkshire common stock outstanding, with each share entitled to one vote on motions considered at the meeting. Of that number, 998,258 shares are represented at this meeting by proxies returned through last Friday. Thank you. If a shareholder is present who wishes to withdraw a proxy previously sent in and vote in person on the two items of business provided for in the proxy statement, he or she may do so. Also, if any shareholder is present who has not turned in a proxy and desires a ballot in order to vote in person on these two items, you may do so if you wish to do this. Please identify yourself to meeting officials in the aisles who will furnish two ballots to you, one for each item. With those persons desiring ballots, please identify themselves so we may distribute them. Just raise your hand and you'll get one.

The first item of business of this meeting is to elect directors. I now recognize Mr. Walter Scott Jr. to place a motion before the meeting with respect to the election of directors. I move that Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase III, Charles T. Munger, and Walter Scott Jr. be elected as directors. I second the motion. The motion has been moved and seconded that Warren Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase III, Charles T. Munger, and Walter Scott Jr. be elected as directors. Are there any other nominations? Is there any discussion? Doing fine. 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 for directors and allow the ballots to be delivered to the inspector of elections. Please collect those. The proxy holders should also submit to the inspector of elections a ballot on the election of directors, voting the proxies in accordance with the instructions they've received. Mr. Fitzsimmons, when you're ready, you may give your report.

My report is ready. The ballot of the proxy holders received through last Friday cast not less than 996,892 votes for each nominee. That number far exceeds the majority of the number of shares outstanding. The certification required by Delaware law regarding the precise count of the votes, including the votes cast in person at this meeting will be given to the secretary to be placed with the minutes of this meeting. Thank you. Mr. Fitzsimmons, Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase III, Charles T. Munger, and Walter Scott Jr. have been elected as directors. The second item of business of this meeting is to consider the recommendation of the Board of Directors to amend the company's certificate of incorporation. The proposed amendment would add a provision to the certificate of incorporation authorizing the Board of Directors to issue up to one million shares of preferred stock in one or more series, with such preferences, limitations, and relative rights as the Board of Directors may determine.

Now, we discussed this some in the annual report, but I would say, and we'll find out the exact number, but I think we probably had, uh, 11 or 12, maybe 12,000 or so shares voted against the proposal. I think we had a couple thousand shares that I abstained, and since there really is no downside to the proposal, that indicated to me that I had not done a very adequate job of explaining the logic of authorizing the preferred. So, I'd like to discuss that for a minute now, and I'd also like anybody that would like to ask questions about it, they can do so now. We can talk about it later too, but if you'd like to do it before the vote, that'd be fine.

The authorization is just that—it's an authorization. It’s not a command to issue shares; it's not a directive—it simply gives the directors of the company the ability, in a situation where it makes sense for the company, to issue preferred shares. Now, when we acquire businesses, and I'll tell you about one when we're through with this in a few minutes, when we acquire businesses, um, sometimes the seller of the business wants cash, sometimes they would like common stock, and it's certainly possible, as one potential seller didn't let, in that case, a convertible preferred stock. Now, from our standpoint, as long as the value of the consideration—the value of the consideration that we give—equates, we really don't care.

Aside from a question of tax basis we might obtain, but in other economic respects, we don't care what form of consideration we use, because we will equate the value of cash versus a straight preferred versus a convertible preferred versus common stock, whatever it may be. So, if the worry is that we will do something dumb in issuing the preferred stock, you should—that's a perfectly valid worry—but you should worry just as much we'll do something dumb in terms of using cash or the common stock. I mean, if we're going to do something unintelligent, we can do it with a variety of instruments, and we will not get more licentious in our behavior or anything, but simply because we have the preferred stock.

And the preferred stock may offer sellers of a business the chance to do a tax-free exchange with us, and they may not want common stock because they may have an ownership situation where they don't want to run the risks of common stock ownership, and that's why our preferred is flexible is the terms, because we could give those people a straight preferred with a coupon that made it worth par at the time we issued it, and then they would know what their income would be for the next umpteen years and that may be of paramount interest to them. We could issue them an adjustable-rate preferred which, as money market conditions change, would also change its coupon, and then they would be sure of a constant principal value for the rest of their lifetimes, and one or both of those factors could be more important to one seller or another.

So that we simply have more forms of currency available to make acquisitions if we have the ability to issue various forms of preferred, because a preferred stock, if it's properly structured, allows for the possibility of a tax-free transaction with the seller, and that's important to many sellers. Now, in the end, many sellers will prefer cash just as in the past, and probably most of the sellers that don't want cash will want common stock. But we will have a preferred stock available—we're only authorizing a million shares because under Delaware law, there's an annual—I think there's an annual fee. I know there's an initial fee and I think there's an annual fee that relates to the number of shares authorized. So if we authorized 100 million shares, we would be paying a larger annual fee which is something Mr. Munger wouldn't let me do. So what we will do if we issue this is we will issue undoubtedly—we will issue some sub-shares so that the number of shares for taxation purposes is relatively limited, but we will issue sub-shares to make it easier to make change essentially in the market.

We may issue, if the occasion demands, we may issue a convertible preferred, but that convertible preferred would not be worth any more at the time we issue it than a straight preferred. We would adjust in terms of the coupon and the conversion price and so on, so we can equate various forms of currency to fit the desires of the seller of the business, and this is simply one more tool to do it. Uh, there's no downside, like I say, unless we do something stupid, and if we do something stupid with us, we would do something stupid with cash or whatever.

So it—we probably should have done this some time ago, but we never had a case of a seller wanting that form of currency before, and so it just—and we always felt we could get it authorized promptly, but there’s no reason to lose a couple of months if a transaction is pending to call a meeting to get this on the books. So it's simply one more tool, and if there are any if there anybody that has any questions or comments on the preferred, like I say, you can't hold them until later, but I'd be glad to have them before we have the vote. Do we have any?

Yeah, there's a question over there now. If you'll wait just a second, we'll get a microphone to you when you ask questions. An hour later if you'll give your name and where you live, I'd appreciate it.

Hi, my name is Dr. Lawrence Wasser. I'm from New York. The question is this. If you want to buy a business and the people in the business want cash, you have to have cash. Um, cash—you know, this kind of cash we're familiar with it, yeah. But it strikes me that the preferred isn't really cash; it’s fiat currency that is, it's currency that we can create. Uh, that's true, it's just like it's like common stock in that respect. It is the—it is a for—it's an alternate form of currency, and it is just in terms of common stock. For example, assuming we had enough authorized, we have an unlimited ability to create currency. Now, if we created the wrong price, it dilutes the value of the old currency. But go ahead on. Until we vote in the affirmative, which I'm sure that this group will probably do because of their confidence in you, but until we vote in the affirmative, it doesn't exist.

That is correct, you would—that would be true, incidentally, with common stock, if we had no more authorized common stock out than we had issued. We have, I think, a million and a half authorized, but let’s assume that we’d issued all that we had authorized. Until more was authorized by the shareholders, there would—it would not be available to be issued. But if more were authorized by the shareholders, then isn’t it true that the value of the shareholders’ holding would be diluted?

Only if we receive less in value than we give. That's the key to it. I mean, if we issue 200 million dollars worth of preferred and we receive a business that's only worth 150 million, there's no question you're worse off than before. So are we, incidentally. But we're all worse off. And that's true if we give cash that's worth more for a business than the business is worth. If we give 200 million of cash for a business that's worth 150 million, we are worse off. We may not have issued a share of stock, but we have diluted the value of your stock if we do that. As long as we get value received, in terms of whether of cash, common stock, or preferred stock, then you are not diluted in terms of value. It’s an important point that, uh, and I obviously a number of companies, as you may have—Charlie and I have commented about in reports and elsewhere—a number of companies in our opinion have issued common stock particularly, which has a value greater than what they receive.

And when they do that, they are running what John Medlen of the Wachovia called a chain letter in reverse, and that's cost American shareholders a lot of money. I don't think it'll cost them any money at Berkshire, but it's a perfectly valid worry for shareholders to have because a management can build an empire just by issuing these little pieces of paper, which they feel don’t cost them anything. That, uh, I think Charlie had one story about that in the past. I don't want to comment on that.

Sure, no names.

The basis of course, there was a particular bank where one of the officers wanting stock options pointed out to the management that they could issue all these shares and it didn't cost anything. Now, imagine hiring a manager who thinks that way and paying the money to behave like Judas in your very midst. We have, um, we have had conversations with managers where they tell us how how fortunate they feel because the stock is down and they can issue options cheaper. Now, if they were issuing those to third parties, I—you know, I'm not sure whether they'd have exactly the same attitude.

But we have no feeling that we're getting richer when we issue shares; we have a feeling we're getting richer when we get at least as much value in the business as the shares are worth that we issue, and we don't intend to issue them under any other circumstances. But it's a perfectly valid worry. The second part of the question is that obviously with preferred issuance you have a situation where the common shareholder moves to the back of the line, as it were. Why should the common shareholder in this room want to step to the back of the line if he's at the front of the line now?

Well, it's also true if we buy a business for cash, and we, let’s say, we borrow the money, the bank that we borrow the money from will come ahead of the common shareholder. There's no question any time you move; you engage in transactions that involve the capital structure. The potential for each part of the capital structure; if you issue a lot of common and you've got some debt outstanding, you've generally improved the position of the debt.

And the question really becomes whether you think that the position of the common shareholder is improved by issuing either preferred stock or perhaps borrowing a lot of money to make an acquisition. I mean, a couple of times in the history of Berkshire, we've borrowed money to buy something, to buy a business, and when we do that, we are placing a bank or an insurance company or whomever ahead of the position of the common shareholder. We did that when we issued some debt a few years back, and there's a question of weighing whether the common shareholders are going to be better off by borrowing money. But borrowing money is not necessarily at all harmful to shareholders, although certainly if it's carried to excess, it is, and the preferred is a form of quasi-borrowed money that does rank ahead of the common shareholder.

But then at the same time we're adding a business, which we think is going to benefit the shareholder if we issue that. So that’s the trade-off. Yep.

My name is Matt Zuckerman. I'm from Miami, Florida. My question is, uh, it seems to me that there's some requirement for shareholder votes if stock of preferred stock is issued beyond a certain limit. What are those limits?

There are no limits on the conversion term that we might do, but, uh, for example, if we were going to issue a convertible preferred, now we have no plans to do it, but it could happen, in fact, it might well happen this year. The— and the alternative, we'll say, was giving somebody 100 million dollars in cash for a business. If we were to issue a straight preferred, we would figure out what 100 million dollars worth of a straight preferred would sell for, what coupon would be necessary, and that would depend on call provisions and a few things, but for a AAA credit like Berkshire, you know, it would be somewhere in the area of seven percent or thereabouts.

And then they would have no participation in the upside of the common. If they wanted something that was sure to maintain its principal value, then you have to issue an adjustable-rate preferred that will keep its value around par. That preferred might have an initial coupon of say five percent or something of the sort because it has the ability to go up or down based on interest rates, but it would always be worth about par. If we were to issue a convertible preferred, it might have a conversion price of, just to pick a figure, 28,000 or something of the sort and a coupon well below the coupon on a straight preferred. And so whatever we did, they would equate out in our mind as to the value we were giving.

We're not going to give 120 percent of X if we're only willing to pay 100 percent of X just because the form of a deal changes. But you may well see us issue at some point, uh, you may see us issue a convertible preferred, you may see us issue a straight preferred, you may see us issue an adjustable-rate preferred. I hope we do something because I'd like, you know, if we do it, we'll think we're better off based on your past performance. I'm sure you'll get more value than you give. Well, but in any case, it was my understanding that if the amount of shares issued for conversion of a convertible issue were greater than 20 percent of the total amount of shares outstanding, then it would require a vote of the stockholders under Delaware law.

It may be wrong; I think it's a stock exchange rule, isn't it, Charlie?

Yes, you're right about the rule, but it’s a New York stock— you know, stock exchange rule. I—that would be five billion dollars plus of deal and, you know, we would love to make a five billion deal, but I don't think we're going to do it.

So I would say that the chances of any acquisition being large enough so that it requires a shareholder vote is probably slim, but it isn't because we wouldn't be interested, and if we have one, we'll be coming back to you with the votes already in hand.

Are there any other questions on the preferred? We can talk more about it later too. I just want to—oh, here we are.

Sure. Good morning, Mr. Buffett. I'm Rena DeCosta-Lowey from Chicago. Very proud to be here. I've seen you grow so that pretty soon we're going to be out in the football field. I think your explanation was very helpful because as I read this, and I'm sure many of the other lay folk, I didn't understand what you were doing. And you mentioned the preferred stock, but in the prospectus it's not clear whether it would be the convertible preferred, the straight preferred, and you cleared that, answering a few other questions. But some of the people felt it would dilute their stock.

Yeah, well, I should have made that clear in the annual report. I'm glad I've had this chance to do it today. Anything else on the preferred? Okay.

[Music] You don't have to come back to the shareholders for a vote after these shares are authorized for the terms of it, and you've discussed this in terms of buying companies. My question is, you yourself, through Berkshire Hathaway, own the preferred shares of several companies: Salomon, U.S. Air, American Express. Did those shareholders have to vote on the terms of the preferred shares that you bought for those companies, or was that left at the board of directors' decision level?

Go—excuse me, go ahead. Could you clarify that point, please?

Yeah, we bought a—I think we probably bought six issues of preferred directly from companies, and since none of those triggered that New York Stock Exchange rule that we discussed earlier—and they could have if they'd been somewhat larger, but they didn't—none of those deals had to be approved by the shareholders. I think the only deal we've had with a company that had to be approved by the shareholders was when we bought the Cap Cities-ABC stock, well, we bought it early in 1986, I think it was approved by their shareholders in 1985. But, uh, the only situations where it would have had to have been approved is if it triggered the New York Stock Exchange rule, and our purchases were not that large. That they did that.

Any other questions?

Yep. There’s one more. My name is Dale Valkovitz. I'm from Champaign, Illinois. A recent issue of Barron's indicated that it may be possible to issue a best-of-all-possible-worlds preferred, that being one where the dividend looks like interest to the issuer and is tax-deductible, and to the purchaser, it would qualify for the dividends-received deduction. Do you think that structure might be possible with these shares?

Well, we haven't thought about that. I know what you're talking about on that, but I don't think it would be possible. For one thing, I don't think—you probably wouldn't have a tax-free deal that way. Charlie, do you?

We probably wouldn't try and be that cute. I've got several quips in mind, but I think I'll keep them to myself. My guess is that that form does not work for a long time. I know what you're talking about, but my guess is it doesn’t.

Some companies, I—I don't then we'll get on with this, but some companies care about the consideration they give in a deal, whether it's cash or preferred or so on, because they care about the accounting treatment that they get. They want—they usually want pooling treatment rather than purchase accounting treatment. I won't get into that here. I know it's going to disappoint you, but I won't get into that here—uh, although I may in the next day’s annual report. That is of absolutely no consequence to us. We care not a wit about the accounting treatment that we receive. We feel that we have a shareholder body that's intelligent enough to understand the economic reality of a transaction and that by playing various games in terms of how we try to structure it and maybe flow part of the purchase price back through the income statement or anything of that sort, which is done, is—that’s not something that we're—that we care about at all. We would rather do whatever makes the most sense for us and for the seller and then explain to you whatever accounting peculiarities may arise out of the transaction, and that probably differentiates us from most companies, and it probably helps us make a deal occasionally.

Anything else? Really? Okay, now I can hear you fine. Okay, and, um, I was wondering, will there be any opportunity for shareholders who may find the preferred issue preferable for any number of reasons to participate in that?

Well, if we issued a preferred, it became actively traded. Let’s say it was a company with many shareholders instead of a few. Obviously, uh, that would be something that any new or present shareholder could make a decision on whether they preferred that issue than others. We could, but we have no plans of doing it. I don't see it happening. We could offer to exchange preferred for common and it's conceivable a few people would have an interest, but that most people have self-selected in terms of the kind of security they want to own in terms of owning Berkshire commons, so it's unlikely they would want to switch into a preferred because there would—we wouldn't have a premium of value, it would just be an alternative security. We could do that though, and it would probably be a tax-free deal. We have no plans of doing that, but it's something that if we ever thought that enough people might want, we could offer. No one would be obliged to take it.

That's a good question. Okay, we'll move on. Is there a motion to adopt the Board of Directors’ recommendation?

I move the adoption of the amendment to the fourth article of the certificate of incorporation as set forth in Exhibit A of the company's proxy statement for this meeting. Is there a second?

I second the motion. The motion has been made and seconded to adopt the proposed amendment to the certificate of incorporation. Any further discussion? We are ready to act upon the motion. If there are any shareholders voting in person, they should now mark their ballot on the proposed amendment to the certificate of incorporation and allow the ballots to be delivered to the inspector of election. We're collecting a few there. With the proxy holders, please also submit to the inspector of elections a ballot on the proposed amendment, voting the proxies in accordance with the instructions they have received.

Wait just a second here. Mr. Fitzsimmons, when you're ready, you may give your report.

My report is ready. The ballot of the proxy holders received through last Friday cast not less than 928,889 in favor of the proposed amendment to the certificate of incorporation. That number far exceeds the majority of the number of all shares outstanding. The certification required by Delaware law regarding the precise count of the votes, including the votes cast in person at this meeting, will be given to the secretary to be placed with the minutes of this meeting. Thank you.

Mr. Fitzsimmons, the amendment to the certificate of incorporation set forth in Exhibit A to the proxy statement for this meeting is approved. After adjournment of the business meeting, I will respond to questions they may have to 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 Jr. to place a motion before the meeting. I move this meeting be adjourned.

I second the motion. The motion to adjourn has been made and seconded. We will vote by voice. If any discussion? If not, all in favor say aye. All opposed say no. The meeting is adjourned.

Now, I'd like to tell you about one thing that since the annual report that some of you probably read about in the papers but maybe not all of you have heard about. Just shortly after the annual report was issued, we completed a transaction with Helzberg's Diamonds with Barnett Helzberg, who's here today. Barnett, would you stand up please?

There he is. Give him a hand. [Applause] You may be interested in how it came about because Barnett attended two of the last three meetings of Berkshire. He had a few shares in an IRA account, and he was here last year. Shortly after this meeting, I was back in New York City, and I was crossing the street at 58th Street, right near the Plaza Hotel on Fifth Avenue, and a woman said, "Mr. Buffett." I turned around, and she came up, and she said she'd attended the annual meeting last year and a few days ago and said that she enjoyed it. I said, "That's terrific." And I started to cross again, and Barnett had been about 30 or 40 feet away. I didn't know him, and he had heard this woman, so he said the same thing, and I turned around, and we shook hands—for the first time I met him.

He said, "You know," he said, "I might have a business you'd be interested in." And I get that all the time. So I said, "Well, why don't you write me?" And a time went by, and I got a letter from Barnett. He'd been thinking about doing something with the business his father started in 1915 and based in Kansas City all that whole time, and he'd been exploring various avenues. But probably in some part because of his background as a Berkshire shareholder, he had some specific interest in the company becoming associated with Berkshire.

He cared very much about the company having a permanent home. He cared very much about it having an environment in which it could grow and be run autonomously and be based in Kansas City, and he wanted to receive something in exchange that he was happy about, happy to own for the rest of his life.

So we worked out a transaction shortly—just very shortly after the annual report went to press, and so now Berkshire, as of 12:01 I guess yesterday morning, the deal was closed. There's this waiting period because of the Hart-Scott-Rodino Act and a few other things. The transaction closed, and now Berkshire is the owner of Helzberg's Diamonds, which has roughly 150 stores, around perhaps 26 or 27 states, I'm not sure the exact number, and mostly in malls, although some others.

It's been enormously successful. Barnett brought in Jeff Comet, who formerly ran Wanamakers, about [Music] about eight years ago, I guess it is, and the company has both expanded in its traditional format. It's gone with a new format recently, which has been very successful.

It is—in its position in the jewelry industry, it tends to compete with the Zales recordings, but it does a far, far better job. Their sales per store on roughly equivalent square footage will be—it'll be very close to double what the competitors achieve. It's got a magnificent, uh, [Music] morale, an organizational structure, and the people. Barnett was very generous with people in making the sale. He took it out of his own pocket to treat people right because they've done such a terrific job over the years, and I think you'll see Helzberg become a very big factor in Berkshire over time, and it just shows you what can come out of these annual meetings.

So the rest of you, you know, do your stuff. The, uh, so anyway, that is an acquisition that was made for—largely, for common stock. It did not involve preferred and because Barnett preferred preferred common, but different people have different needs, and sometimes there's a group of shareholders that can have different priorities. That's the reason we want to have various currencies. If we had not been able to use common stock, we would not have made this transaction because Barnett has been in no hurry to write a large check to the government, and we can help him in that respect with a common stock deal.

So anyway, we're glad to have Helzberg become part of Berkshire. I wouldn't be surprised if we have another announcement or two the next year before we have the next meeting. I hope so, but there's no guarantees.

Now we're going to turn the meeting open for questions. We'll do it as we've done before. We've got this room divided into six zones, and if you will raise your hand, the monitor in your zone will recognize you, and we'll keep going around. We will not go to a second person in any zone until we've exhausted all those who have yet to ask their first question. We also have a zone in the overflow room, so there'll be a total of seven, and we'll just keep going around. If you'll identify yourself, please, and we'll be delighted to answer your questions. The more, the better. So we'll start with Zone One.

My name is Fred Ilfeld Jr. from Sacramento, California, and I wanted to ask if you could elaborate upon the logic of adding two family members to the board of trustees.

Well, it's terrific for family harmony, just to start with. As I've talked about in the annual report, if I die tonight, you know, my stock goes to my wife, who is a member of the board of directors, and she will own that stock until her death, when it will go to a foundation. So, there is a desire to have a long-term, permanent ownership structure as can really be done in terms of planning and the tax laws and so on.

I mean, we have invited people like Helzberg's to join in with Berkshire into what we think is a particularly advantageous way for them to conduct business and to know the future that they're joining. And part of knowing the future that they're joining involves knowing that the ownership is stable, and it will be stable for a very long period of time in Berkshire, probably about as long as anybody can plan for in this world.

After my death, the family would not be involved in the management of the business, but they'd be involved in the ownership of the business. You would have a very large concentrated ownership position going well into the foundation that would care very much about having the best management structure in place and to, in effect, prepare for that over time. I think it’s very advisable that family members who will not be involved in management but who will have a key ownership role to play become more and more familiar with the business and the philosophy behind it.

I discussed that some in the—I guess it was the 1993 annual report because I think it's important that you understand, and anybody that wants to sell us a business, if you've built a business since 1915 and you care enormously about it and you care about the people that you’ve developed but you've got something else you want to do in life, it's more—you know, than advertising your car in the paper to sell it. I mean it is an important—a very important transaction to you not just in terms of how much money you receive, but in terms of who you deliver thousands of people that join you, who you deliver them to.

I think we have a structure that is about as good as you can do. Nothing is forever, but we have a structure that's about as good as you can do in terms of people knowing what they're getting into when they make a deal with us and being able to count on the conditions that prevail at the time of the deal continuing for a long period in the future. Many people—I had a fellow tell me the other day about a business where he'd been wooed by the acquirer and, you know, the day after the deal, they came in and fired the top half dozen people. They had a secret plan all along.

Well, I don't think you run into much of that, but what you do run into is the acquiring company itself either being acquired or some new management coming along or some new management consultant coming along and saying, "Well, this doesn't fit our strategic plan anymore." So let people join in with Berkshire and be relatively, I think, comfortable about nothing like that happening.

Zone Two.

Hello, my name is Jim Lichty from Des Moines. I'm interested in, like, Chrysler. Can you make a comment on the Chrysler Corporation?

No, I don't think I can make a comment on the Chrysler. I think Solomon Brothers, incidentally, has been retained by that. We have nothing to do with it. Charlie and I—I read that in the paper, and Charlie and I are not familiar normally with investment banking arrangements at Solomon, but it's been in the paper that Solomon's involved, but we have no involvement.

Charlie, you're not commenting on the question?

No, try him on something else.

Zone Three is Jim Vardaman from Jackson, Mississippi. In describing the—you said allocation of capital to your wholly-owned subsidiary, as you wrote in the annual report, that quote: "You charge managers a high rate for instrumental capital they employ and credit them at an equally high rate for capital they release," end quote. How do you determine this high rate, and how do they determine how much capital they can release?

Well, what we try to do with those arrangements—the question's about incentives, arrangements we have with managers or other situations where we either advance capital to a wholly-owned subsidiary or withdraw. Usually that ties in with the compensation plan, and we want our managers to understand just how highly we do value capital. And we feel there's nothing that creates a better understanding than to charge them for it.

So we have different arrangements—sometimes it's based a little on the history of the company, it may be based a little bit on the industry, it may be based on interest rates at the time that we first draw it up. We have arrangements depending on those variables and perhaps some others and perhaps just how we felt the day we drew it up. That range can be between 14 and 20 percent in terms of capital advanced.

And sometimes we have an arrangement where if it's a seasonal business where for a few months of the year when they have a seasonal requirement, we give it to them very cheap at LIBOR, but if they use more capital beyond that, we start saying, “Well, that's permanent capital.” So we charge them considerably more. Now, if we buy a business that's using a couple hundred million of capital and we work out a bonus arrangement and the manager figures out a way to do the business with less capital, we may credit him at a very high rate—the same rate we would use in charging him in terms of his bonus arrangements.

So we believe in managers knowing that money costs money, and I would say that just generally my experience in business is that most managers, when using their own money, understand that money costs money, but sometimes managers, when using other people's money, start thinking of it a little bit like free money. And that's a habit we don't want to encourage around Berkshire. By sticking these rates on capital, we are telling the people who are in our business how much capital is worth to us, and I think that's a useful guideline in terms of the decisions they're making because we don't make very many decisions about our operating business. We make very, very few.

I don't see capital budgets in most cases from our 100 percent-owned subsidiaries, and if I don't see them, no one else sees them. I mean, we have no staff at headquarters looking at this kind of thing—we give them great responsibility on them, but we do want them to know how we calibrate the use of capital, and so far I would say it's really worked quite well. Our managers don't mind being measured, and they like getting—I think they enjoy seeing a batting average posted, and a batting average that does not include a cost of capital is a phony batting average.

Charlie?

Well, I certainly agree. And his name isn't even Buffett, I mean. Zone Four.

Hi, my name is Dave Lancaster with Business Insurance Magazine. Some of the property casualty risk management experts are advising commercial insurance buyers to forge five and ten-year policies with their property casualty insurers to promote stronger partnerships with their insurers, as well as to maintain the smooth PC market of the past seven, eight years. Do you believe this idea will take hold for most policyholders, and if so, what would be the implications for policyholders' costs and insurers' underwriting results?

The question is about partnerships between probably commercial policyholders and their insurers, and there are a lot of ways of doing that by various retrospective plans or adjustable rates of various sorts and self-insured retentions and that sort of thing. As a general matter, there are only two reasons for buying insurance. One is to protect yourself against a loss that you are unable or unwilling to bear yourself, and that is partly an objective decision, that's partly subjective.

For example, a manager that's terribly worried that his board of directors may second guess him if he has an uninsured loss is going to buy a lot more protection probably than the company really needs, but he knows he's never going to have to go in front of his board of directors and say, “We just had a million-dollar fire loss,” and then the next question the director asks is, “Was it insured?” and he doesn't want to answer “no.” So he may do something that's very unintelligent from the company's standpoint merely to protect his own position, but the reason for buying insurance is whether—and this is true of life insurance, it's true of property casualty, it's true personal insurance, it's true of commercial insurance—is to protect against losses that you're unwilling or unable to bear yourself or the second reason, which occasionally comes up, is if you think the insurance companies are actually selling you a policy that's too cheap, so that you really expect to overwhelmingly—over a period of time, to have a mathematical advantage by buying insurance.

Well, we try to avoid selling the second kind and to concentrate on selling the first kind, and we think any company we can sell insurance to—and of course much of the insurance we sell is to other insurance companies. I mean, we are a reinsurer, and very large part we are selling them insurance against a loss that they are either unable or unwilling to sustain, and a typical case, you know, might be a company that had a lot of homeowners policies in California, and if those include earthquake coverage, they may not be able to sustain the kind of loss that is possible even though they want to keep a distribution system in place that merchandises and mass to homeowners in California, so we will write a policy. They may take the first five million of loss, they may take the first 50 million of loss, depends on their own capabilities, but then they come to us and we are really uniquely situated to take care of problems that no one else—the companies can't bear themselves and that they can't find anybody else to ensure, but we really don't want to insure someone for a loss that they can afford themselves. Because if we're doing that, it may be because they're dumb, but it may be because they also have a loss expectancy that's higher than the premium we're charging, which is not what we're trying to do in business.

I think that I think probably as compared to 30 years ago, that that risk managers at corporations are probably more intelligent about the way they buy their insurance than many years ago. I think it's become a—I think they're more sophisticated, they've thought it through better, but there is a lot of insurance, there's some, there's a fair amount of insurance bought that doesn't make sense, and there's a fair amount of insurance that isn't bought that should be bought.

There are certain companies that are exposing themselves in this country to losses which would wipe them out, and they prefer not to buy reinsurance because it's quote expensive, but what they're really doing is betting on something that won't happen very often happening not at all, and if you take a huge hurricane on Long Island or you take a major quake in California, there are a number of companies that are not—that have not positioned themselves to withstand those losses, and if you're a 63-year-old CEO and you figure I'm going to retire in a couple of years, you know, the odds are pretty good that it won't happen on your watch, but it will happen on somebody's watch, and we try to sell reinsurance to those people, and usually we do, but sometimes we don't.

Charlie?

Nothing to add? Okay, Zone Five.

He's fighting himself. He'll be dynamite when he gets going. My name is Hugh Stevenson. I'm a shareholder from Atlanta, Georgia. My question involves the company's catastrophe lines of insurance. It seems that there's a relative ease of entry into that business through Bermuda-based companies and others, and given the importance of that business to the overall company, I'm curious how the ease of entering into the business affects its long-term competitive position and its rates of return.

Well, you're very right. There is an ease of entry into the catastrophe business, and it's sort of attractive for—it's particularly attractive for promoters, because if you start an insurance company to write earthquake insurance in California, and you raise a few hundred million dollars, you'll either have essentially no losses, or if you write enough of it, you'll go broke, and most years, you'll have no losses. So if your intention is to sell your stock publicly in a year or two, the odds are very good that you will have a beautiful record for a couple of years, and maybe one time out of ten, you'll go broke, and nine times out of ten, you'll sell to somebody else who eventually will go broke.

There is really ease of entry. The only thing that may restrict that is that if the buyer is sophisticated enough to question the viability of that company under really extreme conditions, which is the only conditions that count when you're buying catastrophe insurance, that may restrict.

The second thing is, of course, none of the people that have started up can offer anywhere near the amount of coverage that Berkshire has. Berkshire is really one of a kind in terms of its capital strength in the business. I'm—I don't think anybody in Bermuda that I can remember. I don't think Ajit spoke out there, but I don't think anybody has a billion of net worth, and you know, we have, at present, we probably have close to 13 billion of net worth and considerably more of value.

So we can sustain shocks that others can't. And we try to get paid appropriately for that. But when we say we can take a billion-dollar loss, we can take a billion-dollar loss, and we will have a billion-dollar loss at some point. And anyone buying it knows we can take it or something greater, and they should know that very few other—very few of our competitors can.

So there's competition. We do an unusual proportion of our business with the eight or ten largest insurance and reinsurance companies and insurance companies in the world, so we really have established, with the people who understand the real risks of the business, they come to Berkshire a lot more often than they stop in Bermuda because they know that we'll pay, and they've been around long enough to know that's what really counts with an insurance company. If the rates—if there were enough capacity at really ridiculous rates, I mean, in the end, we wouldn't be writing that business at that time. But I don't think that will happen. It certainly hasn't happened so far, and if it happens, you know, so be it. We'll all play golf until the loss occurs and enjoy nothing there.

Zone Six. What do we do, Chairman?

Most company Berkshire invest at this time are not hyped in—are not in high technology sector. What we have seen in the last few years is that there seems to be a significant growth both in sales and earnings of the high technology area. And also, what invest your shareholder believe that the times are changing from a brand-named high technology. My question is: can someone apply your investment principle, business philosophy, and your discipline in life to build a portfolio of say five or six high-technology companies? Let's call it the Berkshire Hathaway Technology Fund.

Well, I think it would sell. The— the question about—Charlie and I won't be able to do it. Charlie probably understands high tech, but you can see how hard it is to get information out of him, so he hasn't told me yet. We try not to get into things that we don’t understand.

If we're going to lose your money, we want to be able to come before you, you know, next year and tell you we lost your money because we thought this and it turned out to be that. We don't want to say, you know, somebody wrote us a report saying this is what's going to happen in some field that we don't understand and therefore we lost your money by following someone else's advice. So we won't do it ourselves at—I think that the principles, I think Ben Graham's principles are perfectly valid when applied to high-tech companies. It's that we don't know how to do it, but that doesn't mean somebody else doesn't know how to do it.

My guess is that if Bill Gates were thinking about, you know, that he understood and that I didn't understand, he would apply much the same way of thinking about the investment decision that I would. He would just understand the business—I might think I understand Coca-Cola or Gillette, and he may have an—he may have the ability to understand a lot of other businesses that seem as clear to him as Coca-Cola or Gillette would seem to me. I think once he identified those, he would apply pretty much the same yardsticks in deciding how to act.

I think he would act I think he would have a margin of safety principle that might be a little different because there's essentially more risk in a high-tech company, but he would still have the margin of safety principle on a sort of adjusted for the mathematical risk of loss in his mind. He would have—he would look at it as a business, not as a stock. He, you know, he would not buy it on borrowed money. I mean, a bunch of principles would be carried through.

But our circle of things we understand is really unlikely to enlarge. Maybe a tiny bit here or there, but if the capital doesn't get too large, the circle's okay. And we will not, if we have trouble finding things within our circle, we will not enlarge the circle—we'll wait. That's our approach.

Now, how are we set up for Zone Seven? Can we do it up?

Yeah, here we are. Are you there?

Hi, I'm Susie Taylor from Lincoln, Nebraska. By way of explaining, we wrote down the value of U.S. Air, reflecting our investments' current market value. You had a good explanation in your report as to why the economics of the business are unattractive, and I presume given the choice, we wouldn't do it over again.

I think that's a fair assumption, and I should mention, anyone who wants to ask about U.S. Air, we put them in the other room, just so you'll know why. And then the second part is better, but I'm watching you—I can see you on the monitor.

Quoting from your profound statement, you don't have to make it back the way you lost it, right? Wouldn't it be a good idea to put that 89 million in something you would really behind as opposed to U.S. Air?

Well, that's a very good question because it is true that a very important principle in investing is you don't have to make it back the way you lost it. And in fact, it's usually a mistake to make—try and make it back the way that you lost it. And we have, when we write our investment down, as we did with U.S. Air, 89 million, we probably think it's worth something more than that, but we tend to want to be on the conservative side, but it's worth a whole lot less than we paid.

The nature of that preferred, as well as other private issues we've bought, usually makes it quite difficult to sell. That's one of the things we know going in when we bought preferred. Some people thought that we were getting unusually favorable terms—I haven't heard from them lately on U.S. Air—but one of the considerations in that is that if you buy a hundred shares of a preferred that's being offered through a securities firm from the same issue, you can sell it tomorrow. And we are restricted in some ways legally and in another way simply by the way that markets work from disposing of holdings like that, and we know that there's an extra cost involved to us if we should try to sell, or it may be impossible.

And that's, that's not of great importance with us because we don't buy things to sell. But it's of some importance, and we are not in the same position owning our series A preferred of U.S. Air as we would be if we bought a thousand shares or five thousand shares of the series B preferred, I believe it is, that trades on the New York Stock Exchange. That would be very saleable.

And our preferred could well even be sellable at a price modestly above what we carry it for, but it would require, it would not be very easy to do. It might—if it were dual, if it—if we went about to do it, we could probably, assuming we could do it at all, we could probably get a little more money for it, but it would not—and would not be easy to do partly because of the legal restrictions. Charlie and I are on the board; that complicates things. We always know something that just by being on the board that the public doesn't know, so that complicates things.

And in the end, we usually find that dealing with anything where we've got fiduciary obligations is maybe not practical at all, and Charlie?

Well, it's certainly been an interesting experience. The U.S. Air experience is that it—well, I don't want to say anything, it's too late.

Oh no! I'd like to repeat that business about not having to get it back the way you lost it. You know, that's the reason so many people are ruined by gambling. They get behind, and then they feel they have to get it back the way they lost it. It's a deep part of human nature, and it's very smart just to lick it by will. Little phrases like that are very useful. Yeah, one of the important things in stocks is that the stock does not know that you own it. You know, you have all these feelings about it and, and you remember what you paid, you remember who told you about it, all these little things, you know, and it doesn't give a damn.

It just sits there, and it— you know, a stock at 50, somebody’s paid 100, they feel terrible; somebody else paid 10, they feel wonderful. All these feelings have no impact whatsoever. And so it's, it's—as Charlie says, gambling is the classic example. Someone builds a business over years that they know how to do, and then they go out someplace and get into a mathematically disadvantageous game, start losing it, and they think they've got to make it back not only the way they lost it but that night, and it's a great mistake.

Zone One.

[Music] My name is Donald Stone. I'm from Riverside, Connecticut. This is my second shareholder meeting ever at age 61, so I'm really very privileged to be here. My first was Coca-Cola a week and a half ago, and there were only 200 people there. I'm trying to figure this out. I think the rule is that the number of people present is in direct proportion to the price of the shares. In that case, we won't split.

A prefatory comment to my question. The November 24, 1994 issue of Fortune magazine had an article, a featured article entitled America's Greatest Wealth Builders, dealing with the concepts of market value added and economic value added. It was with great glee that I noticed that Coca-Cola was number two on that list, second only to General Electric. And Coca-Cola had done twice as well as Pepsi-Cola, number nine on the list with one-third as much capitalization.

My question is this: whether the concept of market value added and economic value added as such or any of its variants is a concept that's applicable and useful to Berkshire Hathaway as a whole or in analyzing its line of business segments. I'd really like to hear from Charlie Munger on this first because I've heard Charlie, I've heard that he's thought a lot about this particular subject, right?

If Warren is using economic value added exactly the way they're now teaching it in the business schools, he hasn't told me. Obviously, the concept has some merit in it, but the exact formal methods I do not believe we use. Warren, are you using this stuff, seeking—

Wait, wait, in a sense they're trying to get at the same thing we do where we're trying to get at the same thing they do. But I think it has some flaws in it, although I think it generally comes out with the right answers; it sort of forces itself to come up with the right answer but I really don’t think you need that sort of thing.

I mean, I do not think it's that complicated to figure out where it makes sense to put money; you can make mistakes doing it. But in terms of the mental manipulations you go through, I—I don’t think it's a very complicated subject and I don't think that I think the people marketing one or another fad in management tend to make them a little more complicated than needed so that you have to call in the high priest.

And you know, if all that really counts is the Ten Commandments, it's very tough on religious counselors and everything. It doesn't take—it just doesn't make it complicated enough, and I think there's some of that in quite a bit of that in management consulting and then the books that you see and all of that that come out. It's way less silly than the capital asset pricing model so at least academia is improving.

Yeah, the capital asset pricing model, which is —I don't know how much it's used now; certainly, you know they have these great waves of popularity. You get that in management; you get an investing. I mean, real estate, you know, may have been popular or international. You can read “Pensions and Investments” magazine, which is a pretty good magazine, but you can just see these fads sort of going through, and then they have seminars on them and everything.

And you know, the investment bankers create product to satisfy the demand, and there's these fads in management. I mean, obviously, listening to your customers and things like that, I mean, nothing makes more sense, but it's hard to write a 300-page book that just says, “Listen to your customer.” And you know, that's one of the things I liked about Graham's book. I mean, you know, he wrote everything; he wrote sort of made sense. He didn't sort of get into all the frills and try and make it more complicated.

And it really, truly, I really didn't need to read the November-ish 1994 issue of Fortune to know that Coca-Cola had added about $4 billion to Berkshire, so that's good enough for me.

Zone Two.

My name is Morris Spence from Omaha, Nebraska. I have a two-part question on derivatives. Does Berkshire Hathaway currently or have they in the past engaged in strategies involving derivatives? If so, do you, as CEO, fully understand these financial instruments? Whoever suggested that crazy notion—finally, would Charlie care? You or Charlie could comment on the use of these by other financial institutions.

The question about derivatives—the reason I inject that remark in a Fortune article that all of you should read if you haven't. I suggested that the use of derivatives would be dramatically reduced if the CEO had to say in the report whether he understood them or not. And the answer to your question, though, is we have—we have two types, I guess it would be, of derivative transactions of my very modest size, but that doesn't mean we wouldn't if the conditions were right. We either wouldn't have them on a much greater scale now or we wouldn't have done it in the past.

We have two types of transactions, and I do understand them. And there are times when there are things that we would want to do—not often, but there would be times when they could be best accomplished by a transaction involving a derivative security, and we wouldn't hesitate to do so. And we would obviously care very much about the counterparty because that transaction is just a little piece of paper between two people, and it's going to cause one of the two to have to do something painful at the end of the period, usually, which is to write a check to the other person, and therefore you want to be sure that that person will be both willing and able to write the check.

And so we're probably more concerned about counterparty risk than most people might be. Last year and the year before, I think I said that derivatives often combine borrowed money with ignorance, and that is a rather dangerous combination. And I think that we've seen some of that in the last year. When you can engage in sort of non-physical transactions that involve hundreds of millions or billions or tens of billions of dollars as long as you can get some party on the other side to accept your signature, that really has the potential for a lot of mistakes and mischief.

And if you've looked at the formulas involved in some particularly, I guess, interest rate-type derivative instruments, it is really hard to conceive of how any business purpose could be solved by the creation of those instruments. I mean they essentially had a huge gambling element to them. And I used that in the terms of engaging in a risk that doesn't even need to be created as opposed to speculative aspects that they involve the creation of risk, not the transfer of risk, you know—not the moderation of risk, but the creation of risk on a huge scale.

And it may be fortunate that in the last year half a dozen or so cases of people who have gotten into trouble on them have come out because it may tend to moderate the troubles of the future. The potential is huge. I mean, you can do things in the derivative markets—well, I've used this example before, but in borrowing money on securities, the Federal Reserve of the U.S. government decided many decades ago that society had an interest in limiting the degree to which people could use borrowed money and buying securities.

They had the example of the 1920s with what was 10 percent margin, then was regarded as contributing to the Great Crash, so the government through the Fed established margin requirements and said, “I don't care if you're John D. Rockefeller, you know, you're going to have to put up fifty percent of the cost of buying your General Motor stock or whatever it may be.”

And they said that maybe Mr. Rockefeller doesn't need that, but society needs that. We don't want a bunch of people on thin margins gambling. You know, essentially in chairs where the ripple effects can cause all kinds of problems for society, and that's still a law. But it means nothing anymore because various derivative instruments have made 10 margins of the 1920s, you know, look like what a small-town banker in Nebraska would regard as conservative compared to what goes on.

So it's been an interesting history, and like I said, perhaps the experiences of the last year have got everybody focused on derivatives. Nobody knows exactly what to do about them. Berkshire Hathaway will, if we think something makes sense, and Charlie and I understand it, we may find ways to use them to what we think will be our advantage.

Charlie, you want anything on them?

Well, I disapprove even more than you do, which is hard. If I were running the world, we wouldn't have options exchanges. The derivative transactions would be about five percent of what they are, and the complexity of the contracts would go way down; the clearing systems would be tougher. I think the world has gone a little bonkers, and I'm very happy that I'm not so located in life that I have to be an apologist for it.

You know, a lot of these people, I feel sorry for them. You know, they had great banks, and they have to go before people—including their children and friends—and argue that these things are wonderful.

Zone Three.

My name is John Nugent from Kingsburg, California, and my question relates to Solomon and where I'm just asking if you could take us out the next two or three years in your vision. It started out as a good investment. You got a good return on it, or your interest, and it's clearly had some problems, and we've gotten in deeper and deeper as those problems have continued, and it doesn't look like it's super bright. So you must understand where it's going, but could you just give us where you see it going in the next two or three years?

Well, I think it's very difficult to forecast where Solomon or really almost any major investment bank-slash-trading house will do over the next two or three months, let alone the next two or three years. The nature of that business is obviously far more volatile than the blade-and-razor business. Now, the tough part is assessing over a longer period of time whether, because of volatility, it's much harder to assess whether what the average returns might be from a business, uh, and the answer is Charlie and I probably, if we were to try and write the forecast for the next two or three years, we would not have a high a feeling that we had a high probability of being able to predict what that company or other companies in that industry either would earn three years out or would probably have in the way of average earnings.

Our own commitment is to a 700 million dollar preferred issue, which has five redemption dates starting on October 31st of this year and then every year thereafter. On those dates, we can either take cash or stock. And that’s an advantage, obviously, to have an option. Anytime you have an option in this world, let's do an advantage. It may—it may be a very small advantage, but it's giving options. Options are generally a mistake, and accepting options is usually a good idea if it doesn't cost you anything.

And we will, we have this—other thing about options is you don't make a decision on them until you have to make a decision. But, uh, so we—in addition to that 700 million dollars of preferred, which in our view is 100 percent money good, I mean, we'd like to own more of that, uh, but we also have about 6 million odd shares of common, which we paid perhaps forty-eight dollars a share for, something in that area, and in any event considerably more than the present market of 35 or 6.

So we have got a— we have a loss of probably 80 or 90 million dollars or some number like that at market in the common. The preferred is actually treated as fine. We've received 63 million dollars a year, incidentally, by owning the amount of common we own. This probably isn't generally known but or recognized—if you own 20 percent of the voting power of a company, you have somewhat different dividends received credit; you have somewhat different tax treatment than if you own less than 20.

So until we own that common, we paid somewhat more tax on our preferred dividend than we now pay. It's not a huge item, but it's not immaterial either. Charlie?

Well, I certainly agree it's hard to forecast what's going to happen in the big investment banking-slash-trading houses. I would like to say that Berkshire Hathaway was a large customer of Solomon long before we bought the preferred and that we've had marvelous service over the years. I think Solomon's going to be around for a long time rendering very good service to various clients, satisfied clients. We sold our first debt issue of Berkshire, I think, in 1973 through Solomon, so we've had an investment banking relationship for 21 or 22 years there, and actually we've done business with them before that in various other ways, so it's a long-term relationship.

Well, there’s no question about Solomon being around. The question—and that's why our preferred is absolutely money good. But the question is what the average return on capital will be, and we knew that was difficult to predict when we went in, and we found out it's even more difficult to predict than we thought.

Zone Four.

Thank you for the opportunity. Dick Jensen from Omaha, a fellow Nebraska University supporter. A rather convoluted question—I'm very interested in your recent purchase and your future intention of American Express. And as I understand the company, I know it's a rather involved and complicated and rather expansive company in so far as it has its interests in many areas. I know one of which, of course, is the credit card, but there is also the major part of the organization of IDS and others that I don't even know about. And I wondered what's your hopes for that investment.

And I also just recently, as perhaps you have, became curious to know if you are personally acquainted with Mr. Phil Correa, I believe his name is, and uh, how about the purchase of his firm in your future?

Thank you, Dick. I think Phil Correa is here today, but Phil is right back there. Would you stand up? There he is. [Applause] Give him a hand.

Phil is 98. I first met him in 1952, 43 years ago. He attends every eclipse around the world, and you can run into him in some very strange places. Wrote his first book on securities, I believe in 1924, I am and wrote an autobiography here recently. Probably the greatest long-term investment record in this country's history. And, but I think—I think—you know, my impression is that Phil sold part or a good bit of Pioneer some years ago, which he managed for decades, many decades, in fact.

I first learned about Phil when I was leafing through Moody's Banks and Financial Manual 40-odd years ago, and I saw this company with this great record and with some securities that looked terribly interesting, so we got in touch and he was out in Omaha and we got acquainted.

So anybody that can get Phil to talk to him, listen carefully. I advise that. The question about American Express—we own just under 10 percent of American Express, and obviously even though you mentioned they're in a number of businesses, the by far the key, the most important factor in American Express's future for a good many years to come, great many years to come, will be the credit card.

And that is a business that that has become and will forever probably become ever more competitive. I mean, I've followed it since—I think I met Ralph Schneider at Diners Club in the late 1950s, and American Express entered into the credit card business out of fear. I mean, they were—they were worried about what the credit card was going to do to their travelers' check business. The travelers' check business had been originated back in 1890-something, I believe, and that was in turn building off of the old express business where I think Henry Wells and William Fargo—they would chain themselves to the express boxes as they delivered them through to the West.

And they decided that maybe issuing travelers' checks would be a little easier than carrying all this stuff around. So that the travelers' check was evolved out of the express business. And the credit card business with American Express arose out of fear of what particularly Diners Club at the time—they were all terrified of Diners Club, which got the jump on everybody, and they became enormously successful with it.

And the American Express card, as you know, had a terribly strong position in what they called the travel and entertainment part of the card business. And, of course, the banks entered on a big scale and Visa has been enormously successful, so the card has a strong franchise in certain areas like the corporate card, although people like First Bank Systems are very aggressive in going after them there, the card.

But the card has a significant franchise, but it does not have the breadth of franchise that it had many years ago. For a while, it was the card, and now it’s the card in certain areas, but nothing like as broad an area as before. It has certain very important advantages and economic strengths, and it has some weaknesses, and you have to assess those in deciding where it'll be in the year 2000 or 2005.

And we think that the management of American Express thinks well about the question of how to keep the card special in certain situations, and they've reacted to the merchant backlash for higher discount fees, I think, in an intelligent way. So we'll see how it all plays out, but the key—IDS, which has now been renamed but is a very big part of American Express—accounts for close to a third of their earnings, but the real key will be how the card does over time.

Charlie, nothing to add? Zone Five.

Hi, Philip King from San Francisco. My question has to do with how the FASB has caved in on the stock option proposal and the people opposed to the proposal argued that it would hurt capital formation for companies and that the cost of stock options is already reflected in shares outstanding in fully diluted calculations. And I was curious what is your feelings about what's happened?

Well, as those of you who followed this issue, the FASB did cave, and they were—they hated it. I mean, they knew they were right. As a matter of fact, most of what are now the big six auditing firms, many years ago, sided with the position. But in my opinion, they—the auditing firms caved to their clients in that respect.

And in terms of capital formation, I would argue that the most intelligent form of capital formation follows from the most accurate form of accounting. I mean, that if all the companies whose names began with A through M didn't have to count depreciation, and all the ones with M through Z did or something, you know, that might help in capital formation for companies that had names with A through M. Incidentally, they probably all changed their names.

But I don't think that bad accounting is an aid to capital formation; in fact, I think probably over time it distorts capital formation because if we were to pay all of the shareholders with—I mean all of the people who worked for Berkshire Hathaway in stock and therefore record no wage expense, you know, we might be able to sucker in a bunch of people who thought the earnings were real, but that would not be a great step forward for capital formation in my view.

I really think that, you know, I've talked privately to a number of managers about this, and they understand it, but they—you know, they prefer the present situation, and they used a lot of muscle in Washington many years ago.

And I think I have this authenticated now. The fellow mathematics professor sent me some material after I'd written this. I'd probably get a little proof after the fact when I can. I believe in the Indiana legislature where a legislator introduced a bill to change the value of pi, the mathematical symbol pi, to three, because he said that it was too difficult for the school children to work with this complicated 3.14159, and he was right—I mean, it was difficult.

And I—and Congress, in connection with the stock option question, received all kinds of pressure to—in turn pressure FASB and the SEC not to count stock option costs as part of compensation. I've never met anybody that wanted to be compensated that felt that if he received his present salary plus an option he was not getting compensated more than if he just received the salary. So he thought it was compensation.

And I will tell you that if we had been issuing options over a period of time at Berkshire for things unrelated to the performance of the entire business that we would have had a cost perhaps measuring in the billions of dollars, whether it was recorded or not.

So it goes back to Bishop Berkeley's question of whether a tree that falls in the forest and doesn't make a sound, you know, etc. But I think it is. I really think that it makes you a bit of a cynic about American business when you see the extent to which a group has pressured.

Even to the extent of talking about financial—withdrawn financial support from the Financial Accounting Standards Board, the degree to which they pressured people to make sure the value of pi stays at three instead of 3.14 simply because it was their own ox that was being gored a bit, and in any event it's—it looks like it's all over now for some time.

In fact, now they're pressuring them to even weaken further the standards that have been set. So self-interest is alive and well in corporate America