Berkshire Hathaway 2011 Annual Meeting Transcript

Transcript of the 2011 Berkshire Hathaway Annual Meeting held on April 30, 2011 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)

Introduction and meeting agenda

Warren Buffett:

Good morning. I’m Warren. He’s Charlie.

I can see, he can hear. That’s why we work together.

Have trouble remembering each other’s names from time to time.

We’re going to… we’re going to introduce the directors, we’re going to give you some information on the first quarter earnings.

We’re going to talk briefly about the David Sokol/Lubrizol situation, and then we’re going to open it up for your questions.

Anything as it relates to the Lubrizol matter is going to be transcribed and will be put up on the website… the Berkshire Hathaway website… just as promptly as we can, maybe this evening or this afternoon, maybe tomorrow morning, but very promptly, because we want to be sure that all shareholders hear… or get to read every word of what has been said here about the matter.

Warren introduces Berkshire’s board of directors

Warren Buffett:

First thing I’d like to do is introduce the directors. And if they’d stand and remain standing, you can withhold your applause as they stand, but you can go crazy at the end, or you can continue to withhold your applause. That will be your call.

Charlie and I are up here, and we don’t like to stand up too often so we’ll skip our standing.

The… Howard Buffett, Stephen Burke, Susan Decker, Bill Gates, Sandy Gottesman, Charlotte Guyman, Don Keough, Tom Murphy, Ron Olson, and Walter Scott.

Berkshire’s first quarter earnings

Warren Buffett:

Now, we have a few slides that deal with the first quarter earnings.

I think Marc Hamburg would like me to emphasize that these are preliminary. This is about as early as we ever have a meeting, in relation to the quarter.

Normally it’s always the first Saturday in May, so they had to work a little harder than usual to get these numbers together.

And I will tell you as background that basically pretty much all of our businesses, with the exception of those that are related to residential housing, are getting better, and you can almost see it with most of them quarter by quarter.

We have a wide diversity of businesses. We have more than 70 companies we list, but then Marmon itself has over a hundred businesses. So we are a cross section of not only the American economy, but to some extent we see a fair amount about what’s going on internationally, too.

And in the first quarter, as has been the case, really, since the fall of 2009, both our nonresidential construction businesses, except for those nonresidential construction businesses, our other businesses have generally gotten better quarter by quarter, and there was no exception to that in the first quarter.

What was very different in the first quarter was that we had a… probably the second worst quarter for the insurance industry, in terms of catastrophes around the globe.

Normally, the third quarter of the year is the worst period because that’s when hurricanes tend to hit the U.S. with most of them… well, about 50 percent of them occurring in September and then sort of forming a normal curve on either side of September… so the third quarter usually is the record quarter, and the third quarter was the record quarter back at the time of Katrina.

But in the first quarter of this year, we had some major catastrophes in the Pacific Asian areas, and that hit the reinsurance industry particularly hard.

No one knows at this point. I mean it’s a wild guess, but probably those catastrophes cost the reinsurance industry on the order of $50 billion, and we usually participate to the extent of 3 to 5 percent.

First of all, I’ll give you our overall earnings the way we normally present them. And if we’ll put the first slide up.

You can see that our insurance underwriting suffered an after-tax loss of $821 million.

Now, when I wrote the annual report, I postulated normal earning power of Berkshire at about 17 billion pretax and about 12 billion after tax, assuming breakeven on insurance underwriting.

Our insurance underwriting has done better than breakeven. In fact, it’s made quite a bit of money for eight consecutive years.

But I would say with a start of these catastrophes in the first quarter… or the catastrophes experience we had in the first quarter…

I would say that it’s unlikely that we would have an underwriting profit for 2011.

If it was remarkably catastrophe-free from this point forward, including hurricanes in the United States, it’s conceivable we would break even or make a tiny profit.

But that’s an improbable assumption, so I think for the first time in nine years we will likely have an insurance underwriting loss this year.

I think our record may very well be quite a bit better than, certainly, most other reinsurers and it does not change my expectation that over time, our insurance underwriting should at least break even. And if you have followed the… what I’ve written in the annual reports… if insurance breaks even, we get the free use of float, and that’s been enormously valuable in the past and I would expect it to be in the future.

And if you look at the other lines, insurance investment income is down a little. That will go down more because our Goldman Sachs preferred was called in April.

Our General Electric preferred is almost certain to be called in October. So we have lost… and we lost a… we had called a note from Swiss Re that was paying us 12 percent and came to something over $360 million a year when the Swiss franc went above par.

So we have lost, or are losing, at least three very high-yield investments, which we cannot replace with similar investments at present. So that line will go down.

On the other hand, at the end of the quarter we had 38 billion in cash, and that does not count the 5 1/2 billion that we were going to receive in April from our Goldman Sachs preferred. So that money is earning virtually nothing now, and I would not expect that to be part of the long- term picture, either.

So there would… you know, just a few percent on that would be many, many hundreds of millions of dollars.

So I think over time, our insurance investment income, even though it will dip throughout this year, I would expect that if we have a similar level of investments, to actually grow from the level we show here.

We had the full ownership of BNSF in the quarter this year. We only had it, I think, from February 12th last year, so that, in a significant way, accounts for the gain in that next line of railroad, utilities and energy.

But the BNSF also had a significant gain in earnings and the railroad business looks to me like it will have a very good year this year, not just our railroad but all railroads, and the competitive advantage of railroads is becoming more and more evident, almost by the day, particularly as fuel prices increase.

And in the remaining lines, we also had gains in most of our businesses.

So overall, we got hit very hard in the insurance business.

And if we’ll move to slide 2, we list the three major catastrophes that occurred, which in aggregate we estimate we have a total loss of a billion, 673 pretax, and that figure, as with all estimates… early estimates about major catastrophes… is subject to a lot of change. Nobody knows what the insured losses will be from the Japanese earthquake.

But this is our best estimate now. You’ll notice that over 40 percent of the underwriting loss comes from a contract we have with Swiss Re where we get 20 percent of their business.

That contract is in the fourth of its five years. They have indicated that they will not be interested in renewing it. I just wish they told us that a few months ago.

But we’ve enjoyed the relationship with Swiss Re, it’s just that we enjoy it some quarters more than others.

Our estimate… we’ve added a little something into their estimate because on balance we feel that most catastrophe losses develop upward. It’s sort of the nature of the business.

But that… incidentally, the tornadoes in April, just at GEICO, we expect… and all we’re talking about is automobiles here, cars, because we don’t insure homeowners. We act as agent in placing insurance for people, but we do not take the insurance risk.

We estimate that 25,000 cars will get automobile claims. That’s a lot of automobiles when you think about it, and our market share is about 9 percent, although it varies by state.

But it’s been an extraordinary tornado season, as you know. That does not hit… I do not believe that that hits the reinsurance business particularly hard, because there are multiple, multiple events but no one event is anything like, say, the New Zealand earthquake.

The New Zealand earthquake estimated at $12 billion of insured damage. Charlie, how many people are in New Zealand?

Charlie Munger:

Well…

Warren Buffett:

We don’t practice these things, as will become evident here.

Charlie Munger:

I’d guess…

Warren Buffett:

What, about four million? Three million?

Charlie Munger:

I’d guess a little more than that.

Warren Buffett:

Four?

Charlie Munger:

Five, maybe.

Warren Buffett:

Five, OK. Five million people. So that’s 1/60th of the population, we’ll say, of the

United States. And if you take 12 billion and multiply it by 60, you come up with 720 billion, which is 10 times Katrina, in terms of the impact on a place like that.

So those… there’s been some really extraordinary earthquakes. And as I say, the worst part of the season is, generally speaking, for reinsurers, is yet to come. So this may be a year that the reinsurers will remember, although they might prefer to forget it.

There’s some good news on the insurance front. On the next slide I show the growth in policies at GEICO month by month this year versus last year.

Now, if you’ll remember, in the annual report I gave an explanation, in talking about goodwill value, about how the goodwill of GEICO is carried on our books at about a billion dollars. And no matter how successful the business becomes, that goodwill value is never increased on the books, but it does grow.

And as I put in the annual report, I estimate its value currently, using the same sort of yardstick we used when we purchased the second half of the company back in 1995, I estimate that value has grown, maybe, to 14 billion.

I mean, every policyholder at GEICO, on average, has a value to us, the way I calculate it, of something on the order of $1,500.

And when we add 318,000… and as of yesterday it was up to 381,000… when we add that, we’ve added something approaching $500 million to the goodwill value.

That does not count the earnings from underwriting, which were substantial for GEICO. That does not count the investment income from the float, it does not count the investment income from the net worth we have attributed to it. That is added goodwill value, the same sort of goodwill value that a Coca-Cola has, or a Mars has, or any company like that.

And people think of it differently when they think of most consumer products. But a policyholder to Berkshire at GEICO has very, very significant value.

There’s a very significant percentage have been there for 10 years or more. And it’s something that we do not realize on our balance sheet or income account, but it’s an asset that’s every bit as real as the numbers that we do put on the balance sheet.

So there’s good news at GEICO. We are gaining market share every day.

As a matter of fact, if you think about it, we have some people in the adjacent room that will be glad to sell you GEICO policies, and if only 66 of you sign up, that’s a goodwill value of about $100,000, so it will take care of some of the expenses of this meeting.

Not that I care whether you do it or not but…

Now, there’s one more item I want to go through on the earnings picture, just because it illustrates to some extent the capriciousness of accounting and how we value our securities… or whether we take write-downs on them, I should say.

There’s something called “other than temporary impairment,” which is an accounting rule. It’s kind of a fuzzy accounting rule, but it says that if you own a security for a while, and you paid X for it, and it’s been selling at, say, 80 percent of X for quite a while, nobody knows exactly what quite a while means, and I’m sure they phrase it differently in the accounting textbooks, but anyway, if it sells there for quite a while, you’re supposed to mark it down to that new valuation and have that markdown go through your income account, through your profit and loss account.

Now we mark it down in any event for the balance sheet, and the balance sheet is what gives you the number for book value and is our reference point.

But only when it meets this other than temporary thing does the mark down actually get run through the profit and loss account.

Now, on March 31, as is shown, I believe, on the next slide, we owned some Wells Fargo stock, which had a cost of about 8 billion and the market value was 11.3 billion.

But some of the Wells Fargo stock we bought had been bought at higher prices than the March 31 figure, whereas, as you can see, a lot of the stock, which had a gain in it of 3.7 billion, had been bought at lower prices.

Well, under the rules, we were required to mark down the stock we bought at a higher price by 337 million, whereas we ignored, in the income account, the 3.7 billion of gain.

Now, interestingly enough, there’s two ways you can account for securities, as I understand it, both fully meeting GAAP accounting requirements. And if we had… if we had used the average cost method, we would not have had to mark down.

But we use what they call the specific identification method. Now the specific identification method is actually useful to us from a tax standpoint, because it means whenever we sell a security we can pick out the highest priced security and attribute the sale to that.

So it actually saves us money, or the time use of money, to get into specific identification.

But we could just as easily use the average cost method and then we would not have a write- down like we have and that’s why I… one of the reasons I emphasize that… the fact that you should ignore gains or losses in securities or derivatives on a quarterly basis, or even an annual basis.

The important thing is what the operating earnings of our businesses are doing and what the gain in book value, generally, has been.

And then on top of that, you have to make your own estimate for what intrinsic value is, which would include things like the goodwill value that has been developed at GEICO.

I apologize for taking you through the accounting lessons, but the headlines often just say what the final net income is, as if that’s the all-important figure. And sometimes it’s the all-deceptive figure.

I mean, it really bears… if you include gains and losses… it bears, really, no connection to the reality of whether a quarter has been satisfactory from our standpoint.

But it does get a lot of attention in the press and that’s why we spend, perhaps, an inordinate amount of time trying to explain what really takes place in our financials.

Now, I think we’re going to get to the questions and answers here in just a second. We’ll alternate between the press group on my right and 13 stations that… microphones that have been placed. I think a dozen of them in this room and maybe one in one of the overflow rooms.

Warren talks about the incident involving David Sokol and Lubrizol

Warren Buffett:

I’d like to just comment for a few minutes… and this will be transcribed and up on the internet at our web page… I’d like to comment for just a few minutes, and I’d like to ask Charlie then to give his thoughts, on the matter of David Sokol and the purchase of Lubrizol stock.

You saw in the movie a clip from the Salomon situation, and that occurred almost 20 years ago. It will be 20 years ago this August.

And at the time, it was a Sunday, Charlie was there, and I was elected the chairman at… what, about 3:00 in the afternoon or so I think on a Sunday at Salomon, and I went down to address a press group.

And almost the first… somewhere in the early questions, somebody sort of asked me, you know, what happened?

Well, A) I’d just gotten to Salomon fairly recently, so I didn’t know too much about it, but the phrase that came out of my mind then… out of my mouth then… sometimes my mind and my
mouth are coordinated… the phrase that came out of my mouth then was that what happened was inexplicable and inexcusable.

Now, it’s 20 years later, and looking back on Salomon, I still find what happened inexplicable and inexcusable. You know, I will never understand exactly why some of the events that transpired did transpire.

And to some extent, in looking at what happened a few months ago with Dave Sokol’s failure to notify me at all that he’d had any kind of contact with Citigroup. In fact, he directed my attention to the fact that they represented Lubrizol and never said a word about any contact with them.

And then the purchases of stock immediately prior to recommending Lubrizol to Berkshire, I think I… for reasons that are laid out in the audit committee report, which I urge you to read and which is on our website… I don’t think there’s any question about the inexcusable part that Dave violated, and that the code of ethics, he violated our insider trading rules, and he violated the principles

I laid out… I lay out… every two years in a direct personal letter to all of our managers and which I’ve been doing for a long time.

So I… you can read the audit committee report about that.

The inexplicable part is somewhat… well, it’s inexplicable, but I’d like to talk about it a little bit because I will tell you what goes through my mind in respect to it.

Certainly… well, one interesting point is that Dave, to my knowledge, at least, made no attempt to disguise the fact that he was buying the stock. I mean, you know, you read about insider trading cases and people set up trusts in Luxembourg, or they use neighbors who know neighbors, or they use third cousins… I mean, they have various ways of trying to buy the stock so that when it’s later… FINRA (Financial Industry Regulatory Authority) is a supervising organization… looks at the trading activity in the months prior to a deal, they do not see names that jump out at them as being associated with the deal.

To my knowledge, Dave did nothing like that, so he was leaving a total record as to his purchases.

Now, I think at least usually… and maybe always… we are queried after any deal. We are asked who knew about it when, and we supply a list of whether it’s people at the law firm or people that are in a secretarial position at our place or the law firm.

We give them a list of everybody that might have known or did know about the deal prior to the public announcement. And I don’t know whether they do that 100 percent of the time, but certainly it’s my experience that you get that.

And then a while later, you get a list of names of people that FINRA, again, has picked up as trading it, and they ask you whether any of those names ring a bell with you. So they’re trying to put together whether anybody did any inside trading ahead of time.

So the odds that if you’re trading in your own name, and you’re on that list of people who know of a deal ahead of time, the odds that it’s not going to get picked up seem to me are very much against you.

But, to my knowledge, Dave did not disguise the trading. Which, you know, that’s somewhat inexplicable that if he really felt he was engaging in insider trading and knew the penalties that could be attached to it, that he essentially did it right out in the open.

The second fact, which is less… perhaps less… puzzling, but Dave obviously has a net worth in very high numbers. He made, I think, close to $24 million. He earned it from Berkshire last year, and we got our money’s worth, but he did get $24 million, too.

So I would say that there are plenty of activities in this world that are unsavory that are committed by people with lots of money.

So I don’t regard that as, you know, totally puzzling. But I will give you one instance that does make it puzzling. It makes it very puzzling to me.

We bought MidAmerican at the end… Berkshire Hathaway bought MidAmerican… at the end of 1999. Berkshire Hathaway bought about 80 percent.

Walter Scott, who I just introduced, and his family was the second largest holder, I think something over 10 percent, and then two operating people, Dave Sokol the senior one, owned or had options on a big piece, and Greg Abel, a terrific partner of Dave’s, also had a piece.

And Walter Scott… and I’ve told this story privately a few times but not… I don’t think I’ve done it publicly.

Walter Scott came to me a year or two after we’d bought it, and Walter said, I think we ought to have some special compensation arrangement for Dave and Greg if they perform in a really outstanding manner. And he said… I think maybe he suggested something involving equity and he saw me turn white.

So he said, “Why don’t you design one and let me know.” So I just scribbled something out on a yellow pad. It didn’t take me five minutes.

And we call it, sort of in honor of Charlie, although he didn’t know about it, we called it the Lollapalooza.

And it provided for a very large cash payout, which I’ll get to in a second, based on the five-year compounded gain in earnings.

And we were starting from a high base, in other words this was not from any depressed level, and we set a figure that no other utility company in the United States was going to come close to.

But if that figure were achieved, we were going to give $50 million to Dave and $25 million to Greg Abel.

And I had Dave come to the office and I said, “Here’s what Walter and I are thinking,” and, “What do you think of this plan?”

And it had these figures on per share that… that like I say, move forward at 16 percent compounded per year, and then I say, “Here’s the payout.”

And he looked at it for just a very short period of time and he said… he said, “Warren, this is more than generous.” But he said, “There’s just one change you should make.”

And I said, “What’s that?” And he said, “You should split it equally between me and Greg, instead of being 50 million for me and 25 for Greg. It should be 37 1/2 apiece.”

So I witnessed… and Walter witnessed, you can talk to him about it… we witnessed Dave voluntarily, without any… Greg had nothing to do with it, he wasn’t there… we saw Dave transfer over 12 1/2 million dollars… getting no fanfare, no credit whatsoever… to his, in effect, junior partner.

And I thought that was rather extraordinary, and what really makes it extraordinary is that $3 million, you know, 10 or so years later, would have led to the kind of troubles that it’s led to.

I find… that is really the fact that I find inexplicable, and I think I’ll probably… you know, it’s 20 years after Salomon… 20 years from now Charlie will be 107… and we won’t mention what I’ll be… but I think 20 years from now, I will not understand what causes a man to voluntarily turn away 12 1/2 million dollars to an associate without getting any credit for it in the world, and then 10 or so years later, buy a significant amount of stock the week before he talked to me.

And when he talked to me about Lubrizol, it was either the 14th or 15th… he says it was 14th, I have no reason to disagree with that. The only reason I couldn’t say specifically was I had eight university groups, 160 students, in on that Friday. That’s the only thing that shows, and I spent most of the day with them.

And the 10K and the 10Q that got printed out on Saturday have that date on them, the 15th, when I looked at Lubrizol for the first time.

You might be interested in knowing, I’ve been looking up 10Ks and 10Qs for 20 or 30 years, but I don’t know how to print them out. So, fortunately, Tracy Britt was in the office, and I said, “Tracy, would you print this damn thing out? I don’t know how to do it yet.”

But that is why I don’t know whether it was the 14th or the 15th. The 10Q says the 15th.

But, at that time, when Dave called me on it, he said nothing about contact with Citigroup or anything of the sort and he… and I said, “I don’t know anything, really, about the company.” He said, “Well, take a look at it. It… you know, it might fit Berkshire.”

And I said, “How come?” And he said, well… he said, “I’ve owned it and it’s a good company. It’s a Berkshire-type company.”

And, you know, I obviously made a big mistake by not saying, “Well, when did you buy it?”

But I think if somebody says I’ve owned the stock, you know it sounds to me like they didn’t buy it the previous week.

So there we are with a situation, which is sad for Berkshire, sad for Dave, still inexplicable in my mind, and we will undoubtedly get more questions on that. We’ll be glad to answer them.

Charlie, do you have any thoughts on this?

Charlie Munger:

Well, I think it’s generally a mistake to assume that rationality is going to be perfect, even in very able people.

We prove that pretty well, regularly.

Warren Buffett:

Do you have any explanation for the irrational?

Charlie Munger:

Yeah. I think hubris contributes to it.

Warren Buffett:

Well, we’ve gotten quite a bit out of him, folks.

Warren introduces the panel of journalists

Warren Buffett:

OK. Let’s go to work.

We’ll start with Carol Loomis of Fortune Magazine. I might as well… I should introduce our group here.

Oh, we didn’t go alphabetical this time. We’ve got Carol, and then we’ve got Andrew Ross Sorkin of the New York Times, and we have Becky Quick of CNBC.

In terms of my check-off system, I’m still going to go to Becky. That’s alphabetical.

So, Andrew, it didn’t do you any good to try to move over there into the center spot.

Carol, you’re on.

Carol Loomis:

Good morning from all of us, and I will make the small preamble that I’ve made before.

We’ve been getting questions for a couple of months, each of us on our e-mail.

Sometimes a question will be sent to all three of us and sometimes they’ll just send to one of us, therefore it becomes very hard to count how many we’ve had, but certainly it’s in the many hundreds and probably in the… up into a thousand, 2000.

And obviously we aren’t going to be able to ask every question… every good question. We have a lot of good questions we won’t be able to get to. But it’s just that you had to pick and choose.

And the other thing I should say is that whatever we do ask, Warren and Charlie have no idea of the question. None. No hint.

Warren Buffett:

Sometimes we have no idea of the answer either, but go ahead.

Q&A – Morning Session

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

1. Warren provides more details on the Lubrizol deal and why David Sokol was not fired.
2. What will happen when the United States government ends the Permanent Open Market Operation. To read more about this stimulus program, click here.
3. Why Warren is planning to make his son Howard succeed him as Berkshire’s chairman.
4. What Warren would like to add to his circle of competence.
5. What caused Warren to “quickly warm” to the idea of acquiring Lubrizol.
6. Is the complexity of Berkshire a value trap?
7. Warren still feels “enthused” about the United States.
8. The best asset to own in an inflationary environment.
9. Why Berkshire still won’t pay a dividend.
10. Wells Fargo and U.S. Bank Corp. are both among the best large banks.
11. Investing in productive assets is better than buying gold.
12. How Warren got his first investors.
13. Berkshire is a conglomerate that is different from the “go-go” conglomerates of the 1960s. 
14. What Warren would like to be remembered for.
15. The purchasing power of the dollar will continue to decline over time.
16. Warren’s investment advice for people that won’t go active in investments.
17. Berkshire has 260,000 employees, but only 3 can execute trades.
18. Would Warren make any changes to the then current US economic or fiscal policy to get the economy healthy and growing?

Lunch break and an update on Warren’s bet against hedge funds

Warren Buffett:

Well, with that, we’re getting to our break at noon, and I promised… I made a bet three years ago with some fellows that run a fund of funds, and I promised to put the figures up every year as to how we’re doing.

It’s a 10-year deal, and if we can put up the slide… what number would that be? Probably five.

As you can see, these funds of funds… these are five funds of funds groups chosen by these people who I like, Ted Seides and his friends, and Ted couldn’t be with us today, but we will put these figures up annually.

He got off to a very good start with his group. Obviously, hedge funds should do better in a down market. And we haven’t caught them yet with the S&P 500, but it will give you all a reason to keep coming back over the next seven years as I report regularly on how we are doing in the S&P 500 versus the five funds of funds.

As Carol pointed out in an article recently or a… maybe it was on the web… in reporting on this, she looked at the bottom line where the investors in the S&P 500 are behind for the three years, and the investors in the funds of funds are behind, and the only people that are ahead so far are the investment managers.

They’re doing very well at this point. So we’ll keep you up to date on that.

Ron Olson gave some clarifications on the Lubrizol deal

Warren Buffett:

OK. If you’ll all be seated.

I can’t see whether Ron Olson is in the front row or not.

Ron, are you here?

OK. Ron wanted to… well, we’ll get you a mic.

Because we’re transcribing this and we want to get it all corrected, Ron has one point or two points that he wants to correct in terms of dates that I used. So we are going to give the microphone to him.

Ron Olson:

Not that they’re all that telling, but I thought since we are creating a record, I wanted to clarify two points.

The Berkshire law firm, namely Munger, Tolles & Olson worked with the Lubrizol counsel in pulling together what Warren described as Lubrizol’s proxy describing the background of the transaction.

We, as counsel for Berkshire, started to work on that gathering of facts pertaining to Berkshire’s involvement, essentially David Sokol’s and Warren’s, during the week of March 15.

Warren, in speaking to you about the facts this morning, I believe, placed the beginning of that work in the subsequent week. So I simply wanted to clarify that as we gathered the facts, and that gathering included several interviews of David Sokol during that week.

Secondly, in describing internal policies at Berkshire to protect against misbehavior or negligent behavior, Berkshire maintains a… something that those in the trading business describe as restricted lists.

And on that restricted list are any securities in which Berkshire is buying, selling, has a peculiar interest, and that prohibits any of the corporate officers or the top officers of the subsidiaries of Berkshire from participating in trades in those securities without the consent of the CFO, Marc Hamburg.

That is what I wanted to clarify, Warren.

Warren Buffett:

Thanks, Ron.

Q&A – Afternoon Session

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

1. Charlie defends BYD’s recent pattern of unexplained product launch delays.
2. An intelligent person can make more money over time thinking about productive assets than speculating in commodities and fixed instruments.
3. Ron Olson wanted to clarify his clarification.
4. The most important things Warren and Charlie learned during the past year.
5. There are institutions around the world that governments should properly bailout.
6. Why Warren resigned from the Washington Post board.
7. Warren and Charlie can’t tell how Berkshire is going to do vis-à-vis the Australian dollar.
8. Warren prefers large acquisitions, but equity is not an afterthought in terms of the portfolio.
9. Berkshire has an “unbelievable insurance operation”.
10. Businesses that will perform better in a period of high inflation.
11. Will Berkshire consider splitting its A-class shares?
12. Warren thinks his best deal was hiring Ajit Jain.
13. The proper way to think of goodwill and return on capital.
14. Charlie talks about Costco, General Motors and IBM.
15. How to incentivize and motivate kids.
16. Berkshire’s next CEO should make, and will make, a lot of money.
17. Issues of society are important but doesn’t affect investment decisions at Berkshire.
18. Warren and Charlie are not interested in participating in auctions.
19. How to determine how well Warren had allocated Berkshire’s capital.
20. Berkshire’s deals are made with the then current opportunity costs in mind.
21. Being able to read fast is a huge advantage, but don’t be discouraged if you have to read a little slower.
22. Playing politics with the raising of the debt ceiling is “probably the most asinine act the Congress has ever performed”.
23. Warren thinks nuclear power “is important and safe”.
24. Why Berkshire discontinued its shareholder-directed charitable giving program.
25. Growth is a factor of every investment decision at Berkshire.
26. Warren owns “very, very few securities” and a lot of government bonds.
27. How Warren and Charlie evaluate businesses outside the United States.
28. Where Berkshire’s short term cash is invested.
29. Warren talks about wind power.
30. NetJets would have been “destined for bankruptcy” had it been a standalone entity.
31. There’s nothing like working to improve your own skills.
32. Insurance, particularly reinsurance, is not an easy business.
33. How Warren and Charlie met Todd Combs and how Berkshire shareholders can assess his progress.
34. Warren is very critical of acquisitions paid for using the acquirer’s stock.
35. Warren and Charlie doesn’t like borrowing a lot of money or issuing shares to fund an acquisition.
36. Berkshire is well-positioned to make significant money when home building returns to a normalized level.

End of Q&A

Warren Buffett:

Now let’s see. Yeah, we’re at 3:30, so we will adjourn for about five minutes, and then we will conduct the business meeting of Berkshire Hathaway, and we can turn the lights up, and we’ll rejoin you in just a couple of minutes.

Start of formal business meeting

Warren Buffett:

OK. If you’ll settle down, we’ll conduct a little business.

This morning I introduced the Berkshire Hathaway directors that are present.

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

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

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 and the motions voted upon at this meeting.

The named proxy holders for this meeting are Walter Scott and Marc Hamburg.

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 2, 2011, being the record date for this meeting, there were 942,559 shares of Class A Berkshire Hathaway common stock outstanding, with each share entitled to one vote on motions considered at the meeting, and 1,059,055,810 shares of Class B

Berkshire Hathaway common stock outstanding, with each share entitled to 1/10,000th of one vote on motions considered at the meeting.

Of that number, 663,042 Class A shares, and 659,697,109 Class B shares are represented at this meeting by proxies returned through Thursday evening, April 28th.

Warren Buffett:

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

The 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?

Voice from Audience:

Second.

Warren Buffett:

The motion has been moved and seconded. Are there any comments or questions?

We will vote on this motion by voice vote. All those in favor, say aye. Opposed? The motion is carried.

Election of Berkshire’s board of directors

Warren Buffett:

The next item of business 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, you 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 one of the meeting officials in the aisles, who will furnish a ballot to you.

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

Walter Scott:

I move that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Don Keough, Tom Murphy, Ron Olson, and Walter Scott be elected as directors.

Warren Buffett:

Is there a second?

Voice from Audience:

I second the motion.

Warren Buffett:

It has been moved and seconded that Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson, and Walter Scott 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.

Miss Amick, when you are ready, you may give your report.

Becki Amick:

My report is ready.

The ballot of the proxyholders in response to proxies that were received through last Thursday evening, cast not less than 701,770 votes for each nominee. That number far exceeds a majority of the number of the total votes of all Class A and Class B shares outstanding.

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

Warren Buffett:

Thank you, Miss Amick.

Warren Buffett, Charles Munger, Howard Buffett, Stephen Burke, Susan Decker, William Gates, David Gottesman, Charlotte Guyman, Donald Keough, Thomas Murphy, Ronald Olson, and Walter Scott have been elected as directors.

Advisory vote on the compensation of Berkshire’s executive officers

Warren Buffett:

The next item on the agenda is an advisory vote on the compensation of Berkshire Hathaway’s executive officers.

I recognize Mr. Walter Scott to place a motion before the meeting on this item.

Walter Scott:

I move that the shareholders of the company approve, on an advisory basis, the compensation paid to the company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including compensation discussion and analysis, the accompanying compensation tables, and related narrative discussion, in the company’s 2011 annual meeting proxy statement.

Warren Buffett:

Is there a second?

Voice from Audience:

I second the motion.

Warren Buffett:

It has been moved and seconded that the shareholders of the company approve, on an advisory basis, the compensation paid to the company’s named executive officers.

Is there any discussion?

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

Miss Amick, when you are ready, you may give your report.

Becki Amick:

My report is ready.

The ballot of the proxyholders in response to proxies that were received through last Thursday evening, cast not less than 720,883 votes to approve, on an advisory basis, the compensation paid to the company’s named executive officers.

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

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

Warren Buffett:

Thank you, Miss Amick.

The motion to approve, on an advisory basis, the compensation paid to the company’s named executive officers has passed.

Advisory vote on the frequency of a shareholder advisory vote on compensation of named executive officers

Warren Buffett:

The next item is an advisory vote on the frequency of a shareholder advisory vote on compensation of named executive officers.

I recognize Mr. Walter Scott to place a motion before the meeting with respect to this item.

Walter Scott:

I move that the shareholders of the company determine, on an advisory basis, the frequency, whether annual, bi-annual, or tri-annual, with which they shall have an advisory vote on the compensation of the company’s named executive officers, set forth in the company’s proxy statement.

Warren Buffett:

Is there a second?

Voice from Audience:

I second the motion.

Warren Buffett:

If has been moved and seconded that the shareholders of the company determine the frequency with which they shall have an advisory vote on compensation of named executive officers, with the options being every one, two, or three years.

Is there any discussion?

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

Miss Amick, when you are ready, you may give your report.

Becki Amick:

My report is ready.

The ballot of the proxyholders in response to proxies that were received through last Thursday evening, cast 112,395 votes for a frequency of every year; 4,615 votes for a frequency of every two years; and 609,699 votes for a frequency of every three years, of an advisory vote on the compensation of named executive officers.

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

Warren Buffett:

Thank you, Miss Amick.

The shareholders of the company have determined, on an advisory basis, that they shall have an advisory vote on the compensation paid to the company’s named executive officers every three years.

Shareholder motion to establish goals and prepare a report for shareholders on the reduction of greenhouse gas at its subsidiaries’ power plants

Warren Buffett:

The next item of business is a motion put forth by Miss Coward, a Berkshire shareholder represented by Mr. Bruce Herbert and Mr. Larry Dorrs.

The motion is set forth in the proxy statement.

The motion requests Berkshire Hathaway to establish goals for the reduction of greenhouse gas at its subsidiaries’ power plants, and prepare a report for shareholders on how it will achieve these goals.

The directors recommend that the shareholders vote against the proposal.

I will now recognize Mr. Herbert to present the motion. To allow all interested shareholders to present their views, I ask Mr. Herbert to limit his remarks to five minutes.

The microphone at, well, let’s have Mr. Herbert first, if we can turn up the lights.

Audience Member:

Thank you.

Good day, ladies and gentlemen. My name is Bruce Herbert and I’m chief executive of Newground Social Investment in Seattle, Washington.

It is such a pleasure to be here today, representing a life-long owner of Berkshire Class A shares. And I stand to present the resolution found on page 12 of the proxy, that asks our company to set goals for reducing greenhouse gas emissions at its energy holdings.

This is because serious investors know, and studies show, that climate change creates financial liability.

The Investor Network on Climate Risk, whose members manage more than $10 trillion, and the Carbon Disclosure Project, representing more than $70 trillion in assets globally, call on companies to disclose risks related to climate change, as well as the actions taken to mitigate those risks.

In 2010, 66 percent of U.S. electric utilities had already set greenhouse gas emission reduction goals. Sixty-six percent.

Unfortunately, Berkshire MidAmerican was not among them.

Now, investors have cause to be concerned. Just last year, the SEC announced that climate risks are material, and that they must be disclosed.

We do applaud MidAmerican for having the largest wind energy portfolio of any utility in the United States.

However, it is also true that MidAmerican generates close to three-quarters of its power burning coal. Investors, globally, want to reduce risk through cleaner generation, and 66 percent of public utilities have already published their plans for doing so.

But MidAmerican offers no such plan, despite the public proclamation via its website, that, quote, “We will set challenging goals and assess our ability to continually improve our environmental performance,” unquote.

There is no more important environmental goal for a coal-burning utility than to reduce pollution. But more than this, Berkshire is uniquely vulnerable, in that the financial burdens of climate change are pushed onto insurance companies, and as a major insurer, this has serious financial ramifications for our company.

Berkshire enjoys a remarkable and well-earned reputation, earned over many decades, for being practical visionaries. Addressing climate change offers an opportunity for our company both to uphold and to enhance this reputation.

So in closing, the world’s largest institutional investors call on companies to set greenhouse gas reduction goals. Such goals are key tools for managing the extraordinary business risk of climate change.

Two-thirds of utilities in the United States have already set these types of reduction goals, and this resolution, importantly, gives Berkshire managers the freedom to determine what those goals should be and to shape the process for meeting them.

And the major proxy advisory firms have repeatedly recommended voting for similar resolutions.

So I will close with a request and a question. The request is for all of you here to please join us in supporting this common sense proposal.

And the question, gentlemen, is, have you evaluated the business risk of climate change to our companies and what did you find out? Thank you.

Warren Buffett:

Thank you, Mr. Herbert.

We have a microphone at zone 1. It’s available for anyone wishing to speak for or against the motion. You’ve seen where zone 1 is there.

I’ll wait just a minute or two in case anybody would like… is there an additional speaker there that…?

I’ll ask that, for the benefit of those present, I ask that each speaker for or against the motion limit themselves to two minutes and confine your remarks solely to the motion.

So go ahead.

Audience Member:

Hi, I’m Paul Herman, founder of HIP Investor. HIP stands for Human Impact and Profit. We’re a registered investment advisor in the states of California, Illinois, and Washington.

Climate change is obviously one of the risks to Berkshire Hathaway conglomerate companies, including MidAmerican Energy and Burlington… the Burlington railway… which transports coal, much of which is getting exported to China.

So we are concerned about, also, about the disclosure, quantification, and impact on profit, of greenhouse gases, as well as the quantification of the asset of the carbon credits that might be available for eco-efficient companies.

So we strongly support this resolution for increased disclosure, increased transparency and evaluation of the financial returns that are possible, or the financial liabilities, especially with your expertise in reinsurance, because reinsurance companies typically put a quantification of potential carbon exposure and liabilities, whereas traditional insurance companies may not do so.

So we strongly advocate for transparency, disclosure, and quantification as to the potential risks and liabilities. The SEC has encouraged this type of disclosure, though they have not mandated it. So Berkshire Hathaway would be a leader in doing this, as companies like GE, which their Ecomagination initiative, the 10 percent of revenue that they generate from their Ecomagination products, and other leaders from Jeff Immelt to the leaders of Duke Power that take a positive position on the financial returns that are possible for addressing climate change and carbon efficiency. Thank you.

Warren Buffett:

Thank you.

We have some more speakers there?

Audience Member:

Mr. Buffett, Mr. Munger. My name is Jefferson Lilly, a long-term Berkshire shareholder. It’s my personal opinion that it’s the previous two speakers that are the hot air in the problem around global warming, and that we… that we not regulate Berkshire Hathaway to force it to have carbon disclosure or other silly rules.

It’s fine if the managers of the individual businesses choose to do that on their own, but it’s completely inappropriate to bring this false religion of global warming to try and regulate Berkshire Hathaway.

You guys are doing a great job on your own.

Warren Buffett:

Are there any other speakers there that…?

Audience Member:

Mr. Munger and Warren Buffett. I would just like to say one thing, which I think is really important.

Berkshire Hathaway can be a leader in the environment. And I’m for transparency, as I know these two gentlemen are, and John Doerr, who is very passionate about the environment, and I know if he was here today, he would have the same sentiments as these two gentlemen.

And it’s important that as American citizens, we care about the environment. And not keep polluting the environment. And I’m with these two gentlemen 100 percent.

Warren Buffett:

Thank you.

Do we have any others that haven’t spoken?

Audience Member:

Yes. My name is Eric Shlime. I am not for this, so against the motion.

I think Berkshire Hathaway has a pretty good reputation at being clean, being environmentally responsible. I don’t think anyone is saying that either Mr. Buffett or Mr. Munger is somehow… doesn’t care about the environment.

I think most people care about the environment. But it doesn’t mean that we should for Mr. Buffett and Mr. Munger, or any of the CEOs, to tell them how to run their business.

You guys care a lot about Berkshire’s reputation. If Berkshire’s subsidiaries are just polluting oceans and ponds and destroying the reputation in different towns and cities, I don’t think that would be too cool with either Buffett or Munger.

So, doesn’t mean you don’t care about the environment just because you’re not going to somehow regulate and tell other people how to run their business. Let’s just do things voluntarily, do things to make money, and be responsible. At the end of the day, that’s what wins. Thank you.

Warren Buffett:

Thank you.

Anyone additional?

Audience Member:

Yeah, my name’s Larry Dorrs and I support this resolution.

I don’t think anybody is saying anything other than you’re gentlemen of great integrity. But this is a dollars and cents issue. And the EPA is releasing new rules that are calling for more regulation of greenhouse gas emissions.

So this… you know, we’re really approaching this from a point of view of a conglomerate that has insurance holdings, and it really is insurance companies that are bearing the great costs.

So I’m looking very much forward to your point of view on this. Thank you.

Warren Buffett:

Thank you.

Anyone else?

Audience Member:

Yes, thank you. David Hughes, a shareholder.

It’s my opinion that this is the right thing to do and I think that it makes sense to do it, as an organization, prior to being forced to do it.

And if this gives you the tools to set the rules your way, as you see fit, then I think that’s far more powerful and sets a precedent, as Berkshire has done in the past, so I am for the resolution.

Warren Buffett:

Thank you.

Anyone additional?

Audience Member:

Hello. My name is Thomas Dankenburter and my background was in biochemistry, and I’m very passionate about the environment, and I think it’s very important for Berkshire to work to be a leader, and so I’m very much in support of this proposition.

Warren Buffett:

Thank you.

Got somebody else there?

Audience Member:

Hi. My name is Sarah Cleveland. I’m from Portland, Oregon.

I want to just also put a voice in favor of this resolution, and I think it’s not about rights or wrong. It’s about a willingness to take a look at risks and opportunities. And also for Berkshire Hathaway to be a leader. And also work with the subsidiary companies on specific possibilities.

Warren Buffett:

Thank you.

Audience Member:

Hi.

Warren Buffett:

You’re on.

Audience Member:

My name is Sam Roy. This is my first meeting.

Mr. Munger and Warren Buffett, I’m so impressed how you run your business, but I think you will care for the environment as well.

I don’t know whether we should impose a route, but at least you will, by your act, how the local businesses are run, and all the operating goes out and appears, and there is no question that we do everything possibly that we never pollute the air that cannot be changed.

It is not hot air, but it is something I’m very passionate about. You can do anything with your environmental, but if you are not taking charge right now, we don’t know what the implications would be for our kids and grandkids.

I request you give it total investigation, and I think you will do that. Thank you for this opportunity.

Warren Buffett:

Thank you.

Audience Member:

Yes. Mr. Buffett and Mr. Munger, my name is Bob Stein. I’m a registered, professional engineer, and I have a couple comments, and I’m a Berkshire stockholder.

One, I think we all support very sound environmental protection. But the science before this… that’s being used by EPA for greenhouse gases is not necessarily sound, and is not necessarily in the best interests of Berkshire Hathaway shareholders.

Also, everything that the EPA has proposed is not practical and has caused a lot of problems making U.S. competitive in the world industrial market. Thank you.

Warren Buffett:

Thank you.

Audience Member:

Jason Bang, Palo Alto, California. For me, one thing that’s been very interesting about the issue is that it is something that deserves the passion that people bring to it. And I actually side with many of these people on the science of the issue.

What concerns me is, not necessarily that Berkshire agrees to the motion, I’m actually against it, but that the enterprises under Berkshire are about to help evangelize the true science behind what’s actually going on and help the American public get a better understanding, so they can also bring about change, rather than have it all occur from the executive level.

Warren Buffett:

Thank you.

Audience Member:

Good afternoon. My name is Bill Guenther. I’m a shareholder from Newfane, Vermont.

I work as a state forester back home and I want to say for folks that don’t believe global warming is reality, I wish you would follow me around in the woods. It definitely is.

I want to support this resolution and I hope that the rest of the shareholders will feel it important enough to see it through. Thank you.

Warren Buffett:

Thank you.

Audience Member:

Good afternoon. I’m (the sound in this part of the video is inaudible). I care about energy. I care about energy and environment more than anybody else because I’m currently still studying energy and environment issues.

But I truly believe the power of private sector, the power of free markets. And I think it’s not your responsibility to put the resources of the shareholder for this issue. It’s not your expertise.

I can personally do a better job to provide (the sound in this part of the video is inaudible) to do environmental advocacy than you do. So actually, against this resolution. Thank you.

Warren Buffett:

Thank you.

Audience Member:

Sorry, I have a friend to say something. I can translate it.

OK. He says the development of the solar panel has great impact on China. And the question… and he also thinks that, actually, Berkshire should do something, as should think about the implication of that.

Warren Buffett:

Thank you.

OK. Whoops, we have one more.

Audience Member:

Hi, I’m Kevin Thompson. I’m a shareholder.

I’m for the motion. I am a career engineer that works with an oil company. And what we found when we started looking at greenhouse gas emissions was that what we thought was going to end up costing the company more money actually created more revenue for the company.

And those are some of the stories that generally don’t get told, but they are out there. And I would recommend that you take a look at it, because in actuality, what you may be dismissing may actually be revenue for your shareholders. Thank you.

Warren Buffett:

Thank you.

Audience Member:

Hello, Mr. Buffett. I’m Mike from (the sound in this part of the video is inaudible) and there’s obviously a fine line between, like, cutting down the Amazon forest and, like, just burning some coal.

So sometimes you can give up a little but you can’t really give up that much. So that’s why I don’t support the motion.

Warren Buffett:

Thank you.

Audience Member:

You’re welcome.

Voice from Audience:

There do not appear to be any further comments.

Warren Buffett:

OK, thank you.

Democracy in action at Berkshire.

The… a couple of questions that were raised. In terms of material information, or material risks, in respect to Berkshire and specifically to our insurance operation, annually in the 10-K, there’s a recitation of risk. And, in my own opinion, in terms of our insurance operation, this question does not pose material risk to Berkshire’s insurance operations.

The question one gentleman, toward the end, mentioned the fact that it might even be more profitable for Berkshire, in terms of what might happen if we followed the motion. Ironically, he could well be right if it were in our determination, but just take our three major states in electric utility operation, where we serve almost two million customers, Iowa, Utah, and Oregon, but it’s true of other states as well.

We operate under the dictates of the utility commissions in those three states, all of which… or each of which… sets their own rules regarding operation, and each of which we end up obeying.

If we were to unilaterally, for example, decide to close down significant coal generation, we would be told to depreciate those plants over a shorter period, and that would translate, not in the cost to Berkshire, it would translate into higher rates for electricity there.

We are entitled to a return on our investment and the faster the depreciation, the higher the rates have to be in order to achieve allowed returns.

So there was a woman from Oregon speaking, for example. And the burden of any unilateral attempt by us… and we couldn’t do it without the approval of the utility commissions… but the burden would fall on customers.

And it is true, actually, that we would recoup accelerated depreciation and we would probably have a much larger investment on which we would be allowed a return in other generating facilities.

But this is a question… this is not something that the stockholders of Berkshire end up incurring the costs of. It’s something that the rate, or the users of electricity in these various states, will pay for. And that judgment, quite properly, should be made by the public utility commissions of those various states. And whatever they decide, you know, we will follow.

And over time, there’s no question, just like we’ve talked about our wind generation in Iowa, this country will move toward a different composition of electricity generation.

And as I stated earlier, I personally favor more nuclear over time, but that will be determined both at the state level, and in some ways, at the national level.

So it’s our recommendation that the motion be voted down. And I think the motion is now ready to be acted upon.

If there are any shareholders voting in person, they should now mark their ballots on the motion and allow the ballot to be delivered to the inspector of elections.

Miss Amick, when you are ready you may give your report?

Becki Amick:

My report is ready.

The ballot of the proxyholders in response to proxies that were received through last Thursday evening cast 67,733 votes for the motion, and 608,576 votes against the motion.

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

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

Warren Buffett:

Thank you, Miss Amick.

The proposal fails.

End of formal business meeting

Warren Buffett:

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

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

Walter Scott:

I move this meeting be adjourned.

Warren Buffett:

Is there a second?

Voice from Audience:

I second it.

Warren Buffett:

A 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 opposed say no.

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