Berkshire Hathaway 2005 Annual Meeting Transcript
Transcript of the 2005 Berkshire Hathaway Annual Meeting held on April 30, 2005 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)
Morning. I’m Warren, he’s Charlie. We work together. We really don’t have any choice because he can hear and I can see.
I want to first thank a few people. That cartoon was done by Andy Heyward who’s done them now for a number of years. Andy writes them. He goes around the country and gets voices dubbed in. It’s a labor of love. We don’t pay him a dime. He comes up with the ideas every year. He’s just a terrific guy.
He’s unable to be here today because his daughter is having a Bat Mitzvah. But he’s a very, very creative fellow.
He did something a few years ago called “Liberty’s Kids.” And if you have a child or a grandchild that wants to learn American history around the time of the Revolution, it’s a magnificent series.
I think it’s maybe as many as 40 or so half-hour segments and it’s appeared on public broadcasting. It will be appearing again.
You can get it and video form.
And, like I say, it’s just a wonderful way to — I’ve watched a number of segments myself. It’s a wonderful way to get American history.
The only flaw in it is that the part of Ben Franklin is handled by Walter Cronkite, and Charlie is thinking of suing. A little bit upsetting when Charlie is available.
Incidentally, we have “Poor Charlie’s Almanack” next door in the exhibition hall. And it’s an absolutely terrific book that Peter Kaufman has put together. And I think it’s going to be a seller, a huge seller, long after most books have been forgotten.
It’s Charlie at his best. And Charlie’s at his best most of the time, but it’s a real gem.
I want to thank Kelly Muchemore, who puts all of this together. I don’t give it a thought. Kelly takes charge of this. She works with over 200 people from our various companies that come in and help make this a success. She does it flawlessly.
As I mentioned in the annual report, Kelly’s getting married in October. So this is just a warmup. I mean, we’re expecting a much bigger event than this come October.
Warren thanks his daughter Suze
I want to thank my daughter Suze, who does millions of things for me. She puts together that movie.
She does draw the line, occasionally.
A few years ago… we have a dinner at Gorat’s the day after the meeting. And we were in having — the whole family was there — having dinner. The place was packed and there was a big line that had formed outside.
Be sure not to go to Gorat’s unless you have a reservation tomorrow, because they’re sold out.
But the big line had formed and it started raining cats and dogs. And the waitress came to me. We were eating. Waitress said, “I got to tell you,” she said. “It’s raining like crazy outside and there’s a long line and Michael Eisner is standing out there getting soaked.”
So I turn to Suze… and Michael and Jane are friends of my mine, good friends — and I said to Suze, “Why don’t you go out there and help them out before they get drenched.”
And she looked at me and said, “I waited in line at Disneyland.”
That seems to strike a responsive chord.
Q&A with shareholders will now be conducted first before the formal business meeting
We’ve flipped things this year. We’re going to have the business session at about 3:15.
The plan is to have questions and answers. We have 12 microphones here.
We have an overflow room that’s filled also, so we got another few thousand people there.
We’ll break at noon and when we break at noon — and anybody that’s been in the overflow room that wants to come in here, they’ll be, I’m sure, plenty of seats in the afternoon session.
We will start the questioning as soon as I get through with a few preliminary remarks. We’ll go to noon. We’ll take a break, you’ll have lunch.
Many people find that it helps the digestion to shop while you eat. And we have thoughtfully arranged a few things next door that you can participate in while you eat your lunch. Even if it doesn’t help your digestion, it will help my digestion if you shop during that period.
What Warren can’t talk about during the Q&A period
During the question period, we can talk about anything that’s on your mind. Just, there’s 2 1/2 subjects that we can’t talk about.
We can’t talk about last year’s Nebraska football season. We’ll correct that next year. But that’s off limits.
We can’t talk about what we’re buying and selling. I wish we were doing more of it, but we’re doing a little, and I’ll make reference to something on that a little later.
And finally, in connection with the investigation into the insurance industry practices that’s taking place, there are broad aspects of it we can talk about.
I can’t talk about anything that I or other people associated with Berkshire have disclosed to the investigators.
And there’s a very simple reason for that: to protect the integrity of any investigation like this, they do not, the investigators, do not want one witness talking with other witnesses, because people could tailor their stories or do various things.
And so, witnesses are not supposed to talk to each other and, of course, if you talk — we don’t do that.
And then beyond that, if we were to talk in a public forum, that could be a way of signaling people as to what you’ve said and then they could adapt accordingly.
So investigators, one thing they like to do, is they like to work fast if they can because they don’t want people collaborating on stories .
And they… and to protect the integrity of the investigation, we won’t get into anything that’s specific to something that I or people associated with Berkshire may have told the authorities.
But there may be some broader questions that that we can talk about.
Preliminary view of Berkshire’s first quarter with “certain caveats attached”
I can give you a little preliminary view of the first quarter with certain caveats attached. These figures… our 10-K… or 10-Q… will be filed in the end of next week.
And I caution you that, particularly in insurance underwriting, it’s been a better quarter than… considerably better quarter… than I would normally anticipate.
One of the reasons for that is that our business actually does have some… the insurance business has some… seasonal aspect.
Now, it doesn’t have a seasonal aspect, particularly, at GEICO or at National Indemnity primary business.
But when you get into writing catastrophe business, and we’re a big writer of catastrophe business, the third quarter… the biggest risk we write in big cat area is hurricanes. And those are concentrated… they’re actually concentrated in the month of September.
In this part of the world, 50 percent of the hurricanes, roughly, occur in September and about maybe 17 and-a-half percent in October and August, and the balance, maybe, in November and July.
But there’s a concentration in the third quarter. So when we write an earthquake… I mean when we write a hurricane policy, for example… we may be required to bring the earnings in monthly on the premiums. But all of the risk really occurs… or a very great percentage of it… late in the third quarter, and we don’t have any risk in the first quarter of hurricanes.
So we earn some premium during that quarter that really has no loss exposure. And then we get that in spades come September.
Even allowing for that we had an unusually good quarter. And I would still stick by the prediction I made in the annual report where I said that if we don’t have any really mega catastrophes, I think we’ve got a decent chance of our float costing us zero or less this year, which means, in effect, we have 45 billion or so of free money.
In the first quarter, our insurance underwriting income… and all of these figures are pretax… our insurance underwriting income came to almost $500 million, which was about 200 million better than a year ago.
And GEICO had a very good quarter for growth. We added 245,000 policyholders, which is almost 4 percent, in one quarter to our base.
We were helped very much by this huge reception we’re getting in New Jersey, because we weren’t in there a year ago, so we’re getting very good-sized gains there.
We’re not getting 4 percent in a quarter from around the country, but the boost from New Jersey took us up to that.
And GEICO actually wrote at a 13 percent underwriting profit in the first quarter, which is considerably better than we expect over the full year. And we’ve reduced rates some places. And it’s been an extraordinary period for auto insurers, generally.
But all of our companies in the insurance business did well in the first quarter.
Our investment income was up something over 100 million pretax.
Our finance business income was up, maybe, $50 million pretax. MidAmerican was about the same.
And all of our other businesses, combined, were up about… close to $50 million pretax, led by Johns Manville, had the biggest increase. That businesses is very strong, currently.
So if you take all of our businesses before investment gains, which I want to explain, if you take them all before investment gains, our pretax earnings were up 400 million or a little more.
Now, investment gains or losses: we don’t give a thought as to the timing of those. We take all investment actions based on what we think makes the most economic sense, and whether it results in a gain or a loss for quarter is just totally meaningless to us.
A further complicating factor, slightly complicating factor, is that certain unrealized investment gains or losses go through the income statement, whereas others don’t. That’s just the way the accounting rules are.
Our foreign exchange contracts are valued at market, really, every day, but you see it at quarter end.
And those foreign exchange contracts, which total about 21 billion now, a little more than 21 billion, had a mark-to-market loss of a little over 300 million in the first quarter.
And they bob up and down. I mean, sometimes they bob as much as 200 million or more in a single day.
And those mark-to-market quotations run through our profit and loss statement. Whereas if we own some Coca-Cola stock and it goes up or down, that does not run through our income statement. But with foreign exchange contracts, it does.
So there’s a $310 million mark- to-market… it shows as realized, it actually isn’t… investment loss on that.
And overall, the investment losses, including that 310, came to about 120. In other words, there was 190 million, or something like that, in other gains.
As I say, that means… at least to us… that means nothing.
And to underscore that point, if later in the year the Procter and Gamble-Gillette merger takes place, we are required under accounting rules, when we exchange our Gillette for Procter and Gamble stock, we are required under accounting rules to show that as a realized gain. Now that will show up as, probably, four-and-a-fraction billion dollars.
We haven’t realized any gain at that time, in my view. I mean, we’ve just swapped our Gillette stock for Procter and Gamble stock, which we expect to hold for a very long time.
So it’s no different, in our view, than if we’d kept our Gillette stock. But the accounting rules will require that.
So if in the third quarter of this year the P&G-Gillette merger goes through, you will see this very large supposed capital gain recorded in our figures at that time.
And I want to assure you that it’s meaningless and you should ignore that as having any significance, in terms of Berkshire’s performance.
So, first quarter has gone by. We’ve got a good start on operating earnings this year. We won’t earn at the rate of the first quarter throughout the year, in my view. I think it would be very unlikely, in terms of operating earnings. But the businesses are performing, generally, very well.
Berkshire will soon announce an acquisition in the insurance field
One other thing I should mention, and then we’ll get on to the questions, that we can’t announce the name, because it isn’t quite complete in terms of the other party, but we will probably announce, very soon, an acquisition that is a little less… somewhat less… than a billion dollars, so it’s a huge deal, in reference to Berkshire’s size
But it is in the insurance field. I mean, we love the insurance business. It’s been very good to us. We have some terrific managers in that field.
You’ll see it in the first quarter figures, but you’ll also see how we feel about the business by the fact that this acquisition, which I would say is almost certain to go through, will probably get announced in the next few weeks.
We’re looking for bigger acquisitions. We would love to buy something that cost us 5 or $10 billion. Our check would clear, I assure you.
I think we ended the quarter with about 44 billion of cash, not counting the cash in the finance operations. So, at the moment, we’ve got more money than brains and hope to do something about that.
Now we’re going to go around the hall here. We’ve got 12 microphones and… get oriented here… and we’ll turn the spotlight on the microphone that is live.
People can line up to get their questions asked. I think we’ve got two microphones, also, in the overflow room.
And like I say, after lunch everybody should come in here because there’s enough people that get so enthralled with shopping that they don’t return. They’d rather shop than listen to me and Charlie, and we’ll have plenty of seats for everybody in this main hall after lunch.
And so, with that, let’s go to… have I forgotten anything, Charlie?
That may be the last you hear from him. You never can tell.
Q&A – Morning Session
(Click on a link below to skip to a particular topic)
- Warren’s criteria in selecting managers.
- Why Warren invested in Anheuser-Busch.
- Are Berkshire’s returns going down because of competition from hedge funds?
- How Warren got interested in investing.
- Warren talks about Berkshire’s PetroChina investment.
- Higher commodity prices will lower the profit margin of some of Berkshire’s subsidiaries.
- Tax rate is not a factor in Berkshire’s dividend policy.
- Warren and Charlie shares their views on the current account deficit of the United States.
- Charlie: “You have some extreme housing-price bubbles going on”.
- How risks are managed in Berkshire’s insurance subsidiaries like Gen Re and National Indemnity.
- Warren and Charlie share their thoughts on public education reform.
- Bill Gates is more popular than Churchill, Jesus and Napoleon according to a survey.
- Easy financing is facilitating a boom in real estate prices.
- Charlie: “Gold is a dumb investment”.
- It is very important to have the right incentives.
- It is very hard to identify future great managers before they have a track record.
- Berkshire’s plan for the minority shareholders of Cologne Re.
- Warren is reluctant to comment on AIG and Converium.
- On Fannie Mae, Freddie Mac and other Government Sponsored Enterprise (GSE). To learn more about GSEs, click here.
- Why Berkshire doesn’t invest much in Europe.
- On who gets to shoulder liabilities and obligations in a financial transaction.
- The best investment you can have is in your own abilities.
End of Morning Q&A Session
We’re going to take a break now, so you can all go out there and enjoy yourself in the adjoining room, and have lunch, and we’ll be back here at 12:45.
And those in the other room might come back to this area because I think we’ll have enough seats for everybody after lunch.
Meeting agenda for the rest of the day
OK, we’re going to start in just a minute or two, if you have a chance to sit down.
OK, let’s go to station 9. And I’ve… I’ll… we will go till 3 o’clock. We’ll break until 3:15, when we’ll convene the business meeting. No one has submitted any proposals for that meeting, so it may be relatively short.
At 4 o’clock, Charlie and I will meet in another room here… I’m not sure where… with any of those of you from outside North America that are here. We would like to especially thank you for coming this long distance.
Q&A – Afternoon Session
(Click on a link below to skip to a particular topic)
- The best business to have during periods of high inflation.
- Warren and Charlie never paid much attention to macro economic indicators.
- Ford and General Motors has a legacy cost structure that make it very difficult for them to be competitive today.
- The root cause of the asbestos problem.
- Warren’s advice to his successor.
- Warren’s best investments.
- It would be better if the New York Stock Exchange (NYSE) remained as a neutral, not-for-big-profit institution.
- Warren and Charlie thinks the United State’s Social Security System is a good system.
- Financial companies are difficult to analyze than many other companies.
- Why Warren didn’t liquidate his stock holdings like he did when he closed his partnerships in 1968-69 despite saying that in the coming decade the markets would, at best, go nowhere.
- Warren doesn’t see gold as a good “store of value”.
- What Warren think of the then current stock market valuations.
- Why Berkshire is not investing in commercial real estate or any kind of real estate.
- Is the United States economy a “castle with a moat” in the global economy?
- Warren thinks the then United States economy is running the risk of having chaotic markets if “certain events converged”.
- What Warren looks for in Berkshire’s directors.
- How Warren and Charlie assess the success or otherwise of Berkshire’s companies.
- The book that contains Charlie’s collected wisdom.
- There are things in life that you don’t have to make a decision on.
- How to overcome behavioral and emotional traps in investing.
- There won’t be some automatic and rational correlation between inflation and interest rates.
- “Finite” reinsurance and its importance to Berkshire.
- Warren has made plenty of mistakes but doesn’t agonize over any of them for a long period of time.
- Warren thinks the real estate brokerage business is going to be “a very, very big business”.
- Potential problems in accounting for insurance assets and liabilities and derivatives.
End of Q&A
It’s 3 o’clock now. If you haven’t had enough, Charlie Rose has a show on, on Channel 12 tonight at 8 o’clock where there’s another hour and a half of interviews he did with me and with Bill Gates and various people.
Click here to see the full transcripts of all Berkshire Hathaway Annual Meetings on record.
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