2018 Berkshire Hathaway Annual Meeting (Full Version)

[Applause] Hmm, good morning. [Applause] I'm Warren, he's Charlie. Charlie does, uh, most things better than I do, but, uh, well, this one's a little tough, Charlie; maybe you can chew on that a while.

Okay, at the formal, um, meeting that will begin at 3:45, we will elect 14 directors. Charlie and I are two of them, and I would like to introduce the other 12. I'll do it in alphabetical order. If they will stand as I announce their names, withhold your applause. May be hard to do, but give it your best, and when we get all through, then you can let loose. But, uh, we'll do this alphabetically, beginning with Greg Abel. If you'll stand and stay standing: Howard Buffett, Steve Burke, Sue Decker, Bill Gates, Sandy Ottersman, Charlotte Guyman, Ajit Jain, Tom Murphy, Ron Olson, Walter Scott, and Merrill Whitmer. [Applause] [Applause] [Applause]

Uh, this morning we posted both our earnings and our 10-Q, and if we can put up slide one, you can take a look at, uh, what was reported. And as I warned you in the annual report, a new accounting rule was introduced at the beginning of this year and it provides that our equity securities, whether we sell them or not, are marked to market every day. So we can have a gain or loss of a couple billion dollars in our equity securities portfolio, and that day, according to the accounting principles now in effect, which are a change, will be recorded as making a couple billion dollars, or losing a couple billion.

And I told you that would produce some very unusual effects from quarter to quarter. And it further explains why I like to release our earnings early Saturday morning, as well as the 10-Q, to give people a chance to read through, uh, the explanation. Because if you just were handed this with a TV monitor, you know, at 3:30 in the afternoon or whatever it might be, uh, you would report the net earnings figure under understandably, uh, very quickly, and it really is not representative of, uh, what’s going on in the business at all.

So if you look at the figure of operating earnings, which is what we look at, we actually, uh, earned a record amount for any quarter we've ever had, and that includes no realized gains or losses on securities or on, uh, the few remaining derivatives we have. Um, uh, you might leave that slide up there just a little longer. Maybe this up, uh, the, uh, insurance underwriting.

Uh, Geico had, uh, quite a good size turnaround in, uh, in profitability and a good gain, although not as big a gain as last year, which was a record in terms of policies and force. Uh, and really throughout most of our businesses, and the details are on the 10-Q, which is up on the, uh, on our website now. And as you can see, the railroad was up significantly, and we had most of our businesses tended to be up.

Now, we were aided in that in a material way by the reduction in the federal income tax rate, uh, from 35 to 21. Our businesses were up significantly on a pre-tax basis, but the gain was further enhanced by the change in the income tax rate.

Uh, so, uh, that pretty well sums up the first quarter. We'll probably get some, may well get some questions on it when we get into the question and answer section. Um, the questions we'll be getting, we've got the press over here, and then we have the analysts on my left, and of course, we have, uh, our partners out in front of me. And we will rotate among you, and the questions we get as we, uh, go to the next six hours or so, uh, will understandably relate to a lot of current events.

You know, will we may get asked, and we don't know the questions, but we may get asked, you know about that policy or whether we're seeing any inflation or whether business is speeding up or down or the threats we may face competitively in our businesses as we go along. Anything goes on the questions except we won't tell you what we're buying or selling.

Uh, but, uh, it really can be a question sometimes of confusing the forest with the trees. And I would like to just spend just a couple of minutes, uh, giving you a little perspective on how you might think about, uh, investments, as opposed to the, uh, tendency to focus on what's happening today or even this minute as you go through.

And to help me in doing that, I'd like to go back through a little personal history, and we will start. I have here up here in New York Times of March 12, 1942, and I'm a little behind on my reading. Um, and if you go back to that time, it, uh, it was about, but just about three months since we got involved in a war, which, uh, we were losing at that point.

Uh, the newspaper headlines were filled with bad news from the Pacific, and I’ve taken just a couple of the headlines from the days preceding March 11th, which I'll explain. It's kind of a momentous day for me, and so you can see these headlines. Uh, we've got slide two up there, I believe. Uh, and, uh, we were in trouble, big trouble in the Pacific. Uh, it was only going to be a couple months later that the Philippines fell, but here we were getting bad news.

We might go to slide three for March 9th. Uh, I hope you can read the headlines. Anyway, the price of the paper is 3 cents, incidentally. The [Music] and let’s see, we've got March 10th up there. Slide—I'm, I want to get to with this advanced technology of slides, I want to make sure I'm showing you the same thing that I'm seeing in front of me. So anyway, on March 10th, uh, when again the news was bad, full clearing path to Australia, and it was like, uh, the stock market had been reflecting this, and I'd been watching a stock called City Service Preferred Stock, which had sold at $84 the previous year.

It had sold at $55 the year early, in the—in January, two months earlier, and now it was down to $40 on March 10th. So that night, despite these headlines, I said to my dad, I said, “I think I’d like to pull the trigger, and I’d like you to buy me three shares of City Service Preferred the next day.” And that was all I had. I mean, that was my capital accumulated, uh, over the previous five years or thereabouts.

And so my dad, the next morning, um, bought three shares. Well, let's take a look at what happened the next day. Let's go to the next slide, please. And, uh, it was not a good day. The stock market, the Dow Jones Industrials broke 100 on the downside. Now they were down 2.28 as you see, but that was the equivalent of about a 500 point drop now. So I’m in school wondering what is going on.

Of course, uh, incidentally you'll see on the left side of the chart, the New York Times put the Dow Jones Industrial Average below all the averages they calculated. They had their own averages which have since disappeared but the Dow Jones has continued. So the next day we can go to the next slide. And you'll see what happened. The stock that was in 39, my dad bought my stock right away in the morning because I'd asked him to, my three shares.

And uh, so I paid the high for the day that 38 and a quarter was my tick, which is the high for day and by the end of the day it was down to 37, which was really kind of characteristic of my timing in stocks. That was going to appear in future years. But, uh, it was on the what was then called the New York Curb Exchange, then became the American Stock Exchange.

But things even though the war until the Battle of Midway looked very bad, and if you'll turn to the next slide please, you'll see that, uh, the stock did rather well. You can see where I bought at 38 and a quarter, and then the stock went on actually to eventually be called by the City Service Company for over 200 dollars a share. But this is not a happy story because if you go to the next page, you will see that I, well, as I always say, it seemed like a good idea at the time.

So I sold those. I made five dollars on it. It was, it was again typical of behavior. But, uh, when you watch, you go down to 27, uh, you know, it looked pretty good to get that profit. Well, what's the point of all this? Well, we can leave behind this City Service story and I would like you to again imagine yourself back on March 11th of 1942.

And as I say, things were looking bad in the European Theater as well as what was going on in the Pacific. But everybody in this country knew America was going to win the war. I mean, it was, you know, we’d gotten blindsided, but we were going to win the war, and we knew that the American system had been working well since 1776. So if you'll turn to the next slide, I'd like you to imagine that at that time you had invested ten thousand dollars and you put that money in an index fund.

We didn't have index funds then, but you, in effect, bought the S&P 500. Now I would like you to think a while and do not change the slide here for a minute. I'd like you to think about how much that ten thousand dollars would now be worth if you just had one basic premise. Just like in buying a farm, you buy it to hold throughout your lifetime. And independent, and you look to the output of the farm to determine whether you made a wise investment.

You look to the output of the apartment house to decide whether you made a wise investment. If you buy an apartment, small apartment house to hold for your life, and let's say instead you decided to put the ten thousand dollars in and hold a piece of American business and never look at another stock quote, never listen to another person give you advice or anything of the sort. I want you to think how much money you might have now.

And now that you've got a number in your head, let's go to the next slide, and we'll get the answer. You'd have 51 million dollars, and you wouldn't have had to do anything. You wouldn't have to understand accounting. You wouldn't have to look at your quotations every day like I did that first day. I'd already lost 3.75 by the time I came home from school.

All you had to do was figure that America was going to do well over time, that we would overcome the current difficulties, and that if America did well, American business would do well. You didn't have to pick out winning stocks. You didn't have to pick out a winning time or anything of the sort. You basically just had to make one investment decision in your life.

And that wasn't the only time to do it. I mean, I could go back and pick other times that would work out even greater gains. But, uh, as you listen to the questions and answers we give today, just remember that the overriding question is how is American business going to do over your investing lifetime?

Uh, I would like to make one other comment because it's a little bit interesting. Let's say you've taken that ten thousand dollars and you listen to the profits of doom and gloom around you, and you'll get that constantly throughout your life. And instead, you used the ten thousand dollars to buy gold. Now for your ten thousand dollars, here into your look in your safe deposit box.

And you would have your three ounce, 100 ounces of gold, and you could look at it and you could fondle it, and you could, I mean, whatever you wanted to do with it, but it didn't produce anything. It was never going to produce anything. And what would you have today? You would have 300 ounces of gold, just like you had in March of 1942, and it would be worth approximately 400 thousand dollars.

So if you decided to go with a non-productive asset gold instead of a productive asset, which actually was earning more money and reinvesting and paying dividends and maybe purchasing stock or whatever it might be, you would now have over 100 times the value of what you would have had with a non-productive asset. In other words, for every dollar you have made in American business, you'd have less than a penny by a gain by buying in the store value, which people tell you to run to every time you get scared by the headlines or something disorder.

It's just remarkable to me that we have operated in this country with the greatest tailwind at our back that you can imagine. It's an investor's hey. I mean, you can't really fail at it unless you buy the wrong stock or just get excited at the wrong time. But if you own a cross-section of America and you put your money in consistently over the years, there's just, there's no comparison against owning something that's going to produce nothing.

And there frankly, there's no comparison with trying to jump in and out of stocks and pay investment advisors. If you'd followed my advice, incidentally, or this retrospective advice, which is always so easy to give, if you'd follow that, of course, your friendly stock broker would have starved to death. I mean, you know, and you could have gone to the funeral to atone for their fate. But the truth is you would have been better off doing this than a very, very, very high percentage of investment professionals have done or people have done that are active.

That it's very hard to move around successfully and beat really what can be done with a very relaxed phosphate, and you do not have to be, you do not have to be, you do not have to know as much about accounting or stock market terminology or whatever else it may be or what the Fed is going to do next time and whether it's going to raise rates three times or four times or two times. None of that counts at all, really, in a lifetime of investing. What counts is having a philosophy that you've that you stick with, that you understand why you're in it, and then you forget about doing things that you don't know how to do.

So with all those happy words, we will move on and start the questioning, and we'll start with Carol. Um, good morning. In choosing a first question to ask each year, I look for a question that is definitely virtual related and is timely, and this question seemed to fill the bill. The question came from William Anderson of Salem, Oregon, and he said, "Mr. Buffett, you have previously said that there are two parts to your job: overseeing the managers and capital allocation. Mr. Abel and Mr. Jane now oversee the managers, which leaves you with capital allocation. However, you share capital allocation with Ted Weschlen and Todd Combs. Question: does all that mean you are semi-retired, or if not, please explain."

I've been semi-retired for decades. [Laughter] The answer is that, uh, I was probably, well it's hard to break down the percentage of the time that I was involved in what now, uh, the jobs that are now done by, uh, G and Greg, and in the case of investing, the sub-part of the job that is done by Ted and Todd. Ted and Todd each manage 12 or 13 billion dollars, so in total that's 25 billion, and we have in equities 170 some billion probably now, and 20 billion in longer-term bonds and another 100 billion in cash in short-term.

So, uh, they're managing 2025 and doing a very good job, and I still have the responsibility basically, uh, for the other 300 billion.

[Applause] I think Charlie will tell you, in fact I'd like him to comment, nothing's really changed that much. We've got clearly, we've got two people in Jaden Greg that are smarter, more energetic, uh, just bring more to the job every day. But they don't bring too much because the culture isn't—our managers are running their businesses. But there's a lot, there's a good bit overseas, so they do a superb job and, uh, Ted and Todd not only do a great job with their 12 or 13 billion each. They started with a couple billion each. Not that it's all been the growth of the two billion, um, but they also do have done a number of things for Berkshire that, uh, they do it cheerfully, but more important or skillfully. So there's just, there's one thing after another that I will have them looking into or working on.

And sometimes I steal their ideas, and, uh, but I think actually, uh, semi-retired is probably catches me at my most active point. I think you've, your questioner's got a good point.

Okay, Charlie? Well, I've watched Warren for a long time and he sits around reading most of the time and thinking and every once in a while he talks on the phone or talks to somebody. I can't see any great difference. A lot of people, part of the virtual secret is when there's nothing to do, Warren is very good at doing nothing. I'm still looking forward to being a mattress tester. [Laughter]

Okay, Jonathan Brand. Hi Warren, hi Charlie. Given the growth in airplane build rates, it seems surprising that Precision Cast Parts isn't doing better on the top or bottom line. I understand the issue with a bumpy transition from old to new programs, but I've also heard from industry sources that Precision's market position is not as strong as it used to be amid intensifying competition and some technological disruption. What does Precision need to do to solidify and strengthen its preeminent position with its aerospace customers so that it can deliver the growth you expected when Berkshire acquired it?

More generally, two years after the acquisition, what is your outlook for that business?

Give me the last part again, the outlook more generally two years after the acquisition, what is your updated outlook for that business longer term?

I think, uh, in the reasonably shorter term, it's a very, very good business. I mean, you were, uh, you mentioned aircraft, but we get another industry, but certainly aircraft's the most important. You have manufacturers that are very dependent, uh, on both the quality of the parts and the promptness of delivery. You do not want to have a—a—a aircraft worth 75 or 100 or maybe 200 million dollars and be waiting for a part or something of the sort. So, it's reliability is, uh, both in terms of quality and delivery times and all of that sort of thing is enormously important, and we get contracts that extend out many years, and sometimes we—I mean we will get them well before the plane even starts in production.

So there's very long lead times, and we have found in the last year about it earlier, but I know of some specific cases in the last year where other suppliers have failed, uh, in their deliveries, and then the manufacturers come to us and say, we would like you to help us out. And we say, well, we'll be glad to help you out, but we'd like about a five-year contract if we're going to do it because we're just not going to make up for these other guys' shortfalls periodically.

And, but that sort of thing has a very long lead time. The business is a very good business. One thing you will see their earnings charged with is about 400 million dollars, a little over 400 million dollars a year of, uh, intangible non-deductible, in that case, uh, amortization of, uh, goodwill, which really is not an economic cost in my view.

We have a significant amount of that through Berkshire, but by far the largest amount is related to the Precision acquisition. So whatever you see, you can add about 400 million to that, in my view, is not an economic expense. But—but the accountants would argue otherwise, but it's our money, so we'll take my view.

The, uh, Mark Donegan who runs that operation is incredible, and he has been not only he's a fabulous manager. I wouldn’t have bought it without—without him in charge. Uh, he also has been very helpful to us in other areas and he loves to do it. So you can't beat him both as a manager in his own operation but with his, uh, with his devotion to really doing everything that will help Berkshire.

It was, it was, it's a very good acquisition with very long tails to the products that are being developed.

Charlie?

Well, yeah, I think we'd buy another one just like it tomorrow if we had the chance.

Yeah, that's the answer, man, a few words, but he gets the point. [Laughter]

Okay, now we will go to the shareholder and, uh, station one I believe. That's probably up here to my right.

Hello, this is Xiao from Wuxi, China. So I had the capital. I've been in the mall team for 12 years. Wish you and Charlie good health so we could see you both run a meeting for 12 more years. Thank you. A quick question: we know both you and China delegations, U.S. and China delegations, are in China for intense discussion on so-called trade war. Let's go one step beyond the trade war. Do you think there's a win-win situation for both countries or the world is just too small for those to win? And we have to revisit your 1942 chart again. Thank you.

Thank you. I'd like to just mention one thing: in August, I'm going to be 88, and that will be the eighth month of the year, and it's in a year that ends with an eight. And as you and I both know, eight is a very lucky number in China, so if you find anything over there for me, this is the time we should be acquiring something.

All those eights—the United States and China are going to be the two superpowers of the world economically and in other ways for a long, long, long time. We have a lot of common interests and, like any two big economic entities, there are times when there'll be tensions, but it is a win-win situation when when the world trades basically, and China and the U.S. are the two big factors in that.

But there's plenty of other citizens of the world that are involved in how this comes out, and there's no question, and the nice thing about it in this country, I think, is that both Democrats and Republicans basically on balance believe in the benefits of free trade. And, uh, we will have disagreements with each other; we'll have disagreements with other countries on trade, but it's just too big and too obvious for, uh, that the benefits are huge, and the world's dependent on, uh, in a major way for its progress, uh, that two intelligent, uh, countries will do something extremely foolish.

We both may do things that are mildly foolish from time to time, and there is some give and take obviously involved, but, uh, U.S. exports in 1970 and U.S. imports in 1970 were both about 5 percent of GDP. So here we were selling 5 percent of our GDP and buying them 5 percent of our GDP basically. Now, people think we don't export a lot of things. Our exports are 1100 a fraction percent of GDP that more than doubled as a share of this rising GDP.

Uh, but the imports are about 14 and a half percent, so there's a gap of 3 percent or thereabouts, and I would not like that gap to get too wide. But when you think about it, it's really not the worst thing in the world to have somebody send you a lot of goods that you want and hand them little pieces of paper.

I mean, because the balancing item is if you have a surplus of a deficit in your trade, you're going to have a surplus in investment. And so the world is getting more claim checks on the United States, and they think they, to some extent, they buy our government securities. They can buy businesses, and over time you don't want the gap to get to be too wide because the amount of claim checks you were giving out to the rest of the world could get a little unpleasant under some circumstances.

But we've done remarkably well with trade. China's done remarkably well with trade. The countries of the world have done remarkably well with the trade, so it is a win-win situation.

And the only problem gets to be when one side or the other may want to win a little bit too much, and then you have a certain amount of tension, but we will not sacrifice the world. I mean, we will not sacrifice world prosperity based on differences that arise in the trade.

Charlie?

Yeah, well I think that both countries have been advancing, and of course China is advancing faster economically because it started from a lower base and they've had a little more virtue than practically anybody else in the world in having a high savings rate and, of course, a country that was mired in poverty for a long long time and it assimilates the advanced technology of the world.

And this has a big savings rate, is going to advance faster than some very mature company like Britain or the United States, and that's what's happened. But I think we're getting along fine, and I'm very optimistic that both nations will be smart enough to realize that the last thing they should do is have an elbow for the other.

Okay, Becky, quick. [Applause]

Uh, this question comes from Kirk Thompson. Uh, he says, "Warren, in this year's annual letter to shareholders, you referenced both cheap debt and a willingness by other companies to leverage themselves as competitive examples as to why it's hard to get more acquisition deals done. It seems like the trust in PR and prestige of doing a deal with Warren Buffett and Charlie Munger allows Berkshire to get a hometown discount and beat out other firms that might pay a little more to a prospective seller. Have you given thought to having other Berkshire managers have more public exposure so future generations of successful business owners continue to bring deal opportunities to Berkshire like they have in prior decades?"

Yeah, that sort of reminds me of who was it? Tony O'Reilly remarked one time about the responsibility of a CEO that the very first job of the CEO was to search through his organization and find that person who had the initiative and the brains and the determination, all of the qualities to be his logical successor and then fire the guy.

Yeah, there’s no question, I think the reputation of Berkshire as being a very good home for companies, particularly private companies, a good home for companies—I don’t think that reputation is dependent on me or Charlie. It may take a little, uh, you know. There’ll be a little testing period for whoever takes over in that respect, but, you know, basically we’ve got the money to do the deals, we’ll have the money to do the deals subsequently. People can see how our subsidiaries operate in the future, and the truth is that I think some of the other executives are going are getting better known, but there will be a— you know, I’ll tell you this— if things get bad enough, you don’t have to worry—they’ll be calling us no matter what.

So I do not worry about the so-called deal flow, which is a term I hate, but I don’t think there’s—I think that’s dependent on Berkshire and not dependent on me, and, you know, it’s mentioned my phone isn’t ringing off the hook with good deals, so that apparently this big winning personality or something is not delivering for you. So it may be, it may be the next—the next person will be even more— get even more calls.

Berkshire’s reputation belongs to Berkshire now, and we are for somebody that cares about a business that they and their parents and maybe their grandparents lovingly built over decades. If they care about where that business ends up being after for one reason or another, they don’t want to keep it or can’t keep it in the family. Uh, we absolutely are the first call, and we will continue to be the first call whether Charlie or I answer the phone or somebody else does, then Charlie?

Well, a lot of the subsidiaries have for a long time already been making all kinds of acquisitions with people they know when we don’t, so it’s already happening, and in fact it’s happening more there than it is at headquarters.

So don’t tell them. Charlie, you’re getting your wish. And it is weird that about 99 percent of the public companies that change hands in terms of control change hands in a sort of auction provided presided over by an investment banker, and the people that buy are usually just leverage it to the gills and structuring a little better; they re-leverage it, and that money is coming out of charitable endowments and pension plans. We’re making these highly leveraged investments in all these companies changing hands at very high prices. Sooner or later this is not going to work perfectly, yeah, and it’s going to have an unpleasant episode, and I think we’ll be around and in good shape at that time.

There was one fellow who came to me many years ago, and he had a wonderful business. And he had been worried because he had seen a friend of his dime and the problems that arose later when the managers, some extent tried to take advantage of the widow and it became a disaster. So he said he thought about it a lot the previous year and he decided he didn’t want to sell the business to a competitor who would be a logical buyer because they would fire all of his people and the CFO that would remain, and you know, all up and down the line they’d all be the acquirer’s people. He didn’t want to do that to his people.

And then he thought, and he didn’t want to sell it to a private equity firm because he felt they’d leverage it up, he never liked the leverage that much and then they’d just resell it later on to somebody so it would be totally out of control of what he wanted to do and he wanted to keep running it himself. So he said, he said, "Warren," he said, "it isn’t that you’re such a great guy,” he says, “it’s you’re the only one left.” So Berkshire will continue to be the only one left in many cases.

Gary Ransom, good morning, Warren. In your annual letter, you wrote about the potential for a 400 billion dollar natural catastrophe event, something out in the tail of the loss distribution. I can think of another risk that could have a similar order of magnitude, and that would be cyber risk. I’m sure all your managers have taken steps against that potential but in, out in the tail of the cyber risk distribution it could hit a lot of industries, a lot of your companies. So how do you think about and prepare for the big one in cyber?

Yeah, well, I include incidentally in my that part I wrote in the annual report where I said that roughly nobody knows the answer on this. I mean, I could stick down too and somebody else much smarter insurance would stick down a different figure, but I think it’s about a two percent risk of what I call a 400 billion super cat of all time. And, um, but cyber is in that is in that equation.

I mean, it’s not just earthquakes and that sort of thing and frankly I don’t think we or anybody else really knows what they’re doing when writing cyber. I mean we— it is just very, very, very early in the game and we don’t know what the interpretations of the policies necessarily will be; we don’t know the degree to which there’ll be what they’ll be correlated incidents, which we don’t really think are correlated now or haven’t had the imagination to come up with.

We know that every year when I go and hear these people from the CIA or wherever it may be, they tell me that the offense is added to the defense and will continue that way and I can dream of a lot of cyber incidents which I’m not going to spell out here because the people that have twisted minds maybe they probably got way more ideas than I’ve got, but I don’t believe in feeding them any.

But it’s it’s a business where we don’t—we have a pretty good idea of the probabilities of a quake in California or the probabilities of a three or a four hurricane hitting Florida or whatever it may be. We don’t know what we’re doing in cyber and we try to keep—we don’t want to be a pioneer on this.

We do some business in that arena in Berkshire Hathaway especially but if you’re doing something for competitive reasons, uh, which I’m okay with, but when I’m doing something wrong that people tell me as a competitive necessity, we are going to try not to have—we don’t want to be number one or number two or number three in exposures on it.

And I don’t think, I’m sure we are not in cyber, but I don’t—I think anybody that can tell you now that they think they know in some actuarial way either what general experience is likely to be in the future or what the worst case would be, I think they’re kidding themselves. And that’s why that’s one of the reasons I say that a 400 billion dollar event has, I think, has roughly a two percent probability per year of happening. Cyber’s uncharted territory and it’s going to get worse, not better.

And then the question is whether if we have a whole bunch of 25 billion dollar commercial limits out there whether there’s some aggregation that we didn’t foresee or that the courts interpret those policies differently, then you know they are generally going to give the benefit of the doubt to the insured. So you're right in pointing that out as a very material risk, which didn’t exist 10 or 15 years ago and that—and will be much more intense as the years go along; and all I can tell you, Gary, is that’s part of my 400 billion and my two percent. But if you’ve got a different guess, it’s just likely that yours is right than mine on that.

Charlie?

Yeah, well, something that’s very much like cyber risk is you got computers programmed to do your security training, and your computer goes a little wild from some error that’s already happened at least once where somebody just was fine one morning and by the afternoon they were broke because some computer went crazy.

We don’t have any computers we allow we allow to go big automatically trading securities. I think generally Berkshire is less likely than most other places to be careless in some really stupid way. I do think if there’s a mega cat from cyber, let’s say it hits 400 billion, I do not think we’ll have more than a three percent, no, we’ll get our share.

But I think, except for the new accounting rule, but I think from what I call operating earnings, we probably still have a reasonable profit that year. I mean we are in a different position than any insurance company I know of in the world in our ability to handle the really, really super super cat.

Okay, shareholder from station 2. Point out that the main shareholder to my right here has almost always net worth in one security that’s likely to be more carefully managed than some public place with people just passing through.

Yeah, you don’t want a guy that’s 64 and he’s going to retire at 65. A lot of decisions you really don’t want him or her to be making.

Station two, Walla Obermeyer, Obermeyer Wood Investment Council, Aspen, Colorado. Warren and Charlie, you two have demonstrated great talent in private sector capital allocation and shown the world the power of excellence in this area. Do you think there is a similar opportunity for outstanding capital allocation in the public sector at both the state and federal levels?

And if so, what approach and or changes would you suggest for society to achieve these benefits?

That’s too tough. Why don’t we go on to a new question? I’m afraid I have nothing to add. [Laughter]

I don’t mean to be unfair to somebody asking a question, but it, you know, it is, it is unfortunately an entirely different game and the electorate, the motivations are different. The terms of, uh, the reward system is, is different. I mean, everything is different. And, uh, if we knew how to solve that, uh, we wouldn’t, we’d, we can’t add anything to what you had here in your view. I’m sorry on that.

Okay, Andrew.

Hi Warren, this question comes from Paul Speaker of Chicago, Illinois. I believe he may be here today. He writes, “One of your more famous and perhaps most insightful quotes goes as follows: should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks. In light of the unauthorized accounting scandal at Wells Fargo, of its admission that it charged customers for duplicate auto insurance, of its admissions that it wrongly fined mortgage holders in relation to missing deadlines caused by delays that were its own fault, of its admission that it charged some customers improper fees to lock in mortgage interest rates, of the sanction placed upon it by the Federal Reserve prohibiting it from growing its balance sheet, and of the more than recent one billion dollar penalty leveled by federal regulators for the aforementioned misbehavior.

If Wells Fargo Company is a chronically leaking boat, at what magnitude of leakage would Berkshire consider changing vessels?”

Well, Wells Fargo... [Applause] Wells Fargo is a company that proved the efficacy of incentives, and it’s just that they had the wrong incentives, and that was bad. But then they committed a much greater error, and I don’t know exactly how or who did it or when, but ignoring the fact that they had a faulty incentive system, which was in sending people to do things that were kind of crazy like opening non-existent accounts, etc. And, uh, you know, that is the cardinal sin at Berkshire.

We know people are doing something wrong right as we sit here at Berkshire. You can’t have 377,000 employees and expect that everyone is behaving like Ben Franklin or something out there. And we—I don’t know whether there are 10 things being done wrong as we speak or 20 or 50. The important thing is we don’t want to incent any of that if we can avoid it, and if we find that—when we find it’s going on, we have to do something about it, and that is absolutely the—the key to it. And Wells Fargo didn’t do it, but Solomon didn’t do it, and the truth is we’ve made a couple of our greatest investments where people have made similar errors.

We bought our American Express—that was the best investment I ever made in my partnership years. We bought our American Express stock in 1964 because somebody was incented to do the wrong thing in something called the American Express Field Warehousing Company. We bought a very substantial amount of Geico—we bought what became half of Geico, for 40 million dollars, because somebody was incented to meet Wall Street estimates of earnings and growth, and they didn’t focus on having the proper reserves, and that caused a lot of pain at American Express in 1964. It caused a lot of pain at Geico in 1976.

It caused a layoff of a significant portion of the workforce, all kinds of things. But they cleaned it up. They cleaned it up, and look where American Express has moved since that time. Look at where Geico has moved since that time.

So the fact that you’re going to have problems at some very large institutions is not unique. In fact, almost every bank has had all the big banks have had troubles of one sort or another. And I see no reason why Wells Fargo, as a company, from both an investment standpoint and a moral standpoint going forward, is in any way inferior to the other big banks with which it competes. They made a big mistake; it costs. I mean, we've still got a—I mean, we have a large unrealized gain in it, but that doesn’t—that has anything to do with our decision-making.

But the—I like it as an investment. I like Tim Sloan as a manager. You know, and he is correcting mistakes made by other people. I tried to correct mistakes at Solomon, and I had terrific help from Derek and as well as, uh, as well as a number of the people, Monger Tools, and I mean that—that is going to happen.

You try to minimize it. Charlie says that an ounce of prevention isn’t worth a pound of cure; it’s worth about a ton of cure, and we ought to jump on everything. He’s pushed me all my life to make sure that I attack unpleasant problems at surface, and that’s sometimes not easy to do when everything else is going fine.

And at Wells, they clearly, and I don’t know exactly what, but they did what people at every organization got accentuated to an extreme point. But I see no reason to think that Wells Fargo going forward is, uh, other than a very, very large, well-run, uh, bank that had an episode in its history it wished it didn’t have. But Geico came out stronger. American Express came out stronger. The question is what you do when you find the problems.

Charlie?

Well, I agree with that. I think Wells Fargo is going to be better going forward than it would have been if these leaks had never been discovered or happened. Yeah, so I think it's—uh, but I think Harvey Weinstein has done a lot for improving behavior too.

It’s, it was clearly an error, and they’re acutely aware of it and acutely embarrassed, and they don’t want to have it happen again. No, I—I, if I had to say which bank is more likely to behave the best in the future, yeah, it might be Wells Fargo of all of them.

This New York Times that I have here from March 12, 1942, if you go toward the back of it in the classified section, you have one big section says help wanted mail, and another one that says help wanted female. You know, was the New York Times doing the right thing in those days? You know, I think the New York Times is a terrific paper, but that people make mistakes. And, you know, the idea of classifying between taking ads and saying, well, we’ll take them and divide them up between men and women what jobs we think are appropriate? You know, or the import, the advertising things appropriate?

We do a lot of dumb things in this world, and Geico, as I say in the early 1970s, they just ignored, then you can do it in the setting of proper reserves which mean they charged the wrong price to new customers because they thought their losses were less than they were, and I’m sure some of that may have been a desire to please Wall Street or just because they didn’t want to face how things were going.

But it came out incredibly stronger, you know, and now it’s got 13 of the households in the United States insured, and it came out with an attention to reserves and that sort of thing that—that was heightened by the difficulties that they found themselves in when they almost went bankrupt in 40. A lot more stupid than Wells Fargo.

It was really stupid what they did way back, right? Yeah, they had the world by the tail, and then they quit looking at the reserve development. But it was American Express that was just picking up a few dollars by having the field warehousing company in 1963. And, you know, they were worried whether it was going to sink the company or not.

And when some guy named Tino de Angelus, and I think it was Bow in New Jersey, in fact, I went to the annual meeting in 1964 of American Express after the scandal developed, and somebody asked if the auditor would step forward, and the auditor from one of the big firms, which I won’t mention, came up to the microphone and somebody said, “How much did we pay you last year?” and the auditor gave this answer, and then the questioner said, “Well, how much extra would you have charged to go over to Bayonne, which was 10 miles away, and check whether there’s any oil in the tanks?”

So it—you know, here was something in a tiny little operation some guy was calling in from a bar in Bayonne and telling them the phony stuff was going on, and they didn’t want to hear it. They shut their ears to it, and then what emerged was one great company after this kind of what they felt was a near-death experience.

So it, we’re going to make mistakes, I will guarantee you that we will get some unpleasant news at Berkshire. I don’t know what it’ll be. You know, the most important thing is we do something about it, and there have been times when I’ve procrastinated, and Charlie has been the one that jabs me into action.

And so he’s performed a lot of services you don’t know about.

Okay, Greg.

Greg Warren. Good morning, Warren. I have a little bit of a follow-up on Becky’s question. At the 2014 annual meeting, as well as this morning, you noted that the power of Berkshire's brand and its reputation, as well as the strength of Berkshire's balance sheet, would allow the company's next managers to replicate many of the advantages that have come with your being the face of the organization, one of which has been an ability to extract high rents from firms in exchange for a capital infusion and the Buffett seal of approval during times of financial distress.

I buy the argument about the strength of the balance sheet and believe that deals will continue to be done with sellers still lining up to become part of the Berkshire family, especially if the company's next managers are allowed to keep a ton of cash on hand. But I'm not entirely convinced that they'll be able to garner the same nine to ten percent coupons as well as other add-ons that you've been able to extract from firms like Goldman Sachs and Bank of America in times of distress. I'd expect those rents to be at least a few percentage points lower once you're no longer running the show, that is, until those managers build up a reputation to warrant higher returns. Am I right to think about it that way?

Um, I'm not sure the— when we—in two—you mentioned Goldman Sachs and we also did with General Electric in September, early October of 2008. We probably could have actually extracted better terms. You know, it, uh, I think it might have been counterproductive in the end, but I was—we would have done better, incidentally, financially, if we’d if we’d really waited till the panic developed further, because I didn’t know how far it would develop but we could have made a lot better purchases three or four or five months later than we did at that time.

And we also did not want to do something that looked to be so high as to in make the transaction disadvantageous. Uh, the Goldman or the GE, they were going to take the terms we offered, but, but we actually didn’t—we didn’t push it to the limit because there really wasn’t anybody else around. I think—and I’m working on something right now that won’t probably happen, it’s not huge, but, uh, actually in this case both Todd and Teddy brought deals to me. One of them brought something to me, and, you know, he was thinking the same terms that I got that was thinking about, and he’s the one that returned the call that he had received about a transaction.

And I do not think the party on the other side is going to care about the fact that they had him on the phone rather than me on the phone. I—you know, there may—there could be just a little bit at certain times in history, but, but, uh, you know, we will continue to have our standards of what we think money is worth at any given time and, and, uh, Ted and Todd think just as well about that as I do, and there will be times very occasionally when, uh, our phone will ring a lot, and I don’t think they’ll hang up because I don’t answer if they need the money.

Charlie?

Well, the times he’s referring to, a lot of them were like worse than 50 years, so that’s a really rare kind of an occurrence, and we didn’t make all that many deals, so I think he’s right. It’ll—it’ll be harder for us to make similar deals in the future.

Yeah, the problem is the sums involved now more than the problem of deciding what the proper term should be, and sometimes we can get what we think is appropriate and sometimes we most of the time today we can’t. But you may see a transaction or two that—not in terms of buying business—but in terms of securities that strike you as perfectly decent ways to invest Berkshire’s money, and they may well have come through Waterted and said it directly to me. I like to think I’ll be missed a little bit, but you won’t notice it.

Okay, station three. I’m John Lichter from Boulder, Colorado. Mr. Buffett, are you still involved in pricing decisions and the Buffalo News and with what other Berkshire subsidiaries do you take more than a hands-off approach?

Yeah, you’re correct that at one time I and for some quite a while both Charlie and I took part in the pricing decisions at Sea's Candy and certainly for some years, particularly at the question the survival of the Buffalo News was invoiced was really in question. Uh, I definitely took part in those decisions.

In both cases we had good managers, but we still wanted the—we thought those decisions were important, but it’s been a long, long time. A very long time since we participated in anything like that. I can’t—I can’t tell you what the per pound price is for Sea's Candy, which, uh, it’s because people—and you’re invited to join this group, send me free candy from time to time. And, uh, I can’t, I really—I can’t tell you the prices at the Buffalo News, and then all I know is it’s very, very, very hard to move up prices on advertising generally.

Uh, so now we—the only thing is Ajit and I talk frequently, and if there’s some very big risk, if somebody wants a five billion dollar cover on a chemical plant, some way excessive loss of over three billion or something, we have a certain amount of fun with him deciding on the price in his head and I decide in my pri—in my head and then we compare notes.

Uh, that’s it’s the kind of risk that you really can’t look up in a book and see actually, uh, what it’s fairly— the parameters are fairly likely to be. Uh, I enjoy thinking through the pricing of that and I particularly enjoy comparing it with Ajit. So these are just oddball situations, but we do that sort of thing, and we’ve done it for three decades, and it’s part of the—it’s part of the fun of my job that we—the candy prices, got to complain about those.

You have to go to Charlie.

Well, the answer is Warren is still doing it and talking to Ajit, and—but that’s because Ajit likes it that way. We have a very peculiar place where the—where Warren’s contact with the various people elsewhere in the organization largely depends on what they want, not what he wants.

The CEO of one of our most successful subsidiaries—I may have talked to him unless I saw him here and just said at all, I probably talked to him three times in the last 10 years and, uh, and he does remarkably well. He might have done even better if I hadn’t talked to him those three times.

And on the other hand, Ajit and I talk very, very frequently, and he’s good. He’s got the kind of business, hey, I do know—I know some—I know more about the insurance business than I know about many of the other businesses, and it’s interesting, and we are evaluating things that you don’t look up in a book, you know.

I mean it—it’s, it’s very interesting to see how the directors have directed and managed the companies over the long years, and it’s certainly remarkable what you, as a share, have been able to do.

Okay, Carol.

This question comes from a Berkshire shareholder named Jack Sosilski. He’s a well-known accounting expert who for many years has written the Accounting Observer. Mr. Buffett, in this year’s shareholder letter, you had harsh words for the new accounting rule that requires companies to use market things for analytical purposes. You said Berkshire's bottom line will be useless.

I would like to argue with you about that. Shouldn’t a company's earnings report say everything that happened to and within a company during an accounting period? Shouldn’t the income statement be like an objectively written newspaper informing shareholders of what happened under the management for that period, showing what management did to increase shareholder value and how outside forces may have affected the firm?

If securities increased in value, surely the company and the shareholders are better off, and surely they’re worse off if securities decreased in value. Those changes are most certainly real in my opinion. Ignoring changes in the way that some companies ignore restructuring costs is censoring the shareholders’ newspapers.

So my question is, how would you answer what I say now?

My answer to the question and ask what my answer would be to what he said—the I would ask Jack if we’ve got 170 billion dollars of partly owned companies which we intend to own for decades and which we expect to become worth more money over time and where we reflect the market value in our balance sheet, does it make sense to every quarter mark those up and down through the income account when at the same time we own businesses that have become worth far more money in most cases and become, you know, since we bought, you name the company.

Uh, just take Geico, an extreme case. We bought half the company for 50 million dollars roughly. Uh, do we want to be marking that up every quarter to the value and having it run through the income account? That becomes an appraisal process.

There’s nothing wrong with doing that in terms of evaluation, but in terms of—in terms of a value—and you can call it gain, a net asset value or loss in that asset value—that’s what a closed-end investment fund or an open investment fund would do.

But to run that through an income account if I looked at our 60 or 70 businesses or whatever number there might be and every quarter we marked those to market, we would have obviously, uh, a great many, uh, in certain cases where over time we’d have them at ten times what we paid, but how quarter by quarter we should mark those up and run it through the income account where 99 percent of net of investors probably look at net income as being meaningful in terms of what has been produced from operations during the year.

I think would be—well, I can say it would be enormously deceptive. I mean in the first quarter of this year, uh, you saw the figures earlier, where we had the best out what I would call operating earnings in our history and our securities went—we’re down, uh, six billion or whatever it was.

The [Music] to keep running that through the income account every day, you would say that we might have made on Friday, we probably made two and a half billion dollars. Well, if you have investors and commentators and analysts and everybody else working off those net income numbers and trying to project earnings for quarters and earnings for future years to the penny, I think you’re doing a great disservice by running those through the income account.

I think it's fine to have marketable securities on the, uh, on the balance sheet, uh, the information available to their market value, but we have businesses there. If we were—we never would do it—but if we were to sell half we’ll say of the NSC Railroad, we would we would receive more than we carry it carry form.

We would turn it, we could turn it into a marketable security and it would look like we made a ton of money overnight, or if we were to praise it, you know, praise it every three months and write it up and down it. Hey, it could lead to all kinds of manipulation, but b, it would just lead to the average, to any investor being totally confused.

I don't want to receive data in that manner, and therefore I don't want to send it out in that manner.

Charlie?

Well, to me, it’s obvious that the change in valuation should be noted and it is and always has been—it goes right into the net worth figures. So the questioner doesn’t understand his own profession, I’m not supposed to talk that way but it slips out once in a while. Sometimes he even gives it a push.

Okay, Jonathan McLean. Core operating margins have dropped about 50 percent from where they’ve generally been since acquisition. Could you elaborate on the competitive pressures in the grocery and convenience store distribution business that have caused the deterioration in profits, and do you expect the margin structure of that business to eventually get back to where it was or is this the new normal?

Well, I don’t know the answer to the, uh, the second part about the future, but there’s no question that the margins have been squeezed. Uh, they were very, very narrow, as you know, they were about one cent on the dollar pre-tax, and they have been—they’ve been squeezed from that.

Payment terms get squeezed, and, uh, in some cases we have fairly long-term contracts on that, so it’ll go on for five years at one, and then, uh, it’s a very, very tight margin business, and the situation’s even worse than you portray because within McLean we have a liquor distribution business in a few states, and that business has actually increased its earnings moderately, and we’ve added to that business.

So within McLean’s figures are about seventy million or so pre-tax from the liquor part that has nothing to do with the, uh, the massive parts you’re talking about in terms of, uh, food distribution.

Uh, so it’s even the decline is even greater in what you’re referring to than you’ve noticed. And that’s just become very, very much more competitive, and we have to decide. You look at our competitors and they’re not making much money either, and that’s capitalism.

I think, you know, there comes a point where the customer says, you know, I’ll only pay x, and you have to walk away. And there’s a great temptation when you’re employing particularly employing thousands of people and you build distribution facilities and all of that sort of thing, take care of them, to meet, uh, what you’d like to term is irrational competition.

But that that is capitalism and, uh, you’re right, we took the earnings went up quite a bit from the time we bought it, and we’re still earning more than that and we’ve earned a lot of money over time, but as they say, a fair amount of that is actually coming from liquor distribution activities in about four states that we purchased very well run.

Uh, and we will do our best to get the margins up, but I would not—I could not tell you, give you a really— your guess is almost as good as mine or better than mine maybe as to what margins will be in that distribution business five years now.

It’s a very essential service. We do forty some billion dollars, and we move more of the product of all kinds of companies that names are known to you than anybody else but when you get when you get, uh, Kraft Heinz for that matter or Philip Morris or whomever it may be on one side of the deal and you get Walmart and some other 7-Eleven on the other side of the deal sometimes they don’t leave you very much room in between.

Charlie?

I think you’ve described it very well.

Okay, station four.

Um, good morning, Charlie and Warren. I know that seems a little bit out of order, but, um, I’m a huge fan of yours, Charlie, mostly for your 25 cognitive biases. I’m from Seattle, Washington. I run a one-person digital marketing firm that specializes in Facebook ads and email marketing. I use these a lot. Your breakdown of Coca-Cola was really, really solid, and I use that as a reference when looking to how to understand the mechanics of my clients’ products and how to promote them.

So, I’m fairly certain that your cognitive biases work for internet-related companies. Now that you’re partnering with Amazon on healthcare, I’m curious, have you started to understand how to apply these biases to internet-related companies? Or is there another set of tools you use to decide if you understand a business? Because you guys talk a lot about not investing in businesses that you don’t understand.

Well, healthcare is— we don’t plan to start healthcare companies or necessarily insurers or anything. We simply have three organizations, uh, with leaders that I admire and trust, and we— that mutually goes around all three, and we hope to do something which Charlie correctly would probably say is almost impossible to change in some way, a system which was taking five percent of GDP in 1960 and now it’s taking close to 18 percent, and we have a hugely non-competitive medical cost in American business relating to any country in the world.

The countries that were— there were some countries that were around our five percent when we were at five percent, but we managed to get to 18 without them going beyond 11 or so, uh. Literally in 1960 we were spending 170 per capita on medical costs in the United States and now we’re spending over ten thousand, and you know, every dollar only has 100 cents. So there is a cost problem—it is a tapeworm in terms of American business and in its competitiveness. Uh, we don’t—we have fewer doctors per capita, we have fewer hospital beds per capita, fewer nurses per capita than some of the other countries that are well below us.

And you’ve got a system that is delivering 3.3 trillion dollars—that’s almost as much as the federal government raises—it’s delivering 3.3 trillion or some number like that to millions and millions and millions of people who are involved in the system, and every dollar has a constituency. It’s just like politics.

And whether we can find the chief executive, which we’re working in now and which I would expect we would—we would be able to announce before too long, uh, that—but that’s a key part of it. And whether that person will have the imagination and support of people that will enable us to make any kinds of significant improvements in a system which everybody agrees is sort of out of control on cost.

But what— what they all think is the other guy’s fault generally.

Um, we’ll find out. It won’t be easy, but it is not a—the motivations are not primarily profit-making. They’re—they want to deliver—they want our employees to get better medical service at a lower cost. We’re not gonna—we’re certainly not gonna come up with something where we think the service that they receive is inferior to what they’re getting now, but we do think that there may be ways to make a real some significant changes that could have an effect.

And we know that the resistance will be unbelievable, and if we fail we’ve at least tried, and, uh, but the—the idea is not that I will be able to contribute anything to you know in some breakthrough moment by reading a few medical journals or something changing something that is embedded as the medical system, but the idea is— and maybe the three organizations which employ over a million people—and which after we announced that we had a flood of calls from people who want to join in— but there wasn’t anything to join into now, uh, but they will, they will—if we have come up with any ideas that are useful, whether we can bring the resources to bring the person and the CEO is terribly important and bring the person’s support, that person and somehow figure out a better way for people to continue to receive better medical care in the United States without that 18 going to 20 or 22 percent. You know, in the lifetime of, you know, our children or something of a sort, because there are only a hundred cents in the dollar.

And we will see what happens. It’s, you know, if if you were a gene actually figuring, you would not—you would not bet on us, but, uh, I think there is some chance we will do something. There’s a chance nobody can quantify that we can do something significant, and we are positioned better than most people to try, and we certainly got the right partners, so we will give it a shot and see what happens.

Charlie?

[Applause]

There is some precedent for success in this public service activity if you go back many decades. John D. Rockefeller, the first, using his own money, made an enormous improvement in American medical care—perfectly enormous. In fact, there’s never been any similar improvement done by any one man since, that morals, so Warren having imitated Rockefeller in one way is just trying another, and maybe it’ll work.

Rockefeller instantly lived a very long time, so actually I’m trying to imitate him three ways there. We’ll see what happens, but we are—we’re making a lot of progress, and I think we’ll probably have a CEO within a couple of months. But if we don’t have one, then we’re not going to pick somebody just because we want to meet any deadline or anything like that.

We’ve got these wonderful partners; we don’t have a partnership agreement among us. Somebody started growing up one in the legal department and the CEO just put a stop to it; they do have places that have a lot of resources, and while we all have our share of bureaucracy, we can cut through it if we’ve got something that we really think makes sense and we will get the support.

We’ll get a lot of resistance too, but we will get the support of a lot of American business if we can come up with something to make sense. But if it was easy it would have already been done. There’s no question about that; it’s not easy, but it should be tried.

Okay, Becky.

This question comes from David Rolfe, who is with Wedgwood Partners and has been the company’s been shareholders in Berkshire since 1989. The stock is currently the largest holding in their stocks, 18 stocks. He asks this question: Over the past two years you have listed the individual fund of funds performance from Protege Partners. When will you start showing the annual performance on 25 billion that Ted and Todd manage? Can you state if either Ted or Todd has beaten the S&P 500 index over the last five years?

Yeah, both, uh, Ted and Todd. We’ll probably never report their individual performance, but you can be sure that I have an enormous interest in, uh, as does Charlie, in how much we think they contribute to Berkshire and they have—they’ve been—they’ve been terrific. Uh, they not only have the intellect and the record, but they are— they are exceptional human beings, and, uh, Todd has done a tremendous amount of work, for example, on the medical project.

And, uh, Ted has, uh, I’ve given him several things and he’s done them better than I can do them. So the record since inception—and I’m measuring it, Ted came later than, uh, than 9 years old later—but the record since inception is almost identical both for the two managers from their different interceptions and matching the S&P. And, and they’ve received some incentive compensation which they only get if they beat the S&P, and as I say, they’re just slightly ahead; that really hasn’t—it’s been better than I’ve done, so naturally I can’t criticize it.

They were the two very, very good choices.

Charlie, you did report it in the previous year. You just didn’t do it this year and, but now you have your report.

Well, yeah, well, I would—the problem that all of us has is size. It’s actually—it’s harder to run even 12 or 13 billion dollars, frankly, than it is to run a billion. And if you’re running a million dollars or something of the sort, it’s a whole different game, you’d agree with that, wouldn’t you, Charlie?

Of course, yeah.

Okay. Just like any good lawyer, you never ask them a question unless you think you know the answer.

I gotta give—

Okay, Gary, my question’s on Geico. Last year you promised growth and delivered, but along the way the combined ratio was moving up, and it was the first time it was over 100 in about 15 years. Granted, some of that was catastrophes, but even excluding catastrophes there was something going on in the loss trends that caused you to slow down that growth at least it was as we got to the latter part of the year, and I wondered if you could tell us what was going on.

And I did look this morning too, so it looked like the first quarter settled down a little bit, but I’d still like to know about before.

Yeah, sure. The only thing I did different with the questions I did when you say it caused us to slow down, we didn’t want to slow down the growth. I mean if you’re looking at a guy here that’s never wanted to slow down the growth at Geico, the growth did slow down, but it wasn’t because we wanted it to.

Our prices that led to the underwriting loss, the actual—we’d have been slightly in the black without the catastrophes. But, you know, if we hadn’t paid our light bills we might have been in the black too. I mean, this except for stuff doesn’t mean much in insurance as far as I’m concerned.

If you look at the first quarter, uh, our margins were around seven percent, which is actually a little more than we aim for, and I’ve received the unordered—I mean the preliminary figures for April, and they’re similar. So the underwriting gain is—our margins are perfectly satisfactory now, and we’d love to get all the growth we can, and we will gain market share this year, and we gain market share.

Tony, when Tony took over the place, it was in 1993; it was two in a fraction, two and a very small fraction percent and it’ll be thirteen percent of the house, you know, thirteen percent of the households in the country now, and we will keep gaining share.

We will keep riding on profitably, uh, most of the time. And every now and then, our rates will be in that slightly inadequate, modestly inaccurate and inadequate, I should say, and/or we may have maybe some big losses on hurricanes or something of the sort, uh, or we’ll have a Sandy in New York.

The, uh, but Geico is a jewel, and it’s, it’s, you know, it’s really our—we’ve got some others we feel awfully close to similarly about, but, but it’s it’s an incredible company. It has a culture all of its own. It’s saving its customers probably four or five billion dollars a year against which they would otherwise be paying based on the average in auto insurance, and it will be profitable on underwriting a very high percentage of the year.

It contributed another two billion dollars to float last year. It is a terrific company, and like I say, the first four months are dramatically better now. There’s some seasonal in auto insurance, so the first quarter is usually the best of the four quarters, but it’s not a dramatic season. Also, I think when you read the 10-Q and you can take my word for April, I think Geico is on a good profit track as well as a good growth track and the more it grows the better I like it.

Charlie?

Well, I think you’ve said it perfectly. It was never very bad, and it’s better now.

Okay, station five.

Good morning, Warren Buffett and Charlie Munger. My name is Ethan Raposa. I’m from Omaha, Nebraska. My question is how Donald Trump’s tariffs affect the manufacturing business of Berkshire Hathaway?

Well, today steel costs [Applause] so, uh, we’ve seen steel costs increase somewhat. But as I said earlier, I don’t think the United States or China—there’ll be some jockeying back and forth and there’ll be something that leaves some people unhappy, but I don’t think— I don’t think either country will dig themselves into something that precipitates and continues any kind of real trade war.

In this country we’ve had that in the past a few times, and I think we’ve learned a general lesson on it. But there will, uh, there will be some things about our trade policies that irritate others, and there’ll be some from others that irritate us, and there’ll be some back and forth. But in the end, I don’t think we’ll come out with it with a terrible answer on it.

Uh, Charlie?

Well, steel has—it reached the conditions in steel were almost unbelievably adverse to the American steel industry. You know, even Donald Trump can be right on some of the stuff.

The thing about trade I’ve always said is that the president, whether it’s president, any president, uh, needs to be an educator in chief, which Roosevelt was in the Depression. That’s why he had those fireside chats, and it was very important that he communicated to the people, uh, what needed to be done and how and what was happening around them.

And trade is particularly difficult because the benefits of trade are basically not visible. You know, you don’t know what you would be paying for the closure ordering today if all had to be manufactured in the United States or what you’d be paying for your television set or whatever it may be. No one thinks about the benefits day by day as they walk around buying things and carrying on their own business.

The negatives—and there are negatives—are very apparent and very painful if you’re laid off like happened in our shoe business in Maine, and you know, you are, been a very, very, very good worker. You are proud of what you did, and maybe your parents did it before you. And all of a sudden, you find out that American shoes made in America are not competitive with shoes made outside the United States.

You know, you can talk all you know about Adam Smith or David Ricardo or something and explain the benefits of free trade and comparative advantage and all that sort of thing, and that doesn’t make any difference. And if you’re 55 or 60 years old to talk about retraining or something like that, you know, so what?

So I— it is tough in politics where you have a hidden benefit and a very visible cost to a certain percentage of a con of your constituency, and you need to do two things under those circumstances.

If you have that situation, you know what’s good for the country, so you have to be very good at explaining how it does really hurt in a real way somebody that works in a textile mill like we had in New Bedford, where you only spoke Portuguese; half our workers only spoke Portuguese, and suddenly they have no job.

And they’ve been doing their job well for years. You’ve got to do two things: you can—you have to understand that that’s the price individuals pay for what’s good for the collective good, and secondly, you got to take care of the people that are become the road kill in something that is collectively good for us as a country.

And that takes society acting through its representatives to develop the policies that will get us the right collective result and not kill too many people economically in the process. And, you know, we’ve done that in various arenas over the years. The people in their productivity years do help take care of the people that are too old and too young.

I mean, every time a baby is born in the United States, you know, we take on an obligation of educating them for 12 years. It’ll cost 150,000 now. You know, we have a system that has a bond between the people in the productive years and the ones in the young and old, and it gets better over time, far from perfect now, but it has gotten better over time.

And I believe that the trade, properly explained and with policies that take care of the people with a road kill is good for our country and can be explained, but I think it’s a tough sell to a guy that made shoes in Dexter, Maine, or worked on a loom in New Bedford, Mass, or works in a steel