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The Complete Transcripts of Berkshire 2012 Annual Meeting

michael kass

Peter Boodell

This is the detailed notes taken by Peter Boodell, Portfolio Manager and Managing Partner, Boodell & Company Capital Management LLC, located in New York City. The firm is an Asia-focused long short equity hedge fund.

These notes are recollections only, without the aid of a recording device. They should not be relied upon. - Peter.

WB: Good morning. I’m Warren and this hyperkinetic fellow is Charlie. We’ll conduct this pretty much as we have in past. We’ll take questions until 3:30, and then begin the regular meeting of shareholders at that time. Feel free to shop. See ‘s Candy has placed a lollipop at every seat, and if you could open the lollipop now we’ll post a picture on Facebook, and for the media. And now you can take off the cover and good part comes. CM and I have fudge and peanut brittle. If we’ve consumed 10k calories each we’ll have to stop early.

We released Q1 earnings yesterday. In general, all our companies with the exception of those in residential construction have pretty much shown good earnings. Our five largest non-reinsurance companies all had record earnings last year, $9bil pre-tax. I said that I thought they would earn $10bil pretax this year, and nothing we have seen so far would cause me to backtrack on this. One cost at Geico is an accounting change or deferred policy acquisition cost, dpac. No change on cash, but took earnings down 250m pretax. It is a deferred advertising issue. We had a terrific Q1 at Geico, float grew and we had a 9% margin. The Dpac charges may affect 2Q and a little in 3Q, but underlying figures are somewhat better than what we’ve presented.

We feel good about Q1 and about the year. We should introduce the directors. Introducing the directors: Charlie Munger. Please hold applause until end, but I know he’s sort of irresistible. Howard Buffett, Steve Burke, Susan Decker, Bill Gates, Charlotte Gottesman, Koegh, Don Murphy, Walter Scott, and Ron Olson.

We’ll go to questions. Sometimes there are about 60 questions, and if we get to 54 questions, we’ll do nothing but answer shareholder questions.

Q1 -- Loomis: Heavy responsibilities on successor. Chris Ng: As CEO of large financial company, must be chief risk officer. Does leading and backup possess knowledge temperament to be Chief Risk Officer?

Second question: GE, BAC, GS deals - could they have been done at similar terms without your involvement?

WB: CEO should be Chief Risk Officer. We have seen it delegated, where risk committee would report to directors, with sigmas and everything. The place was ripe for real trouble. I am Chief Risk Officer. It is up to me to understand what could hit us catastrophically. We would not select anyone who couldn’t’ do it. Allocation of capital and selection of managers is right up there in importance. Of course need to be concerned about excessive leverage and insurance risk. The person at the top needs to understand if the managers are properly assessing their business units. So the top person has to aggregate across the units.

CM: Many have delegated risk, and value at risk and other theories of financial markets following Gaussian curves is one of dumbest ideas ever put forward.

WB: He’s not kidding. Everyone knows the properties of the curve, and can make a calculation. The problem is that the curve doesn’t apply, and they find that out occasionally. We are not going to have an arts major run Berkshire.

WB: Berkshire can act with speed and finality, and it is rare in corporate America. It takes a willing party on the other side. I dreamt up a deal, but I’d never talked to Brian Moynihan before in my life. I said we’d do it and he knew we had the money. The ability to commit in large sums for complicated instruments is a plus. Berkshire will possess that subsequent to my departure. Not every deal could have been made. But the new CEO can do many things better than I can do. Those deals have not been key to Berkshire. BAC/GE/GS deals – they were ok, but they were not as remotely important as buying Coke when we did, and we bought IBM in the market over 8-9 months. The value of these negotiated security transactions is not as important as Coke. But we still have the ingredients for doing these deals which is important. It isn’t a crank call from Berkshire.

CM: Many of the Berkshire directors are great at risk analysis. Kiewit, which bids for oil platforms and other major construction jobs, has a long history of superior risk control. Sandy Gottesman tells one of my favorite stories on risk control. He fired one of his staff, who said, “How can you fire me -- I’m an important producer!” “But I am a rich old man and you make me nervous.”

Q2 – Cliff Gallant, KBW: Another question on mortality: in 2011, reinsurance – you had assumptions about mortality rates. You exceeded assumptions at Swiss Re, but at Gen Re, they were lower. What was surprise in Swiss Re, are there different assumptions in different units? What is your reserving philosophy across companies?

WB: We wrote a large Swiss Re contract about 18 months ago, for business they had been written prior to 2004. Mortality figures were above expectations. So at the end of last year – we had a stop loss arrangement. We set up a reserve and we present-valued it, until we figure out what can be done, we will keep that reserved at worst case. We are reinsuring Swiss Re and they are reinsuring a bunch of American insurers. There is ability to reprice that business later. We put it up on a worst case assumption. How does Geico reserve vs Gen Re? It is described a little in the annual report. One overriding principle, we hope to reserve conservatively. It is different reserving in the auto business. You find out quickly how well you are doing. Gen Re – was under-reserved at time we bought it. In 1998/1999 reserves had developed badly, but now developing well. Tad Montrose – I feel good about how he reserves. But there is no coordination btwn Ajit, Tad, and Tony.

CM: There will always be some contract where results are worse than expected. Why would anyone buy our insurance if that weren’t the case?

WB: It was very hard to reserve post 9/11 for instance. Can you collect on insurance when you close stock market, and restaurants 2000 miles away in an airport claim business interruption? We were somewhat over-reserved for 9/11. Thailand and Japan is having same issue now – business interruption as result of floods and the Tsunami. Does your business interruption insurance pay? Our reserves generally develop favorably.

Q3 – Station 1: Andy, Westin CT – You’ve had a few investments in China, PTR and BYD. What advice would you give the new Chinese leadership and to corporate CEOs?

WB: CM made our last China investment, I’ll let him handle it.

CM: We’re not spending much time giving advice to China. China has been doing well from a tough start, in some ways we ought to seek advice.

WB: We have found it useless to give advice in 60 years of business.

CM: It is like pushing on a noodle. Even with 20% of stock. At Berkshire, we created a system that doesn’t require much control at headquarters.

WB: Four largest investments are 50bil and have had some for 25 years, one for 20 years. The number of times we have talked to CEOs of those companies, it doesn’t average more than twice a year. We are not in business of giving them advice. If success of our investment depended on them following our advice, we’d go somewhere else.

Q4 -- Becky Quick: Ben Knowl – I am pleased about 1.1x price-to-book buybacks, it is bad to be overvalued. Why didn’t you warn us previously when overvalued? Or have you felt Berkshire not overvalued over last decade?

WB: If we could have our way, we would trade stock once per year, and we’d come up with a valuation and it would trade there. That is what some companies do. It would be odd if 30min before market open to announce stock was overvalued. We have never consciously done anything to suggest people to buy stock when stock was above intrinsic. We put on cover in 1990s ‘that neither myself nor CM would buy stock at this price.”

WB: if we repurchase, we think people should know we think they are selling too cheap. We are not saying 110%. We know significantly above 110%. I don’t think we will ever announce that we think stock considerably above intrinsic biz value.

CM: Nothing to add.

Q5 - Jay Gelb, Barclays. Share buybacks. Not a dime of cash has left for dividends and share repurchases in 40 yrs. What is Berkshire’s capacity for buybacks, and how attractive vs. M&A and dividends?

WB: At 1.1x we feel very comfortable. We feel comfortable above that, but we want large margin. We want shareholders to know. We have terrific group of businesses. Some of businesses are worth far more money than we carry them at. We have no businesses at large discount to carrying value. From money making, we’d love to buy tens of billions at 110% of book. You never know what kind of market you run into. We’ll keep cash at $20bil. Valae per share goes up if we buy at 110% of book. We would do it on a big scale, if didn’t take our cash balance below $20bil.

CM: Some people buy back their stock regardless of price. That is not our system.

WB: Some are idiotic.

CM: I’m trying to say that more gently.

WB: Been in boardrooms, they like buying stock at higher prices, and they like issuing options at lower prices. We will only do for one reason, to increase per share value the next day. If we get chance to do in large way, we will. As financial investor, I hope we can do it. As fiduciary, I hope opportunity never comes.

CM: But if it comes we’ll grab it.

Q6 – Station 2: Bernard from Austria, US Banks and European Banks. View?

WB: We have a decidedly different view of American banks. US banks are in far better position than they were a few years ago. They’ve taken many of the abnormal losses, and buttressed capital in big way. They have liquidity coming out of their ears. The American banking system is in fine shape. EU on the other hand is gasping for air. Mr. Draghi opened wallet and came up with 1tril euros, or 1.3tril USD, or 1/6th of all bank deposits in US. it was a huge act by EURO central bank, designed to replace funding that was running off. More wholesale funding in Europe versus more natural funding in US. Wholesale money can leave more quickly. One Italian bank had a rights offering a few months ago. They didn’t want to raise capital, didn’t like prices at which they had to do so. They are funding at 1%. I’d like a lot of money for 3yrs at 1%, but I’m not in trouble so I can’t get it. It is remarkable what has been accomplished in our banking system. I thought at time Fed/Treasury were overdoing it when they did TARP. I think overall that policy was very sound for the economy. Our society benefitted enormously. Fed and treasury handled quite sensibly.

CM: Europe has a lot of problems. W ehave full federal union, central bank can print money. EU doesn’t have full federal union. We are more comfortable w risk profile in US.

WB: It is night and day. When Paulson and Bernanke said we’ll do whatever it takes, we knew they have the power to do so. When 17 countries. If I wan tto call Europe what number do I dial?-kissinger. If I had 17 states governors and all agree on a course of action when panic in money market funds. We would have had different outcome. I would put EU and US banks in very differnet categories.

Q7 - Andrew Serwer: I work at a train company, and about coal and natural gas? You seem to have elegant hedge, Mid-American versus BNSF and coal versus gas?

WB: MidAmerican will never be affected too much by coal price – they pass on costs. Regulated, Mid- American holding, and iowa – they are pass through organizations, and operated efficiently, but coal labor may go up and down but this affects customers more. Coal traffic affects all railroads. KWH used in US went down 4.7% in Q1. That is a remarkable decrease in usage. Nat gas is down under $2. Oil was $100. If a few years ago you told CM or me that oil vs. natural gas would be 50:1 ratio we would have asked you what you were drinking.

CM: What is happening now is idiotic. We are using up precious resource which we need for fertilizer. I would use every piece of coal before gas. Gas is the most precious resource we could leave our children.

WB: The installed base is so huge, so you can’t change percentages too much. Gas generation is feasible, and in future will see diminution of coal usage but can’t be dramatic – the megawatts involved are too huge. It will be interesting to see gas oil ratio play out, as it has changed in very short time. Three years ago.

CM: Many assume if it happens in a free market it will work out in end – this is not right and I think crazy to use up [natural gas].

Q8 – Gary Ransom, Dowling: Telematics and effect on insurance pricing?

WB: Progressive is leader in what you described. If we think there is superior way to evaluate likelihood of having an accident we will use it. You have to answer 51 questions on our website – all evaluate propensity to have an accident. If you could ride in the car for 6 months, you could learn. If you have tool that gives better predictive value, we will take it on. We are always looking. What tells us their likelihood? Youth – no question, a 16 year old male is much more likely to have an accident. I’m not trying to impress a girl when I drive my 3,500 miles per year. Some things are good predictors. Credit scores are good predictors, they tell you a lot about driving habits. I don’t see anything that threatens Geico. We added a significant number of policies in first quarter. We were close to 300k policies. Marketing is working well, risk selection and retention is working well. We carry it at $1bil over tangible book value. It is worth a whole lot more than that. It would come up to 15bil now at least. And we wouldn’t sell it there.

Q9 – Station 3: Chris Reese – representing students from UVA/Charlottesville, are business school to blame, do you have changes to suggest?

WB: Many taught them bad investment ideas.

CM: No but it is a considerable sin. I think business school education is improving. From a low base. WB: I’d agree. In investing, probably the silliest stuff we saw was taught at business schools has been in the investment area. Mathematically based, and when popular it is difficult to resist for faculty advancement. To go against revealed wisdom of your elders can be dangerous to your career path. I would have just a couple courses. First how to value a business, and second how to think about markets. Who needs option pricing to be in investment business? When Ray Kroc started McDonalds, he wasn’t thinking about option pricing. It was how to make people buy hamburgers and make the fries different.

If you buy businesses for less than they are worth, you’ll make money. If you know difference between ones you can value and you can’t, you’ll make money.

CM: The folly creeps into the accounting. For a very long term option on a business you understand or index, the optimal way to price it is not Black & Scholes. They want a standardized solution that requires them not to think too hard.

WB: Is there anyone we forgot to offend?

Q10 - Carol Loomis: Buffett Rule – all over TV. Could you clear up the confusion? Leo Saselin, Kansas City.

WB: It has gotten used in different ways. It was more fun to attack something I hadn’t said than I had said. If you have high income, you pay a rate which is commensurate with rate you are supposed to pay. 131 of those 400 paid 15% or below. Under Buffett rule a minimum tax for very high earners restores rate to what it used to be. There were only 3 in 1982 who paid less than 15%. When shared sacrifice, I would make sure huge incomes get taxed at rate that is commensurate to rate they used to be taxed, and 2/3rds of the people do pay that much, and it would raise a lot of money.

CM: Do you want to talk about the giving half to government question?

WB: If you give to private foundation - only 20%. Charitable contributions help you? Sheldon Whitehouse’s bill in the Senate – it got 51 votes but needed 60. There can be other ways to get at the solution. If you have huge income, I have no tax planning, no gimmicks. I made 2004, 2006, and 2010 public – all three of those years, I came in with lowest tax rate in our office. There are 15-22 people in our office. Office was in the 30%s and I was in 17%. Tax law favors the rich. [31] of 300 were below 10% on tax rate. My wife wants it clear, however, that we have no cleaning lady and no cook. My cleaning lady is at the office – she has been paying 15.3% to social security and those with incomes of 100s of millions paying less than 10%. I think time to look at that.

Q11 – Cliff Gallant, KBW: Many catastrophic losses recently, affect on reinsurance pricing? Increased frequency of catastrophes – affecting your view on reinsurance?

WB: It is hard to measure things that move slowly. Separating out random from new trends is not easy to do. We assume worst. We see more earthquakes in NZ recently, but we don’t extrapolate last few years, but also don’t take the 100 year figure. We have written far more business in Asia, NZ, AU, Thai and Japan this past year because they have had huge losses and the rates they were using were inadequate. They have large capacity and we can do that. We can tell you how many 6.0 quakes in CA and category 3 hurricanes in Florida this past century. But how much does it tell you about next 50 yrs? When we think we are getting rates which a fairly negative hypothesis would support, then we move ahead.

Last year the 2-3 quakes in Christchurch, the second one caused $12bil of damage. If you think of a country of 4-5mil, that is 10 Katrina’s. Losses were huge in respect to entire premium value in country. We will take on very big limits if getting right price. We have propositions for $10bil of coverage. We want right price. We may write some. The market for CAT business is significantly better from our standpoint than it was 1-2 yrs ago.

Q12 – Station 4: Verne – asking on behalf of Oberlin Park Kansas. Wind and solar power subsidies,sustainable energy policy? What is most appropriate use of natural gas?

WB: We have two solar projects, and we are big in wind. We get 2.2c for 10yrs per kilowatt hour, a federal subsidy, and that makes wind projects work. They wouldn’t work without that subsidy. Government by putting in 2.2 cents has encouraged a lot of wind development. If there had been none, there would have been no wind development. In case of our solar projects, we have got a commitment from Pacific Gas & Electric for very long term purchase commitments. There may be some subsidy involved at that price so they are willing to pay. Neither solar nor wind – Greg Abel is here, if he wants to correct. No solar or wind would be working without subsidy. Also, you can’t count on wind for base load. It works and is clean, but if wind not blowing doesn’t mean everyone wants lights off. Not base, only supplementary.

CM: We’ll have to take a lot of power from renewable. I think wise to offer subsidies.

WB: The future is subsidizing oil & natural gas in a sense.

Greg Abel: Subsidy with wind allowed us to build 3000mw in three utilities. We wouldn’t have moved forward without it. In solar, we got a large incentive to construct the asset. We get 30% of construction cost recovery. It is an advantage since we are a full tax payer. Many competitors don’t have tax appetite. We benefit from our tax structure in wind and solar.

WB: Greg hit on point – we have distinct competitive advantage in that we pay lots of federal income tax. There are programs that involve tax credits. We get 1:1 benefit. I don’t have figures, but I would guess 80% of utilities can’t reap tax benefits because they don’t have federal income tax. They wipe out taxable income on bonus depreciation. So they can’t have appetite for projects with tax credits. By being part of BK, a huge taxpayer, Mid-American has extra abilities to do projects without worrying about exhausting tax capacity.

Q13 - Becky Quick: In Georgia, Buffett Tax is quite loud. It is limiting interest in Berkshire stock. My 84 year old father is not investing because of it. Should political dialogue be muted for betterment of share price?

WB: I don’t think any employee of Berkshire, and I don’t think any CEOs should have their citizenship restricted. When Charlie and I took this job we did not put our citizenship in blind trust. It’s fine if they disagree. I don’t know politics of Mukthar Kent, Ken Chennault, Ginni Rometty – I don’t know her politics or religion. It doesn’t make any difference and I just want to know how he or she will run the business. I don’t think it makes sense to make investment decision based on politics. It sounds like that 84 year old should invest in Fox.

CM: I am less popular around my country club. It is a cost I am willing to bear to participate in this enterprise.

WB: Roughly half the country will feel one way, other half will feel the other way. If you start investing or selecting friends and neighbors by who agrees with you you’ll have a pretty funny life.

Q14 – Jay Gelb: M&A over 20bil? How would you finance it?

WB: We thought of one over 22bil. We won’t use our stock at all. But we used it in BNSF on 30% of deal since we were doing well enough on cash.

CM: It could happen, but I don’t think so.

WB: We would have done it, if we could have made deal. It would not have taken cash below 20bil, we would have sold securities. I would have had to sell some securities I wouldn’t have wanted to sell, but I liked the deal. I wouldn’t have sold $25bil however, for $40bil deal. I don’t like the limbo. If you have a $20bil deal, I have a 1-800 number. But you sort of hit the point where I start squirming a bit. But money is building up every month. And next year the right $30bil deal we’ll probably do it.

Q15 – Station 5: Westlake Ohio. Hope to see you at dinner at Gorat’s Sunday?

WB: The last lunch was $2.6m on Glide…. [laughter]

Q14, continued: Jobs coming back to US – how many jobs do you have coming back? WB: I have to finish my fudge. 270,858 jobs at year end at Berkshire. I don’t think we have more than 15k overseas. As I put in Annual Report – we invested in US in PP&E, $8bil invested last year, and 75% was in USA. Our ISCAR operation in Israel operates all over the world. The product they sell will be sold throughout the world. US is not a majority of their business. It has 11,000 employees. They have relatively few in US, but we want more business in India, Japan, Korea - you name it. We have utility operations in UK. We just bought a business in Australia at Marmon. Buying for CTV, bought an operation based in Netherlands, but it has employment here. Extremely likely 10 years from now, we will have many, many more employees and many outside, but most will be here in US. Spent $8.2bil in US – we loved putting that money out. We’ll put out more this year. US has lots of opportunity, we find lots to do.

CM: You can’t bring a lot back if it never left.

WB: That is long version of my answer. [laughter]

Q16 - Andrew Serwer: How are you feeling?

WB: I feel terrific. I always feel terrific. I love what I do. I work with people I love. It is more fun every day. I have a good immune system. My diet is such, as any fool can see, I am eating properly. [laughter] I have four doctors. A few own Berkshire Hathaway. My wife and my daughter and I listened to four of them two weeks ago. They described various alternatives – the ones they recommend – not a day of hospitalization, not a day off from work, survival numbers are 99.5% in 10 yrs. Maybe I’ll get shot by a jealous husband. This is a really minor event.

CM: I resent all this attention and sympathy Warren is getting. I probably have more prostate cancer than he does. I don’t know because I don’t let them test for it. At any rate, I want the sympathy.

WB: My secretary was getting too much attention.

WB: In all seriousness, it is a non-event. Treatment is a few minutes in afternoon, maybe I’ll be a little tired, so I’ll do fewer stupid things!

Q17 – Gary Ransom: Runoff property casualty. AIG/Hartford have runoffs. Would you consider these liabilities?

WB: We do not like taking on long term liabilities and receiving 150bps. We want money on liabilities at an attractive rate. We will pay for annuity type liabilities, and don’t think impossible – we’ve done some in UK. Not huge. We’re game to take on more.

Q18 - Station 6: Glad you are feeling well. Ryan Doyle, 26 working in Chicago. If starting over, what would you do. Do we have as many opportunities? Emerging markets?

WB: I would do same, but I’d be better at aggregating the money faster. I would try to develop audited record as fast as I could, then build investor base. Private equity is buying to sell. More interesting is buying businesses for keeps. That has been enormously satisfying, but it takes capital to get into that business. I built the capital by managing money for partners.

CM: Nothing to add.

WB: And I’d do it with Charlie.

Q19 - Carol Loomis: Buffett Rule, he suspects 95% of people in arena believe stock undervalued. If not undervalued by Buffett rule, then why?

WB: Over 45 years, there have been several times when stock significantly undervalued, and at times it cut in half over fairly short time frames. Tom Murphy ran one of most successful companies ever, in early 1970s selling for 1/3rd the price of selling the properties. Berkshire in 2001 was selling at a very low price. The beauty of stocks is that they sell at silly prices from time to time. That is how we got rich. Chapter 8 and Chapter 20 in Security Analysis is all you need. In the stock market you have partner named Mr. Market, and he is a psychotic drunk, and he is there to serve you not to advise you. There are thousands of prices – and he is making lots of mistakes every day. Occasionally you have to oblige him. So it is built into the system that stocks get mispriced. Generally speaking Berkshire has come close to selling at intrinsic more than most companies over 40 years. Our stock fluctuates somewhat less than most. Berkshire will be significantly overvalued and sometimes undervalued. I don’t know in which order and times. But make decisions based on what business worth. Stick with businesses that you can value, you will do well in stocks. Stock market is most obliging place to make money because you don’t have to do anything. It is a marvelous game and rules stacked in your favor as long as you don’t start behaving like drunken psychotic.

CM: We bought businesses to hold instead of resell. It is an enormously constructive life. The faster you can work yourself into our position the better you’ll be. [laughter]

Q20 – Cliff Gallant: In this drunken market, have systemic fears ever made you pause?

WB: You’ll probably find this interesting. CM and I have never had a discussion on buying or selling a business where we have talked about macro affairs. If we find a business we understand and we like it we buy it. There will always be good and bad news, it depends on moods, etc. There is a ton of that. I bought my first stock in June of 1942. We were losing the war, Battle of Midway. My older friends had disappeared, we were building battleships and we were losing. In Oct 2008 I wrote that article, should have been a few months later, but stocks were cheap.

CM: We kept liquid reserves at bottom of panic that could have been spent.

WB: A fair amount of liquid reserves. First rule is to be able to play tomorrow. Charlie runs a little company called the Daily Journal, and when 2008 came along, he bought a few stocks, that was the time to use the money not sit on it.

CM: [Cough]

WB: Was that the name of a stock Charlie? You don’t get anything out of him. [laughter]

Q21 - Station 7: Which businesses have improved position a lot in last 5 years? Which not?

WB: We don’t like to dump on the not so good ones. We have owned significant piece of railroad business – and has improved its position dramatically over last 20 years, and is an efficient and environmentally friendly way to move things that need to be moved. Couldn’t be duplicated for 5-6x what it is selling for. A whole lot better than it was 5-10yrs ago. Geico is a better business, could have predicted. Approaching 10%, we had 2%. And fortunately we had Tony Nicely there to maximize. Burlington is worth billions more. Mid-American has done a great job. We bought at $34 per share, and now appraised $250. We bought Iscar six years ago, and they just don’t stop – I would not want to compete with them.

CM: 80% of our businesses, by value, have increased their market position. We are not suffering. WB: Mistakes were made in purchasing, where I misgauged the competitive position. Too much Cherry Coke? I assessed future competitive position inappropriately. It didn’t change much. GenRe looked like real problem, but Tad now doing great work. Ajit – created it out of nothing. Tens of billions. He has created a business like I’ve never seen.

CM: We’ve been very fortunate. What is interesting is that the good fortune isn’t going to go away because Warren happens to die. But it won’t help him.

Q22 - Becky Quick: Joel Bannister – Dallas TX. Who will run the derivative book after your tenure, we don’t want to end up like AIG.

WB: I don’t think there will be much of a derivatives book after I’m gone, and there isn’t much of one now. There will be some derivatives in utility businesses. They engage in swaps of generation. Not huge scope. The railroad hedged diesel fuel. They may do in future, they may not. A few operating businesses will have minor positions. Whoever follows me, 2 are on board now, Ted Weschler and Todd Coombs, it is unlikely they will do derivatives, but I wouldn’t restrict them – sometimes derivatives get mispriced. We will likely do quite well with derivative positions we have so far. Rules have changed in relation to collateralizing, and I don’t like exposing to financial conditions if Federal Reserve hit by nuclear bomb. We think about worst cases all the time. We think about worst cases more than any two managers, our requirement to collateralize – you may need to have cash on considerable scale tomorrow morning.

CM: We wouldn’t have entered our derivatives without the favorable credit terms we had. When they runoff we would have made $10bil and maybe considerable multiples above that.

Q23 Jay Gelb: What is a reasonable multiple for non-insurance businesses?

WB: I would value Geico differently than General Re and other insurance businesses. Geico value is significantly greater than net worth and float, and that is for two reasons – it is right to assume significant underwriting profit over next two decades, and significant growth – but I can’t say that about the other businesses. Operating businesses – they have different characteristics. I would buy similar operating businesses at 9x pretax and maybe 10x pretax. Not EBITDA - which is nonsense, but only if similar characteristics.

CM: EBITDA – I don’t even like hearing the world. There is so much nutcase thinking, it is like quoting ‘earnings before costs that really matter’.

WB: We prefer earnings before everything.

CM: [didn’t catch this line – something about ‘I don’t sell …’]

Q24 – Station 8: Neil from Phoenix. Since 1999, gold up a lot?

WB: In [1970], Gold at $20, Berkshire $120. Now 1600 and Berkshire 120k. You can pick different starting point. If you pick something up a lot, of course it has short term advantage. One thing I would bet my life on, Berkshire will do better than gold and probably common stocks and even farmland. You’ll still have a single ounce of gold 100yrs from now. But I’ll have had 100 harvests. Hard for an unproductive investment to be productive over long period of time. I recognize. Bonds no good and Bernanke still smiles. If you say anything negative about gold, it arouses passions. If you thought through intellectually. Facts and reasoning. If you run into people really excited about gold, they can’t discuss it.

CM: I have never had slightest interest in owning gold. I can’t imagine a worse crowd to deal with than gold bugs.

Q25 – Andrew Serwer: Bought shares in JPM in personal account. How do you differentiate which stocks are for personal account?

WB: I like WFC more than JPM. We are buying WFC so I buy something else. I can’t be buying what Berkshire is buying. So my best ideas in Berkshire. Charlie’s bought some real estate.

CM: The Munger family is in 2 or 3 things. I have no interest in diversification. It happens automatically at Berkshire. I rejoiced the day I got rid of stock quote machine. You deal with a better class of people. WB: 98.5% of my money is in Berkshrie. If you spend your time on the 1.5% you are crazy.

CM: He does like WFC more than JPM. I JPM, but I know WFC better and it is easier to understand. We bought WFC in Q1, also last year. If I wasn’t managing Berkshire, I’d have a lot of money in WFC and some in Berkshire.

Q26 – Gary Ransom: When Berkshire bought BNSF, it raised surplus of PNC by 4%. Org chart is challenging, lots of pieces, and question of capital efficiency? Does organization have hindrances to using capital efficiently?

WB: Money in life companies has less utility to us, it has more restrictions. I’d rather have 100mil in P&C vs. life. Can’t be used as effectivelya, and this is a disadvantage of life vs. P&C. The number one choice for our cash is at the holding company, where we have $10bil. Most of our operating businesses keep more cash than they need. We’ll never have anything remotely to cause me to lose sleep as long as we have the $20bil. It leaves us comfortable. Having railroad inside National Indemnity, it is nice to have huge asset to make rating agencies feel comfortable. One rating agency didn’t want to give it any credit. They would give us value at 20%, but not 100%. There is a fair amount of logic to where things are placed. If we make big acquisition, we might need to shift cash around.

CM: Two things peculiar to P&C. Capital vs. premium value is much higher, and it has BNSF – immensely stronger from policy holder perspective, so a huge advantage. Unrelated to insurance, it will make $5bil pretax. We write less than that. If we write $125b and we get to operating neutrality. They wouldn’t let us do it if we weren’t so strong.

Q27 - Station 9: Waterville Capital. if you dividend, won’t it raise stock price and so in M&A might cash outlay be lowered when using stock?

WB: We would obviously prefer to have our stock sell at intrinsic business value, we’d be happy and we would like that. That is very likely to occur in future. It has occurred in past. Without paying a dividend, it has sold at or above intrinsic as much in last 30 years as below. A dividend might not help. Buyers are willing to pay $1.10 for dollar of cash in the stock, and it trades for 1.1x so doesn’t make sense to send it out. But most of time it will bob up and down from that level. We’ve tried to point it out. There may be times when we use stock, though cash is our favorite medium of purchase. We hate giving out shares. We don’t like giving away our interest in See’s or BNSF. Leaving less for you is anathema to us. CM: What he suggested is very conventional approach, and we think our shareholders are better off for not doing it.

WB: There is no one here than me that has more interest is stock trading at fair value. I am disposing of stock now for next 10 years, and I don’t want to buy 80% of vaccines, and so we want it up, and so we spend time explaining it. But if people get excited about internet stocks they’ll be disillusioned about Berkshire.

Q28 - Carol: Kevin Gatanowski, you have described newspaper business, chopping down trees to get yesterday’s news. Demise of newspaper? Why buy Omaha herald? Was there self-indulgence?

WB: It is really fascinating about newspapers, and it is even worse than that. Newspapers have 3 problems, 2 are very difficult, and 1 if they don’t overcome they’ll have worse problems. News is what you don’t know that you want to know. If you go back 50 years, the newspaper contained dozens of areas of interest to people where it was primary source. Rent apartment, want job, which banana’s are cheapest, Stan Musial, stock prices, etc. All of those things have now found other means of distribution, in more timely and cost free basis. To survive, newspapers have to be primary about something of interest to people who live in distribution area. There were so many areas of interest 30 years ago, but we now don’t use newspaper for stock prices, for apartments to rent or for sports. They have lost primacy. But they are still primary in a great many areas. They still tell me something primary that I can’t find elsewhere. Overwhelmingly those items will be local. City, local sports, neighbors. As long as they stay primary in that arena, they are item of interest. Problem is that they are expensive to distribute. There are something like 1,400 daily newspapers. They were going up on the web and giving free the same thing they were charging for. I don’t know any business plan that has charged a lot for one version and free to people in another format. Lately, many newspapers have experimented and succeeded in getting paid for what they were giving away. I think there is a future for newspapers in a community. They are not as bulletproof when there were 50 different reasons to buy a newspaper. In a community, where it tells them things that concern them, this is important – for instance obituaries are still in newspapers. When I lived in White Plains I wasn’t as interested. In Buffalo there is community, and we make reasonable money. Economics based on prices we paid. We may buy more newspapers. It is nothing like the old days, but they still fulfill an important function. Stocks won’t matter, ESPN news has the national sports – but local institutional reporting will work.

CM: We had a similar situation years ago, when World Book was 80% destroyed by Bill Gates. But we are still selling encyclopedias. But we don’t make as much as we used to. They won’t be great lallapoloozas. We may do more in newspapers. In North Platte, children are there. In church, you will be interested in North Platte and state of Nebraska. Won’t find on internet. Won’t be like old days.

Q29 – Cliff Galant, KBW: in past some of investments have been affected by technology, like newspapers. What about Amazon? Does it affect Mcclane?

WB: AMZN is a tough one to figure. It could affect a lot of businesses who don’t think they will be affected. It won’t affect NFM, but maybe others. In first four days this week, (tues/wed/thu/fri) our business is up over 11% over last year. On Tuesday we did over $6mil of business. Those are huge volumes. We’ll go to Dallas, and we have a 433 acre plot of ground. We’ll have a store that will make current records seem like nothing. AMZN: Geico was affected a lot by internet. It was mail originally back in the 1940s, and very successful. Then it moved to TV big time. Then the internet came – but I thought originally young people only would look for quotes on the internet. But a lot has changed. AMZN has milliions of happy customers. They can introduce to new items. It could affect a lot of businesses.

CM: It is almost sure to hurt a lot of businesses a lot. Anything that can be easily bought with a home computer or ipad. I won’t be buying the stuff. And I almost never buy anything. I think it will hugely affect a lot of people. It is not slightly terrible, but really terrible.

Q30 - Station 10: From China: Would net asset growth slow without using float?

CM: We have a very peculiar model, it works well for us. It is very hard for others to get same result. WB: It has taken a long time to get here, and significant consistency, because of controlling shareholder. We have had a culture where we could write out 14 principles 30 years ago. That is hard to do for most American corporations. Many have small shareholdings – very unusual structure. It took a long time – people with small private businesses, it took a long time before people think of Berkshire first. And they often don’t need a second. We don’t do auctions. But big private acquisitions come to Berkshire because they want to come to Berkshire.

CM: If Warren went back to 30yrs of age and modest capital and he’d have a hell of a time trying to do it too.

WB: I’d like to try. [laughter]

Q31 - Becky Quick: Annual proxy voting for publicly held companies. How do you vote?

WB: We have virtually never voted against management, in fifty years. There have been a couple times, stock option expensing, or an egregious option grant. Our general feeling, when we are large shareholder, we like business, we realize they won’t subscribe 100%. Doesn’t mean bad people. We don’t try to change people. It doesn’t work well.

CM: it doesn’t work well with children either.

WB: We accept people the way they are. We don’t expect other people to be clones of us. We might vote against an egregious merger or stock option plan. We wouldn’t stop them. We’ve usually been right.

CM: You’ve said it all.

Q32 - Jay Gelb: Commercial has smaller lines, when would you increase?

WB: If we thought we could expand internally (would be tough), or buy great company in commercial – this is more likely. We had chance when GE sold their medical insurance and then expanded by buying Princeton insurance. We jumped at it. GE was getting out of insurance. It is hard to think of many commercial insurance companies we’d get excited about. There are few personal lines, but we love Geico. If we can find quality company in commercial lines, we would buy in instant.

Q33 – Station 11: Whitney Tilson: I have a question for Debbie [laughter]. I applaud fact that you set price that you won’t buy above. But is there a ceiling on it too? Intrinsic is far higher 1.1x? Would you be flexible? I’d rather see you spend $3.4bil paying 1.1x pb rather than the stocks of the other companies you bought last quarter.

WB: So would I. Floors can disappear, and there could be circumstances where we would buy a lot of stock. At 1.15x – we wouldn’t buy a lot more stock. I do think it signals to many that they don’t have much to lose to buy slightly above. When people feel differently, it could sell at much different price. We might buy a lot of stock in chaotic markets.

CM: I have nothing to add to that either.

Continue to read Part II here.

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