Berkshire Hathaway 2002 Annual Meeting Transcript

Transcript of the 2002 Berkshire Hathaway Annual Meeting held on May 4, 2002 on Omaha, Nebraska:

(Click here to skip to the Q&A section)

(To see the full transcripts of all Berkshire Hathaway Annual Meetings on record, click here)

Formal Business Meeting Started

(The video starts with the annual meeting already in progress)

Warren Buffett:

… second or anybody would like to speak to that motion, might now work their way over to the microphone in zone 1. Could we have a spotlight on where that is? In that way, when we get to that point of the program…

If anybody that would like to speak to the motion that was in the proxy statement, if you’ll work your way over to the microphone there then we’ll be ready at the time… you can be ready at the time when it will be appropriate to talk about it.

And so we’ll get there in just a minute and if you’ll all wander over there that are interested.

Also with us today are partners in the firm of Deloitte & Touche, our auditors. They’re available to respond to appropriate questions you might have concerning their firm’s audit of the accounts of Berkshire.

Mr. Forrest Krutter, the secretary of Berkshire. He will make a written record of the proceedings.

Miss Becki Amick has been appointed inspector of elections at this meeting. She will certify to the count of votes cast in the election for directors.

The named proxy holders for the meeting are Walter Scott Jr. and Marc 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?

Forrest Krutter:

Yes, I do.

As indicated in the proxy statement that accompanied the notice of this meeting that was sent by first class mail to all shareholders of record on March 6, 2002, being the record date for this meeting, there were 1,323,707 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting and 6,290,415 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, 1,103,455 Class A shares and 5,260,231 Class B shares are represented at this meeting by proxies returned through Thursday evening, May 2nd.

Warren Buffett:

Thank you. That number represents a quorum and we will therefore directly proceed with the meeting.

First order of business will be a reading of the minutes of the last meeting of shareholders. I recognize Mr. Walter Scott who will place a motion before the meeting.

Walter Scott:

I move that the reading of the minutes of the last meeting of the shareholders be dispensed with and the minutes be approved.

Warren Buffett:

Do I hear a second? The motion has been moved and seconded.

Are there any comments or questions? Three second pause. We will vote on this motion by voice vote.

All those in favor say aye. Opposed? The motion’s carried.

Election of Berkshire’s Board of Directors

Warren Buffett:

The first item of business of this meeting is to elect directors. The shareholders present who wishes to withdraw a proxy previously sent in and vote in person on the election of directors here, he or she may do so.

Also, if any shareholder that is present and 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.

Would those persons desiring ballots please identify themselves so that we may distribute these?

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

Walter Scott:

I move that Warren E. Buffett, Charles T. Munger, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chace, Ronald L. Olson and Walter Scott Jr. be elected as directors.

Warren Buffett:

Is there a second?

It has been moved and seconded that Warren E. Buffett, Charles T. Munger, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chace, Ronald L. Olson and Walter Scott Jr be elected as directors. Sounds like a hell of a slate to me.

Are there any other nominations? Is there any discussion?

Nominations are ready to be acted upon. If there are any shareholders voting in person, they should now mark their ballots on the election of directors and allow the ballots to be delivered to the inspector of elections.

The proxy holders please all submit to the inspector of elections a ballot on the election of directors, voting the proxies in accordance with the instructions they have received.

I will have to say at this point, deviating from my script, that… in the spirt of disclosure which now permeates the corporate world…

I have a tally here from yesterday as to the number of votes each director has received.

And the… I won’t give the affirmative votes, but the total… basically negative vote is a withhold vote… Charlie and I and Howie came in last, by a significant margin.

Susie did the best. She only had 1,000 votes against her, but Charlie and I had 16,000-some votes against us.

So, I really suspect that Susie voted against us so that she could lead the ticket, but who knows?

Miss Amick, when you’re ready you may give your report.

Becki Amick:

My report is ready.

The ballot of the proxy holders in response to proxies that were received through last Thursday evening has not less than 1,139,672 votes for each nominee.

That number far exceeds a majority of the number of the total vote related to all Class A and Class B shares outstanding.

The certification required by Delaware law of the precise count of the vote, including the additional votes to be cast by the proxy holders in response to proxies delivered at this meeting, as well as any cast in person at this meeting, will be given to the secretary to be placed with the minutes of this meeting.

Warren Buffett:

Thank you, Miss Amick.

Warren E. Buffett, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chace, Charles T. Munger, Ronald L. Olson, and Walter Scott Jr. have been elected as directors.

Next…

A shareholder proposes Berkshire to refrain from providing charitable contributions to programs supporting abortion

Warren Buffett:

The next item of business is the proposal put forth by a Berkshire shareholder, Gloria Jay Patrick, the owner of two Class B shares.

Miss Patrick’s motion is set forth in the proxy statement and provides that the shareholders request the company to refrain from making charitable contributions.

The directors have recommended that the shareholders vote against this proposal.

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

Steven Mosher:

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

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

I’ve written about the coming depopulation… that’s right, I said depopulation… in the Wall Street Journal and other publications.

I say all this to explain why Gloria Patrick, a Berkshire Hathaway shareholder, has asked me to present her action at this meeting, the following proposal.

And I do have one other qualification: I have nine children.

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

I will present the proposal and then, with the chairman’s indulgence, spend a couple of minutes explaining why it’s necessary.

Here is the resolution:

Whereas, charitable contributions should serve to enhance shareholder value.

Whereas, the company has given money to groups involved in controversial activities like population control and abortion.

Whereas, our company is dependent on people to buy the products and services of the various companies we own.

Whereas, our company is being boycotted by Life Decisions International and investment- related groups like Pro Vita Advisors because of these contributions.

Resolved: The shareholders request the company to refrain from making charitable contributions.

Let me take these very quickly, point by point.

You all know shareholder money is entrusted to the board of directors to be invested in a prudent manner for the shareholders.

I think you will all agree, as the resolution states, that charitable contributions should serve to enhance shareholder value.

Indeed, this is already Berkshire Hathaway policy with regard to its operating subsidiaries.

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

I think you will also likewise agree that activities like population control and abortion are controversial.

In fact, some of the charitable money has been given to Planned Parenthood, a group that is responsible for almost 200,000 abortions a year in the United States… and in countless more through its population control programs worldwide.

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

Next, it should be self-evident that Berkshire Hathaway, like the economy as a whole, is dependent upon people. It is people who produce the products and services of the various companies we own, and it is people who buy them.

Now, you may think that there is the superabundance of people in the world and that we will never run short, but this is not true.

Half of the countries of the world, including countries in Latin America, Africa, and Asia, now have birthrates below replacement.
Europe and Japan are literally dying, filling more coffins than cradles each year.

Dying populations may shrink the economic pie. We already see this happening in Japan and some European countries.

How much of Japan’s continuing economic malaise can be directly traced to a lack of young people to power the economy?

Dying populations may also make economic development nearly impossible. Russia is having trouble finding its feet economically.

Why? Because of its ongoing demographic collapse, losing a million people a year.

These problems will spread to many more countries in the near future.

Charitable contributions to simple-minded population control programs, in which governments impose restrictions on childbearing, are not in Berkshire Hathaway’s interest.

Such programs are not investing in humanity’s future, they are compromising humanity’s future and putting a roadblock in the way of future economic growth.

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

Let me give you a concrete example of what I mean. Berkshire Hathaway owns Dairy Queen.

Now, there are 103 Dairy Queens in Thailand. But Thailand, due to a massive population control campaign, now has a birthrate that is below replacement and falling.

This means that its cohorts of young children are shrinking. There will be fewer and fewer families in the years to come and its population will eventually fall.

Now, you may think Thailand has too many children. But is it possible for there to be too many children for Dairy Queen?

According to Dairy Queen, the Dairy Queen concept especially appeals to, quote, “young families.” But there will be fewer young families in Thailand’s future and Dairy Queen’s future because of population control.

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

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

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

Warren Buffett:

Thank you.

Do we have a… do we have a second to the motion?

Ok, we have.

And is there are any further discussion? Is there anyone there at the microphone that would like to talk?

OK. If there’s no further discussion, we’ll have Miss Amick report on the votes cast on that.

If anybody wishes to cast a vote in person, they can raise their hand and submit that, but we’ll have a preliminary report from Miss Amick.

Becki Amick:

My report is ready.

The ballot of the proxy holders in response to the proxies that were received through last Thursday evening cast 28,452 votes for the motion, and 1,014,353 votes against the motion.

As the number of votes against the motion exceeds a majority of the number of votes related to all Class A and Class B shares outstanding, the motion has failed.

The certification required by Delaware law of the precise count of the vote will be given to the secretary and placed with the minutes of this meeting.

Warren Buffett:

Thank you, Ms. Amick. The proposal failed.

End of Formal Business Meeting

Warren Buffett:

After adjournment of the business meeting, I will respond to questions that you may have that relate to the businesses of Berkshire but do not call for any action at this meeting.

Does anyone have any further business to come before this meeting before we adjourn?

If not, I recognize Mr. Walter Scott to place a motion before the meeting.

Walter Scott:

I move that this meeting be adjourned.

Warren Buffett:

Is there a second?

Motion to adjourn has been made and seconded. We will vote by voice.

Is there any discussion? If not, all in favor say aye. All say no? The meeting’s adjourned. Thank you.

Warren introduces one of his old boss – Mickey Newman

Warren Buffett:

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

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

So, I was there about ten hours later. I didn’t have a NetJets plane, so it took a little longer.

And I went in to see Ben and he offered me a job and I took it on the spot. I didn’t ask what the salary was, or anything else, and a month or two later the family joined me.

I had… my daughter was already born and Susie was pregnant with Howie. And we moved back there and I went to work for Graham-Newman Corp.

And, one of my three bosses… I had three bosses that… Ben Graham, Jerry Newman, and Mickey Newman. And Mickey was exactly ten years older than I was at that time and he’s exactly ten years older now.

And Mickey was a major factor in a hugely successful… he ran the place… company that was not quite that successful yet in 1954 when I went back there: the Philadelphia and Reading Coal and Iron Company, as it was called then.

And after I’d been there maybe a year… Mickey was in charge of Philadelphia and Reading… and a fellow named Jack Goldfarb came into the office, and I really didn’t know what was going on.

I had a good bit of my net worth in Philadelphia and Reading, so I was interested, but Jack Goldfarb and Mickey were behind closed doors, largely.

But when they emerged, the Philadelphia and Reading Company, which was controlled by Graham-Newman, had bought Union Underwear, which was the manufacturer of Fruit of the Loom product under a license at that time.

And, as I told in the annual report, was a very, very attractive buy, and Mickey made a number of good buys.

And when… Mickey and I have talked and seen each other over the years, some, not a lot, but we would see each other.

And when Fruit of the Loom entered bankruptcy a few years ago, Mickey called me and sort of said, what are you going to do about it? You should do something.

And he was very helpful, particularly helpful, in introducing me to John Holland, who runs Fruit of the Loom, and who is a tremendous asset to the company. And, Mickey gave me lots of insights on that.

And when I got discouraged with the bankruptcy procedure… and it is discouraging to try and buy a company out of bankruptcy… Mickey would gently prod me along.

And so I believe, today, we have with us Mickey Newman and his son, who I last saw when he was a little red-headed kid, Bill.

Mickey and Bill, if you’re here, if you’d stand up, it’d be great. Now, let’s see if they made it.

There they are. Let’s have a spotlight on them.

I can’t see very well from here whether Bill is still redheaded.

But Mickey is 81, believe it or not. You won’t believe it if you meet him.

And he’s been a tremendous help and a great friend over the years.

And he accomplished much for us in the past year. We… I don’t think we would have Fruit of the Loom if it hadn’t been for Mickey, particularly nudging me along as we went through the process.

Warren introduces Scott and Fetzer’s Ralph Schey

Warren Buffett:

I also hope we have today with us, and again, I didn’t get a chance to see them before the meeting, but are Ralph and Luci Schey here? Ralph and Luci? Did they… were they able to make it or not?

Yeah, there they are.

Ralph is in the Berkshire Hathaway Hall of Fame. I mean, this is like being at Cooperstown, you know, and introducing Bob Gibson or Sandy Koufax.

Ralph, for a great many years, added tremendous value to Berkshire at Scott and Fetzer.

We wouldn’t be able to buy some of the things, like Fruit of the Loom, if it hadn’t been for the profits developed under Ralph’s management at Scott Fetzer.

So I’m delighted that he and Luci can join us.

Warren introduces Larry and Dolores Brandon

Warren Buffett:

I believe, and I hope we have Larry and Dolores Brandon. Are they here?

Show your… there they are. Let’s have a spotlight on them.

Delores is also known as “Dutchy” but we call her “Saint Dutchy” at Berkshire headquarters because she gave birth some years ago to Joe Brandon, and Joe has been doing a fabulous job for us at General Re. He took over early in September.

It’s really going to be our number one asset. There’re been a lot happened since those days in September when Joe took over. I think you’re going to see some terrific results throughout our insurance business, but particularly at General Re.

I wrote Dutchy a letter and I said, you know, it’s terrific what you’ve done for us, but… you know, I was a little like the farmer that went into the henhouse, and I, you know, pulled out an ostrich egg, and said to the hens, you know, I don’t like to complain, but this is just a sample of what the competition’s doing.

Well, I berated her a little bit for not having twins, because if she just had a twin for Joe, we’d own the world.

But she tells me that… and she wrote me back and said… she really had done her best. I mean, she’d had seven children, five of whom are in the insurance business, and she has 19 grandchildren.

So, we have people out on the road trying to sign up these grandchildren now and…

If you get a chance, you know, tell her productive years are not over.

Warren introduces Andy Heyward

Warren Buffett:

And finally, we have with us today the fellow who put together that terrific cartoon.

Anybody that can… even takes on the job of making me look like James Bond is a very brave person.

And, Andy Heyward has a company called DiC Entertainment, which is a leading producer of children’s programming. When you turn on the television on Saturday morning, you will be seeing his output.

And Andy puts this product together. He sends people to Omaha. He does it all.

It’s his script, it’s his production. He does it on his own time, on his own nickel, he just… it’s his contribution to the Berkshire meeting. And it, I mean, it’s absolutely fabulous.

And I have to tell you that this fall, Andy is going to have a series of 40 episodes that are called… I think it’s called “Liberty’s Kids.”

It will be on public broadcasting at 4:30, five days a week. And it’s really the story of America.

It’s told… Charlie will like this… Charlie doesn’t know about this… it will be told through the eyes of three young apprentices in Ben Franklin’s print shop.

And it will view the evolving of the American democracy and the Constitution, and all with Andy’s creative characters, but it will use the voices of various other people.

And I’m flattered. I get to be James Madison in this. And we have Sylvester Stallone, we have Billy Crystal, we have Whoopi Goldberg.

And Charlie will be crushed to find… I think its Walter Cronkite is going to be Ben Franklin.

I mean, I think Charlie held out for too much money or something.

But, it’s going to be a fabulous series. I mean, I am looking forward to this. It will run all this year, starting in the fall, and then it will run again in the following year. And it will be a great, great, piece for American children and American adults.

I plan on watching it myself. And it will just be the story of how this country came about, through the eyes of these three young apprentices of Ben Franklin.

So, Andy is here with his son Michael, and if Andy and Michael would stand up, I’d like to give them a hand myself. Andy, where are you?

They’re here someplace.

Warren praises Berkshire’s managers

Warren Buffett:

We’ve got a lot of other special guests, but they’re up here in our managers’ section. You saw them up on the screen. They’re the people who make this place work.

We have a larger and better cast this year than we’ve had even in the past, and it will grow in the future.

This is a company of managers. And, you know, we confess to how little we do around headquarters, as you saw in the movie.

And we now have, I think… I’m not sure of the exact number, whether we have 130,000 now, or something like that… people working all over the world in all kinds of occupations.

And, I think they get a sense when they come here that they’re working for real people on this side, too.

I mean, they get to see people who are actual owners. We have some institution holders, but we have 350,000 individual owners now, and I think… I believe… it’s correct to say that our stock turns over… less turnover… in the shares of Berkshire than in any other company of major size in the country.

Which means, in effect, we have more what I would call real owners, people who want to be in partnership with the kind of managers we have. And Charlie and I are very proud of them.

A “little” update on Berkshire’s insurance aspects of the first quarter

Warren Buffett:

Now we’re going to get to the questions in just one second.

I thought I would give you a little update on, particularly, the insurance aspects of the first quarter, because insurance cost us a lot of money last year.

It’s our main business. It’s always going to be our main business. It’s a very, very big business, and it’s going to get bigger.

And, there were some special events of last year, and there were some mistakes of our own that made it a bad year for insurance last year.

Our float last year cost us almost 13 percent, and that’s a lot to pay for money.

It’s not our record. We had a period in the ’80s when we ran into even more difficulties.

But I think there’s been… well, I know there’s been… there’s been a change in the market. There’s been a change, to a degree, in the culture at a very important unit.

And, I think that, barring some really mega-catastrophe, and we’ll talk about those later… possibility… that we are… I think we’re doing pretty well.

And if we could have the first chart that I… yeah… the first chart, which I can’t see myself here, but I think it will be the insurance underwriting results for the first quarter.

And you will see that two good things happened in the first quarter.

One is our float increased by $1.8 billion. That’s a lot of money to take in, net. I don’t think there’s any company, probably in the world, that had a gain in float that was even close to that.

And we actually achieved that with a small underwriting profit. So the float not only cost of nothing in the first quarter, but we had a gain of a billion-eight in it. And all units contributed to that.

Our goal is to obtain more and more float at minimal or no cost. And there have been a number of years in the past when we’ve run an underwriting profit, which means that the use of that money is essentially free, or even better than free.

And we’ve had one very bad year, and a couple of so-so years before that.

But I think our cost of float over the next few years, unless we get into an extraordinary catastrophe, I think it should be pretty satisfactory.

Now, you’ll notice there’s a note down at the bottom that’s slightly technical, but it’s an important enough item in Berkshire, and in understanding our cost of float, that I thought I’d just devote a minute to it.

If you find this uninteresting, you can live a happy life without understanding what I’m about to explain next. You may even lead a happier life if you don’t understand it.

As I look at the people that understand it and don’t understand it, I’m not sure which group is happier.

When we write… we write a good bit… and have written a good bit, I should say… of retroactive insurance.

Now, in retroactive insurance, a company may come to us that’s merging with another company, and they want to put a cap on their liabilities, or define them better, from past incidents.

So they may come to us and say, we want you to pick up all the losses that are going to be paid from things that happened prior to, say, 1990.

And we think that we owe $1 billion… have yet to be paid in losses from that period… but we want to protect ourselves up to, say, $2 billion, or some number like that.

So they write us a check and we take over… this is called retroactive insurance… we take over their losses from the past for a specific period and for a specific amount.

And, when we do that, the accounting… it’s not accounting you run into every day… we’ve explained it in the past… but it creates a charge which will occur over time in the future.

And, as you can see, in the first quarter, the 20 million of underwriting profit we made was after a total of 112 million for the amortization of this charge that is set up.

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

And that 500 million we set up as a deferred charge, we amortize over a period of time as we expect to pay the claims.

Now, there would be a lot of room for judgement… there is a lot of room for judgement… in terms of how fast we amortize that.

We try to be conservative. We make an estimate of when we will pay those claims and how much we will pay, and we try to amortize it over a reasonable period.

I’ve got another slide that shows how those amortization charges will work over time.

And we’re going to put these slides on the internet, because we feel that our shareholders should understand the impact of these charges that will come against underwriting profits.

In the year 2002, we will have a 400 million-plus charge for this. It’s built into the figures now.

And if we do 20 billion of premium volume, that’s about a 2 percent charge.

So, to have our float be cost free, we have to make 400-plus million on underwriting elsewhere, in order to offset that.

And as you can see, we did that the first quarter and we’ll find out whether we do it for the full year.

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

I should emphasize that in all of these contracts, we cap our liability. So a lot of these contracts apply to liabilities that primarily… or not primarily… but in a significant way, and often primarily, arise from asbestos.

But when you read about asbestos claims accelerating and all of that, the numbers are capped in our case, in all of these contracts. So really don’t care whether we pay it on an asbestos claim or whether we pay it on an old auto liability claim, or whatever.

The question is whether we’ve been correct in estimating the speed at which we will pay. And in some cases, we may pay even less than our maximum amount.

So, anyway, that’s available for those of you who have previously were unhappy not understanding this and now are thrilled to know how it all works.

Now the final item, which is a little easier to understand, is… we talked in the annual report about how we expected growth to resume at GEICO.

And I put up… again I can’t see what’s up there… but I assume that we have the GEICO policies in force figure and the increase by… Charlie hasn’t seen these, as a factor of fact, so I’ll give him the slide.

And as you can see, growth, not at the rates of a couple of years ago, but quite a turnaround from last year. Growth has resumed at GEICO in a reasonable way.

We figure each policyholder of a preferred nature is worth $1000 to us, at least, and so if we had 40,000 policyholders in a month, we’ve created, in our view, $40 million of value.

And, of course, we have the earnings in the float, and so on, that goes with it.

You’ll notice on the first slide, GEICO operated at a significant underwriting profit in the first quarter, so all of its float was free and its float has continued to grow.

We are… you saw one of our little squirrel ads there which I like… we are getting… we are not getting a whole lot more inquiries than a year ago, but we’re closing a significantly higher percentage of those that call. So our growth has been… has been picking up because our closure rate has increased quite substantially, and our retention rate of old policyholders, also, is increasing month by month.

So we’ve got two trends that are quite favorable, in terms of adding business.

And the third one of adding more inquiries is something that we are working on, and we’re delighted to spend a lot of money on it, if we can figure out the way to spend it intelligently.

But, the increase in the retention ratio, the increase in the closure ratio, is resulting in very decent growth at GEICO.

And it’s growth in all of our categories, in the preferred class, and the standard class, and the nonstandard class of business, whereas last year, the latter two fell.

Well, that’s enough about the formal presentation.

Q&A – Morning Session

(Click on a link below to skip to a particular topic)

1. How Warren decides when to hold forever and when to sell.
2. Having low cost float is more important than having a lot of float.
3. Asbestos-related risk and opportunities in Berkshire’s operating and insurances businesses.
4. How to select an appropriate index fund and which benchmark to use when purchasing it.
5. Did 9/11 changed Warren’s life and investment strategy? To learn more about the horrible incident that happened on 9/11, named after the date it happened – September 11, 2001, click here.
6. On banks trading at relatively lower P/E than the S&P.
7. How to detect accounting fraud.
8. How Warren was able to assess and buy a company (Larson-Juhl) after just talking to the owners for no more than 90 minutes.
9. At 71, Warren is still having a lot of fun living life.
10. Warren’s philosophy about turnaround situations and preference for businesses that have barriers to entrance.
11. Warren’s and Charlie’s book recommendations.
12. How to select true friends and future business partners.
13. Great IQ is not needed to do well as an investor.
14. Is Coca-Cola starting to lost their way?
15. The fundamental bases and how long it takes for companies to develop sustainable competitive advantages.
16. Coca-Cola and Gillette are still great companies.
17. Warren and Charlie’s way of thinking.

Blue Chip Stamps under Warren and Charlie

Warren Buffett:

You’ve heard us talk here about the importance of our managers. However, occasionally, Charlie and I get involved in management ourselves. And we would normally be too modest to claim any great accomplishments.

But we have had one rather incredible performance which, since Charlie participated in it as well I do… I think if we put up the slide on the company that Charlie and I have managed personally, you’ll see that this entity… you can’t… Charlie, here it is, right here.

It’s one where we took over 30-odd years ago. And as you can see, the 46,000 became… what?

Voice from Audience:

That’s the wrong slide.

Warren Buffett:

Oh. Excuse me. Are you sure? Oh.

Voice from Audience:

Oh, yeah.

Warren Buffett:

OK. Well, I guess we better put up the next slide.

We… they got that first one… they got it reversed. We were doing 120 million when we took over, and we’re now doing $46,000 a year. But we may get a bounce one of these years.

That was a company that also had a lot of float… that we were attracted to. And the interesting thing is, you know, this was Blue Chip Stamps.

Although Blue Chip was a copy, of a sort, of Sperry & Hutchinson, which really was the main inventor of trading stamps on any large scale in the country, and they go back to the 19th century.

But if you think about it, S&H Stamps… Green Stamps… or Blue Chip Stamps, had many similarities to frequent flyer miles. You know, the only difference being that, you know, you got them a lot at, like, grocery stores and all of that and then you had to lick them and put them in a book. Whereas now, it’s all done electronically.

But the basic underlying business was very similar to frequent flyer miles, which have this incredible hold on the American public.

But somehow, we were not able to make the transfer.

We haven’t yet made the transformation, let’s put it that way, from the lick-it stamp to something that the public will accept.

But we’ve still got $47,000 of revenue annually from the entire state of California, so we’re building a base.

Charlie and I continue to spend most of our time working on this one.

By owning Berkshire, a shareholder was able to become a philanthropist 

Warren Buffett:

Let’s go to area 7. I think we stopped in area 6 last time, and we’ll go from there.

Audience Member:

Yes, my name is Mort November. I’m from Cleveland, Ohio. I’m here with my wife, Iris, who in 1986 founded the Statue of Liberty Collectors’ Club.

I wanted to tell you personally what Berkshire Hathaway has meant for me. By owning it, we have become philanthropists in Cleveland. And the way it happened is we sold all our other stock. It was never any fun owning it, and I could never understand that my stock went down and the CEO’s bonuses went up.

So, I got rid of that, and we took all of that money and we’re doing things for children in Cleveland. On May 16th, we’re sending a group… thank you.

On May 16th, for the tenth year in a row, we’re sending a group of children from Cleveland Municipal Schools, who win the trip by doing good work in their class and good work in the community, to Dearborn, Michigan, Henry Ford Museum, Greenfield Village.

It’s a lot of fun for them and it’s really a lot of fun for us.

We invested in a building in the Cuyahoga National Park for campers, and hopefully we’ll be able to help put up an addition to a library in East Cleveland, Ohio, which really needs all the help it can get.

So, my wish for you gentlemen is that you have many, many more years of good health and that we have the opportunity to see you on this stage, or any stage, for as many years as you want. I salute you both.

Warren Buffett:

Thank you.

It’s terrific what a number… a large number… of Berkshire shareholders, particularly the ones, perhaps… well maybe not particularly… but in the Omaha area, because they go way back to the partnership, and a number of them are in their mid-seventies or thereabouts.

But there have been a lot of things that have come out of the stock. In fact, there’s been a suggestion that somebody may do a book on some of the things that have flowed from various Berkshire shareholders.

And I’m sure many of you know about the case of Don and Mid Othmer. Don went to Central High, here in Omaha. Mid Othmer’s mother, Mattie Topp, was a wonderful woman, who was a customer when I started selling securities when I was 20 or 21, and she ran a dress shop.

And they, you know, they left about $750 million to a group of mainly 4 or 5 charities, one of which was the University of Nebraska.
But there have been all kinds of things. And there may actually be something done on that at some point, but I’m glad to hear what you’re doing in Cleveland.

Q&A – Afternoon Session

(Click on a link below to skip to a particular topic)

1. Pharmaceuticals, as an industry, has been a very, very good business over time.
2. How to take into account the individual balance sheets of the Coca-Cola bottlers to the Coca-Cola company.
3. The goodwill rules are in accord with what Warren and Charlie believe they should be.
4. Does compensation plans at Berkshire and its competitors have anything to do with the mispriced insurance policies issued?
5. Berkshire is “pretty well” positioned if valuations decline.
6. The price of gold has nothing to do with the valuation of businesses.
7. The difference between investing and speculating.
8. Stock option is both an expense and a dilution.
9. The impact of inflation or deflation on Warren and Charlie’s investment decisions.
10. Warren shares his thoughts about the long/short equity model of Alfred Winslow Jones. To learn more about Alfred Winslow Jones, click here.
11. The role of creative accounting in the stories of tremendous growth and success over many years.
12. How young people can develop and define their circle of competence.
13. Population projections have been “notoriously inaccurate” over the years.
14. Expect Berkshire’s returns to be less than that of the last 20 years.
15. In investing and insurance business, it doesn’t make any difference where you’re located.
16. Take good care of your mind and body.
17. How to factor potential damage from litigations when valuing a company.
18. Warren gives an update on the Finova deal.
19. Real estate is accurately priced most of the time.
20. How to value stock options.
21. America’s capital system produces extraordinarily inequitable results that should be corrected by a tax system.
22. Acquiring Dexter Shoe was a “dumb decision”.
23. Why the annual report was shorter this year.
24. Why Berkshire’s audit costs are so low.
25. It’s very hard to pick a superior investor.
26. Berkshire’s subsidiaries makes their own decisions on how to operate the business.
27. Why the class-B shares are priced at 1/30 of a class-A share, yet only have 1/200 of voting right.
28. Demand, not the leasing of, determines the price of silver.
29. Warren defends Kirby vacuums’ sales practices and policies.

End of Q&A

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