2001 Berkshire Hathaway Annual Meeting (Full Version)
Right, and, uh, Andy, if you're here, you can stand up. I think the crowd would like to say thanks. [Applause] We have one other special guest who, uh, after, uh, doing an incredible job for, uh, all Berkshire shareholders, and particularly for Charlie and me, uh, Roushay, uh, retired this year. But Ralph and Lucy, I believe, are here. Ralph and Lucy would stand up. By the shareholders, I would like to say thanks. [Applause] Thank you. Scott Petzer was one of the best acquisitions we ever made. But the reason it was among the very best was, uh, was Ralph. And a great many of the other companies that we own now — our ownership was made possible because of the profit that Ralph delivered over the years. So, thanks very much, Ralph.
Now we will come to order. I will go through this fast. I'm Warren Buffett, chairman of the board of directors of the company, and I welcome you to this 2001 annual meeting of shareholders. I will first introduce the Berkshire Hathaway directors that are present in addition to myself. First of all, of course, it's Charlie on my left. The field of directors will stand when I give your name: Howard Buffett, Susan Buffett — she was the voice on the songs, the ones that were sung a song well — Malcolm G. Chase, Ronald L. Olson, and Walter Scott, Jr. Also with us today are partners in the firm of Deloitte and Touche, our auditors. They are available to respond to appropriate questions you might have concerning their firm's audit of the accounts of Berkshire. Mr. Forrest Crutter, secretary of Berkshire, and he will make a written record of the proceedings. As Becky Amick has been appointed inspector of elections at this meeting, she will certify the count of votes casting the election for directors. The named proxy holders for this meeting are Walter Scott, Jr. and Mark D. Hamburg. We will conduct the business of the meeting and then adjourn the formal meeting. After that, we will entertain questions that you might have.
Does the secretary have a report of the number of Berkshire shares outstanding entitled to vote and represented at the meeting?
"Yes, I do. As indicated in the proxy statement that accompanied the notice of this meeting that was sent by first-class mail to all shareholders of record on March 2, 2001, being the record date for this meeting, there were 1,343,041 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting; and 5,505,791 shares of Class B Berkshire Hathaway common stock outstanding, with each share entitled to 1/200th of one vote on motions considered at the meeting. Of that number, 1,116,384 Class A shares and 4,507,896 Class B shares are represented at this meeting by proxies returned through Thursday evening, April 26th. Thank you. That number represents a quorum, and we'll therefore directly proceed with the meeting."
First order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott, Jr., who will place a motion before the meeting. "I move that the reading of the minutes of the last meeting of the shareholders be dispensed with.”
Do I hear a second?
The motion has been moved and seconded. Are there any comments or questions? We will vote on this motion by voice vote — all those in favor say ‘aye,’ opposed say ‘no.’ The motion is carried.
The first item of business of this meeting is to elect directors. If a shareholder present who wishes to withdraw a proxy previously sent in and vote in person on the election of directors, he or she may do so. Also, if any shareholder that is present has not turned in a proxy and desires a ballot in order to vote in person, you may do so. If you wish to do this, please identify yourself to meeting officials in the aisles who will furnish a ballot to you.
With those persons desiring ballots, please identify themselves so that we may distribute them. 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, Charles T. Munger, Ronald L. Olson, and Walter Scott Jr. be elected as directors."
It has been moved and seconded that Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase, Charles T. Munger, Ronald L. Olson, and Walter Scott Jr. be elected as directors. Are there any other nominations? Is there any discussion? The nominations are ready to be acted upon.
Is there any show of hands on the election of directors? Allow the ballots to be delivered to the inspector of elections, and with the proxy holders, please also submit the inspector of elections a ballot on the election of directors voting the proxies in accordance with the instructions they've received.
"Ms. Amick, when you are ready, you may give your report."
"My report is ready. The ballot of the proxy holders, in response to the proxies that were received through last Thursday evening, cast not less than 1,126,480 votes for each nominee. That number far exceeds a majority of the number of the total votes related to all Class A and Class B shares outstanding. The certification required by Delaware law of the precise count of the votes, including the additional votes to be cast by the proxy holders in response to proxies delivered at this meeting, as well as those cast in person at this meeting if any, will be given to the secretary to be placed with the minutes of this meeting. Thank you. Ms. Amick, Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chase, Charles T. Munger, Ronald L. Olson, and Walter Scott Jr. have been elected as directors."
The next item of business was scheduled to be a proposal put forth by Berkshire shareholder Bartlett Naylor on April 20, 2001. Mr. Naylor advised us he was withdrawing his proposal. Accordingly, we will not have the proposal presented at this meeting.
After the German of the business meeting, I will respond to questions you may have that relate to the business 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."
The motion to adjourn has been made and seconded. We will vote by voice — is there any discussion? If not, all in favor say "aye," opposed say "no." The meeting is adjourned. [Applause]
I ask you, am I getting slower in my old age? Now the first — we're gonna go; we have eight microphones strategically placed. We have the first two on my right, far back, three and four, and over to the back area over here, and then up front for the seven and eight. And if you have a question, just go to the microphone and queue up at the microphone, and we'll keep rotating like I say until noon, then we'll have a break, and then we'll start again around 12:30 or thereabouts and go until 3:30.
Now, [music] first question, and in area one, we have a special guest. I received a letter from Mark Perkins on April 5th, telling me about his daughter, who has been a shareholder since she was six months old, and she's going to be four in November. And she would like to — Marietta would like to ask the first question. And frankly, I take all the questions from four-year-olds, and Charlie handles them from anybody that can run a little longer. So Marietta, if you've got the microphone, would you ask your question please?
Unfortunately, [music] her actually — her question was, um, she said she was three, and she says Berkshire Hathaway, "Fistful of Dollars" and she says, "What should we invest in now so that she'll be ready when she goes to college?" What should she invest in, or what should Berkshire invest in?
Well, Berkshire would like very much to buy businesses of the same quality and with managements of the same quality and at prices consistent with the eight businesses that we bought over the last 16 or 18 months. Our first preference is, and has been for many decades, although, I would say most observers didn't seem to realize it, but our first preference has always been to be buying outstanding operating businesses. And we've had a little more luck in that respect lately. We also own lots of marketable securities. We've bought many of those, for example, in the mid-70s that did very well for us, but the climate has not been as friendly toward making money out of marketable securities, and we frankly prefer the activities associated with owning and operating businesses over time.
So what we hope to do, Marietta, is by the time you're ready to go to college, I would hope that — well, first of all, I hope I'm still around, but beyond that, I would hope that we would have — you'll be ready in about 14 years or so. I would hope that we would have another maybe 40 businesses or so that would be added, and I would hope that we would have every business that we have now, and I would hope we would not have more shares outstanding, or at least any appreciable number more shares outstanding. If we can get all that done, I think you'll probably be able to afford college.
Charlie, do you have anything to add?
No, and there's some things in life, Mary, that you can really count on. Okay, let's go to microphone number two. Good morning, Mr. Buffett, Mr. Munger.
Oh, sorry, okay. If you want to trade a share of Berkshire A for 30 shares of Berkshire B, as you had mentioned before, a personal stock split, or vice versa, is this considered a wash sale for tax purposes?
Also, I'd like to ask you a question which you've heard before but in a slightly different context. A few years ago, you said you had made a mistake by not buying shares of the major pharmaceutical companies around 1993. You cited their value to society, as well as their terrific growth, high profit margins, and great potential. You said that while you didn't know which companies would do the best, you could have made some kind of sector play because the entire sector had been decimated. These exact same words, including those about not knowing which businesses will dominate over time, can also be used to describe another industry, which has recently been decimated. This industry is, of course, technology. How do you see these two investment ideas, pharmaceuticals in '93 and technology now, and what difference in the two situations makes the first a good opportunity for Berkshire and the second not one?
Well, Charlie answers all the questions about mistakes, so I will turn the second question over to him.
Foreign, I think the future of the pharmaceutical and this industry was easier to predict than the future of the high technology sector. In the pharmaceutical sector, almost everybody did well, and some companies did extremely well. In the other sector, where there are many permanent casualties in the high tech sector, yeah, I would say that there's certainly nothing obvious to us about the fact that the tech sector as a group or imbued in aggregate would be a good buy or be undervalued, whereas we should have had enough sense to recognize that the pharmaceutical industry as a group was undervalued. But the pharmaceutical industry has a far, far better record of returns on large amounts of equity over time, and with a high percentage of the participants having those returns than the tech industry. I wouldn't regard those two as comparable at all.
Your first question about exchanging and whether you have a wash sale — and I think you indicated exchanging from B and A, if you actually physically have a share of A and turn it in for 30 shares of B, that is not a taxable transaction.
So there would be no reason, unless the B was at a significant discount, to actually sell the A and buy the B. But I'm not giving tax advice on this, but I would think that the tax code refers to substantially identical securities when they talk about wash sales. And I would think that you — that the IRS would be entitled to at least raise the question if you had an A share and you were selling at a loss and replacing it with 30 shares of B. You'd have a better argument than if you bought a share of A back the next day. If you were establishing a loss, if you're establishing a gain, you'd have no reason. You know they don't worry about wash sales in that respect.
You can't go from B to A by exchange, but you could go by selling 30 shares of B in the market and buying a share of A again if that were being done at a loss. I think the IRS could well argue that they were substantially identical, but you could argue otherwise.
Charlie?
No, no, I think the IRS would win.
Yeah, Charlie might even go state’s evidence, you know, if there was a thief.
Okay, let's go to zone three.
I'm Dan Blum from Seattle City. As an insurance holding company, Berkshire Hathaway is subject to regulation by insurance for your other insurance. Do business.? Has that handicapped or affected your operations in any way? And do you have any transient or wise observations to make about governmental regulation in that context?
Yeah, we've really not been impeded in any way by the fact that Berkshire Hathaway itself is not an insurance company, but it owns various insurance companies, of course. It owns a lot of other companies, too, but being the holding company of insurance companies, which indeed are regulated by the states in which they're admitted, it really is not slowed down any acquisition. They are not, whereas with the Public Utility Holding Company Act, under that statute, the authorities are directed to be concerned with the activities of the holding company. And in the banking business, to some extent they are. In the insurance business, there’s relatively little in the way of regulation or oversight that extends up to the holding company. So it has not slowed us down in that business but has been reported recently. And the electric utility business has a statute from 1935, the Public Utility Holding Company Act — It's the acronym is that euphemism “Puka”.
The Public Utility Holding Company Act has a lot of rules about what the parent company could do, and that act was put on the books because the holding companies of the 20s, most particularly ones held by others formed by Sam Insult, but there were many abuses, and a good many of those abuses involved what took place at the holding company. So it was quite understandable that that act was passed in the 30s and it achieved a pro-social purpose at the time. I don’t think there’s anything frankly pro-social about limiting Berkshire’s ability to buy into other utilities. We can buy up to five percent of the stock, but we might well in the last year or two have bought an entire utility business if we’re not — if that statute weren't present. So we’re handicapped by the Utility Holding Company statute. We are not handicapped, in my view, by any state insurance statutes.
Charlie?
Nothing to add.
Zone four.
Good morning.
Good morning!
Steve Bloomberg from Chicago. I have two questions regarding the insurance operations. With regard to the reinsurance contracts which were written at what some consider and call good losses, you discussed those insurance contracts in your report indicating that they generated $482 million of losses in the year 2000. Do we need an annual schedule disclosing the aggregate amortized charges of all current and past such deals to make our adjustments to reflect economic reality?
Well, there are two unusual type deals, and you refer to one type — what I call the pain today, gain tomorrow, or good losses type deals. And under the deals you're describing, we record usually quite significant loss in the current year, and then we have the use of float for many years to come, and there are no subsequent charges against that. So in respect to those contracts, the important thing is that we tell you, and we should tell you really every quarter if they're significant and certainly yearly any significant items that fall in that category. And as you mentioned, you know we had over 400 million last year; we had a significant amount the year before; we have not had a significant amount this year. I think in the first quarter there may have been a $12 million charge for one of those. If they’re significant, we're going to tell you about them.
It's a one-time adjustment in your mind that in effect you should regard as different than any other type of underwriting loss that we experience because we willingly enter into these. We take the hit the first year and accounting calls for that and over the life of the contract, we expect to make money, and our experience would be that we do make money. But we'll tell you about any significant item of that sort so that you will be able to make an adjustment.
Cost of float last year at six percent, which is high, it’s not unbearable, but it’s high, very high, and included in that six percent cost was about a quarter of it coming from these transactions that distorted the current year figure and therefore our cost of float. If we hadn't willingly engaged in those transactions, it would have been about four and a half percent.
I should mention to you that I expect that our cost to float — I said in the annual report that absent Omega catastrophe — and I might define a mega catastrophe as insured losses, we'll say, of $20 billion or more, something on that order — absent a mega catastrophe, we expected our cost of float to come down this year, and I said perhaps substantially. In the first quarter, our cost of float will probably run just a touch under three percent on an annualized basis, and I think that the trend is in that direction.
Absent Omega catastrophe, I would expect the cost of float actually to come down substantially this year. But if we were to take on some of these gain-a-pain-today-gain-tomorrow transactions, we don't have any in the works at the moment, but if we were to take those on, then it would be reflected in our cost of float, and we would lay out the impact of that sort of transaction.
Charlie?
Yeah, I think almost all good businesses have occasions where they're making today look a little worse than today would otherwise be to help tomorrow, so I regard these transactions as very much the friends of the shareholders.
We have a second type of transaction, just to complete, which we also described in the report, which also creates a large amount of float but where accounting rules spread the cost of that transaction over the life of the float, and those do not distort the current year figures, but they do create an annual charge that exists throughout the life of the float and that charge with us is running something over $300 million a year, but there again it’s a transaction that we willingly and enthusiastically engaged in and that has this annual cost attached to it.
So when you see our cost of float at three percent annualized in the first quarter, it includes probably an $80 million charge or so relative to those retroactive insurance contracts, were those which were the second kind described in the report.
I recognize this accounting is, you know, and even the transactions are somewhat Greek to some of you, but they are important in respect to Berkshire, so we do want to lay them out in the annual report for those who want to do their own calculations of intrinsic value.
Zone five.
Good morning, gentlemen. My name is Jay Parker. I'm from Washington State, and this question regards mistakes, so that being the case, it should probably be directed to Mr. Munger. Mr. Munger, I know you're fond of evoking humility to promote rational thought. So my question is, what's the most recent business mistake that you've made, Mr. Munger, and why did it occur?
I’m going to take notes on this one. The mistakes that have been most extreme in Berkshire’s history are mistakes of omission. They don't show up in our figures; they show up in opportunity costs. In other words, we have opportunities, we almost do it. In retrospect, we can tell that we were very much mistaken not to do it. In terms of the shareholders, those are the ones in our history that have really cost the most.
And very few managements do much thinking or talking about opportunity costs, but Warren, we have blown billions and billions and billions of dollars. I might as well say it. You're right. Right? And we keep doing it. Some might say we're getting better at it. [Applause]
I don't like mentioning the specific companies because we may in due course want to, but do so at our price. But practically everywhere in life, and then corporate life too, what really costs in comparison with what easily might have been are the blown opportunities.
I mean, it just it's an awesome amount of money. When I was somewhat younger, I was offered 300 shares of Bell Reach Oil. An idiot could have told it there's no possibility of losing money and a large possibility of making money. I bought it, and the guy called me back three days later and offered me 1500 more shares, but this time I had to sell something to buy the damned Bell Reach Oil. That mistake, if you traced it through, has cost me $200 million, and it was all because I had to go through a slight inconvenience and sell something. Berkshire does that kind of thing too — we never get over it.
Yeah, I might add that when we speak of irritable omission, of which we've had plenty and some very big ones, we don't mean not buying some stock where a friend runs it, or we know the name, and it went from one to a hundred; that doesn't mean anything. It’s only we only regard errors as being things that are within our circle of competence.
So if somebody knows how to make money in cocoa beans, or they know how money would make money in a software company or anything, and we miss that, that is not an error as far as we're concerned. What's an error is when it's something we understand and we stand there and stare at it, and we don't do anything, or worse yet, what really gets me is when we do something very small with it.
We do an eyedropper's worth of it: we could do it very big. Charlie refers to that elegantly when I do that sort of thing as when I'm sucking my thumb.
And they're really... I mean, we have been thumb suckers at times with businesses that we understood well, and it may have been because we started buying and the price moved up a little, and we waited around hoping we would get more at the price we originally started.
There could be a lot of things, but those are huge mistakes. Conventional accounting, of course, does not pick those up at all, but they're in our scorebook.
Zone six, please.
My name is Joseph Lapray. I am from Minneapolis, Minnesota. In recent years, tobacco companies have been compelled to pay large damages for marketing their unhealthy but discretionary products. My question has two parts. First, does the potential for similar damage liabilities reduce the intrinsic value of Coca-Cola, Sees Candies, Dairy Queen, or any other business which sells discretionary products of questionable healthfulness? Not that I don't like these products.
And second, are either of you concerned that a possible erosion in the principle of caveat emptor is undermining the legal basis of contracts in general? Thank you for taking my question.
The products you described, I've been living on for 70 years, so they'll probably haul me in as a witness if I... that they don't do much damage. No, I think if you're opposed to sugar, and I think the average human being eats something like 550 pounds dry weight of food a year, and I think 125 pounds, or thereabouts, consists of sugar in one form or another. I mean, it's in practically every product that you have, and it happens to be in Coca-Cola, it happens to be in See's Candy, but it's in practically everything here. I mean, it's over 20% of what Americans are consuming one way or another.
And you know the average lifespan of Americans keeps going up, so I would not be worried at all about product liability in connection with those companies. But product liability generally is an area that is a fertile field for the plaintiffs’ bar, and we are conscious in buying into businesses, and we have passed up some businesses because we were worried about product liability potential.
Unless there is some legislative solution, I think you will see more and more of the GDP going into liability awards, and whether there will be any change by legislation, I don't know, but it's a big field, and the lottery ticket aspect of it is so attractive because if an attorney can gamble a modest amount of time or even a reasonable amount of time and have a potential payoff of 10 or 20 or maybe in some cases hundreds of millions of dollars, you know that that's a decent lottery ticket.
Who knows what 12 people are going to be on the jury? As one of my friends was a lawyer, he said, you know, he said Lincoln said you can fool all the people some of the time and all of the — some of the people all the time and all the people some of the time, but not all of them all the time. He says, I'm just looking for 12 that you can fool all of the time.
And all you have to do is get an award, and the odds are fairly favorable in a nation where lots of zeros have sort of lost meaning to people, so it's a very real concern in any business we get into in terms of trying to evaluate product liability. Surely what's particularly pernicious is the increasing political power of the plaintiffs’ contingency bar. If you're on a state supreme court in most places, you're on for life, and at least you're on for life if you want to stay for life, and the one thing that could get you off the court would be to really irritate some important group, and I think that greatly helps a lot of abusive conduct in the courts.
I think the judges of the country haven't been nearly as tough as they should be on junk science, junk economic testimony, trashy lawyers, and I don't see many signs that it's getting better. In Texas, they actually improved the Supreme Court of Texas, which really needed it, so there are occasional glimmers of light.
We make our decisions in the insurance and in buying businesses with a very pessimistic attitude toward the chances of that particular ills that Charlie described being even moderated. We think it... we would project out that the trend would accelerate, but that's just our natural way of building a margin of safety in decisions. Don't worry about eating the Seeds Candy or the Dairy Queen or the Coke. I, you know, if you read the papers long enough — I use a lot of salt, and I was always being warned about that, and then, you know, a few years ago they started saying you know, you can't get enough salt and all that.
I don't know what the answer is, but I feel terrific.
Zone seven.
Good morning, I'm Murray Cass from Markham, Ontario. The financial community relies heavily on the P/E ratio when evaluating prospective investments. When you buy a company, you must certainly consider not just the future stream of earnings, but also the company's financial condition, among other things. My financial condition — I was speaking mainly of cash and debt, but the P/E doesn't take into consideration either cash or debt. Occasionally, you see a company with consistently positive free cash flow trading just over cash value, effectively giving away the future earnings. In cases like this, the P/E looks terribly overstated unless adjusted for cash and debt. I've always preferred companies with oodles of cash to those burdened with lots of debt.
And then I read Phil Fisher's book, Conservative Investors Sleep Well. Well, I haven't slept well since. He really confused me when he commented that hoarding cash was evil. He wrote that instead companies should either put the cash to good use or distribute it to shareholders. Can I get your thoughts on this?
Well, there are times when we're awash in cash, and there have been plenty of times when we didn't have enough cash. Charlie and I, I remember in the late 60s when bank credit was very difficult, we were looking for money over in the Middle East. Remember that story?
Yeah, thank you. Yeah. And they wanted us to repay it in dinars, yeah, and the guy that we wanted us to repaint... to repay him in dinars, or dinners or whatever the hell they called them, was also the guy that determined the value of those things.
So we were not terribly excited about about I'm on payday and having him decide the exchange rate on that date. But we obviously are looking every day for ways to deploy cash, and we would never have cash around just to have cash. I mean we would never think that we should have a cash position of X percent.
And frankly, I think these asset allocation things that tacticians in Wall Street put out, you know, about 60 stocks and 35, we think that's total nonsense.
So we want to have all our money working in decent businesses. But sometimes we can't find them, or sometimes cash comes in unexpectedly or sometimes we sell something, and we have more cash around that we would like.
And more cash around being than we would like means that we have 10 or 15 cents around, because we want money employed. But we’ll never employ just to employ it.
And in recent years, we've tended to be cash heavy but not because we wanted cash per se. In the mid-70s, we were scraping around for every dime we could find to buy things. We don't like lots of leverage, and we never will. We'll never borrow lots of money at Berkshire; it's just not our style.
But you'll find us quite unhappy over time if cash just keeps building up. And I think one way or another, we'll find ways to use it.
Charlie?
I can't add anything to that.
Zone eight.
Good morning, my name is Mark Dixon from Sarasota, Florida, and I'd like to thank you for providing this forum for all of us. It's wonderful.
In past years, you've been very specific about some of the numbers related to Coca-Cola, Wells Fargo, Rockwood specifically, like with Coca-Cola, cost of aluminum and sugar and all that goes into the bottom line of Coca-Cola.
Can you provide some of the specific numbers that go into some of your more recent purchases of the last couple of years?
Well, they have such different characteristics, it's very difficult. I mean we have service businesses such as FlightSafety and Executive Jet, as a service business, and you know, in many of those companies the big cost is personnel.
I mean we need people with — at FlightSafety, we've got a lot of money invested in simulators. We'll put over $200 million into simulators this year just as we did last year.
So we have a big capital cost in that business, and then we have a big people cost because we are training pilots. We're training pilots and that's very person-on-person intensive netjets. Part of Executive Jet is very very people intensive.
I mean we are absolutely no better than the people that interact with our clientele.
You get into something like the carpet business, and maybe only 15 percent of your revenues will be accounted for by employment costs, and you're a very heavy raw material buyer.
I mean you're buying lots of fiber, and so it varies enormously by the kind of business here. I mean when we're in the insurance business, you know, we're in the business of paying future claims, and that's our big cost.
And that obviously involves estimates because sometimes we're going to pay the claim 5, 10, or 20 years later, sometimes still 20 years later, so we're not going to know about it.
Sometimes the estimates are usually very far off.
So it's very hard to generalize among the businesses if you're in the retail business, which we are in the furniture and jewelry in a significant way, purchased goods, are obviously very important.
We don't manufacture our own goods to any extent in those businesses.
And then the second cost, of course, is labor in a business like that, but we don't have any notions as to what we want to buy based on how their costs are segmented.
What we really are looking for is an enduring competitive advantage.
I mean that's what's going through our mind all the time, and then we want, obviously, top-notch people running the place because we're not going to run a march ourselves.
So those are the two factors we look at. We want to understand the cost structure but Charlie and I can understand the cost structure of many companies.
There's many we can't, but we can understand a good many companies and we don't really care whether we're buying into a people-intensive business, a raw material-intensive business, a rent-intensive business — we just do want to understand it and understand why it's got an edge against its competitors.
Charlie?
Basically to some extent, we're like the hedgehog that knows one big thing. If you generate float at 3 percent per annum and buy businesses that earn 13 percent per annum with the proceeds of the float, we have actually figured out that that's a pretty good position to be in.
Took us a long time.
And I would hope that we would — and actually expect that absent Omega catastrophe, that 3 percent figure will come down over the next, well, but in the near future.
But Omega catastrophe could change all of that. I mean if you had a — if you had a 50 billion dollar insured catastrophe, Tokyo earthquake, California earthquake, Florida hurricane — I mean those, those were in the business of taking those risks.
We're the largest insurer of the California earthquake authority.
I have a sister here who is from Carmel, and she used to call me when the dogs and cats start running in circles.
And so we're exposed to some things that could change but absent Omega catastrophe, our experience is going in the right way at both, really at all of our insurance companies, and I would expect that to continue for a while and then at some point, I expect it to reverse itself.
Isn't that helpful?
Area one, please.
Good morning, I'm Martin Wiegand from Chevy Chase, Maryland. Good to have you here, Martin. Thank you for the wonderful shareholder weekend and thank you for the leadership in education you give your shareholders and the general public.
My question: Large airlines are in the news negotiating labor contracts. They claim they can't pass along rising labor costs to their customers. In the annual report, you say Executive Jet is growing fast and doing great. Executive Jet seems to be able to pass along its rising labor costs to its customers.
Is this because Executive Jet has a rational compensation plan that keeps employees' salaries in line with billable services? If not, why does Executive Jet do well while the airlines experience troubles?
Well, the big problem with the airlines is not so much what their aggregate payments will be. The real problem is when you're in the airline business and your wage rates are out of line with your competitors. When you get right down to it, the figure to look at with an airline among a lot of other things, but you start with the cost per available seat mile, and then you work that through based on the capacity utilization to get to the revenue person or the cost per occupied seat mile.
You can have labor costs or any other cost. You certainly have fuel costs up dramatically for the airlines from a couple of years ago. As long as you're more efficient than your competitor and your costs are not higher than your competitor, people will continue to fly.
It's when you get your costs out of line with your competitor which was the situation that Charlie and I were directors of US Air a few years back, and our cost per seat mile was far higher than competitors and that was fine where we didn't have competitors on so many of the short routes in the east.
But as Southwest Airlines would move into our territory and they had costs we'll say, from memory, but they might have had a cost of below 8 cents a seat mile and our cost might have been 12 cents a seat mile. You know, that is, uh, you're going to get killed eventually.
They may not get to this route this year, but they'll get there next year or the year after. So if you're running a big airline at Delta or United or whatever, if your costs are on parity or less labor costs compared to your other major competitors, that is much more important to you than the absolute level.
And the NetJets service is not really designed to be competitive with United Airlines or an American or something of that sort. It has a different group of competitors.
And I think we have a terrific pilot force there, and we want them to be happy. But there's lots of other ways — I mean you want to pay them fairly but with our pilots, for example, it's extremely important to them, in many cases, to be able to live where they want to and to work the kind of shifts that we can offer.
So we attract them in many other ways than bidding against United Airlines or American Airlines.
Big thing — and you just can't take labor costs that are materially higher than your competitor in a business that has commodity-like characteristics such as airplane seats. You just can't do it over time, and you can get away with it for a while, but sooner or later the nature of a capitalist society is that the guy with the lower cost comes in and kills you.
Charlie?
The airline unions are really tough, and it's interesting to see a group of people that are paid as well as airline pilots. It’s such a brutally tough union structure that really makes it hard in a commodity-style business.
Nothing is all that different with the airline travel. We hope that our services are preferred by customers more than one airline seat is preferred compared to another.
Yeah, fractional ownership is not a boundary business. I mean, the people care enormously about service and the assurance of safety and I don't think that, you know, I don't think if you were buying a parachute you’d want to take the necessarily take the low bid.
And now with the big commercial airlines with millions and millions of passengers — people, I think probably correctly, assume that there’s quite a similarity in both service and safety, but if you're in a business that cannot take a long strike, you're basically playing a game of chicken, you know, with your labor unions because they're going to lose their jobs too if you close down.
So you're playing a game of chicken periodically, and, uh, it has a lot — there’s a lot of game theory that gets involved to some extent, you know, the weaker you are, the better your bargaining position is. Because if you’re extremely weak, even a very short strike will put you out of business.
And the people are on the other side of the negotiating table understand that whereas if you have a fair amount of strength, they can push you harder.
But it is no fun being at a business where you cannot take a strike.
We faced that one time back in the early 80s when we were in kind of a death struggle in Buffalo with the Courier Express.
And when I bought the Buffalo News, actually, Charlie, that he was stranded there during a snowstorm, and he got bored, so he called me and said, “What should I do?” I said, “Well, you might as well buy the paper.”
And so we were in this struggle, and when we bought the Buffalo News, we had two questions of the management, and one of them I can't tell you.
But the second one was we wanted to meet with the key union leaders and we wanted to tell them, “Look, if you ever strike us for any length of time, we're out of business. You can make our investment valueless. That’s the last thing we want.”
So we really want to look you in the eye and see what kind of people you are before we write this check.
And we felt quite good about the people, and they were good people.
And we had one situation in 1981 or thereabouts where a very, very small union, I think less than 2 percent of our employees, struck over an issue that the other 10 or 11 unions really didn't agree with them that much on.
But they struck in the, uh, and the other unions observed the picket line, which you would expect them to do in a strongly pro-union town such as Buffalo.
And I think, as I remember, they struck on a Monday, and I remember leaders of some of the other unions actually with tears in their eyes over this because they could see it was going to put us out of business.
And frankly, I just took the position then. I said, "Look, if you come back in a day, I know we're competitive. If you come back in a year, I know we will not be competitive. And if you're smart enough to figure out where exactly the point is that you can push us to and still come back and we have a business, and you have jobs, I said you're smarter than I am."
So, you know, go home and figure it out.
And they came back in on Thursday, and we became very competitive again. But they could have — I mean, it was out of my hands; I couldn't make them work.
If they decided they were going to stay out long enough, we were not going to have a newspaper.
And that's the kind of situation occasionally you find yourself in, and I would say the airline industry is a good example of people whether people find themselves in that position periodically.
Charlie?
Well, the shareholders may be interested to know vis-à-vis competitive advantages in our NetJets program that the day the other charter plane crashed in Aspen, NetJets refused to fly into Aspen at all.
People remember that kind of thing.
Zone two.
Good morning, gentlemen. David Winters from Mountain Lakes, New Jersey. Thank you for hosting Woodstock for capitalists.
Berkshire seems to have an enormous long-term advantage in spite of its large size and high equity prices. The structure of the company's activities, non-callable capital, substantial free cash flow, and improving insurance fundamentals permit Berkshire to capitalize on potential asset price declines and dislocations in financial markets.
While most investors would not either have the money or the cool minds to buy, am I on the right track here?
Well, I think in certain ways, yeah. I mean we do have some significant advantages in buying businesses over time. We would be the preferred purchaser, I think, for a reasonable number of private companies and public companies as well and our checks clear, so we will always have the money.
People know that when we make a deal, it will get done and it will get done as fast as anybody can do it. It won't be subject to any kind of second thoughts or financing difficulties, and we’ve bought, as you know, we’ve bought John's Manville because the other group had financing difficulties.
People know they will get to run their businesses as they've run them before if they care about that, and a lot of people do; others don't.
We have an ownership structure that is probably more stable than the company — our size or anywhere near our size in the country, and that's attractive to people.
So, and we are under no pressure to do anything dumb; you know, if we do things dumb, it's because we do things dumb, and it's not because anybody's making us do it.
So those are significant advantages and the disadvantage — the biggest disadvantage we have is size. I mean it is harder to double the market value of a $100 billion company than a $1 billion company using what we have in our arsenal, and that is — I hope it isn't going to go away.
I mean I hope we don't become a billion dollar company and enjoy all the benefits of those and I hope, in fact, we have the agony of becoming a much larger company.
So you're on the — you are on the right track. Whether we can deliver or not, it's another question, but we go into combat every day armed with those advantages.
Charlie?
Yeah, this is not a hog heaven period for Berkshire. The investment game is getting more and more competitive, and I see no sign that that is going to change.
But people will do stupid things in the future even...
Yeah, there's no question. I mean, I will guarantee you sometime in the next 20 years that people will do some exceptionally stupid things in equity markets, and then the question is, you know, are we in a position to do something about that when that happens?
But we do, we continue to prefer to buy businesses, though. That's what we really enjoy.
When Charlie mentioned hog heaven, I thought we ought to open the peanut brittle here, which I recommend hardly.
Zone three, good morning!
Most spins from Waterloo, Nebraska; you've often stated that value and growth are opposite sides of the same coin. Would you care to elaborate on that? And do you prefer a growth company that is selling cheap or a value company with moderate or better growth prospects?
Well, actually, I think you're — you may be misquoting me, but I really said that growth and value, they're indistinguishable; they're part of the same equation.
Or really growth is part of the value equation.
So there is — our position is that there is no such thing as growth stocks or value stocks the way Wall Street generally portrays them as being contrasting asset classes.
Growth usually is a chance to — growth usually is a positive for value, but only when it means that by adding capital now you add more cash availability later on at a rate that's considerably higher than the current rate of interest.
So there is no — we calculate into any business we buy what we expect to have happen in terms of the cash that's going to come out of it or the cash that's going to go into it.
As I mentioned, at FlightSafety, we're going to buy $200 million worth of simulators this year; our depreciation will probably be in the area of $70 million or thereabouts.
So we're putting $130 million above depreciation into that business. Now that can be good or bad. I mean, it’s growth, there's no question about it. We'll have a lot more simulators at the end of the year, but whether that's good or bad depends on what we earn on that incremental $130 million over time.
So if you tell me that you own a business that's going to grow to the sky and isn't that wonderful? I don't know whether it's wonderful or not until I know what the economics are of that growth, how much you have to put in today and how much you will reap from putting that in today later on.
And the classic case, again, is the airline business. The airline business has been a growth business ever since, well, you know, the Orville took off, but growth has been the worst thing that happened to it.
Been great for the American public, but growth has been a curse in the airline business because more and more capital has been put into the business at inadequate returns. Now growth is wonderful at See's Candy because it requires relatively little incremental investment to sell more pounds of candy.
So it's growth, and I've discussed this in some of the annual reports. Growth is a part of the equation, but anybody that tells you you ought to have your money in growth stocks or value stocks really does not understand investing other than that they're terrific people.
Charlie?
Well, I think it’s fair to say that Berkshire, with a very limited headquarters staff and that staff pretty old, we are especially partial to laying out large sums of money under circumstances where we won't have to be smart again.
In other words, if we buy good businesses run by good people at reasonable prices, there's a good chance that you people will prosper us for many decades without more intelligence at headquarters.
And you can say, in a sense, that's growth stock investing.
Yeah, if you'd asked Wall Street to classify Berkshire since 1965 year by year as this a growth business or value business, a growth stock or value stock, you know, who knows what they would have said?
But, you know, the real point is that we're trying to put out capital now to get more capital or money. We're probably going to put out cash now to get more cash back later on.
And if you do that, the business grows, obviously, and you can call that value or you can call it growth but they're not two different categories, and I just cringe when I hear people talk about "Now it’s time to move from growth stocks to value stocks" or something like that because it just doesn't make any sense.
Zone four.
Hi, my name is Stephen Comp from Irvine, California. I'm 10 years old, and this is my fourth consecutive year here.
Terrific, we're glad to have you here. Thanks.
This is my fourth consecutive year here and how I got to owning stock is my dad taught me to start my own business, and I bought Berkshire Hathaway stock with my profits.
And in school, they don't teach you how to make and save money, not in high school or college, so my question is how would you propose to educate kids in this area?
Well, that's a good question. Thank you.
Sounds to me like you could do a good job yourself too, and I'm — you know, at 10, you're way ahead of me. Unfortunately, I didn't buy my first stock until I was 11, so I got a very slow start.
What it takes, really, is — and you find it in some classrooms and you don't in others — but it takes teachers who can explain the subject.
Charlie would say Ben Franklin was the best teacher of all in that respect. But it looks like you either got it from your parents — an education on that, and parents can do more education, really, in that respect, even than teachers.
But it's, you know, I got a chance to talk to students from time to time, and, you know, one of the things I tell them is, you know, what a valuable asset they have themselves.
I mean, it, you know, I would pay any bright student probably $50,000 for 10 percent of his future earnings the rest of his life.
So he's a $500,000 asset just standing there. And what you do with that $500,000 asset in terms of developing your mind and your talents is hugely important.
The best investment you can make at an early age is in yourself. And it sounds to me like you're doing very well in that respect. I congratulate you on it.
I don't have any great sweeping program for doing it throughout the school system.
We have here in Nebraska, we have an annual get-together of students from all the high schools throughout the state, and it's a day or two of economic education. I think it's a very good program.
But I think if you just keep doing what you're doing, you may be an example to other students.
Charlie?
I'd like to interject the word of caution. You sound like somebody who's likely to succeed at what you're trying to do, and that's not always a good idea.
If all you succeed in doing in your life is to get early rich from passing holding of little bits of paper, you get better and better at only that for all your life, it's a failed life.
Life is more than being shrewd at passive wealth accumulation.
I think he's going to do well in both.
Zone five.
Morning. My name is Thomas Command. I am 11 years old and from Canfield, California.
This is my fourth annual meeting. Last year, I asked how the internet might affect some of your Holdings since a lot of the internet companies have gone out into business.
How are you? Has your view of the internet changed?
Well, that's a good question. And I think that the internet probably looks to most retailers like less of a competitive threat than it did a couple of years ago.
For example, if you look at the jewelers who have been on the internet and in many cases, in several cases at least, had very large valuations a couple of years ago, so the world was betting that they would be very effective competitors against brick-and-mortar jewelry retailers.
I think that that threat has diminished substantially.
I think that's been true in the furniture business, and in both of those industries, very prominent dot.coms that had aggregate valuations in the hundreds of millions have vanished in short order.
So I would say that we think the internet is a huge opportunity for certain of our businesses. I mean, Geico continues to grow at a significant rate in the internet business.
Sees Candies' internet business is up 40% this year; last year was up a much larger percent from the year before, and it grows and it'll continue to grow.
So the internet's an opportunity, but I think the idea that you could take almost any business idea and turn it into wealth on the internet, many were turned into wealth by promoting them to the public.
But very few have been turned into wealth by actually producing cash results over time.
So I think there's been a significant change in the degree to which I perceive the internet as a possible threat to our retail businesses.
There's been no change in the degree to which I regarded it as an opportunity for other of our businesses.
Charlie?
Well, Warren, you and I were once engaged in the credit and delivery grocery business, and it was a terrible business.
It barely supported one family for a hundred years with all of them working 90 hours a week. And somebody actually got the idea that was the wave of the future and turned it into a great internet idea that can only be described as mania, and it sucked down a lot of intelligent people.
Yeah, Charlie’s talking about the infamous buffet in the Sun grocery store, which did barely support the family for 100 years and only then did we support the family by hiring guys like Charlie for slave wages.
But I used to go out on those delivery trucks, and it was pretty damned inefficient. People would phone their orders in, and now it's true. We took them down with a pencil and an order pad instead of punching them into a computer.
But when we started driving around the trucks and hauling the stuff off and everything, we ran into the same cost the web van is running into now.
And the what the internet offered was a chance for people to monetize the hopes of others in effect. I mean you were able to capture the greed and dreams of millions of people and turn that into instant cash in effect through venture capital in the markets.
And there was a lot of money transferred in the process from the gullible to the promoters, but there's been very little money created by pure internet businesses so far.
It's been a huge trap for the public.
Charlie?
Anyway, nothing more.
Zone six.
Thank you for taking my question. My name is Frank Jurvich. I'm from London, Ontario. It's great to see all the young people asking questions.
I even have my own 11-year-old here, Matthew, this year. I first want to start by passing on a message from my wife to you, Mr. Buffett. That is, uh, thank you, Mr. Buffett, for your autograph that Frank brought back last year.
However, quite frankly, the ring in the Borsheim’s box you autographed was far more precious. You can repeat that if you'd like.
My question relates to the future of Berkshire. Back in 1994, there was a PBS video interview of you at the Flagler Business School, and I believe you said Berkshire was not an insurance company.
It appears that's not quite the case as much anymore, and I suppose insurance acquisitions will provide the financial fuel and the stability that John Manville's in Mid-America types of acquisitions will need for their future growth.
But I'm hoping that you and Charlie can describe for us an anticipated future look at say 20 years out of how Berkshire might be different from how it is today.
And perhaps a couple of the not-so-obvious problems that Berkshire will need to contend with. And thank you for all the apparently wonderful acquisitions you've made on our behalf in the last year.
Well, thank you. I think you ought to take your wife another ring too.
But the, uh, well, thank you.
We actually, as long ago as — I don't remember whether it was in the 1980 annual report or at least 20 years ago, we did say that we thought insurance would be our most significant business over time.
We had no idea that it would get to be as significant as it is but we've always felt that we would be in many businesses but that insurance was likely to be our largest business.
Right now, it's not our largest business in terms of employment, but it's our largest business in terms of revenue, and we would hope it gets a lot bigger over time.
We don't have anything in the works that would make that happen, although we will have natural growth in what we already own.
But we will just keep acquiring things, and sometimes some years we’ll make a big acquisition, some years we'll make a few small acquisitions.
We'll do whatever comes down the pike.
I mean, if there's a phone call waiting when this meeting is over and it's an interesting acquisition, it'll get done.
We don't have a master plan.
Charlie and I do not sit around and strategize or talk about the future of various industries or do anything of that sort, which just doesn't happen.
We don't have any reports, we don't have any staff, we don't have any of that.
We've — we try to look at what comes in; we try to survey the whole financial field. We try to look at what comes in and look for things we understand, where we think they have a durable competitive advantage, where we like the management, and where the price is sensible.
And, you know, we had no idea two or three years ago, you know, that we would be the 87th owner of the largest carpet company, broad-room carpet company in the world.
But it, you know, we just don't have a master plan now other than we had back in 1965 when we bought the textile mill.
Really, I mean we had a lousy business. I didn't realize it was as lousy as it was when I got into it, and we had to — you know, we just started trying to deploy capital in an intelligent way.
But we've been deploying capital, you know, since I was 11.
And I mean that is a — that's our business, and we enjoy it, and we get opportunities to do it, but the bigger you are, the fewer the opportunities you're likely to get.
Charlie?
Well, I think it's almost a sure thing that 20 years from now there will be way more strength and value behind each Berkshire share.
I also think it is an absolutely sure thing that the annual percentage rate of progress will go way down from what it has been in the past.
There's no question about it, on that happy note, we move to zone seven.
Good morning, Mr. Buffett, Mr. Munger. My name is Gary Ratstrom from right here in River City. I've been a shareholder since '93 and have loved every minute of it.
Recently, there has been medication available to reduce cholesterol — my doctor even gave it to me since mine is kind of high. Every time I hear what you like to eat, Warren, it makes me wonder what your cholesterol level is or if you even worry about it.
I think everyone here wants you to be with us for a long time, so have you considered taking this new medication to reduce your cholesterol level? [Applause]
Ah yeah, my dad, I do it. I do it on the number, and I don't remember. My doctor tells me it's a little high, but if he says it's a little high, it means it isn't that high. Because he always tries to push me into making a few changes in my life — but he — I've got a wonderful doctor.
And I was lucky last year because I hadn't been in to see him for about five years. And due to those guys costing a lot of money, I mean, and due to a purely an accident, a reaction to some other medicine I was given when I was out of the city, he got ahold of me and then he ashamed me into having a physical.
And it was extremely lucky because I had a polyp in the colon that would have probably caused trouble within a couple of years.
I would say that if you ask my doctor, he would want me to make a few changes, but he would also say that my life expectancy is probably a lot better than the average person of 70.
And I have no stress whatsoever. Zero. I mean, I get to do what I love to do every day, and I'm surrounded by people that are terrific.
So that problem in life just doesn't exist for me, you know. And I don't smoke or drink or bubble-end it right there.
And so my, you know, if you were an underwriter for a life company, you would make me considerably better than that. Would you rate Charlie better than average too at, uh?
And I'm sure that, you know, it could change slightly, perhaps on the probabilities, you know, if I change my diet dramatically or something, but it's very unlikely to happen.
Actually, when my mother got to be 80, you know, the most important thing in life in terms of how long you live is how long your parents live.
So I got her an exercise bike once she got the B-80, man; she put 40,000 miles on it.
I told her to watch her diet and do all these things and, I mean, she lived to be 92. So, you know, she did her share, and I helped her do it by giving her the exercise bicycle.
So I think that improved my odds at that point. Charlie?
Yeah, I have a book recommendation which will be very helpful to all shareholders that won't worry about Warren's health and longevity, and that's this book called Genome by Matt Ridgley, who was for years the science editor of The Economist magazine.
And if Ridgley is right, Warren has a very long life expectancy. They're very interesting correlations between people who cause stress to others instead of suffering it themselves.
And Warren has been in that position ever since I've known him, and the figures that Ridley quotes are awesomely interesting.
That is a fabulous book, of course, I'm recommending a bestseller, but they're selling it in the airport; it's called Genome.
And you'll feel very good about Warren's future if you agree with the science of the book.
Zone eight.
My name is Charlie Seek. I'm from North Carolina. Mr. Buffett, your article last year in Fortune magazine was excellent.
I'm thinking — well, I'm wondering what your thoughts are on American business profit margins, return on equity in the future. Also, I would like your thoughts about the — some businesses today with their huge inventory write-offs. What's your thoughts about those?
Yeah, well in that article I talked about the unlikelihood of corporate profits in the United States getting much larger than six percent of GDP.
Historically the band has been between four and six percent and we've been up — we've been up at six percent recently.
So unless you think that profits as a part of the whole country's economic output are going to become a bigger slice of the pie, and bear in mind, they can only become a bigger slice of the pie if other slices get diminished to some extent; and you're talking about personal income and items like that.
So I think it's perfectly rational and reasonable that in a capitalistic society, corporate profits are something like six percent of GDP.
That does not strike me as outlandish in either direction. It attracts massive amounts of capital because returns on equity will be very good, and on the other hand, I think it would be very difficult in society to get where they would be 10 or 12 or something like that because it just would look like an unfair division of the pie to the populace.
So I don't see any reason for corporate profit — they're going to be down in the near future as a percentage of GDP from recently, but then they'll go back up at some point.
So I think 10 years from now you'd be looking at a very similar picture. Now, if that's your assumption and you're already capitalizing those profits at a pretty good multiple, then you have to come to the conclusion that you have to — you have to come to the conclusion that the value of American business will grow at a relationship that's not much greater than the growth in GDP.
And most of you would estimate that probably to be, you know, maybe five percent a year if you expect a couple percent a year of inflation.
So I wouldn't change my thoughts about the profitability of American business over time, and I wouldn't change my thoughts much about the relationship of stock prices over time to those profits.
So, you know, I would come down very similarly.
Now, interestingly enough, some of those same relationships prevailed decades ago, but you were buying stocks that were yielding you perhaps five percent or something like that.
So that you were getting five percent in your pocket plus that growth as you went along, and of course now if you buy stocks, you get one and a half percent if you're the American public, before the frictional costs.
So that the same rate of growth produces a way smaller aggregate return, and so, you know, I think stocks are a perfectly decent way to make six or seven percent a year over the next 15 or 20 years.
But I think anybody expects to make 15 percent per year or expects their broker or investment advisor to make that kind of money is living in a dream world.
And it's particularly interesting to me the back when the prospects for stocks were far better. I even wrote something about this in the late 70s; Pension funds were using investment rate assumptions that were often in the six percent range and now when the prospects are way poor, most pension funds are using building into their calculations returns of nine percent or better on investments.
I don't know how they're going to get nine percent or better on investments, but I also know that if they change the investment assumption down, it will change the charge to earnings substantially, and they don't want to do that.
So they continue to use investment assumptions which I think are quite unrealistic, and with companies with a big pension component in their financial situation and therefore in their income statement, that can be quite significant.
It'll be interesting to me to see whether in the next couple of years where pension funds are experiencing significant shortfalls from their assumptions, how quickly they change the assumptions.
And the consulting firms are not pushing them to do that at all.
It's very interesting; the consulting firms are telling them what they want to hear, which is hardly news to any of us, but it's what's taking place.
Second question about inventory write-offs. You know, that gets into the whole the category entirely of big bath charges, which are the tendencies of management when some bad news is coming along to try and put all the bad news that’s happened into a single quarter or a single year, and even to put the bad news that they are worried about happening in the future into that year.
And it leads to real deception in accounting. The SEC has tried to get quite tough on that, but my experience has been that managements that want to do it, usually can find some ways to do it.
And managements frequently are more conscious of what numbers they want to report than they are of what is actually transpired in a given quarter or given year.
Charlie?
Yeah, I think pension fund accounting is drifting into scandal by making these unreasonable investment assumptions.
It's evidently just part of the human condition that people extrapolate the recent past, and so since returns on common stocks have been high for quite a long period, they extrapolate that they will continue to be very high into the future, and that creates a lot of reported earnings in terms of pension benefits that aren't available in cash and or likely not to be available at all, and this is not a good idea.
And it's interesting how few corporate managements have just responded like Sam Goldwyn — "Include me out."
You’d think more people would just say, "This is a scummy way to keep the books," and "I will not participate."
And instead, everybody just drifts along with the tide, assisted by all these wonderful consultants.
I don't think I don't know of any case in the United States right now, and I'm sure there are some, but except for the pension funds that we take over, I don't know of any case where people are reducing their assumed investment return.
Now, you think if interest rates drifted down several percentage points that that might affect what you would think would be earned with money? It certainly is to bondholders or to us with float or something of the sort, but most major corporations I believe are using an investment return assumption of nine percent or higher, and that's with long-term governments below six percent, you know, and maybe high-grade corporates at seven.
They don't know how to get it in the bond market; they don't know how to get in the mortgage market; I don't think they know how to get it in the stock market.
But it would cause their earnings to go down if they change their investment assumption, and like I say, I don’t know of a major company that’s thinking about it, and I don’t know of a major actuarial consultant that’s suggesting it to the managements.
It just — they’d rather not think about it. The way they’re doing things would be like living right on an earthquake fault that was building up stress every year and projecting that the longer it's been without an earthquake, a little less likely an earthquake is to occur.
That is a dumb way to write earthquake insurance, and the current practice is a dumb way to do pension fund planning and accounting.
Improper, if you talk to a management or board of directors about that, you get absolutely no place with them.
Oh yeah, their eyes would glaze over before the hostility came.
Area one.
Good morning, gentlemen. My name is Mark Rabinov from Melbourne, Australia. I had a question on two of our key operating businesses.
Firstly, Executive Jet. Once this becomes a mature business, would it be fair to say that its net margin should be about five percent?
Secondly, would it be fair to say that our current insurance businesses are likely to grow aggregate float at about 10 percent over time?
Well, it's really anybody's guess.
I mean, I don't expect Executive Jet to become a mature business for decades. I mean, there's a whole world out there on that one, and we have something over two thousand customers in the United States at the current time; we have a little over a hundred but in Europe, but there are tens of tens and tens of thousands and perhaps hundreds of thousands of people that or businesses where it does make sense over time.
So it's going to be a long time. I mean, when we get into Europe, as we make progress in Europe, we'll move to Asia, we'll move to Latin America over time, and so we're going to be — I think growing that business significantly for a very long time.
When it becomes mature, you're close to it. I mean, if you're talking five percent after-tax margins, I'd say that that's probably a reasonable figure.
But we're so far away from even thinking about that, that, you know, it's pure speculation.
In our insurance business, we've grown our float, and then we purchase businesses to add to the float.
This year, I would certainly expect, unless one big transaction would fall through or something, I would certainly expect our float to grow at least $2.5 billion. And that's close to 10 percent of the beginning of the year float.
That's a rational expectation, but whether it can grow ten percent a year, how far you can do that — I would say the total float of the property-casualty industry in the United States is probably—it's — I'm pulling this out for making some other calculations in my head as I talk, but it wouldn't be much more than $300 billion, so we are close to 10 percent of the entire U.S. float now.
And I don't think the U.S. float, the aggregate float, you know, is going to grow at a ten rate, so when you're as big a part of the pie as we are, it may be difficult to sustain that 10 rate.
But we're doing everything possible that makes sense to grow float. I mean that is a major, major objective, but the even bigger objective is to keep it low cost.
I don't think you can see unless the world changes in some way, I don't think you can see 10 growth over 25 years. But we'll do our darndest to get it at the rate you suggest for at least the near future.
Charlie?
Well, I certainly agree that long-term it's not going to happen, good but not that good. But we've been surprised at what's happened.
I mean, there's no question. I mean, when we bought Jack Ringwalt's company in 1967, you know, my memory is Jack had a float of, you know, less than — and would we ever guess that we might hit, you know, something close to $30 billion this year?
We never dreamed of it, but we just kept doing things, and we'll keep doing things.
But it can't be at huge rates for a long period of time because we're too big a part of the pie now.
We were nothing initially, and we kept grabbing a little more of the pie as we've gone along, and we like that, but it can't go on forever.
Yeah, that's what I call really low-cost float. If it ever should be advantageous for us to go into what I would call higher-cost float, that might change the figures upward in terms of growth of float.
Although that won't be, I mean it could happen that we could take on incrementally some higher cost float under very special circumstances if we saw unusually good ways to use it, but that we don't even like to think about that.
We certainly don't want the people running our businesses to think about that because keeping it low cost, you know, that is the big end of the game. I mean anybody can generate float.
I mean if we gave our managers a goal of generating $5 billion afloat next year, they could do it in a minute, you know, and we would be paying the price for decades to come.
You can write them insurance policies; you know there's an unlimited market for dumb insurance policies.
And they’re very pleasant because the first day the premium comes in and that’s the last time you see any new money from then on; it's all going out, and that’s not our aim in life.
Zone two.
Good afternoon, my name is Shel Hogan, and I'm a Norwegian working in Tokyo in Japan. I'm very satisfied to have more than 95 percent of our family savings in Berkshire.
I have two questions. In my work, I've seen a lot of insurance companies in Europe and Japan, and I think that Geico's business model is quite superior to most primary insurance companies in Europe and Japan.
And I think that Geico would be very successful in Europe and Asia so I'd like to hear what are the views and plans for Geico doing business in Europe and Asia.
Second, regarding Coca-Cola, living in Japan, I noticed that Coke has a relatively low presence in advertising, although they are the largest player with 30 market share versus 15 for the number two.
I think Coke is being too cheap on advertising, thus hurting the long-term position. I wonder if advertising strategy internationally is a high enough priority of Coke's management and if they're aggressive enough.
I'd like to hear if you have any comments on this, and also I’d just like to thank you very much for this experience and for the wonderful company you have created.
Well, thank you very much. Clearly, when you've got a business model that works as well as Geico has in this country and it continues to work well and has that fundamental advantage of being a low-cost operator, we think about every possible way that we can take that idea and extend it.
It's been remarkably hard to do it. I mean the management has tried various things ever since Leo Goodwin started the company in 1936 to take it into other areas, and those efforts have been modestly successful in certain things like life insurance but then they got out of it and various other things.
But it's an idea still we have a — you know, we have four percent or so of the market in the United States. This market is so huge, and as we look at the drain on human resources involved in extending it into other countries and we’ve looked at it a lot; maybe something will do it sometime.
But we've never felt that the possible gain, considering the rigidities of these both in Europe and in Asia breaking in, it's not easy to get into those markets.
And the cost, the time, we've just felt that it would be better to concentrate those same resources in this country.
It's not a question of capital at all. I mean we'd put the money in