Berkshire Hathaway 2003 Annual Meeting Transcript

Transcript of the 2003 Berkshire Hathaway Annual Meeting held on May 3, 2003 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)

Warren welcomes Berkshire’s shareholders

Warren Buffett:

Thank you. We promise not to sing.

Good morning, and we’re delighted to have you all here.

One of the things that makes it fun to run Berkshire is that we see real shareholders. We have… we probably have a larger proportion of our shares held by individuals and not by institutions than virtually any large company in America. And that’s the way we like it.

We love it when you come, we get to see you, you buy our products. You know, there’s still a few things left downstairs so… feel free to leave anytime during the meeting when Charlie’s talking… to go down and make a few purchases.

Warren praises Andy Heyward

Warren Buffett:

Now, we’re going to do as we’ve always done.

First of all, I’d like to… I would like to give very special thanks to Andy Heyward. Andy, would you stand up if you will please? Andy is the man that… there he is.

Andy does those cartoons, he recruits Walter Cronkite and Bill Gates, and he does the script. He gets Charlie and me to do recordings. And it’s just wonderful the production he’s put on.

And for those of you… last year I mentioned a program that’s on public broadcasting called “Liberty’s Kids.”
It’s running in… consecutively. There’s, I think, 40 episodes. It tells the story, really, of the founding of the country, and it’s a marvelous way to learn history.

I’ve watched a number of the sessions myself, and it kind of comes back to me from my early days, grade school and high school.

And Andy’s done, I think, the parents of America and the country, a real service in producing this. And I will predict that a hundred years from now, people will be watching “Liberty’s Kids.”

So I really salute Andy Heyward, and be sure to catch it on public broadcasting. And Andy, thanks for a wonderful production.

Meeting guidelines

Warren Buffett:

Now, we’re going to follow our usual procedure of leisurely proceeding through the formal part of the business in three or four minutes. And… then we will…

I’ll have a few comments, actually, on our business, and then… and a couple of acquisitions… and then we will spend the rest of the day, until 3:30 with a break for lunch, we will spend here to answer any questions you have.

We have microphones in various zones, and we will proceed around and try to get every… any subject that’s on your mind, fire away and I’ll answer the easy ones and Charlie will answer the tough ones.

Warren introduces Berkshire’s Board of Directors

Warren Buffett:

So now we will go through the formal part of the business, they’ve written a little script for me and I will go through this. The meeting will now come to order.

Oh, I should introduce Charlie over here, not that he needs an introduction. But Charlie…

Charlie and I have been partners of one sort or another since 1959. We both grew up a good bit here in Omaha, but we didn’t know each other at the time.

We both worked at the same grocery store. We had a similar experience, we found that neither one of us liked hard work.

And if you go down to the Western Heritage Museum, they just opened an exhibit of that grocery store. It’s a permanent exhibit, and actually, I loved it. Charlie worked there a few years before I did in the past, but we didn’t actually meet until I was 28 or 29, and Charlie was a few years older, as he still is.

And… we have worked together now for… in one way or another… for 44 years. We’ve never had an argument. And we disagree sometimes on things.

He… you have to learn to calibrate Charlie’s answers. He… when I ask him whether he likes something, if he says, “No,” that means we put all our money in it. I mean, that is a huge…

If he says, “That’s the dumbest idea I’ve ever heard,” that’s a more moderate investment that we make. And then you have to calibrate his answers, but once you learn to do that you get a lot of wisdom.

We have our directors with us, and I’ll introduce them. We have, if you’ll stand please as I call your name and then you can… it’ll be hard to do… but you can withhold your applause till they’re all standing.

Susan T. Buffett, Howard G. Buffett, Malcolm G. Chace, Ronald L. Olson, and Walter Scott Jr., in addition to Charlie. Those are the directors of Berkshire Hathaway.

As we mentioned in the annual report, we will be adding some directors who meet the four tests that I laid out in the report. We’ll be adding some of those, probably within the next year. When we’re required… whenever we’re required to do so, we will be doing it.

And we will have people who have a lot of their own money on the line, just like you do, in Berkshire. And they will prosper or suffer in relation to how Berkshire does, and not in relation to their directors’ fees or other things.

So they will be selected for business savvy, which they will have.

They will be selected for interest in the company, which is almost guaranteed by their holdings.

They will be selected by their shareholder orientation, which, again, I think that their holdings will produce. And we will have those people on board, probably by our next meeting.

Start of formal business meeting

Warren Buffett:

Also with us today are partners in the firm of Deloitte and Touche, our auditors. They’re available to respond to appropriate questions you might have concerning their firm’s audit of the accounts of Berkshire. And I might say that almost any question would be appropriate.

Mr. Forrest Krutter, secretary of Berkshire, he will make a written record of the proceedings. Miss Becki Amick has been appointed inspector of elections at this meeting, and she will certify to the count of votes cast in the election for directors.

The named proxy holders for this meeting are Walter Scott Jr. and Marc D. Hamburg. We will conduct the business of the meeting and then adjourn to the… adjourn the formal meeting. After that we will entertain questions that you might have.

Warren Buffett:

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 to all shareholders of record on March 5, 2003, being the record date for this meeting, there were 1,309,423 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting.

And 6,763,493 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 1,071,967 Class A shares and 5,228,705 Class B shares are represented at this meeting by proxies returned through Thursday evening, May 1.

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 approved.

Warren Buffett:

Do I hear a second? Motion has been moved and seconded. Are there any comments or questions? We will vote on this motion by voice vote. All those in favor say “aye.”

Voice from Audience:

Aye.

Warren Buffett:

Opposed? You can signify by saying, “I’m leaving.”

The motion is carried.

Election of Berkshire’s board of directors

Warren Buffett:

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

Also, if any shareholder that is present has not turned in a proxy and desires a ballot in order to vote in person, you may do so. If you wish to do this, please identify yourself to meeting officials in the aisles who will furnish a ballot to you.

Will those persons desiring ballots please identify themselves so we may distribute them?

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

Sounds good to me.

It has been moved and seconded that Warren E. Buffett, Charles T. Munger, Susan T. Buffett, Howard G. Buffett, Malcolm G. Chace, 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. 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.

Would the proxy holders please also submit to the inspector of elections a ballot on the election of directors voting and proxies in accordance with the instructions they have received?

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, cast not less than 1,058,098 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 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.

A shareholder proposes to include holders of the class-B shares to participate in the charity program

Warren Buffett:

The next item of business is a proposal put forth by Berkshire shareholder Christopher J. Fried, the owner of two Class B shares.

Mr. Fried’s motion is set forth in the proxy statement, and provides that the shareholders request the company allows Class B shareholders who own at least seven registered shares of Class B stock to become eligible to participate in the shareholder-designated contributions program.

The directors recommended that the shareholders vote against this proposal.

We will now open the floor to recognize Mr. Fried, or his designee, to present his proposal.

Chris Fried:

Thank you, Mr. Buffett. Good morning, my fellow shareholders.

My name is Chris Fried, and I am here to present a shareholder proposal.

This proposal is designed to extend the shareholder-designated contribution program to include Class B shareholders.

Let me first start off by saying in our shareholder’s “Owner Manual,” there is a statement that I’d like to quote at this time.

“Although our forum is corporate, our attitude is partnership. Charles Munger and I think of our shareholders as owner-partners, and of ourselves as managing partners.

“We do not view the company, itself, as the ultimate owner of our business assets, but instead view the company as a conduit through which our shareholders own the assets.”

With that in mind, I present the following proposal for a vote.

This proposal would extend the shareholder contribution program to Class B shareholders who own at least seven registered shares of Class B stock. Under my proposal, each Class B stock would be allocated 1/30th the value to Class A donation rate.

Currently the Class A rate is $18 which translates to 60 cents per Class B share. The required minimum seven registered shares results in no less than $4.20 being donated by a Class B shareholder.

This figure is important, for when inflation is taken into account, the donation rate will be on par with the original 1981 donation level when the shareholder… proposal… designated program was initiated.

I do understand that there are certain perks involved with owning a Class A share. However, those perks should only be limited to voting rights and the ability to convert Class A shares to Class B shares.

Therefore, I believe that is an appropriate… to extend the shareholder-designated program to Class B shareholders.

If Berkshire Hathaway is to truly follow… truly follow what it preaches about this firm being a partnership among all of its shareholders, then Class B shareholders must have the right to at least have the option to take part in the shareholder-designated contribution program.

Thus, I ask my fellow Berkshire Hathaway shareholders to vote in affirmative on this matter. Thank you for your time.

Warren Buffett:

Thank you, Mr. Fried. And you’re absolutely right that Charlie and I do regard our shareholders as partners, and we have ever since we really started.

In fact, Berkshire, in a sense, evolved out of a couple of partnerships. Charlie had a partnership, I had a partnership, we made an investment in certain things. And a lot of our original partners are still with us as shareholders.

The partnership… but partnerships have partnership agreements, and when we set forth… or when we issued the Class B shares some years ago, we set forth the relative terms of the partners. And the Class A and the Class B are quite similar in economic terms, but they’re not identical.

And at the time we issued those shares to a new group of partners, Class B partners, we explained, quite clearly I believe, exactly what differences there were.

There was a difference in voting rights, there was a difference in that the Class A could be converted to B, but not the reverse.

And there was a difference in the shareholder-designated contribution program.

Ever since we issued those shares, I don’t know, maybe six or seven years ago, we, in effect, have had a compact with both the A and B shareholders that they… that we would treat the two classes in a way consistent with what was explained at the time of issuance.

So if we were to change the vote, the conversion ratio, or the shareholder-designated contribution program, we would, in effect, be changing a deal that was made, and that has been recognized as having been made, ever since the B shares were issued.

People have bought the A shares in preference to B because of certain reasons. People have bought the B shares for other reasons. But they have relied on the fact that we would abide by what we said we would do at the time we issued those shares.

We’ll not take anything away from the B, we’ll not take anything away from the A. We’ll run things just as they are.

And in the future, you know, I happen to have shares… my holdings… concentrated in A shares.

But the A will never get any advantage over the B except for the ones we laid out at the time of issuance of the B.

It would actually be unfair to A shareholders, and particularly to A shareholders who have bought since the B was issued, to tell them that the economic relationship between the A and B was being changed, even though only in a slight way, to the benefit of the A… benefit of the B… and the detriment of the A.

We wouldn’t do that in either direction, so that’s why we recommended to vote against it.

Charlie, do you want to add anything?

Charlie Munger:

Well, not only is all of that true, but the cost of getting down to all of B would… it would be a very inefficient process.

Warren Buffett:

Yeah, well of course… and that’s the reason, back when we issued the B, I mean, we anticipated that.

So it seemed like something that would offer very little value to the B at a significant cost to the company, and therefore we spelled it out quite clearly, I believe, in the original prospectus, and it’s been spelled out in every annual report subsequently.

So it’s the deal, and the deal is that… is also that we never change things to benefit the A in any way over the B, except as originally explained in the original prospectus, and subsequently in all the annual reports.

Is there a second to Mr. Fried’s motion?

What do we do if we don’t get a second, Charlie?

Charlie Munger:

It dies.

Warren Buffett:

OK. I guess it just died.

But, there’s nothing inappropriate about bringing something like that up (this part of the audio is inaudible).

I mean, I understand exactly, you know, what you’re thinking about. But I think you have to think of fairness to both classes.
Moving right along… figuring out where we are.

End of formal business meeting

Warren Buffett:

I guess we’re moving along to adjournment of the meeting. And after that we will have the questions we talked about, and I’ll also tell you a little bit about the business, since the annual report come out… came out.

Walter Scott, do you have a motion to put before the meeting?

Walter Scott:

I move we adjourn the meeting.

Warren Buffett:

Do we have a second?

Voice from Audience:

I second.

Warren Buffett:

Motion to adjourn has been made and seconded. We will vote by voice. Is there any discussion? If not, all in favor say, “aye.”

Voice from Audience:

Aye.

Warren Buffett:

All opposed say, “No.” The meeting’s adjourned.

Q&A Guidelines

Warren Buffett:

Now, I’d like to bring you up to date on a couple of things, and then we will proceed with questions.

We have eight microphones placed around the auditorium here, and we will proceed regularly around and just keep going around, and around.

And Marc, do we have anything in the… any microphones in the Music Hall or not? I’m not aware. Maybe if Marc could come up and inform me whether there’s (this part of the audio is inaudible) Music Hall or not, we can…

Voice from Audience:

There’s two in there.

Warren Buffett:

There’s two microphones in the Music…

Voice from Audience:

Yes, nine and 10.

Warren Buffett:

Nine and 10 are in the Music Hall. And are there quite a few people there?

Voice from Audience:

Yeah, it’s full. It’s full.

Warren Buffett:

It’s full?

Voice from Audience:

Yeah.

Warren Buffett:

Oh OK.

We haven’t put microphones out on the sidewalks yet, but we’ll get to that someday.

Berkshire bought McLane from Walmart

Warren Buffett:

We’ve made… we’ve contracted to make… two acquisitions this year.

You just read about one, perhaps, in this morning’s paper, but it went on the tape at 7:45 yesterday morning, Central Time, and that involved the contract to buy McLane’s from the Walmart company.

McLane’s is the very large wholesaler to all kinds of institutions, but convenience stores, quick- serve restaurants, the Walmart operation itself, theaters, restaurants.

And this year we’ll probably do something like 22 billion of business. So it’s a very substantial enterprise, with distribution centers around the country, with much in the way of transportation equipment.

Walmart had owned McLane’s since about, I believe, 1990. It grew substantially while they owned it. It’s been run by a terrific manager who’s here with us today, Grady Rosier, and Grady took the business from 3 billion to 22 billion, or thereabouts.

Walmart, for very good reasons, wants to specialize in what they do extremely well, and through Goldman Sachs and Company, we were approached by them a little while back about the possibilities of buying the business.

It’s a… it really makes sense for both sides, because Walmart knows what to do with the capital very, very well in their own business, and has lots of opportunities. And this was something of a sideline to them.

On the other hand, their ownership of McLane’s resulted in certain people that would be logical customers of McLane’s not wanting to do business because they didn’t want to do business with a competitor.

And we plan to see all those people very soon, and explain to them that that’s no longer the case, and they can sleep well at night doing business with us and not worry about benefiting their competitor, Walmart.

So this deal… a representative of Walmart came up last Thursday to Omaha, a week ago this past Thursday, a CFO. And we made a deal in, maybe, an hour or two and shook hands. And when you shake hands with Walmart, you have a deal.

And so the time remaining until yesterday morning, a contract was put together and it must go through the Hart-Scott-Rodino process in… to be cleared. But there’s obviously no conflict, so we fully expect that, in just a few weeks, that McLane’s will become part of Berkshire.

It serves, presently, about 36,000 of the 125,000 or so, convenience stores. If you take the 50 largest convenience store chains in the country, it does 58 percent of the business with those companies. Sells each convenience store an average of, perhaps, 300,000 or a slight bit more of product a year, which those convenience stores then resell to the consumer.

It also serves about 18,000 quick-serve restaurants, primarily those operated by Yum! Brands: the Taco Bell, and Pizza Hut, and Kentucky Fried Chicken group.

And it will have opportunities to serve many more as we go along. So we’re delighted.

If any of you get a chance to see Grady, or better yet, if any of you own a convenience store, step forward and we’ll be glad to give you our card.

It’s really… you know, Walmart knows that we will be a good owner, they know we’ll be good for the people that work at McLane’s.

They know our check will clear, that we won’t, you know, make a proposition and then run into financing difficulties, or try to jiggle around the contract later on.

And it’s just an ideal way to do business, and we’re delighted to add McLane’s to the Berkshire group of companies.

It’s a very narrow-margin business, obviously. I mean, when you get up to 22 billion of sales and you’ve got Hershey, and Mars, and people like that on one side, and you’ve got buyers like 7- Eleven and Walmart on the other side, they’re not going to leave a lot in between.

But you have to perform a valuable service for them in order to earn, you know, say, one cent on the dollar, pre-tax.

But McLane’s knows how to do it. It’s a very efficient operation, and it will continue to deliver value to both their vendors and their customers.

Warren talks about Berkshire’s other notable acquisition: Clayton Homes

Warren Buffett:

The other acquisition that is in the works is Clayton Homes. Clayton is the class of the manufactured home industry, and the acquisition came about in kind of an interesting way.

Every year for the last five years, a group of about 40 finance students from the University of Tennessee in Knoxville would come up to Omaha, and they would have a lot of fun in Omaha. They’d go to the Furniture Mart.

And then in the afternoon they’d come to Kiewit Plaza and the 40 students or so, with their professor, Al Auxier, would have a session with me. We’d just have a classroom session for a couple of hours, and wonderful group of students.

And generally at the end of the session they would give me a football, or a basketball, they’ve got a great women’s basketball team at the University of Tennessee, and so we’d have a good time together.

And, matter of fact, a year ago, when they came up, Bill Gates, by chance, was in town. So I presented him as a substitute teacher, which is a post he’s always wanted. And students got quite a surprise.

This year when they came, 40 or so students, we had a good session together, a couple of hours at Kiewit Plaza. And when they got through, they gave me a book. And it was the autobiography of Jim Clayton, who started and ran Clayton Homes, and built it into a huge success.

And he’d written a nice inscription inside, and I mentioned to the students and the professor that the… that I was an admirer of Clayton. I’d followed the manufactured home industry in other ways, not always so successfully, and I’d seen what Clayton had done.

And so I said I look forward to reading the book, which I did. And then I called Kevin Clayton, Jim Clayton’s son, and Kevin is the CEO of the company. And I told him how I’d enjoyed his dad’s book.

And I said we still had a little money left in Omaha… and, if they ever decided to do anything, you know, we would be interested.

And I suggested at what price we might be interested in.

A phone call or two later, a couple of phone calls, we made a deal.

And I had not been to Knoxville. You know, I checked out a few manufactured homes. Suggested that my family buy a repo.

But that deal came about in that manner. And that’s the way things tend to happen at Berkshire.

It, you know, the phone rings or we pick up the phone, in this particular case. And the manufactured home industry got into significant trouble, very significant trouble, because credit terms… well, they went crazy on credit four or five years ago.

And when you go crazy on credit, you suffer in a very big way, and that’s what happened to that industry.

Conseco, that some of you may have read about, ended up holding… or servicing I should say… $20 billion worth of manufactured home credit and they got in big trouble, for that and other reasons.

And Oakwood, where we own some junk bonds, went into bankruptcy. They’re a big operation in the country, most of the… couple of the other biggest players in the industry are losing significant money.

Manufactured home companies have lost the ability to securitize the receivables they get when they sell these… when they sell homes. And so the industry’s been in the tank.

This year, or this past year, there were maybe 160,000 new manufactured homes sold, but there were also about 90,000 repos came back and that depresses the market enormously. And like I say, financing sources have dried up. A lot of people that lent money have left the field.

So for the strong, as Clayton is, and particularly with the financial backer like Berkshire, it should be a good field. Twenty percent or so of all the new single-family homes are manufactured homes in this country.

I mean, you can… we can put you in one for about $30 a square foot, and if you compare that to a site-built home, it’s quite a deal.

I mean, I was amazed.

They have 2,500 square foot homes, two stories, I mean, it’s changed a lot over the last 30 or 40 years.

And we’ve got an operation that is, even the competitors would admit, it’s clearly the class of the field.

But even for Clayton, financing was getting more difficult. I mean, the lending community got burned very badly in manufactured homes, and people have sworn off them, from the lending standpoint.

And Clayton did securitize an issue in February this year, but they had to keep more of the bottom layers of the securitization themselves.

So it’s a good marriage, and it’s one where we will be useful to them. And we should do very well together in the future.

Berkshire’s earnings got a boost from its insurance businesses

Warren Buffett:

The first quarter, I’ll just… I don’t have final figures yet, and we’ll put this… what I say today… we’ll put it on the website so that everyone has the information before the opening on Monday.

But the economy, as you know, has been quite sluggish. It’s really been sluggish for a very long time.

It’s interesting, I wrote in a letter that’s also on the website, right after September 11th, I put something up there.

And I said that we were in… we had been in a recession, which was not something that was generally acknowledged at that time, and I thought would be longer and deeper than most people anticipated.

And what has happened is that, really since late 2000, housing and autos have done quite well, but the rest of the economy has just been plain sluggish. And it continues.

During that time we’ve dropped the federal funds rate dramatically down to 1 1/4 percent. Charlie and I weren’t… probably wouldn’t have predicted that we might ever see that in our lifetime, and maybe it’ll even go lower.

And we’re running a huge budget deficit now, but business continues to be sluggish.

So our non-insurance businesses generally did not do great in the first quarter.

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

But our $290 million is after that charge.

Our float grew by, probably, at least 1.3 billion, so we’re up to 42 1/2 billion or so of float. And people… that means people have… are letting us use that money.

And as I said in the first quarter, did it not only cost us nothing to use the money, but, in effect, people paid us to use the money, which we would like them to continue to do.

And I don’t see our float growing much from this point. Charlie said last time that it was impossible for it to grow, but it probably would. I don’t know whether he’ll change his opinion on that, but I think… I really think our insurance businesses are in exceptionally good shape.

We have some of the best insurance businesses in the world.

GEICO’s premium volume was up a little over 16 percent in the first quarter, and in April it was up just right at 17 percent. It had a 6 percent, roughly, underwriting profit in the first quarter.

Gen Re, thanks to an incredible job by Joe Brandon and Tad Montross, has turned the corner in a big, big way, and it showed an underwriting profit in the first quarter.

Ajit Jain made so much money I don’t want to even tell you about it.

Some of our primary operations… yeah, you should give him a hand. I mean, that…

When you get Charlie to clap, you know he’s made us a lot of money.

And our primary businesses, particularly U.S. Liability and National Indemnity primary operations, and our Homestate Company, they’ve all done… they’re all doing remarkably well. And I…

You never know what’s going to happen in insurance. I mean, there could be an 8.0 earthquake in California or Tokyo, or there could be one in New Madrid, Missouri, as there was a couple hundred years ago. And it could happen tomorrow, there could be huge hurricanes this summer, whatever.

But I can’t imagine having a much better group of companies or managers than we have, and they’re all working well now.

For a while, Gen Re was a drag, but that’s not true now. And I think that we have an excellent chance of having very low cost, and perhaps even no-cost or negative cost float over the next five years or so, or really as far as the eye can see.

Now, that doesn’t mean it won’t fluctuate around. But if you average it out, I think we will have our float at a very cheap price. And it’s… you know, as Martha would say, “Having 42 1/2 billion for nothing is a good thing.”

Now, with that, I think we’ve covered… the first quarter was a good quarter. Overall, it’s the best operating earnings we’ve ever had. Now, we’ve got more capital now than we’ve ever had, but nevertheless it will be a good quarter.

And I would estimate, I think it’s fair to say, Marc, that from operating earnings we will have something like 1.7… in the range of 1.7 billion. We had some securities gains too, but I don’t count those because they can do anything from quarter to quarter. We don’t pay any attention to the timing of those.

But we… from a straight operating standpoint, 1.7 billion or so after-tax. Am I safe with that number, Marc? Or… OK. What could he say?

We don’t change numbers at Berkshire, I promise you that. There are… a lot of companies do, but fewer now than did a few years ago.

So, we’re going to get the questions in. Charlie, do you have anything to add about acquisitions or operations, or anything else you’d care to say?

Charlie Munger:

Well, I hate to be an optimist, but…

Warren Buffett:

Does he ever.

Charlie Munger:

We really added a lot of wonderful businesses to Berkshire in the last few years. It’s been some delightful business.

Warren Buffett:

That’s all you’re going to get out of him, folks.

Q&A – Morning Session

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

1. NetJets will not make a profit this year but is still a good business.
2. Warren “loves the idea of growing” but what he really wants is cost-free float.
3. How to value options.
4. Warren and Charlie talks about compensation.
5. Lack of inflation is a plus for owners.
6. Warren doesn’t require any of Berkshire’s managers to come to the annual meeting.
7. America will do pretty well over time.
8. How Warren learned Accounting.
9. On insurance companies taking on credit risk through the sale of credit derivatives.
10. Warren wants a business that is “going to have, if run well, some kind of competitive advantage… over many decades”.
11. Warren and Charlie on rising health costs in the United States.
12. How Warren and Charlie define success.
13. Buying good businesses was a better long-term investment strategy than buying “cigar-butt” companies. To learn more about what Warren likes to call “cigar-butt” companies, click here.
14. There aren’t many examples of companies which lost and then subsequently regained its competitive advantage.
15. Warren is happy having “99 and a large fraction percent” of his net worth in Berkshire and is not the least bit uncomfortable holding it until he die, and “quite a bit thereafter”.
16. A triple-A rating doesn’t affect how Berkshire’s insurance businesses writes their policies.
17. Warren talks about Gen Re’s recent decision to exercise a call option on the remaining shares of Cologne Re.
18. Berkshire would only buy back stock if the stock is selling at significantly below intrinsic value.
19. Warren’s long term vision for MidAmerican Energy.
20. Warren is willing to “pay a lot of money” to be Berkshire’s CEO.
21. Charlie: “I’ll be amazed, if I live another five or 10 years, if we don’t have some significant blow-up” involving derivatives.
22. Qualities Warren looks for in a manager.

A small clarification before the starting the afternoon Q&A session

Warren Buffett:

OK. We have no afternoon movie, so we’ll get to business in a second. And if everybody will just find their seats, please.

I’ve been advised by Marc Hamburg to make sure I make clear what I may not have made clear earlier.

In terms of the figures we gave you about the first quarter: A, I think I said we had 16 billion of cash or cash equivalents, which is correct. We had a $290 million pretax underwriting profit. I think I said that.

What possibly I may have misstated, we had a billion-seven-hundred million, pretax operational gain. We had actually also, by coincidence, very close to a billion-seven of after-tax, counting securities gains. But our operating gain, excluding security gains, was about a billion-seven, pretax.

Q&A – Afternoon Session

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

1. How Warren gets his investment ideas.
2. Warren and Charlie wants shareholders to understand Berkshire.
3. How Berkshire is positioned in an environment with low interest rates.
4. The intrinsic value of a business is “terribly important and very fuzzy”.
5. Charlie: “I would bet a lot of money that they (Fannie Mae and Freddie Mac) weigh the possibility that counterparties won’t pay a lot lower than we do”.
6. Berkshire doesn’t have a huge foreign currency exposure.
7. Berkshire has more acquisition opportunities now than 20 or 30 years ago.
8. Warren: “I, frankly, don’t have the faintest idea how to evaluate telecommunications companies down the road”.
9. Warren doesn’t know “how in the world anybody would successfully dethrone Coca-Cola”.
10. On Berkshire’s investment in Level 3 communications convertible bonds.
11. Warren explains why Berkshire invested in a hedge fund that employs 30 to 35 times leverage.
12. Clayton Homes had “much sounder policies” than other manufactured housing company.
13. Conservative accounting protects Berkshire’s business decision-making as well as financial integrity.
14. Warren and Charlie talks inaccurate and misleading accounting practices.
15. Warren’s criteria for investing in banks.
16. The whole concept of cost of capital is “a little crazy”.
17. What Warren thinks about China.
18. The very fortunate owe a duty to the general civilization.
19. The ideal business is one that earns very high returns on capital and could keep using lots of capital at those high returns.
20. Warren doesn’t make requests to his friends for anything.
21. Warren thinks its not a good idea for him to express his opinions on everything.
22. Forcing a certain part of Social Security into common stocks is not a good idea.
23. Berkshire’s compensation policy.
24. Warren is not bothered that he has a lot of personal securities sitting with a very large stock exchange firm.
25. Charlie thinks the creation of a state fund to invest in equities on behalf of the people is “a pretty dumb idea”.
26. The fact that intrinsic values are fuzzy to calculate doesn’t mean that it’s not the proper way to think about it.
27. Warren and Charlie shares their thoughts about the increasing tort spending in the United States. To learn more about tort, click here.
28. Trying to buy a business out of bankruptcy is “a very awkward way to buy a business”.
29. Warren and Charlie doesn’t like taking small positions when investing in marketable securities.
30. When evaluating a company, Warren and Charlie looks at it as if they will hold it forever.
31. The big benefits of exempting taxes from dividends would go to the rich and not the poor.
32. Warren and Charlie doesn’t like to buy equities where the real expectancy is below 10 percent.

End of Q&A and Pepsi’s $1B contest

Warren Buffett:

We are writing… and then we’re going to close this up… but you will read a lot, or you may hear a lot, maybe you’ve heard it already, Pepsi-Cola’s having a contest. They’re going to have a drawing in September.

The contest goes through a lot of little phases, but in the end, there’s going to be one person who’s going to have one chance in a thousand of winning a billion dollars. That billion dollars will have a present value of maybe 250 million.

If whoever gets to that position hits the number, we will pay it. And we don’t mind paying out $250 million as long as we get paid appropriately for us. And that would create bad cash flow that particular week. We’re willing to… maybe even for two weeks.

We’re willing to assume that for a payment, and very, very few people in the world are. Even those that can afford it. We would even assume it for 2 1/2 billion, present value.

We’d want more proportionally to assume it for that, but Charlie and I, I think, would agree that we would take that on if we got paid well enough for it.

We wouldn’t do it for 25 billion, but we will do things, and therefore, you know, we get the calls on that sort of thing. And that is more profitable business, over time, than bread and butter business.

It also can, you know… it can lead you having an intense interest in watching the television show when the drawing takes place… making sure who draws the number, too.

Charlie, you have anything to add? Then we’ll…

Charlie Munger:

Yeah, once you’re talking about opportunity cost that’s personal to yourself and your own situation and your own abilities, you’ve departed from modern finance, totally. And that’s what we’ve done.

We’re intelligently making these guesses, as best we can, based on our own circumstances and our own abilities. I think it’s crazy to do it based on somebody else’s circumstances and somebody else’s abilities.

Click here to see the full transcripts of all Berkshire Hathaway Annual Meetings on record.

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