Warren Buffett: Earnings chart benign in insurance, other businesses did well.

Weve
never had higher operating earnings.
Insurance earnings were helped by strong revenue and reduced liabilities in foreign
currencies. Hurts in other ways. o !any businesses, coca"cola, never #now if revenue
going up or down either hurts or helps.
Had a wiss $e disagree!ent for over a year. ettled in the first %uarter, and showed a
gain of &''( !illion, but wiss $e showed a gain of &'(( !illion too. )agnificent what
accounting can do.
High point of %uarter one was a gain in persistency rate of *eico. trength of +(,+
continued in +(,- and got stronger. easonal to policy gains !onth by !onth gains
increased over +(,+ because the closure rate i!proved this year and a gain in
persistency. .ure gold. /losure rate at high levels, !eaning people getting a %uote can
save !oney and love *eico but buy because they save !oney. Wal# out and get a %uote
while /harlie )unger is tal#ing.
0inally, railroads this year are doing very well. 1here was a gain in car loadings of -.23,
while others gained (.(43 in the first ,5 wee#s of +(,-. 1he rate was helped by oil found
close to the railroad trac#s. What better place to find oil6 )oving a lot of that. *oing to be
!oving !ore.
Ber#shire Hathaway is now the fifth !ost valuable co!pany in the world.
7nnounce!ents
We 8ust bought out +(3 of a co!pany we didnt already own for &+ billion. We are happy.
1heyre happy. 1he relationship with the fa!ily will be continued. 1he co!pany will be
part of Ber#shire forever.
9:7
9uestion: ;ou !easure corporate perfor!ance by growth in boo# value, but it grew less
than :. for < of ,, periods.
7nswer: Were not assured of the future. 1he last ,( not best because of business in
general. If it continues, it will be the first period it falls short of the :.. Were not happy
with that but no totally discouraged. =i#ely to better in down !ar#ets li#e +((2, relatively
than when things are up. We use boo# value scale figure as a reasonable pro>y in
intrinsic value figure. If we gain , !illion at *eico? theres a significant gap but to be
useful trac#ing device. When bought insurance, !ar#ed and boo# value by &, billion. o
there are distortions. In the end, we have to do better for you than the inde> fund.
E>pect Ber#shire to do well over long ter!. @ont pay attention to five years of three
years. We want to do as well in future in ter!s of annual gain average gains because in
the past we did unbelievably well. 7t 2< /harlie is not
/harlie: Ald age !ight co!e on at any ti!e.
9uestion: What is your co!petitive advantage over a! Bic6
WB: Iscar is better because the co!pany has brains, passion. *o bac# to ,<', when
eth Warhouser started Iscar. .ossibilities facing hi!, well entrenched co!petition. He
was also +' years in Israel, getting raw !aterials fro! /hina, selling to Boeing, *),
industrial co!panies in *er!any. He didnt have a great locational advantage in being in
Israel. But the re!ar#able business co!es fro! that. Co other answer will result than
talented people never stopped wor#ing. a! Bic was very good on figures and other
aspects by Iscar is one of the greatest in the world.
/harlie: a! Bic is a fabulous co!pany. It is an achieve!ent to do better than Iscar.
WB: Is there a better operation than Iscar in the industrial sector6
/): ;ou cant believe how !odern they are.
9uestion: ;ou dont lose sleep over everything. But what worries you the !ost6
WB: *ood %uestion. /ulture is all"i!portant. Business is all i!portant. .eople will #eep
calling *eico after I die. 1he #ey is the present culture. 1he successor /EA will have
!ore brains and passion. Were all in agree!ent of who it should be. 1he culture
intensified year after year. /harlie and I #new what we were about fro! the beginning but
!a#ing sure everyone who bought in understood too# ti!e. 7ny foreign behavior is cast
out. .eople self"select into it. We re8ect foreign tissue. I thin# the successor after !e,
after si> !onths will be sure. /harlie6
/harlie: 1his is to all the /harlie )ungers in the audience: @ont be so stupid as to sell
your shares.
9uestion: HeinD
WB: Its accurate. I !et *eorgie in @ece!ber, and he said he was thin#ing of going into
HeinD. Because I #new the! both and thought high of the!, I said I! in. 1hen they got
!e a ter! sheet. *eorgie .aolo brought !e a ter! sheet on the deal and it was good.
7bsolutely fair deal. I didnt change a word in either. /harlie and I paid !ore than if we
were doing the deal ourselves because *eorgie .aolo is a great !anager, because hes
so classy, so we stretched a little. I li#e the business. 1he design of the deal is if we do
good at HeinD we will get a high rate of return. =ess leveraged than the!. 1hey wanted
!ore leverage. In five years they receive higher rate of return but us with !ore !oney
will get !ore.
9uestion: Ber#shires 78it Eain is bringing in high profile 7I* e>ecutives. What is the goal
of the !anagers6 Will they get average results6
WB: 1he goal is to increase the share of the !ar#et. 1he second was 78it. Ane, a 5.'3 in
business at =oyds and =ondon !ar#et. Insured have a right to pic# insurance. Cot totally
auto, we get 5.'3. We had an arrange!ent with )arsh on )arine but not across the
board. He will give e>ecutives of business than theyre used to having. 1wo, four well"
#nown 7I* people 8oined to write co!!ercial insurance down and Dero internet rate
world. Ather people reached out. 7 nu!ber of e>ecutives have in the past. Will see
Ber#shire add all insurance business because its a significant factor worldwide, into
billion and we hope could be !ore greater nu!ber of billions. We have people, capital,
and ability to sign on to coverage others spread out.
/): *eneral spea#ing, reinsurance spread is very good for !ost people. Ber#shire is
different fro! other businesses. If reinsurance business is peculiar, its because people
thin# its easy, and find out it isnt.
9uestion: $egarding *eico, no policies are usage"based li#e .rogressive. Is that still the
case6
WB: Its still the case. napshot is getting attention because you get a picture of how
people really drive. Insurance rates go down as they atte!pt to figure out the possibility
of an accident. .ossibility of ,(( li#e to die than 5(. 7n insurance assess!ent !easures
variables. @ifferent co!panies do it differently. 7 ,F year old !ale is !ore li#ely to get in
an accident than I a!. I! not a better driver. We as# a nu!ber of %uestions and find the
possibility of accident and charge policy fees on this, and see how they do. 1he process
is wor#ing well. We have a huge nu!ber of policy holders. Everyone is trying to figure out
how to figure out who will have an accident. Its interesting by our wor#s well.
9: ;oure on 1witter and the E/ recently allowed business results to be posted on
social !edia. Is this i!portant for Businesswire and do you agree6 Would you sell
Businesswire6 7nd what in the world are you doing on 1witter6
WB: Its a !ista#e. 1he #ey to disclosure is accuracy and si!ultaneity. If we want to be
sure its accurage and received at the sa!e ti!e as other people, Businesswire does
that. I do not want to #eep going to a web page and be ,( !inutes before others. I dont
thin# anything does as well as Businesswire. )anage!ent couldnt be happier. I wish I
could clone Gathy. Ber#shire puts out info after the !ar#et close because theres so
!uch to digest. 7nything i!portant on Ber#shire goes to Businesswire.
/): I! avoiding it li#e the plague.
9uestion fro! short"seller @oug Gass: I! in a lions den of 4',((( of your closest friends.
In a follow"up to =oo!is %uestion: siDe !atters.
WB: It does.
Gass: Ber#shire used to buy things cheap or wholesale. Cow youre buying pricier and
!ature businesses at higher sals and earnings. 1he businesses !ight be great to add to
Ber#shire, but could result in lower rates of return. 7re you loo# !ore after your legacy6
Is Ber#shire beco!ing !ore of an inde> fund, better for widows and orphans6
WB: We cant do as well as in the past. It depends on the nature of !ar#ets. Bad !ar#ets
can be an advantage. I ta#e e>ception that I paid fancier prices. *E was +(> earnings. I
paid a far bit !ore than I would. It gets tougher as we get bigger. 1he price would
di!inish and we could still be satisfied. 1here are co!panies we should have bought -(
4( years ago. Cow we realiDe that paying up for co!panies is good.
/): I could !a#e a short"sellers %uestion even better. When we say we wont do as well
in the future, we still thin# better than others have done in the past.
WB: Were buying good businesses. We own eight businesses that would be on the
0ortune '((. In a few !onths well own half of another.
9uestion: In /hina the dollars status as reserve currency could be changing6
WB: I dont #now the answer. 1he H.. and /hina will be the super"powers in decades to
co!e.
/): 1here is an advantage to the country that has the reserve currency. Europe had a
better hand when it had the reserve currency. If it happened it would not be all that
significant in nature of things. Every great leader is not one any longer. Were all dead.
WB: 1hats the cheery partI
/): I still thin# it will be +( years fro! now. Cot forever.
9uestion: If the 0ed is buying ,("year treasuries, what are the long"run ris#s and how do
they stop without i!plications:
/): I dont #now.
WB: He has nothing to add. Were in uncharted territory. )any find out is easier to buy
than sell. -.4 trillion on the 0eds balance sheet. 1hats a lot of securities. Ban# reserve is
incredible. Its uncharted territory. 0ed is in per!anent if ris#s, he #nows ris#. @ont #now
if he hands baton to another guy. )r. Bernan#e is s!art. But we havent see this. 1heres
a potential for inflation. Cot so far. 1he 0ed wishes there had been inflation. Hp till now
*@. is inflation. 1heyd never ad!it it. When !ar#et learns significant buying ends it
should be the shot heard round the world. Cot the end of the world. But start revolting
hard and fast.
/): *enerally, what happened surprised people who thought they #new that interest
rates were so low and would stay that way. Everyone has to be !ore cautious when they
print !oney in !assive a!ounts.
WB: Its a huge e>peri!ent.
9uestion: How is a Dero interest rate policy affecting Ber#shires subsidiaries6
WB: It helped. Interest rates are to asset prices as gravity is to an apple. @ecreased
interest rates pull on asset prices. .eople !a#e different decisions when they cant get
so!ething for practically nothing. Interest rates power everything in the econo!ic
universe. We paid less on HeinDe than ,( years ago. Its a huge factor in what people
borrow. Houses are !ore attractive. Its easy for 0ed to borrow &2' billion per !onth.
@ont #now what would happen if they tried to sell. Its li#e watching a good !ovie
because we dont #now the end.
/): Interest rates have not stayed this low for an e>tended period.
WB: We have at the first %uarter 42 or 4< billion in short ter! securities. Earning nada.
Aur !oney doesnt count on anyone else. We have benefited and the country has by
what the 0ed has done in the last few years. If we can successfully end without support
were better off.
9uestion: What not !a#e an ac%uitiion in your co!!ercial insurance business6
WB: We have a terrific !anager in 78it. 1here are so!e operations if we could buy at the
right price we would have done it. We predict we will have good insurance business.
9uestion: What significance is there to bitcoin and what does it !ean for the future6
/): We have no confidence whatsoever in bitcoin beco!ing world currency.
9uestion: 7c#!an %uestions the legiti!acy of Herbalife JH=0K. Ber#shire Hathaway
JB$G.7KJB$G.BK owns .a!pered /hef. Has there been any i!pact on .a!pered /hef6
Its a !ulti"level !ar#eting co!pany.
WB: Ive never loo#ed at the ,(G of Herbalife. 1he #ey is whether its based on selling
profits. .a!pered /hef is !iles away fro! selling to level 7 and level B. .eople get paid
based on who they recruit. But people are based on selling to end user. 1here are
thousands of parties a wee# selling to people who want to use the products. 7nd that
should be the distinguishing characteristic.
/harlie: 7nd theres li#ely !ore fli! fla! in selling !agic potions than pots and pans.
9uestion: Ber#shires returns in the last ,( years are based on repeating and e>tensive
deals than in the past when you were a value investor doing e>tensive analysis. How will
your successor achieve the sa!e returns6
Warren: )y successor will have !ore capital and when !ar#ets are in distressed fewer
people have capital and willingness to co!!it. )y successor will have unusual capital
and ability to say yes. Ber#shire is the 2(("nu!ber when there is really panic in !ar#ets
and people need capital. Its not our !ain business, but fine. It will happen again. When
the @ow Eones drops ,,((( points you find out whos been swi!!ing na#ed. 1hey will
call Ber#shire. 7nd Ber#shires reputation does not rest on any single individual.
/harlie: Buffett had success in value investing because co!petition was less intense. Its
ridiculous to thin# the way he did things in the past he should have stayed in.
Warren: *old!an achs, *E, Ban# of 7!erica are trying.
/harlie: Ather people were not getting calls.
Warren: 1hey dont have !oney and speed.
9uestion: What are the three #eys to influencing people to sell who didnt want to sell6
Warren: 1here was a death at ees and the rest of the fa!ily didnt want to run the
business, so they put it up for sale. I didnt hear about it until after one person had
already fallen through. I didnt persuade the! to sell. It traded actively, I bought #ey
pieces and stoc#. anborn was not the !ost attractive business. I bought stoc# in the
!ar#et fro! tanton and /ase. 1hey were happy to sell. I never !et tanton. I did not
convince the! to sell their stoc#. I tal#ed to Betty .eters about avoiding a transaction I
thought was du!b.
9uestion: Aver the years you have built Ber#shire to be sustainable. I have difficulty
e>plaining to people the long ter! sustainable advantage of Ber#shire. /an you give it in
a .eter =ynch two"!inute speech6
/harlie: 1he co!petitive advantage is its getting bigger. 1he golden rule we treat
people li#e we want to be treated. 1he long ter! co!petitive advantage is we are a good
partner to people who need !oney.
Warren: ;ears ago a person in F(s said one year to thin# about selling his business. We
had e>perience buying business years earlier, this person died and he wanted to put to
bed what had happened. 1hat one year and that if he sold to a co!petitor, which is a
logical buyer, it would put its people in charge and it would !ean it would fire his people,
and co!e in li#e 7tila the Hun. He could sell to a private e%uity fir! and lose control. 1o
!e, were not the !ost attractive, but we were the only guy left standing. We pro!ised
hi! he could #eep doing what he loved, and not worry. 1he co!petitive advantage was
we had no co!petitor. 7nd the shareholder base weve developed we loo# at the! as
partners.
9uestion: I heard Warrens way to conserve energy is to write +( things he wanted to do,
choose five and forget ,'. How does that wor#6
Warren: Cot the case. 1hat is !ore disciplined than I a!. /harlie and I live si!ple lives.
We #now what we en8oy and we do it pretty !uch now. /harlie is a real architect now. I
never !ade lists in !y life. )aybe I should startI
/harlie: I can see here, I dont #now when it started that !ar#eting psychology that you
shouldnt !a#e decisions when youre tired, and if thats true, we live on auto pilot, its
habitual. We dont waste decision"!a#ing energy. We use caffeine and sugar.
Warren: When we write our boo# on nutrition it will be a hit.
/harlie: Warrens style is idea for hu!an cognition.
9uestion: Buying newspapers doesnt see! to !a#e sense econo!ically to get a higher
rate of return on a business that is s!aller, and you li#e big elephants.
Warren: We will get a decent rate of return. /o!pared to HeinD we have a structural
advantage because write offs and after ta> return declined to ,(3 after ta>, !aybe
higher. 1o date, we !eet or beat ,(3. Cever !ove the needle. &,(( !illion in preta>
earnings would not !ove the needle but give a decent return. We wouldnt have done it
in another business. We pro!ise to give figures annually of invest!ents, but at low price
to earnings.
/harlie: Its an e>ception and you li#e doing it. 1hats what I heard you say.
Warren: I wish I had no as#ed.
9uestion J@oug GassK: ;ou suggested for the first ti!e when you go, you would !ove to
a !ore centraliDed approach to !anage!ent. In past respect of Henry ingleton, he was
,((3 rational. .rior to his death Ber#shire should you !ove Ber#shire to three
co!panies6 1eradyne was harder to !anage given its siDe. /o!pared to Ber#shire,
should you split it along business lines6
Buffett: 7 tiny bit !ore in ter!s of s!all co!panies. Co change of significance Henry
ingleton can give views on what he did right and wrong. Brea#ing up would not give the
present result now and in the future.
/harlie: Henry ingletons geniun was he !anaged his co!panies !ore centraliDed than
us. In the end he wanted to sell tous. He loved you and the business, but we didnt want
to issue Ber#shire stoc#.
Warren: He issued stoc# li#e craDy. *) wor#ed wonderfully if diluted created how ended
up.
/harlie: Were !ore avuncular than Henry ingleton was. I li#e us better.
9uestion: 1a>es and deficit. What are two things policy!a#ers can focus on to stay
co!petitive.
Warren: Health care costs are ,+3 of *@.. $ivals <.' to ,,.'3. 1here are only ,((
cents in a dollar. *ive up 2 cents 8ust li#e raw !aterial. It will be a !a8or proble! in H
co!petitiveness. Averall since the crisis it wor#s, but nu!ber one is health care costs.
/harlie: *rossly swollen alternatives !ar#ets. ;ou can graduate fro! )I1 in derivatives
!ar#ets. 1hey are craDy !ar#ets. I agree on health care but find the other !ore
revolting.
Warren: /harlie is very Ald 1esta!ent.
9uestion: Will the health care act affect Ber#shire Hathaway JB$G.7KJB$G.BK6
Warren: Were not sure. We dont #now of any units that dont have health care. Health
care was a huge cost for us. @o few things on a centraliDed basis but we have not
assessed figures of the %uarter. We saw a few units costs rising ,(3 to ,+3. Were not
trying to centraliDed head%uarters.
9uestion: What are your capital spending plans6 7nd do you owe your success to
ti!ing6
Warren: I was born in the H.. so I had a huge advantage, and I was born !ale so I had
a big advantage. I! not sure in the business world if I was born in ,<-( the ti!e could
have been better. I was conceived in Cove!ber ,<+< when !y parents had nobody to
call on and no 1B, so here I a!, luc# the crash of +< ca!e along. It caused a lot of
people to be turned off on stoc#s li#e the last crash. Business was a terrible environ!ent.
Every baby born in the H.., on a probably basis, will do better in all #inds of ways than I
do. In the invest!ent field, it is not as good as it was in ,<'(. But a person with a passion
for investing co!ing of age li#ely will do better and live better.
/harlie: /o!petition was wea# in the early days. /o!petition is not as wea# now. 1here
is surely an advantage fro! e>iting between not !ean !ore to do ahead.
9uestion: If you can i!aging yourself at -(, how have you changed, and what advice
would you give yourself, and how would you give the advice in a way that you would
actually ta#e it6
/harlie: Its so old fashioned and boringly trite. Geep plugging along. 7ll old virtues still
wor#. 7nd wor# where youre turned on.
Warren: We !et in the grocery business. I! not in the grocery business now.
/harlie: ;ou were not pro!oted either. Even though you had the fa!ily na!e.
9uestion: How concerned are you about
Warren: I hate du!b co!petition. 7nd a lot of hedge funds have entered into the hedge
fund business aggressively in the last few years. It gives the! an opportunity to operate
in Ber!uda and avoid ta>es. Its respectable and sold to investors. 7nything Wall treet
can sell it will sell. Its very sellable now. )oney is flowing in and bringing down prices. In
the end we #now what were willing to do and do what we thin# will get us underwriting
profit. If a hedge fund guy is willing to sell gas and buy first, he has a proble!. In the
,<2(s we had e>pense ratios up and volu!e down. tandby costs were real, but not
bac#brea#ing. We loo# forward to better days and they ca!e. Cever anticipated it would
happen. Weve been luc# to get people Eain and Cicely. We hit the 8ac#pot of people
and li#e not having pressure to do?
9uestion: I noticed your boardroo! reflects the fact that wo!en are not hired for top 8obs
in corporate 7!erica.
Warren: I wrote an article for 0ortune and you can see !y views on that. 1heres no
%uestion that throughout !y lifeti!e wo!en have not had the sa!e shot as we have. )y
sisters were as s!art, grades were good, and !ore personable than !e. )y parents
loved the!. 7ll !y teachers were fe!ale and because they only had a few occupations
available to the!. I!prove!ents have been !ade, but there is a long way to go. When
people are placed in that position they start believing it the!selves, so they dont
envision !ore. Gatherine *raha! was an intelligent wo!an and told wo!an couldnt run
a business as well as a !an. he #new it wasnt true, but couldnt get rid of it and
secretly told herself that. 1he stoc# went up 4(3 under her and she wrote a .ulitDer
.riDe"winning biography. I hope it #eeps !oving and !oving faster. I hope fe!ales
hearing this will not see the!selves in funhouse !irrors.
9uestion: Is Ber#shire too big to fail6 How about @0 and how does it i!pact insurance
and Wells 0argo JW0K and *old!an achs J*K.
Warren: It wont affect it to !y #nowledge. /apital ratios for long ban#s at high levels and
affects return on e%uity. /ap ratios increase and return on e%uity will increase. Ban#ing in
the H.. is stronger than in the past +( years. /o!pared to the EH or +( years ago, its
dra!atically stronger. @ont worry about ban#ing being the cause of the ne>t bubble.
Hsually we dont get to a bubble the sa!e way we got to the last one. I feel good about
our invest!ents at )C1 and W0/. We wont earn as !uch return on e%uity because the
rules change.
/harlie: I! less opti!istic in the long ter!. I see so!ething !ore e>tre!e. I dont see
why !assive derivatives boo#s should be !i>ed with deposits of people. 1he !ore ban#s
act li#e invest!ent ban#s, the less I li#e it.
Warren: 0ive years ago I wrote about investors getting sold predictions. I offered to beat
bet a group of hedge funds that they could not beat a no"load inde> fund over five years.
Each put &-'(,((( into a Dero"coupon treasury at &, !illion. Interests rates have gone
down, so fro! an invest!ent of &<'(,((( sold Dero"coupon and bought Ber#shire
Hathaway, now worth ,.+ !illion. Hedge funds have returned (.,-3 and the :.
returned 2.<F3, at the half"way part. If it does well well have !ore than &, !illion to give
to charity. ;ou can see it on =ongbets.co!, where there is a bet a large hadron collider
will destroy the earth in ,( years. 7nd one that says one hu!an in +((( will be alive in
+,'( /harlie6